Introduction

Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 30 May 2019. Information about Chartered Accountants Ireland is provided on the previous page.

We wish to briefly comment on the current consultation and would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area.

Two-pronged approach

In considering the role which increasing carbon taxes beyond €20 per tonne will play in Ireland’s response to climate change, it is widely accepted that policy in this area needs to advance rapidly. In order to reduce greenhouse gas emissions to combat climate change, people and businesses must be incentivised to switch to less carbon intensive technologies and increasing carbon tax is a direct tool to influence such behavioural change.

A two-pronged approach of increased carbon taxation combined with targeted tax reliefs would also help satisfy the recommendation of the Oireachtas Committee on Climate Action that the taxpayer should see a direct link between taxation and a return on his or her behavioural adjustment.

One suggestion included in the Commission on Taxation Report in 2009 was to make the tax clearly visible at the point of final consumption to ensure that it is not seen as “just another tax”. If the rate of carbon tax is doubled from €20 per tonne to €40 per tonne, this would mean an increase of about 6 cents on a litre of diesel. Not everyone can currently draw a parallel between the extra 6 cents per litre that they pay when filling up their car tank and the green energy being produced around them in other areas.

While the Commission on Taxation Report did not elaborate on ways to do this, we suggest for example that the amount of carbon tax paid is clearly shown on a purchase receipt for diesel or petrol. This would connect the consumer to how much tax is paid and may be a trigger in changing consumer behaviour.

Consultation options

We have considered the options contained within the consultation document which set out nine possible uses of the funds generated by an increase in the rate of carbon tax above €20 per tonne. We believe two of the options should be considered first and foremost.

Poorer households must be protected as much as possible from the consequences of an increase in carbon tax. According to a report by the Department of Communications, Energy & Natural Resources7, 28 percent of households in Ireland experience energy poverty. Therefore climate policies must not be unfair to low income workers and households.

In 2018, the fuel allowance of €22.50 per week for 28 weeks was paid to 364,000 households and cost the Exchequer €230 million8. The Joint Oireachtas Committee found in its research that poorer households tend to spend a significant proportion of their budgets on energy and may not have the disposable income to invest in energy upgrades as those on higher incomes. These households cannot choose not to heat their homes and therefore cannot afford an increase in carbon taxes.

To compensate these households, exempting them from the carbon tax increases is not recommended given that one of the purposes of the tax is to change behaviour. It would also be impractical to administer such an exemption. Instead, we believe that the fuel allowance should be increased at the same time as offering viable participation in a home energy retrofit or upgrade scheme.

Retrofitting & grants

The Oireachtas Committee on Climate Action highlighted the urgent need to retrofit the majority of Ireland’s housing stock in order to reduce emissions from heating. The recent Climate Action Plan9 published by the Department of Communications, Climate Action and Environment aims to upgrade 500,000 homes to B2 equivalent BER by 2030.

According to the Government’s Climate Action Plan, it’s estimated that 1.5 million homes in Ireland need to have energy status improved. Irish homes use 7 percent more energy than the EU average and over 80 percent of homes are rated BER C or worse. Only about 25,000 homes are participating in retrofit schemes at the moment. Only a minority of citizens have funds on hand to immediately implement all of the required changes to improve energy ratings and this is a barrier to achievement. When considering state support for improving energy efficiency in homes, a distinction must be made between households who, over a period of time, may be expected to repay some or all of the investment required and those for whom the State must fund the work in its entirety and from whom repayment cannot be reasonably expected.

The maximum number of low and ordinary income households to undertake retrofitting of their homes and install additional energy efficiency measures must be encouraged. Grants should not benefit the highest earners disproportionately.

The use of a tailored scheme similar to the Home Renovation Incentive (HRI) should be considered as a means of encouraging homeowners and landlords to retrofit their properties to achieve energy efficient rating targets.

Though the HRI ceased on 31 December 2018, Chartered Accountants Ireland suggests that an environmentally focused scheme could be modelled on the HRI online application facility and could successfully drive energy efficient retrofit targets over a set period of time.

For homes most vulnerable to fuel poverty, the current grants towards the cost of energy efficiency improvements in the home through the Better Energy Homes scheme or the SEAI Better Energy Warmer Homes scheme should be enhanced and more widely encouraged.

