An Environmental Dilemma

Jul 24, 2017

Sunday Business Post, 23 July 2017
The Government's track record on critical areas of environmental management, how we treat water and how we treat waste, has been abysmal.  In regard to waste collection and a universal pay by weight system, that particular can was quite literally kicked down the road.  The shambolic efforts to establish a water authority with adequate resources to deal with the crumbling infrastructure defy description.  Not only has a water charges regime failed, we are to be allowed retain the €100 water conservation grant.  It would apparently be administratively too difficult to recover – “extremely difficult both legally and logistically” as the Taoiseach was quoted as saying earlier this week.

If this is the way we deal with environmental problems we can see, touch, taste and smell, how are we to deal with environmental problems that we can’t?  Falling into this invisible category are carbon emissions.  The need to control the amount of carbon reintroduced into the atmosphere primarily by burning fossil fuels is tackled by yet another government plan published this week – the National Mitigation Plan.  On foot of recent experience with water and waste, even those of us who are not climate change sceptics are disposed to be sceptical about this new “living document” as it has been described.  Weighing in at over 60,000 words this particular living document will require a lot of sustenance to keep it going. 

Carbon Emissions

The management of carbon emissions is a serious topic, not least because we subscribe to international agreements which can involve financial sanctions for countries which don't do enough to meet carbon emission reduction targets.  The National Mitigation Plan observes that there will need to be a “targeted balance” (whatever that means) between Exchequer-supported expenditure and fiscal, taxation policies and regulation.  It then goes on to observe that in certain cases, “taxation policy may have a stronger role to play in changing individual or business behaviour”. 

There is no doubt that taxation policy can have a huge influence on both business and consumer behaviour.  The paradigm is the environmental levy or the plastic bags tax as it is far better known.  This levy has decimated the use of plastic bags in this country.  It is striking when travelling abroad just how prevalent the use of plastic bags continues to be in countries which did not take similar steps to reduce their potential for pollution.  

Ireland doesn’t only use a plastic bags tax to help improve the environment.  There are other levies already in place towards managing carbon emissions.  In this country, we have a system of carbon taxes on fuels, calculated at the rate of €20 per tonne of CO2 emitted from their combustion.  This results in a levy of about 5.6 cent on a litre of petrol, and 6.5 cent per litre of diesel.  Almost every motorist knows that a big chunk (around 60%) of the price of fuel at the pumps goes directly to the government in various forms of VAT and excise.  Nevertheless in a straw poll around my office which has its fair share of financially savvy people, hardly anyone was aware of the carbon tax component.

Changing Behaviour

This begs two questions.  First of all, is a 5 or 6 cent per litre levy sufficiently hefty to change consumer behaviour?  I suppose that's down to the individual.  It does strike me that the differential between the carbon tax on petrol and the carbon tax on diesel is not sufficient to make the average motorist prefer one fuel over the other.  But more importantly, how can any tax or levy change behaviour if people are unaware of it?

Behavioural economics theory suggests that a big part of the reason the plastic bags tax is so effective as an agent of behavioural change is because it is so obvious.  A positive answer to “do you want a bag for those” results in an additional 22 cent being rung up at the till.  Shops even promote tax avoidance strategies by offering more robust shopping bags for sale or cardboard boxes for packing groceries.  Carbon taxes do not have anything like this prominence.

On the other hand a carbon tax break which is well publicised might be far more effective.  The lower the rated emissions from the car, the lower the annual motor tax.  The Mitigation Report identifies this as a success with some justification – apparently three quarters of all vehicles sold fall into the lowest emissions bands.  Lower annual motor tax is an obvious advantage which a dealer will always point out on the forecourt when selling a car.   

If effective measures to counter the volume of carbon emissions are to be taken via tax policy, any new charges involved have to be both clear and high-profile.  On recent evidence the instinct of the current administration is to shy away from any type of clear or high-profile charges on the population.  Charges of that type have already caused the demise of our water and delay of our waste policies.  This is the dilemma for this Mitigation Report. 

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