ESRI used its Ireland Environment, Energy and Economy (I3E) CGE model to examine the environmental and economic impact of increasing the Irish carbon tax along a trajectory to €80 per ton by 2030 using various revenue recycling schemes.
This research was funded by the Irish Department of Finance and the Department of Communications, Climate Action and Environment (DCCAE) under a Joint Research Programme on Macroeconomy, Taxation and Banking in 2019. Since the research, legislation has been implemented to increase the carbon tax in Ireland to €100 per ton by 2030, which impacts the estimates presented.
- A carbon tax increase to €80 per ton in 2030 alone will not be sufficient to reduce emissions to the levels needed to reach the EU emissions targets for 2020 and 2030. Although the increase in carbon tax decreases emissions by 15% in 2030 compared with no tax, emissions increa se significantly over time due to economic growth.
- The carbon tax is estimated to have a limited impact on GDP, especially if carbon taxes are used to reduce other distortionary taxes. The tax will increase the price of Irish goods, reducing domestic and international demand for those goods.
- Though rural households emit less carbon than urban households, they face higher price impacts from the carbon tax. The impacts for rural households are regressive, with poorer households facing the highest price increases.
- With revenue recycling, real disposable income can increase despite a decrease in consumption. Revenue recycling through transfers that benefit particularly poorer households can be progressive, while revenue recycling through wage tax reduction has regressive impacts, despite resulting in the highest average increase in real income.
Since the publication of this research, implemented fiscal policy changes mean that carbon tax revenue raised from the programmed rate over and above the first €20 per ton of CO2 is ring-fenced for specific climate action expenditures.
Keywords
carbon pricingdistributional consequencesmacroeconomic indicatorspolicy designrevenue recycling
