Document Sample
					                                                  THIS PAPER ACCOMPANIES TSG PAPER 02/23
                                                           PREPARED FOR GREEN TAX GROUP
                                                                           OCTOBER 2002

       Proposal for a Carbon Energy Tax from the Department of Environment & Local
                       Government discussed by the Green Tax Group

1. Under the Kyoto Protocol and the EU burden sharing agreement Ireland has undertaken to
   limit the growth in emissions of greenhouse gases to 13% above 1990 levels in the period
   2008-2012. The Kyoto Protocol places an absolute cap on emissions in the period 2008-2012
   of an average of 60.9 million tonnes (Mt) of CO2 equivalent per annum. Business as usual
   projections made in preparation of the National Climate Change Strategy (NCCS) suggest
   that emissions would be at 73.7 Mt per annum by 2010, requiring an annual reduction of 13
   Mt by that time. Measures put in place to date have the potential to reduce annual emissions
   by 3.3 Mt, leaving reductions of 10 Mt per annum still to be found through the mechanisms
   set out in the National Climate Change Strategy including taxation measures.

2. Irish emissions in 2000 were 23.7% (67 Mt) above 1990 levels (53.9 Mt). Estimates of
   emissions growth by DIW Berlin suggest that Ireland’s emissions grew by 5.7% (3.8 Mt) in
   2001. This would put our 2001 emissions 30.75% (70.5 Mt) above 1990 levels. Preliminary
   indications from the EPA suggest that the DIW analysis may be an overestimate, but an early
   EPA estimate of 3.8% (2.5 Mt) growth in 2001 is still the highest in the EU. Annual
   increases in emissions of the order of the EPA estimate would suggest that the NCCS
   business as usual base could be significantly overshot, to in excess of 60% (86+ Mt) above
   1990 levels. At this stage, to ensure the business as usual expectation is not exceeded by
   2010, annual increases in emissions must be controlled at approximately 0.8%, of 1990
   levels, year on year, before any reductions in emissions are made to reach the Kyoto target.
   Against an expectation of 5% annual economic growth in the medium term, achievement of
   this performance will require considerably greater decoupling of emissions from economic
   growth than achieved heretofore.

3. Per capita emissions of greenhouse gases in Ireland, at 17.4 tonnes in 1999, are the highest in
   the EU. This compares to an EU average of 11t. Ireland also had the greatest increase in per
   capita emissions over the period 1990-1999. The high levels of per capita emissions and high
   growth rates in these emissions would represent a significant challenge for Ireland if future
   climate change commitments are expressed in terms of emissions per capita, an outcome that
   looks increasingly more possible.

4. The need to implement measures across the economy is imperative and has now become very
   urgent, as Ireland has now ratified the Protocol and with ratification by Russia expected no
   later than Spring 20031 the Kyoto Protocol would enter into force by Summer 2003 at the

5. For the first time, the Kyoto Protocol has created limitations for the use of a previously open
   access resource across the developed world, i.e. greenhouse gas emissions to the atmosphere.
   In a real sense greenhouse gas emission “rights” have now become a limited national asset,
   which, similar to all other public assets, need to be employed to maximise the returns to Irish
   society. In common with all limited resources, Ireland’s future economic performance will
   rely on ensuring the application of our limited emission capacity to the highest value use.
   This can be best achieved through the setting of an appropriate economic signal, via taxation
   across sectors or an emission trading scheme in certain sectors. Such a price signal would
   ensure that the use of this limited resource is valued appropriately.

6. The European Commission has proposed a Directive to create an EU-wide emissions trading
   regime beginning on January 1st 2005. The Council of Environment Ministers and the
   European Parliament are currently finalising their opinions on this proposal. While there may
   be opt-outs for firms on an individual basis, these are likely to be quite restrictive, and it is
   expected that emissions trading will cover all of Ireland’s powergen emissions and two thirds
   to three quarters of Ireland’s industrial emissions.

7. However given the varied and diffuse source of many of Ireland’s greenhouse gas emissions
   a trading scheme would be too complex and entail excessive transaction costs to deal with
   sectors outside of powergen and large industrial installations. This is also the expectation in
   all other Member States. Taxation, therefore, represents the least cost and most efficient
   method of achieving the required reduction in emissions on an economy wide basis, and it is
   already widely used across the EU and elsewhere in the OECD specifically to target
   greenhouse gas emissions.

8. The Government’s National Climate Change Strategy made specific reference to the use of
   carbon taxation as a cross-sectoral policy instrument. This commitment, to “implement
   greenhouse gas taxation on a phased and incremental basis in a manner which takes account
   of national economic, social, and environmental objectives”, was restated in the “Agreed
   Programme for Government” published in June of this year alongside a commitment to fully
   implement the National Climate Change Strategy.

             Together with the ratifications submitted to date, ratification by Russia, promised at the WSSD in
   Johannesburg in Sept 2002, on its own would be sufficient to ensure entry into force. Should Russia refuse to
   ratify (together with the US), the Protocol cannot enter into force.

9. The Taoiseach also restated the Government’s desire to tackle climate change in his address
   to the plenary session of the World Summit on Sustainable Development (Aug 2002) when
   he announced, “We are gearing up to meet our Kyoto commitment and prepare for the
   tougher action that is necessary to tackle climate change,” thus acknowledging that
   mitigating climate change will be an ongoing process with more ambitious targets to be met
   in the longer run.

10. The cost to the Exchequer of not taking action to reduce emissions now will be significant in
    years to come. The NCCS estimates of “business-as-usual”(BAU) emissions predict that
    Ireland will overshoot its Kyoto target by 13 Mt CO2 equivalent per annum (which must now
    be considered a best scenario, with the possibility of a significantly worse outcome).
    Measures implemented or planned to date will only have the potential to reduce the BAU
    figure by 3.3 Mt. The consequence of this is that Ireland would need to purchase emission
    rights at their market price in the period 2008-2012 or pay a penalty (effectively the market
    price plus 30%). Current estimates put the market price in the region of €2 to €20 per tonne.
    Without the involvement of the United States, who were expected to be net buyers, prices at
    the lower end of that range appear more probable due to the decrease in demand. Assuming
    that the agricultural sector2 meets its target as set out in the NCCS and that electricity
    generation is covered by the EU emissions trading scheme, this would leave c.6 – 123 Mt CO2
    equivalent of an overshoot to be accounted for with an Exchequer bill of between €12m and
    €240m per annum.

