THE IMPACTS OF REMOVING FOSSIL FUEL SUBSIDIES AND INCREASING CARBON TAX IN IRELAND. RESEARCH SERIES NUMBER 98 December 2019

de Bruin, Kelly and Monaghan, Eoin and Mert Yakut, Aykut (2019) THE IMPACTS OF REMOVING FOSSIL FUEL SUBSIDIES AND INCREASING CARBON TAX IN IRELAND. RESEARCH SERIES NUMBER 98 December 2019. UNSPECIFIED.

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Abstract

A subsidy is classified as potentially environmentally damaging if it is likely to incentivise behaviour that could be damaging to the environment irrespective of its importance for other policy purposes. Examples of such subsidies include providing fossil fuels (including diesel, kerosene, fuel oil, and peat) at lower prices to certain industries and providing fuel allowances to households to alleviate fuel poverty. While some publicly-funded supports can have important social and economic purposes, they can have a negative impact on the environment. While the main approach in Ireland to address this has been to use different excise duties, Ireland also introduced a carbon tax in 2010. The carbon tax is one of the primary fiscal policy tools used in several countries to reduce human-induced greenhouse gas (GHG) emissions. For the first time after the equalisation of its level on all fossil fuels in 2014, the Irish government increased the carbon tax from C20 per tonne of CO2 to C26 in 2020. It is expected that the total carbon tax revenues will increase by C100 million in 2020, compared to 2019. Notwithstanding this, the total budgetary cost of these fossil fuel subsidies, excluding the agriculturerelated ones, was around C2.44 billion in 2014, whereas the government’s total carbon tax collection was C390.9 million. In other words, the monetary value of environmentally damaging subsidies was over six times higher than carbon tax revenues. In 2017, the same ratio was slightly higher, since the total value of subsidies increased by 11.85%, whereas the growth rate of total carbon tax revenues was only 7.7%. This report analyses the economic and environmental impacts of the removal of eight different fossil fuel subsidies in Ireland by using the Ireland Economy-Energy-Environment (I3E) model. In addition, a separate set of scenarios in which the removal of each subsidy is accompanied by a gradual increase in the level of the carbon tax are run to quantify the combined effects of these policy instruments.

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