The heterogeneous effects of carbon taxation in Ireland

Carbon taxation has emerged as a key component of Ireland’s decarbonisation strategy. At present, carbon tax stands at €41 per tonne and is due to increase by €7.50 per year until it reaches €100 per tonne in 2030. It is well-known that carbon taxation is regressive, in that less affluent households pay a greater proportion of their income in carbon tax than their more affluent counterparts, but compensation of low-income households can ensure that carbon taxes are progressive rather than regressive. However, there are outstanding questions regarding the impacts of carbon taxation policy that this paper addresses.

We estimate the impacts of carbon taxation on different types of households across income bands and within the same income band. We identify the households with the largest burden under these two distributional views (e.g., households with children versus those without, or couples versus single people).

We also estimate energy demand responses to energy prices and quantify the distributional impacts of measures to compensate the most affected households for losses in disposable income after carbon taxes.