11. Therefore any attempt to “buy” our way out of non-compliance would cost the Exchequer
    €12m - €240m per annum in perpetuity. Assuming an interest rate of 5% this would have a
    net present value of between €240m and €4.8bn just to meet an ongoing Kyoto overshoot.
    The Kyoto Protocol is only the first step in an evolving process to combat climate change,
    requiring a reduction in global average emissions of 60%-70% over the rest of the century. It
    can therefore be expected that this Exchequer bill would grow in perpetuity. The expected
    rise in CO2 price on the world market post 2012, in combination with ever more ambitious
    targets, would push this cost to unbearable levels without action. Carbon taxation will have
    the dual effect of reducing this bill and providing a revenue stream to pay any small residual

12. Last year the Department of the Environment and Local Government presented a framework
    for carbon taxation (TSG 01/22) to the Tax Strategy Group. That paper set out a number of

          Details on a potential framework for greenhouse gas taxation in the agricultural sector are contained in
   Annex 16.
            The lower figure the business as usual estimate presented in the NCCS, the higher assumes the
   potential rate of growth in emissions detailed in paragraph 2 of this paper.

   key questions on the design of a carbon taxation regime. This paper makes more specific
   proposals for such taxation and quantifies the environmental benefits. Analyses of the
   economic and competitiveness impacts are also presented against the clear understanding that
   the short-term protection of specific sectoral interests will add costs to the economy as a
   whole, including higher costs, in time, to the protected sector.

    Design and Coverage
13. Defining the scope of the tax involves two separate questions, firstly “what to tax?”, and
    secondly “who to tax?”.

14. The answer to the question of what to tax should be focused as closely as possible on direct
    emissions. It would be prohibitively costly to monitor every source of carbon emissions.
    However the carbon content and emission factors of individual fuels is sufficiently well
    established to act as the basis for taxation without dampening its effectiveness as an
    environmental policy instrument.

15. It is therefore proposed that the charge should be an environmental levy based on the carbon
    content of fuels. It should be a separate, stand-alone charge applied in addition to current
    excise duties.

   Table 1. TOE to CO2 Conversion Factors
                                                            Conversion Factor
                       Fuel                       Tonnes of CO2 emitted for each tonne of
                                                      oil equivalent (toe) consumed
   Peat                                          4.14
   Coal                                          3.96
   Oil                                           3.18
   Auto Fuel (Average)                           3.05
   LPG                                           2.66
   Natural Gas                                   2.30
   Source: EPA

16. Table 1 above details the carbon content of the main fuel categories. Because of the disparity
    in carbon content of fuels, it is clear that the greater CO2 reduction benefit is achieved by
    placing a charge per tonne of CO2 rather than per TOE or unit of energy. This is further
    illustrated in Table 2 below, which details the tax rate to be applied per tonne of TOE to
    individual fuels. The variation from the mean is significant and only this form of taxation
    will generate the necessary fuel switching. Table 3 presents the price increase per barrel of oil
    equivalent (BOE), and indicates that the price increase per barrel of oil is within the range of
    common oil price fluctuations

   Table 2: Tax (€) per TOE corresponding to various rates per tonne of CO2
                   €7.50      €10           €15           €20          €25
   Peat                   € 31.05            € 41.40          € 62.10        € 82.80          € 103.50
   Coal                   € 26.90            € 35.86          € 53.79        € 71.72            € 89.65
   Oil                    € 22.88            € 30.50          € 45.75        € 61.00            € 76.25
   LPG                    € 19.95            € 26.60          € 39.90        € 53.20            € 66.50
   Natural Gas            € 17.25            € 23.00          € 34.50        € 46.00            € 57.50

   Table 3: Tax (€) per BOE corresponding to various rates per tonne of CO2
                   €7.50       €10          €15           €20           €25

   Oil                       €3.09             €4.11            €6.17           €8.23            €10.28

   LPG                       €2.69             €3.59            €5.38           €7.18             €8.97

   Natural Gas               €2.33             €3.10            €4.65           €6.20             €7.76

17. The question of whom to tax should be asked in light of the aim of a carbon levy, which is to
    realise behavioural changes rather than to raise revenue. Therefore the tax should be directed
    at the agents most capable of the behavioural changes (e.g. fuel switching and increased
    energy efficiency) that will result in lower emissions.

18. In the case of CO2 emissions the agents most capable of change are those burning the fuels,
    and therefore this will be the most effective point at which to apply the tax. In the case of
    electricity generation this means applying the tax to the generating station4, while in the case
    of transport it will require applying the tax to the motorist.

            Renewable energy is carbon free and will not be taxed. This will improve the economics of renewable
   energy, such as wind powered generation. A tax of €20 per tonne of CO2 will increase the fuel price of coal and
   oil generating by c0.018c, gas by c0.012c and peat by over 0.025c per kWh while the price of renewables would
   remain unchanged. This price increases would close the cost gap between wind and most fossil fuels
   significantly, and a tax of €20/t would make wind energy among the most competitive forms of generation.
   Conversely a tax on end use electricity (e.g. an increase in the VAT rate of electricity from 12.5% to 21%)
   would provide no incentive for additional renewable energy, nor would it provide any incentive for fuel
   switching in the carbon-based electricity generation sector.

