Déjà vu all over again

Sep 30, 2019

Sunday Business Post, 29 September 2019

Were the events of the past week genuinely unprecedented? No. There really is a tedious sense of déjà vu about the headlines which have been grabbing our attention. 

It is not the first time we have seen impeachment proceedings launched against the US President.  It is not the first time we have seen a young woman, in this instance Greta Thunberg, deservedly grabbing the headlines for bringing injustices to international attention. Remember Malala? And while the decision in the UK Supreme Court that the prorogation of Parliament in Westminster was unlawful may, of itself, be unprecedented, the Brexit stridency in British politics that followed it is certainly not.

Nor was the Taoiseach's statement earlier this week to the United Nations Climate Action Summit unprecedented.  All new revenue raised from carbon tax in Ireland from next year will be ring fenced to fund new climate action and “just transition”. Just transition apparently means the protection of people who are most exposed to higher fuel and energy costs, or who will lose their jobs because of the shift from one type of energy to another.

It's already been well signalled that carbon taxes will increase from the current rate of €20 per tonne of CO2 ultimately to a rate of €80 per tonne. It can scarcely be in doubt that this process will commence in the Budget statement next Tuesday week, 8 October.  All that is open for debate now is the number of steps it will take to get from the €20 per tonne rate to the €80 per tonne target rate, and how big those steps will be. 

Scarcely mentioned in the Taoiseach’s statement were options within the tax system to forgive a charge on taxpayers who make environmentally sound purchasing decisions, and in fact there are quite a few such incentives. If an employer provides an employee with the use of an electric car, no taxable benefit will be ascribed to the employee, if the car isn't too expensive. Given that the highest amount of benefit in kind on company cars is 30% per annum of the value of a new car, that's not a small concession.  When buying a car outright, there are also VRT rebates on various types of hybrid engineered models. 

If you're comfortable with self-propulsion, the tax system will allow you a full deduction for the reasonable cost of a bike and the gear that goes with it so you can cycle in and out to work. If the distances are too great and a public transport option is available, employees can get what in effect is a full deduction from their taxable income of the cost of a commuter ticket. The cycle to work tax scheme and the travel passes scheme are two of the more efficient ways for an individual to reduce their income tax bill.

For all that, some environmentally sound tax measures have not been followed through. There has been a law on the statute books since 2008 to reduce the tax charge on company cars by reference to their emissions, but this law was never brought into force. A tax incentive for investment in renewable energy generation lapsed some five years ago. The Home Renovation Incentive, which ceased last year, could usefully have been extended to encourage homeowners to retrofit their homes with more efficient heating or insulation. There are special tax allowances when a business buys energy efficient equipment, though anecdotally there seems to be little enough take up of this particular scheme.

Have these failed through lack of publicity, or through a lack of willingness to create workable incentives? Probably both.

If the preference is now to apply tax charges which might be avoided, rather than introduce tax reliefs which can be claimed, such new charges may not be quite as effective or as universal as is sometimes thought. A recent OECD study highlights that the average effective carbon tax rate on the archetypal carbon culprit, coal, is close to zero across many developed economies. 

Even at our current rate of €20 per tonne, Ireland ranks high in the international carbon tax comparison tables. We share this rate with the UK but our rate lags behind countries like Finland, France and Norway. The tax loving Swedes enjoy a carbon tax rate of some €100 per tonne of CO2.

Once carbon taxes are introduced, the rates must increase over time. An efficient carbon tax will reduce consumption of carbon emitting fuels, which in turn will reduce revenues from the carbon tax. Tax revenues may decline, but you can be sure that the government’s appetite for the taxes raised will not, and thus the rates must continue to increase. 

Carbon taxes can only work when there are alternatives in place. There is no point in levying ever-increasing taxes on traditional fuels like coal and diesel without offering access to cleaner energy sources like wind energy. As in the Taoiseach’s statement, it’s easy to be specific about levying a tax while being vague about “just transition”. We have seen this before. 

Déjà vu all over again.

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