Professor Edgar Morgenroth:

I thank the select committee for inviting me to appear before it. It is a great pleasure to be here.

In my brief opening statement I will outline the objectives of the ESRI's study of the environmental impact of fiscal instruments, the approach used and the findings, particularly in respect of the taxation of motor fuels. I was the lead author of the report which was completed while I was still at the ESRI.

The research which was funded by the Environmental Protection Agency, EPA, sought to assess the extent to which fiscal instruments in Ireland, particularly those not specifically aimed at achieving environmental goals, had environmental impacts. The premise for the work was that while the fiscal implications of taxes, tax expenditures and subsidies were usually well understood, other potential impacts were sometimes ignored. This is important, given that the fiscal system, by adjusting prices, can play a significant role in changing behaviour. Overall, the findings confirm that a large number of fiscal measures have some effect in at least one environmental domain and that specific tax changes can make a significant contribution to achieving environmental objectives.

The approach used in the analysis was, first, to conduct a simple assessment of the potential environmental impacts of a large number of existing and potential fiscal instruments. This considers the incentives a particular measure sets, the likely resulting behaviour and the consequent expected environmental impact. The environmental impacts considered covered the main domains of climate change, air quality, water quality and land but did not include resource intensity. In total, 142 measures were considered, for which 246 impacts were identified, which implies that, on average, measures have an impact in more than one domain. The most widespread impact is on climate change emissions, with 98 measures having impacts. The least common impact is on water quality, with 23 measures having impacts. Just over half were assessed to have a likely positive impact on the environment.

The nature of the initial assessment of environmental impacts of the 142 measures does not identify the size of the environmental impact. It also does not provide a definitive assessment of the effects. To achieve this, a more thorough analysis is necessary. Therefore, a more thorough analysis was conducted in four case studies, including of the difference in diesel and petrol excise rates. The choice of case studies was influenced by the importance of specific sectors in generating environmental impacts and data availability.

The choice of the case studies in the report was influenced by the importance of specific sectors in generating environmental impact and by data availability. Agriculture and transport are the two largest contributors by sector to overall GHG emissions in 2015, so measures affecting those were chosen. As an example of measures that we would have liked to have looked at, a lack of data on the number and type of company cars prevented us from analysing the tax treatment of company cars. In future, that is something the committee might be interested in.

It is important to note that the changes in the tax system in Ireland introduced in 2008 have had a significant effect on CO2 emissions as they incentivised the purchase of more efficient vehicles - from a CO2 perspective at least. In 2009, just 13% of new cars registered were in the lowest emission category but by 2016 that had increased to 78%. However, the rising stock of new vehicles was accompanied by longer travel distances and somewhat larger cars, so that on average the efficiency improvements have been more modest than one might expect.

Research has shown that the increasing dieselisation due to the motor tax changes introduced in 2008 resulted in lower reductions in nitrous oxide, NOx, emissions than would otherwise have been the case. Furthermore, diesel vehicles produce significantly higher levels of particulates, PM, impacting significantly on air quality. That and the vehicle emissions testing scandal have raised the awareness of these emissions. The higher level of emissions compared to those claimed by manufacturers combined with growing traffic volumes have resulted in poor air quality in many European countries. As a consequence, and given the need to meet EU air quality regulations, many cities are now considering diesel bans or at least bans on diesel vehicles that do not meet the Euro 6 standard.

In order to assess the potential impact of raising the excise rate for diesel to that of petrol a simple simulation was conducted. This involved assessing the response of motorists to a change in the price of diesel resulting from excise equalisation, which was based on estimates of the price responsiveness from the academic literature. These calculations take the current composition of the vehicle stock, which have been significantly determined by the tax changes introduced in 2008 as given - that is important as the results would be very different if they were calculated using the 2008 car stock as a basis. The simulations do take into account that some motorists might switch to petrol vehicles.

The analysis shows quite broadly that an equalisation of excise rates of petrol and diesel to the current rate for petrol would reduce fuel consumption, drive down vehicle-related emissions and provide a revenue boost to the Exchequer. The simulation results suggest that NOx emissions would be reduced by 3.8% and PM emissions would be reduced by 4.1%. Tax revenue could increase by more than €500 million. It is important to note that these simulation results are not precise predictions, but indicate the broad magnitude of the effect holding other factors fixed.

Overall, the analysis shows that the environmental impact of the fiscal system should be studied more carefully as some measures have significant environmental costs. The appropriate reform of these measures could make a significant contribution to reducing Ireland's GHG emissions and reduce local pollution. I again thank the committee. I am happy to take any questions.