   Table 4: Retail Fuel Price Increases
   Fuel                  Retail Unit        € 7.50  € 10    € 15    € 20   € 25
   Peat - Briquette      Bale                0.250    0.340   0.500  0.670   0.840
   Coal                  40kg Bag            0.790    1.054   1.580  2.107   2.634
                         Tonne              19.76    26.34   39.51  52.68   65.85
   Oil - Heating         Litre               0.029    0.039   0.058  0.077   0.097
   Oil - Motor           Litre               0.028    0.037   0.056  0.074   0.093
   LPG                   Litre               0.028    0.038   0.056  0.075   0.094
   Gas                   kWh                 0.0014 0.0018 0.0027 0.0037 0.0046
   Electricity5          kWh                 0.0049 0.0065 0.0095 0.0124 0.0152

19. Table 4 above indicates the consequent increases in the retail price of energy products for
    residential users resulting from various potential tax rates.

    Point of Tax
20. In order to lower administrative costs the collection of the tax should be connected to the
    collection of existing excise duties. Where excise is not currently applied to a fuel (gas, peat)
    the tax should be imposed at the level of the generating station (electricity inputs), gas
    provider, and commercial extractor of peat. Explicit identification of the climate tax element
    of the resulting total price of the fuel should be required. Such a requirement would serve the
    dual purpose of informing consumers about their direct impact on climate change, and
    ensuring that the tax is passed to the fuel consumer thus maximising the incentives for

    The Rate of the Charge
21. Indecon Consultants (who carried out a study for Forfás and the Department of Enterprise,
    Trade and Employment on competitiveness of the enterprise sector and the use of taxation
    and negotiated agreements for reducing greenhouse gas emissions in Ireland) identify three
    options for determining the level of taxation for the industrial sector.

    - Benchmarking
22. This was also identified as an option in the paper presented to the TSG in 2001 and would
    involve applying a proportion of the rate applied by other EU Member States. However such
    a tax rate would not now necessarily suit Irish requirements, as the policy objectives and
    abatement opportunities of other EU countries are not the same as those in Ireland. The
    differentiated emissions targets and emission sources, our strong economic growth and high
    fossil fuel dependency all make benchmarking inappropriate. It would be more advisable to
    set the tax to reflect Irish requirements.

           See footnote 13 re attribution of electricity price increases to residential users.

    - Market value of carbon
23. Indecon suggest that applying the market value of carbon, as discovered through emissions
    trading would produce an effective tax rate. The European emissions trading market will
    incorporate approximately 20% of Ireland’s greenhouse gas emissions, and will create
    certainty that the emission limitation targets for the sectors included will be met. The
    interaction of supply and demand will produce a market price for carbon in those sectors
    covered. However it would be unwise to apply this price to the wider economy, as it merely
    reflects the supply (emissions target) and demand (opportunity cost of abatement) in the
    sectors affected. This price does not reflect the market value of carbon in the wider economy
    where the equilibrium price is likely to be different. Using such a methodology would also
    fail to realise many of the ancillary benefits arising from CO2 reductions such as increased
    energy efficiency and health benefits from reduced SO2 and NOx. These benefits in
    combination with the likelihood that our future commitments will be even more ambitious
    make domestic action both necessary and desirable. It should be further noted that the Kyoto
    Protocol specifically requires Parties to make significant effort domestically.

    - Targeting emission reductions
24. The objective of the levy is to assist in meeting Ireland’s Kyoto obligation and therefore
    achieving the required emission reductions should be the guiding principle in deciding the
    level at which to set the charge. The targets for Ireland’s emission reductions are set out in
    the NCCS, which operated on the basis of sectoral reductions from business as usual. These
    reductions amount to 5.745 Mt of CO2 equivalent in the sectors to be covered (11.395 Mt if
    electricity generation is not covered by emissions trading). Reaching this target will be
    assisted by a number of measures already in place or in the pipeline, such as improving
    vehicle efficiency (380,000t per annum), improved public transport (up to 1Mt per annum),
    and new building regulation standards (300,000 tonnes per annum). Some of this target also
    relates to reductions in non-CO2 industrial greenhouse gases. However despite these
    measures Ireland is still currently projected to overshoot our Kyoto obligation. A target of
    c.2 Mt of CO2 reductions from taxation is, at this stage, the minimum that should be
    implemented. This is a conservative target in the context of the overall need to reduce
    emissions and the appropriateness of this level of reduction target, the scope for more
    taxation, and alternatives should be reviewed throughout the period to the Kyoto commitment
    period (2008-2012).

25. Targeting emissions reductions will require an examination of the price elasticity of demand
    for the individual fuels covered in the sectors to which the charge will be applied.

    Price Elasticity of Demand
26. The emissions target will be achieved through a combination of reductions in the use of
    individual fuels, substitution to less carbon intensive fuels, and lower overall energy demand.

   The estimation of elasticity is complicated by the variety of these mechanisms through which
   taxpayers may reduce their total tax bill.

27. There have been a large number of studies undertaken internationally and domestically aimed
    at estimating the price elasticity of energy demand. The consensus is short-run own price
    elasticity for overall national energy demand of –0.1 rising to –0.46 in the long run. These
    figures are even greater for certain fuels when the price increase is applied to individual fuels.
    Estimates of cross7 price elasticity vary greatly with little or no agreement. The analysis
    presented in this paper does not take full account of the level of fuel switching and is likely to
    underestimate the level of CO2 reductions that can be achieved

28. ESRI estimates for Ireland in its Medium-Term Review (Sept 2001) suggest that a 10%
    increase in electricity and energy prices would cause a 2% reduction in emissions. However
    the proposed carbon charge would be more focused than a general price increase,
    differentiating in favour of less carbon intensive fuels, and therefore achieving greater
    emission reductions.

29. It should be noted that the application of the observed elasticities is likely to underestimate
    the actual level of price elasticity of demand. This is due to the fact that the certainty of
    carbon taxation will lead to greater shifts in demand than random price spikes. Most of the
    observed elasticities are calculated on the basis of price changes which consumers see as
    being reversible. The perception that a carbon charge would result in permanently higher
    prices, being applied on a phased incremental basis over a number of years in favour of lower
    carbon fuels, is likely to lead to greater efficiency improvement, innovation and fuel
    switching and therefore a higher long-run elasticity.

