Thursday, 11 July 2019
Department of Finance
The Economic and Social Research Institute (ESRI) and the Department of Finance operate a joint research programme on various macroeconomic and taxation issues in Ireland. Under this programme, the ESRI produced research on the carbon tax in 2018, including on the distributional impacts of a once-off increase in the tax. The research found that households at all income levels will face similar percentage increases in consumer prices in the event of such an increase, but with the impact felt differing on the basis of the carbon intensity of the goods they consume and the ease with which households can switch their consumption. In the case of a €5 increase in carbon tax, the research found that costs would increase by €0.45 per week for the poorest households and by €2.30 a week for the richest, reflecting the different consumption patterns experienced by these households. However, in terms of shares of income, the impacts on poorer households was found to be more than double that on 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.
The model used in this research was limited to performing a static analysis and could not capture the impact of producers and consumers altering their behaviour in reaction to increases in the carbon tax. The next phase of this joint research work underway utilises a the more dynamic Ireland Environment-Energy-Economy (I3E) model which can examine phased increases in tax rates over time. As part of this work, the Department has also commissioned the ESRI to undertake an extension of the model to distinguish impacts by household income level and location. This research is currently in progress and is expected to be completed in advance of the budget so as to inform budgetary decisions on the carbon tax.