Awareness needs to be created about the availability of these grants, particularly for households which rely on fossil fuels to heat their homes. For example SEAI have stated10 that up to November 2018, over 390,000 homes have availed of a grant to make their homes more energy efficient.

Affordability will be an issue and while the increase in the fuel allowance could be a short term measure to combat fuel poverty, raising awareness and enhancing the grant system to target poorer households would have the long term benefit of reducing the reliance on fossil fuels and providing more energy efficient homes.

Low income earners

Research by the Economic and Social Research Institute11 (“ESRI”) shows that poorer households spend a greater proportion of their income on carbon taxes than more affluent households. This leads to the question of how to ensure these poorer households are not unfairly penalised by any increase in carbon taxation.

According to the ESRI, the potentially regressive effect of carbon taxation can be reversed by “returning the carbon tax revenues to households” making the net policy effect progressive. This would then lead to the change in behaviour needed to tackle climate change.

The ESRI posits that a targeted mechanism be used which resembles recycling the revenues through the tax and welfare system. This would have a lower administrative costs than a so called ‘carbon cheque’. This approach is more progressive which is appropriate given that higher income households emit higher levels of carbon. In addition, the administrative cost of a more targeted return is lower than a flat allocation via the “carbon cheque” approach.

As set out earlier in this submission, one suggested method to recycle the revenue to poorer households is via an increase in the fuel allowance.

Other suggestions

We believe that the accelerated capital allowances for energy-efficient equipment scheme should continue and some of the proceeds from the carbon tax should be used to fund this if necessary.

The Oireachtas Committee on Climate Action’s report notes that in order to reach a target of net zero emissions by 2050, Ireland must fully decarbonise electricity generation. The report recognises that new technologies will be required to develop solutions in energy production and storage and carbon sequestration. Chartered Accountants Ireland suggests that an enhanced form of the R&D tax credit could be used to fast track the development of technology to make renewable forms of energy cheaper and more readily available to businesses and households alike. The R&D tax credit has an established administrative infrastructure which could be refined to encourage renewable energy technological research and development necessary to support Ireland’s net zero emissions targets.

Communicating with taxpayers

It is clear that the key to driving behavioural change will be via the two pronged approach previously outlined. As part of this, the Government should develop a communication programme to enable them to establish a clear causal link between any higher taxes paid or any rebate or incentive received and the positive benefits for climate change. This could be via the inclusion of a simple “How the carbon tax is working for you” message in literature, applications forms and documentation. A wider country wide campaign could also be undertaken to spread the message and help people “make the connection” needed to drive behavioural change.

On an annual basis, perhaps at each Budget, the government should publish more detailed information on the Exchequer take from raised carbon taxes, how this has been spent and how Ireland is progressing in its climate change action plan. This annual publication should be publicised in the media and online with a clear message that taxpayers and consumers are investing in both Ireland and the world’s future via both carbon taxes and any incentives they receive to invest in less carbon intensive technologies.

Conclusion

We look forward to engaging in further consultation in the future on this matter. In the meantime, in the context of the foregoing, as a minimum Chartered Accountants Ireland recommends the following to help stimulate behavioural change:

1. Clear parameters of what an increase in carbon tax rates will achieve must be set out from the outset. If an increase in carbon tax is intended to change consumption patterns, alternatives to the use of high carbon taxed fuels must be provided for consumers first.
2. Consumers need to see a direct link between the carbon tax collected and what the additional revenues are spent on and how it benefits them. They are more likely to accept it and support it by changing their behaviour. How this is communicated will be critical to the success of the two pronged approach.
3. Revenues generated from carbon taxes should be ring-fenced rather than go into a central exchequer fund. The poorest households should be protected from increased carbon taxes by a series of targeted reliefs through the tax and welfare system, starting with an increase in the fuel allowance.

7 A strategy to combat energy poverty 2016–2019, Department of Communications, Energy & Natural Resources, 2016

8 Fuel Allowance Expenditure, Dáil Éireann Debate, 2018

9 Climate Action Plan to Tackle Climate Breakdown

10 Home Energy Upgrades By County, November 2018

11 Carbon taxation in Ireland: Distributional effects of revenue recycling policies, ESRI Special Article, June 2019