30. The long-run elasticity in CO2 reductions is therefore higher than for overall energy demand,
    and is conservatively estimated at –0.5.
31. This section sets out to test the potential environmental effectiveness of a tax rate of €7.5 per
    tonne of CO2 in 2003 rising to €209 in the medium term. The analysis is based on fuel use, as

           An own price elasticity demand of –0.4 means that for a 10% increase in the price of a good there will
   be a 4% decrease in demand.
            Cross price elasticity of demand refers to the rate of substitution between goods. For example a relative
   increase in the price of oil will lead to a decrease in demand for oil and an increase in demand for gas.
            The analysis presented here does not take account of the CO2 reductions that will arise from the
   application of VAT for the residential, public and transport sectors. This reduction will be small in year one but
   could rise to 0.08 Mt when the tax is fully implemented.
            All cash amounts referred to in this paper are expressed in current market prices and will, over time,
   need to be adjusted in line with inflation.

   derived from projected energy balances for 2010 used in the ESRI’s Medium Term Review
   (Sept 2001). The immediate emission reductions are based on an elasticity of demand of –
   0.1, while long run projections are based on an elasticity of –0.510. Two scenarios are
   presented for long run emission reductions, the first is where emissions trading is not utilised,
   and the second assumes emissions trading is used by 100% of the electricity generation sector
   and by 66.67% of the industrial sector. However until the EU emissions trading scheme, for
   electricity and other large industrial CO2 emitters, comes into force in 2005, at the earliest, all
   fuels in the national economy should be subject to the levy. Sensitivity analysis of the results
   is presented in Annex 1 and 3 showing the effects of various tax rates and elasticities.

32. The projected level of emissions reductions in 2003, from a tax rate of €7.5, is 0.64 million
    tonnes (Mt) of CO2. The sectoral breakdown of these emission reductions is presented in
    Annex 2. The projected reduction by 2010, with a tax rate of €20, is 2.02 Mt with emissions
    trading and 7.4 Mt without. The 5.39 Mt difference would be achieved through international
    emissions trading. Annex 2 indicates that one third of the 2.02 Mt would be achieved by both
    the residential sector and the transport sector, with a further fifth of the reductions coming
    from the commercial sector. 10% would be attributable to industry and 2% to energy use in

33. Introduction of the levy now, sufficiently in advance of the Kyoto commitment period, would
    be a significant and effective contribution to Ireland’s efforts to combat climate change as
    long-run elasticities would have been realised. Conversely, delay in applying a levy would
    reduce its effectiveness in Kyoto terms, as the longer-run elasticity could not be reached by
    the commitment period.
    When to Tax
34. The precise timing of the application of the levy could also have a significant impact on the
    long run elasticity of demand for fossil fuels. This process of maximising elasticity would be
    aided by a transparent and phased implementation of the charge over a period of 3-4 years.
    This would allow time for consumers to make the necessary investments in capital, such as
    purchasing more fuel efficient cars or converting home heating to natural gas or LPG. The
    requirement for advance notice to economic actors has been met by in the agreed Programme
    for Government, and the provisions of the NCCS. Accordingly a significant proportion of the
    ultimate tax may be applied immediately.

            Short-run elasticities would include reductions in energy use through simple management measures
   such as reductions in driving and energy saving in the home. Longer-run elasticities would include additional
   reductions in carbon consumed resulting from investment in fuel switching (oil to gas in industry and
   households, coal to oil, oil to gas/LPG in households) and/or investments in higher efficiency equipment in all

35. It is therefore proposed, as stated above, to impose a levy of €7.5 per tonne of CO 2 in 2003
    and to increase this charge to €20 within a maximum of four years. In the medium term these
    figures will need to be adjusted to reflect the effects of inflation on the general price of
    energy products. It is also imperative that the rate of €20 be signalled at the beginning to
    ensure that €7.5 tax is seen as a first step in a progressive attempt to reduce the carbon
    intensity of the Irish economy in line with other developed countries.

    Revenue Raised11
36. The primary aim of the carbon levy should be to affect behavioural changes and reduce
    Ireland’s emissions of greenhouse gases in the most economically efficient manner.
    However as it will only be possible to limit, rather than eliminate, emissions of CO 2, it is
    clear that revenue will be raised. The precise level of revenue will depend on a number of
    factors but the three most significant will be the rate of the charge, the elasticity of demand
    and the speed at which the charge is phased in.

37. Details of the likely revenue streams of various tax rates and elasticities are included in
    Annexes 4 and 5. Earlier analyses of the environmental benefits suggest that a carbon levy
    rising to €20/ tonne of CO2 would be necessary. The NCCS and the Programme for
    Government both call for the implementation of carbon taxation on a phased and incremental
    basis. It is likely therefore that the rate of taxation in 2003 would be lower than the Kyoto
    optimal. Applying a low elasticity of –0.1 and a charge of €7.5 per tonne to ESRI estimates
    of the 2003 energy balances would suggest a revenue stream of €315m. If the 2003 tax rate
    were increased to €10, still lower than that necessary for Kyoto purposes, the revenue stream
    would increase to €420m.

38. By the Kyoto commitment period with a charge to €20, an elasticity of –0.5, and electricity
    generation and two-thirds of industry covered by the emissions trading scheme the tax
    revenue will be c. €510m (€740m if emissions trading is not employed).

39. The amount of revenue raised by this proposal cannot be viewed against the consequent
    emission reductions to arrive at a cost per tonne of CO2 reduced. The cost per tonne of CO2
    reduced will be equal to or less than the rate of taxation (€7.50 or €20, resulting in a total cost
    of €40.4m for a reduction of 2.02Mt). The amount of revenue raised (€315m or €510m)
    reflects a tax on emission reductions not made and will form part of the general budget
    revenue stream to be recycled to protect competitiveness as describe in papragraphs 58 to 61
    below. In the current fiscal climate this revenue will also offset necessary tax rises in other
    areas and the macroeconomic effects of raising this revenue will be broadly comparable

            The figures presented in this section do not take account of VAT (@12.5%) which would be collected
   from the residential, public, and transport sectors. The additional revenue would be of the order of €8m in the
   short run rising to c.€20m in the medium term.

   whatever fiscal instrument is used to raise it. Ensuring that all sectors of the economy bear
   this tax in an equitable manner, reflecting their emissions levels, helps ensure there are no
   disproportionate sectoral effects.

