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Jan 07, 2019

Sunday Business Post, 08 January 2019, And so, a New Year and a new tax.  That's according to the Taoiseach this week who wants to see a decision taken about carbon tax for 2020.  He says the carbon tax is an environmental tax that’s designed to change behaviour, and he thinks that the money that’s raised in carbon tax from households should be given back to households to compensate for the cost.  

A tax which is not designed to take money out of your pocket might indeed be a new concept (the refund of the water charges two years ago doesn't count because that wasn’t an original design feature) but the notion of using tax to change behaviour is far from new.

Old ideas only survive for as long as they work.  Irish economic policy has long been influenced by the notion that a judicious application or non-application of tax could result in desirable commercial behaviour.  Since the mid-1950s, we've been offering the lure of low corporation tax rates to attract investment and generate jobs.  In the 1980s, we breathed life into a moribund and dysfunctional property market by offering significant tax incentives to develop and provide residential accommodation.  We overdid that particular stimulus, but that's not to say it didn't work in bringing properties onto the rental market.  The paradigm behavioural tax is the plastic bag tax which almost overnight eliminated the blight of discarded grocery bags along Irish lanes and hedgerows.

Using the tax system to change behaviours does not always have the expected outcome.  The property tax incentives of the 80s and 90s backfired because they were left in place for too long.  Their contribution to property price inflation was a significant factor in the malaise which ultimately led to the property collapse in 2007/08.  So harsh was this lesson that governments since then have ruled out widespread property tax incentives as a mechanism for addressing the current housing shortage. 

Sometimes tax changes result in behavioural changes, but not in the way intended.  For example, there is a credible view that the successive tax increases on tobacco products have ceased to be effective in encouraging people to either quit smoking, or better again not start at all.  When tax drives prices too high, people will find alternatives and cigarette smuggling continues to be a problem.  During 2017, over 34 million cigarettes were seized, and this pattern continued during 2018 with the last reported seizure of contraband cigarettes being made just before Christmas.  Would additional carbon taxes increase the incidence of fuel smuggling?

Nor is it just about the amount involved.  It seems to me the plastic bags tax worked not because just because people were jibbing at the additional 22 cent levy at the till, but because there was an element of optics involved.  People buying disposable carrier bags were seen to have more money than sense.  It is incongruous that hundreds of thousands of euros of expensive grocery items get carefully packed into mangled and tattered “bags for life” in shops and supermarkets every week, but the image is one of environmental consciousness.  Many businesses also supported the idea by providing alternative packaging for shoppers and this contribution was essential.  If the visible element is missing, a taxation change alone is unlikely to alter consumer behaviour. 

So the Taoiseach's plan for a carbon tax involving a visible refund to households may have merit as a driver of behavioural change.  Any upfront tax refund is profoundly gratifying, but the quantum of the refund will be important too.  In a cash-strapped household, the view might well be taken that you'd buy a lot of loads of coal for the price of converting an oil based water heating system to solar power.  It could be a costly prospect to influence in a meaningful way patterns of car ownership, or home insulation programmes, or even public transport usage with carbon tax refunds.

Most important of all however is the fact that while household behaviour is important in addressing greenhouse gas emissions, any change could be outweighed by the consequences of changing transport patterns and industrial behaviour.  According to the CSO, transport accounts for more than 40% of energy consumption in this country, with industrial and domestic consumption accounting for just over 20% each.  There are already significant tax incentives in place for industry of all types to invest in energy efficient equipment.  Businesses can write off the upfront cost of energy efficient equipment against their tax bill.  It may be far easier to change commercial behaviour with tax breaks than to change the behaviour of individuals. 

Further developing the Irish carbon tax regime in 2020 along the lines proposed by the Taoiseach would raise consumer awareness of the issues.  It might even be reasonable to make a start with a campaign to highlight just how much carbon tax we are already paying in our fuel bills - €52.67 on a tonne of coal, €36.67 on a tonne of peat briquettes, and anything up to €61.75 on 1,000 litres of home heating oil.  However, in terms of making an appreciable difference to Irish greenhouse gas emissions, better consumer awareness even if via a tax refund is not the whole solution.  The role of business, both as energy suppliers and consumers, is crucial as well.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland