Dr. Aykut Mert Yakut:

I thank the committee for this opportunity to present our research. I am a research officer working in the energy and environment modelling group at the ESRI. My colleagues and I are analysing the economic and environmental impacts of climate change policies.

In October 2019 we published a report entitled, The Economic and Distributional Impacts of an Increased Carbon Tax with Different Revenue Recycling Schemes. The committee has invited me to discuss the results presented in the report. It examines the distributional impacts of an increased carbon tax with different revenue recycling schemes. A revenue recycling scheme is a policy option designed to eliminate or at least lessen the negative consequences of a tax increase by using the revenue raised. The climate action plan proposes that the level of the carbon tax should reach €80 per tonne of CO2emissions in 2030. In a trajectory of an incrementally increasing carbon tax, the report compares ten revenue recycling scheme options. The results indicate that total emissions will continue to grow over time owing to economic growth and an increase in population. The suggested increase in the carbon tax will be helpful to Ireland in reducing its emissions, but it will not be sufficient on its own to meet the country's legally binding targets for non-emissions trading system, ETS, emissions in 2030. The strong economic growth profile of the economy will be marginally affected. In the case of no recycling of carbon tax revenues, the annual average growth rate of real gross domestic product will drop from 3.3% to 3.288%. In this case, on the other hand, household income and public fiscal balances deteriorate most among considered revenue recycling schemes.

Using carbon tax revenues to reduce other taxes such as sales, wage or corporate taxes can reduce the macroeconomic impacts of a carbon tax increase and lead to increases in household income but they often result in disproportional effects on poorer households. In other words, an increase in carbon tax has regressive impacts. Returning carbon tax revenues to households in the form of transfers can, however, significantly reduce the regressive impacts at the expense of poorer macroeconomic performance. Rural households face higher and regressive increases in consumption prices than urban households. In urban areas, however, middle income households face the highest price impacts. Carbon-intensive production sectors such as transport and mining will be hit the hardest by a carbon tax increase. In contrast, low carbon-intensive sectors such as the accommodation sector can benefit from a carbon tax increase.