    Effects on overall national competitiveness12
40. This section presents the cost effects of the tax at a sectoral level and indicates that this
    proposal does not represent a significant decrease in overall national competitiveness. It does
    not present an undue burden on any sector in aggregate and even for the households most
    affected (the poorest 5%) the burden will not exceed 1.5% of total household expenditure.
    The only section of the economy exposed to total cost increases greater than 2% is
    internationally exposed energy intensive heavy industry with an over-reliance on coal and oil.
    It should be further acknowledged that the money spent on reducing CO2 via technologies
    and fuel switching will provide a spur for economic activity in the area of environmental and
    energy services, reducing the net macroeconomic impact of the tax. If the revenue raised
    were used to fund necessary infrastructural investment to lower the industrial cost base in
    areas such as transportation and telecommunications, and improved waste management
    facilities, some critical barriers to national competitiveness could be addressed.

41. Ameliorating the effects on national competitiveness is best achieved through productive use
    of tax revenues to remove infrastructural bottlenecks, rather than protectionist support for
    specific sectors or firms. In other OECD countries much has been made of the “double
    dividend” that can be achieved by reducing distortionary taxation such as labour taxes or
    social insurance contributions. In Ireland’s case the double dividend may be best achieved
    through productive investment in the capital stock forming a valuable contribution to the
    source of future growth.

42. For any given level of desired CO2 reductions a uniform rate of taxation will have the lowest
    total cost, the lowest rise in CPI and the smallest impact on national competitiveness. Any
    attempt to shield/ exempt energy-intensive sectors would cause greater cost and
    competitiveness effects in less polluting sectors. Such an outcome would be in complete
    contravention of the polluter pays principle. This effect is further illustrated in Annex 6,
    which shows that exemptions and lowering of the effective tax rate would nullify the
    advantages of using taxation as an economic instrument.

    Immediate Cost Effects
43. Assuming a tax rate of €7.5 per tonne of CO2 in 2003, the overall revenue raised would be, as
    stated above, c. €315m. The direct incidence of this would fall primarily on the electricity
    (36%) and transport (28%) sectors with the residential and industrial sectors bearing 16% and

           Detailed information on the cost increases for each sector is contained in Annexes 8 to 15.

   10% respectively, and the commercial sector and energy use in agriculture contributing 8%
   and 2% respectively. However the indirect incidence of the tax would be somewhat different.
   The ESRI have predicted that most of the tax on the industrial and commercial sector would
   ultimately fall on the household sector as the former will be able to pass through the cost rises
   in their final prices. Notwithstanding the difficulties of analysing the pass through
   opportunities in the business sectors, an estimate of the indirect incidence of the tax, derived
   by passing the tax paid by the powergen sector through to final consumers13, would suggest
   that households would pay 27% of the increase, while transport and industry would pay 28%
   and 25% respectively, with 18% falling on the commercial sector and 3% on energy use in

    Long-run Cost Effects – without emissions trading
44. With a longer run optimal tax rate of €20 per tonne of CO2, and no emissions trading, overall
    revenue raised would be c. €740m. The direct incidence would fall more heavily on the
    transport sector (38%), while electricity generation would account for relatively less (25%)
    than the effects of the tax in 2003. This is due primarily to the projected growth in the
    transport sector and the greater penetration of CCGT in the liberalised powergen sector. The
    direct percentage paid by the residential, industrial, and agricultural sectors would remain
    relatively constant at approximately 17%, 9% and 2% respectively, while the share paid by
    the commercial sector would rise to 10%

    Long-run Cost Effects – with emissions trading
45. However, it should be noted that 100% of the powergen sector is likely to be engaged in
    emissions trading by 2010 and estimates from the EPA14 suggest that upwards of 2/3rdsof
    industrial combustion-derived emissions (c.50 companies) would be covered by the proposed
    emissions trading scheme. Assuming that these emissions will be granted a 100% exemption
    from the tax, the overall tax take would drop to c. €510m15. Under this scenario transport
    would bear over half of the direct cost with households accounting for a quarter and SMEs
    carrying 5%. It is not possible to estimate who would carry the indirect incidence of the cost
    of emissions trading as the price remains difficult to predict, though it is reasonable to assume
    that households and transport would end up paying the lion’s share.

            The pass-through has been calculated on an equitable pro rata basis to consumers of electricity. It is the
   responsibility of the Commission for Energy Regulation (CER) to determine the timing of the pass-through of
   cost-increases arising for the ESB, and attribution of the cost increase to different sectors, which may not be on
   the same basis as that assumed here. It is expected that the attribution would not significantly distort the analysis
   presented here.
           Derived from EPA 04/09/2002 note to the Emissions Trading Advisory Group, chaired by Mr. John
   Corrigan of the NTMA.
            This drop in potential revenue could be offset, in full or part, if emission allowances are allocated via
   auction from 2008 onwards.

    Sectoral energy cost increases
46. Assuming a tax rate of €7.5 per tonne of CO2 in 2003 the total energy price increases for the
    residential sector will be just under 6%. This contains a range of individual fuel price
    increase from 10% for peat to 4.5% for electricity. The corresponding price increase for a
    €20 tax rate in 2010 would be 10.57% without trading and in the range 7.24% - 10.57% with
    trading, depending on the price of permits on the international market.

