Dr. Miguel Tovar Reaños:

I thank the committee for the opportunity to discuss our research. I work for the ESRI in the area of energy and environment. I am the lead author of the ESRI paper, Carbon taxation in Ireland: distributional effects of revenue recycling policies. The study was funded by the ESRI’s energy policy research centre. It shows that a well-designed carbon tax and revenue recycling mechanism could reduce emissions and alleviate income inequality. Consequently, this research finds that environmental and distributional policy goals are not necessarily in conflict if the policy is designed appropriately. The model does not consider the economy-wide effects that will happen if taxes are changed. This part of the research is discussed by my colleague, Dr. Mert Yakut.

When simulating a carbon tax increase of €30 per tonne, we estimate that carbon emissions would fall by 3.9%. A tax increase of €80 per tonne would yield a 10.2% reduction in emissions. We use data on household expenditure and income and statistical methods to simulate the mix of products that people would buy once a carbon tax was applied. For additional taxes of €30 or €80 per tonne, we estimate that on average, each household would pay €2.70 or €6.80 more per week, respectively. While reducing emissions, an additional carbon tax is found to disproportionately affect low income households. Poorer households spend a greater proportion of their income on energy, and therefore on carbon tax, than richer households. This negative distributional effect can be corrected by returning some of the additional revenue to households using a recycling mechanism. The study shows that if revenues were recycled in a manner that targets poor households, inequality would be reduced. The study also estimates the distributional effects of allocating the additional revenue equally across households as a carbon cheque would do. For additional taxes of €30 or €80 per tonne, this mechanism brings a smaller reduction in income inequality than the targeted mechanism. In addition, a carbon cheque mechanism implies additional administrative costs.

We use individual level data on household expenditure and income from the Central Statistics Office. In addition, we use data on commodity prices from the same source. This study focuses on household consumption behaviour under different scenarios of changes in prices and income.