An increase in carbon tax would have small impacts on households and producers

A new ESRI study finds that both households and producers would face relatively small increases in costs in the event of a higher carbon tax. The work was undertaken as part of a joint research programme with the Department of Finance and Revenue Commissioners to examine the impacts of an increase in the current carbon tax. It estimates that an increase in the carbon tax of €5 per tonne of CO2 will on average increase consumer prices (measured by CPI) by 0.13% and producer prices by 0.08%. Even quite large increases in the carbon tax are found to have limited impacts, where a doubling of the carbon tax (to €40) is estimated to increase consumer prices by 0.53% and producer prices by 0.37%. At the same time, the study estimates small impacts on emission reductions of 1.2% for a €5 increase and 4.7% for a €20 increase.

Households at all income levels will face similar percentage increases in consumer prices. In the case of a €5 increase in carbon tax, costs would increase by €0.45 per week for the poorest households and by €2.30 a week for the richest. However, in terms of shares of income, the impacts on poorer households will be more than double that of richer households. For a €5 increase, the poorest households will have to spend 0.16% more of their income to continue the same level of consumption (of all commodities), whereas the richest will have to spend 0.07% more.

Energy prices will have the greatest impact on consumer prices, where the poorest households face a 0.7% increase in energy prices and the richest a 1.1% increase for a €5 increase in the carbon tax. The study finds that the prices of heating increase slightly more for poorer households. The poorest household will face a 0.28% increase in home heating costs and the richest a 0.22% increase. This is due to the stronger reliance of poorer households on carbon intensive fuels (such as peat and coal) for heating.

The production sectors most impacted by a carbon tax increase are the energy and transport  sectors. However, the impacts are estimated to be small, with an increase of less than 0.3% increase in the production costs of the transport sectors. The production sectors that drive Irish exports will face extremely small cost increases.

The emission reductions resulting from a carbon tax increase are limited. Transport sectors display the largest decrease in annual emissions with a decrease of almost 2.5% in water and land transport. Richer households will decrease their emissions more than poorer, with a 1.4% decrease for the richest households and 1.1% for the poorest.

One of the ESRI report’s authors, Kelly de Bruin commented: “The relatively low carbon tax, which makes up less than 2% of taxes on products, has limited impacts on prices and hence does not give consumers and producers enough incentive to decarbonise. To ensure a transition to a low carbon economy and to meet the EU emissions targets, the carbon tax would need to increase significantly.”