47. CSO figures16 show that fuel and light account for 5% of total household expenditure.
    Therefore, the short run increase in total household expenditure would be c.0.3%. The
    maximum long-run increase in total household expenditure would be c.0.5%. This is the
    average effect for the household sector, with many being significantly less effected.
    However these headline figure do not indicate the differential between income deciles. The
    bottom income decile spends approximately 12% of total expenditure on household energy
    products. This proportion declines steadily to c.2% for the highest income decile. Therefore
    the poorest 10% of the population may have to bear price increases in the range to 0.7% -
    1%17 of total expenditure in the short run, depending on the fuel mix used. This would rise to
    between 1.2% and 2% in the longer run when the tax is fully phased in.

48. Households would also bear the bulk of increased transportation costs. Transport fuels
    amount to c3.25% of total household expenditure without significant variances across the
    income deciles. Transport energy cost increases would therefore amount to c.0.11% of total
    household expenditure in the short run, rising to c.0.3% when the tax is fully phased in.

    Commercial, Public, and Institutional Sector
49. The total energy price increases in the commercial sector in 2003 would be of the order of
    4.59%, incorporating a range from 14.6% for peat to 3.46% for electricity. By 2010 with a
    higher tax rate this figure would rise to 7.9% without trading and in the range of 4.62% -
    7.9% with trading depending on the price of permits. As a percentage of this sector’s total
    expenditure, this would most likely be insignificant.

50. The total energy price increase for the agricultural sector would be 6% in 2003, rising to
    11.83% without trading and between 9.32% and 11.83% with trading. As a percentage of
    agricultural output this figure would most likely be insignificant.

           Household Budget Survey 94/95 Volume 1.
            The lower increases in these ranges are for households spending 12% on energy, the median point of
   the bottom income decile. The higher increases are based on energy expenditure of the order of 20% of total
   household expenditure to take account of that portion of the bottom income decile below the median.

51. Energy prices in the transport sector would increase by 3.52% in 2003 and 8.9% by 2010,
    regardless of whether or not emissions trading is utilised.

52. Industry would face an energy price increase of 8.82% in 2003, though this headline rate does
    mask a wider variance in individual fuels than is the case in the other sectors. The price
    increase for coal would be of the order 48% in 2003 while gas and electricity prices would
    increase by 9% and 7.8% respectively.

53. By 2010 with emissions trading the overall price increase resulting from the tax 18 would be as
    low as 3%, with all industrial coal use included in emissions trading. Without emissions
    trading, the overall price increase would be 13.8%.

54. ESRI estimates that energy inputs accounted for just under 1.1% of value of gross output in
    manufacturing in 1999. In the high tech sector energy accounted for only 0.5% of the value
    of output, and up to 2.25% in the traditional manufacturing sector. The overall average price
    increase in terms of gross output would be 0.1% for the industrial sector on aggregate in the
    short run rising to 0.15% when the tax is fully phased in. For the traditional sector these
    figures would rise to 0.2% in the short run and 0.3% in the long run.

55. It must be noted that this headline figure masks a degree of divergence within the
    manufacturing sector as a whole. Indecon, based on the CSO Census of Industrial
    Production, identify 562 installations with “high” or “above average” energy intensity, i.e.
    installations where expenditure on energy exceeds 3% of gross output. These installations
    employ a total of 31,820 persons. This portion of industry includes electricity production and
    water services, which employ 10,911 and do not compete internationally and will be in a
    position to pass through 100% of the price increase in the medium term. In is difficult to
    ascertain the international exposure of the remaining firms, though it can be assumed that not
    all firms would be fully exposed to international competition. The average fuel price increase
    for the non-powergen non-water services elements of this cohort will be between 0.27% and
    1.1%19 in the short run. The long run price effect is more difficult to ascertain due to the
    complicating factor of participation in emissions trading. Again these headline figures must
    be read with a caveat of higher overall increases for those installations with a heavy reliance
    on coal or oil, where the tax could amount to as much as 4% of gross output.

            There is also a potential for price increases as a result of emissions trading, depending on the emission
   reduction opportunities in the sector (reducing the incidence of price increases) and the market price of CO 2.
            Calculated on basis of energy intensiveness of between 3% and 12%.

56. Industry would also face a further medium term cost increase in terms of higher wage costs
    driven by increases in the CPI. The ESRI have informally estimated these increases to be of
    the order of 0.66% in the long-run, i.e. when the tax is fully phased in to €20 per tonne.

57. As stated previously to the extent that the revenue of this tax are recycled as an investment in
    the public capital stock other barriers to competitiveness such as inadequate waste
    management facilities, high cost of transportation, congestion, and telecommunications can
    be reduced with the potential for a net increase in competitiveness for the industrial sector as
    a whole.

    Effects on the CPI
58. A tax rate of €7.50 would generate a CPI increase of 0.299 index points in year one. Over the
    full implementation phase in the next 2-3 years the tax rate would rise to €20, with electricity
    generation engaged in emissions trading and exempt from the tax. This would result in an
    eventual increase in the CPI over 4 years of 0.631 index points due to the tax. The breakdown
    of these price increases for residential users is presented in Table 5.

   Table 520: CPI effects of various tax rates by fuel.
                          €7.5         €10          €15                      €20             €25

   Peat                            0.016            0.022           0.033         0.044            0.055
   Coal                            0.034            0.045           0.068         0.090            0.112
   Oil                             0.051            0.068           0.102         0.136            0.170
   Petrol                          0.086            0.115           0.172         0.229            0.287
   Diesel                          0.016            0.021           0.031         0.041            0.052
   Gas                             0.034            0.045           0.068         0.090            0.113
   Total (without elec)            0.236            0.315           0.473         0.631            0.788
   Electricity                     0.062            0.083           0.125         0.166            0.208
   Total                           0.299            0.399           0.598         0.797            0.997

    Revenue recycling
59. For the reasons outlined above it would be economically inefficient to recycle the revenues
    raised from this tax in a manner which reduced the effective tax rate in any of the sectors
    covered. It should also be noted that all revenues raise will be recycled in some format which
    would enhance national economic and social objectives in line with Government policy.
    Exemptions have been provided for in other OECD countries, for sectors which compete on a

