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Carbon tax

An impact assessment (Tol et al., ESRI, 2008) of the introduction of a carbon tax shows positive effects on economic growth, provided that the tax revenue is used to lower labour costs. If the tax revenue is used to reduce government debt, the positive economic effects are much smaller. The same is true if the revenue is reduce lump-sum to households -- that is, everyone gets the same cheque in the post. See Figure 1 (Conefrey et al., ESRI, 2008). Note that a carbon tax with lump-sum recycling is also referred to as cap and share.

Figure 1. The difference in Gross National Product between a scenario with a zero carbon tax, and scenarios with a €20/tCO2 carbon tax in 2010 rising to €40/tCO2 in 2020, for three alternative ways to recycle the revenue of the carbon tax.
Figure 1. The difference in Gross National Product between a scenario with a zero carbon tax, and scenarios with a €20/tCO2 carbon tax in 2010 rising to €40/tCO2 in 2020, for three alternative ways to recycle the revenue of the carbon tax.

Although a carbon tax is regressive, the negative implications for the income distribution can be compensated with a minor increase in social benefits and a slight decrease of income taxes, See Figure 2 (Callan et al., ESRI, 2008).

Figure 2. The implications across the income distribution of a €20/tCO2 carbon tax, an increase of social benefits of €2/week/adult and €0.80/week/child, and an increase of the tax credit by €104/year.
Figure 2. The implications across the income distribution of a €20/tCO2 carbon tax, an increase of social benefits of €2/week/adult and €0.80/week/child, and an increase of the tax credit by €104/year.


The ESRI has a long tradition in studying the impact of carbon taxes in Ireland. Previous work includes