           Increases in VAT will also have effects on the CPI which cannot be estimated with the same precision.
   However the effect is likely to increase the immediate CPI effects f rom 0.299 to 0.336 and the long run effect
   from 0.631 to 0.71.

   global basis, by lowering the overall emission reduction targets. Such an approach would
   displace emissions reduction obligations to elsewhere in the economy, at a greater overall
   cost, and it is incompatible with the scale of the challenge now facing us to meet our Kyoto

60. The commitment to introduce greenhouse gas taxation, as detailed in the NCCS, incorporated
    broad fiscal neutrality as part of revenue recycling as a design consideration.21

61. In view of the need to target absolute emissions reductions it would be most appropriate that
    any direct or earmarked recycling of revenue would seek to maximise efforts to reduce
    emissions. Therefore a key element of any measures to recycle revenues should be, as stated
    in the NCCS, to ensure that firms and society in general are made aware of alternatives to the
    current carbon intensive method of energy production and consumption. This would entail
    enhanced and targeted information and awareness campaigns for all sectors in the economy
    and society, additional funding for research into clean technologies, the provision of
    incentives for firms, households and others to promote energy efficiency and to identify
    alternatives to reduce energy-related costs, and incentives for renewable energy.

62. While the analysis indicates that the overall national effect of this new tax will be small, it is
    acknowledged that certain sections of society and the economy will be affected more than the
    average. Therefore consideration will have to be made to meet increases for those living in
    fuel poverty both through, for example weekly social welfare payments and through
    assistance with the capital costs of fuel switching. It would be wholly inappropriate to
    recycle any of the money through the Free Electricity or Free Gas Schemes or through the
    winter fuel allowance.

    Ancillary benefits
63. There will be significant non-Kyoto benefits as a result of a carbon tax. OECD studies have
    categorised these benefits into health, environmental, and economic. The greatest effort at
    quantifying these benefits has been conducted for the first two of the three categories.

   Health and Environmental Benefits

            The full reference in the NCCS to revenue recycling is “Revenue Recycling: - so that measures are
   broadly fiscally neutral, provide new incentives (e.g. towards energy efficiency, reduce labour costs and
   enhance employment protection) and disincentives (e.g. on energy inefficiency), ease the impacts on firms most
   affected (e.g. those using high levels of energy in sectors open to international competition) and on society (e.g.
   by minimising CPI effects); and promote social inclusion (e.g. those outside the wage system and/or dependent
   on welfare payments). Potential mechanisms include reductions in direct taxation, labour costs, PRSI,
   incentives for spending on energy efficiency, R&D, information and education programmes, reductions in rates
   of tax in the light of commitments made to quantified emissions reductions to be achieved at a sectoral level
   through negotiated agreements, etc. However, revenue recycling will not be used to insulate the sectors and
   firms concerned from the requirement to achieve sufficiently ambitious greenhouse gas emissions reductions.”

64. While CO2 itself is not a local pollutant the process through which it primarily arises, namely
    the combustion of fossil fuels, also produces a range of other pollutants which can have
    severe local effects. These pollutants include SO2, NOx, and PM10. Individually and in
    combination these pollutants cause environmental problems such as acid rain and
    eutrophication, and have negative health effects such as increase respiratory and
    cardiovascular disease. Ireland has international obligations to reduce the emissions of SO2
    and NOx by 2010. Significant attempts have been made at a European and global level to
    measure the reduction in emissions of these gases that will result from Kyoto compliance. In
    the case of Ireland it has been determined that €1.5bn (1990 €’s) of damage was caused by
    these three pollutants in 1995. The valuation incorporates the physical impacts of pollution
    on human and animal welfare, materials, buildings, agriculture and vegetation as well as a
    valuation of the mortality, morbidity and other physical effects.

65. On a Europe wide basis these reductions have been valued at €9bn (1990 €’s) per annum,
    including a saving of 104,000 life years, 11,000 fewer instances of chronic bronchitis, and 5.4
    million fewer restricted activity days. European Commission models have estimated the
    value of the ancillary benefits at over €130 per tonne of carbon (or c. €35 per tonne of CO2).
    These benefits alone significantly outweigh the difference between the proposed tax rate and
    the likely international permit price, and therefore justify domestic action, on non-Kyoto

    Economic Benefits
66. It is difficult to quantify the precise economic benefits of CO2 reductions, however a large
    number of international studies and anecdotal evidence reveals that there is an economic
    upside to eco-taxation. This upside comes in the form of increased expenditure on R&D and
    on the development of products which reduce the total cost of energy in the long-term.

    Linkages with other policy instruments
67. From an environmental and Kyoto perspective it is acceptable to either tax a sector to ensure
    it meets its emissions target or to allow it to trade on the international market (still to be
    operationally established) within legally mandated absolute limits. The draft emissions
    trading directive provides that all emissions allowances must be granted for free for the
    period 2005-2008: - it is not expected that this element of the draft will be changed either by
    Council or Parliament. As previously estimated, the removal of tax from the trading sectors
    would reduce the total tax take by c. €200m per annum for the electricity sector alone, rising
    to c. €260 when heavy industry is included.

68. It will be possible for the State to trade on its own account under the Kyoto Protocol to help
    meet its national target. However, there is a specific requirement that emissions trading may
    only make a contribution to countries’ Kyoto targets: - “domestic action shall constitute a

   significant element of the effort made”. Meeting even part of Ireland’s obligations from the
   Exchequer without a revenue stream from greenhouse gas taxation specifically for the
   purpose will require a diminution in available revenues for economically and competitively
   productive purposes.

69. In the case of negotiated agreements with industry, Indecon recommends an “action based”
    approach i.e. Government agrees with firms/sectors specific actions to reduce emissions
    intensity e.g. investments in specific technologies and/or fuel switching to CHP and
    renewable energy, and thus gaining an exemption from the tax. This approach places no
    absolute cap on emissions from a sector or firm and is a serious weakness in the context of
    the absolute national cap on emissions. For this reason it would be inappropriate to grant
    block exemptions to firms or sectors that are engaged in “action based” negotiated
    agreements. To the extent that these agreements will achieve actual emissions reductions per
    unit of production, the firms concerned will lower their exposure to the tax; the results of the
    pilot negotiated agreements being developed by SEI may also be a useful lead in to the
    determination of allocations or emissions trading.

    Profile of taxation in other countries
70. Nine EU countries have introduced some form of carbon/energy taxation specifically
    designed to reduce greenhouse gas emissions. Examples are included in Annex 7.

    Other issues
    State Aids and the Single Market
71. The issue of exemptions must be examined in light of EU laws regarding State Aids. Any
    exemptions would have to receive approval from the European Commission and it is
    expected that a case based on protecting the competitiveness of individual sectors or firms
    would be difficult to progress. Current state aid guidelines allow for exemptions on
    environmental grounds which would justify a 100% exemption for installations engaged in
    emissions trading. These guidelines do not encompass granting exemptions to companies not
    subject to environmental targets of equal ambition to those proposed by the tax.

72. The proposed EU emissions trading scheme will operate at the level of the generating station
    therefore environmental taxes applied at the output level may be a distortion to the operation
    of a liberalised energy market. Taxation applied at the level of the generating station should
    not act as a distortion to cross border trade, as it would be in line with the format of the EU-
    wide emissions trading scheme.

    Public Service Obligation
73. Ireland is permitted to charge a “Public Service Obligation” on all users of electricity to cover
    the additional costs of using peat and renewables as inputs in electricity generation, and there

    are “Take or Pay” contracts and Power Purchase Agreements in place for peat and peat
    generated electricity. These will reduce the incentive for powergen companies to move away
    from peat as they will be able to pass on 100% of the additional costs without concerns over
    the competitiveness of their retail price; however it will result in a rise in the price of
    electricity which reflects the use of peat.

    Observations from other Departments on this paper.

    Views of the Department of Enterprise, Trade and Employment.
74. The Department of Enterprise, Trade and Employment is fully committed to ensuring that
    the Enterprise Sector meets its obligations to reduce Greenhouse Gas Emissions as agreed in
    the National Climate Change Strategy. However, the Department is also committed to
    ensuring that those reductions are achieved as cost effectively as possible. It is seriously
    concerned that the proposals set out in the Department of Environment's paper will
    undermine the competitiveness of the Enterprise Sector and will achieve only a relatively
    small reduction in Greenhouse Gas Emissions. More specifically, the paper indicates that
    the cost of achieving a reduction of 2 million tonnes of CO2 will be €510m. Of that 2
    million tonne reduction, the reduction from the industry sector will be less than 200,000

75. The DELG paper argues that their proposals do not represent a significant decrease in overall
    national competitiveness. However, this assertion does not adequately take into account that
    the tax proposals will have a significant impact on firms and sectors that are high energy
    users. The cost per annum of a €20 per tonne tax for some companies would potentially be
    over €20 million. In the SME sector many indigenous companies are operating with very
    tight margins and would be forced into loss making situations by the imposition of the
    proposed tax.

76. It should also be remembered that the proposed tax would operate in addition to price
    increases which are expected to take place outside the tax area. For example, a 9% increase
    in electricity charges is due to be introduced early next year; it is understood that the
    proposed tax of €7.5 would add a further 9% increase to energy prices in 2003. In addition it
    should be noted that agreement is likely to be reached shortly on an Energy Taxation
    Directive which will further increase energy costs for industry.

    National Climate Change Strategy
77. The National Climate Change Strategy set out a menu of integrated measures to reduce CO2
    in the Enterprise Sector, including taxation, negotiated agreements and emissions trading.
    The underlying rationale for this menu was to enable industry to achieve CO2 reductions as
    cost effectively as possible. Tax was intended as a compliance measure to deal with "free
    riders". This Department subscribed to the view that the ultimate objective of Government
    Policy in so far as it relates to climate change and the Enterprise Sector, should be to ensure
    that targeted reductions in CO2 emissions are achieved by whichever method is most
    effective. If enterprises commit themselves to achieving those reductions through either
    emissions trading or negotiated agreements, they should be exempted from paying a Carbon

78. The current proposal advocates that a Carbon Tax should be introduced on a stand-alone
    basis with effect from 2003; enterprises involved in emissions trading would have to wait
    until 2005 before being eligible for exemption from the tax and no concessions are proposed
    for enterprises involved in negotiated agreements. This will be strongly opposed by industry

79. It should be noted that, since the publication of the National Climate Change Strategy, the
    rationale for introducing a Carbon Tax for the Industry Sector has significantly reduced. This
    is because it is now clear that under the EU pilot Emissions Trading Scheme, which is
    planned to commence in 2005, up to 75% of emissions from the Industry Sector will be
    subject to Emissions Trading. Consequently one would now have to question the rationale
    for introducing a tax which is designed to address only 25% of emissions in the sector. As
    already stated, even the very high level of tax of €20 proposed will only achieve a reduction
    of 200,000 tonnes of CO2 emissions in the Industry Sector.

    Implementation Date
80. The paper proposes that a Carbon Tax be introduced with effect from 2003. It is the D/ETE
    view that the introduction of a Carbon Tax with immediate effect would not be effective in
    reducing emissions and would increase the adverse competitiveness impact. It is self-evident
    that industry cannot change its energy requirements with immediate effect. To facilitate
    proper planning, it would be necessary for the Government to signal, well in advance, the
    definitive start date for the tax and the level for the tax in year one and subsequent years.

81. D/ETE contends that there is no justification, from a climate change perspective, of applying
    a Carbon Tax, with effect from 2003, to enterprises which will be subject to Emissions
    Trading with effect from 2005. Participation in Emission Trading will be an expensive and
    demanding exercise for those enterprises, but will result in targeted reductions of their
    emissions. To subject them to Carbon Taxation in the period 2003 – 2005 would result in no
    additional reductions in carbon emissions but would deprive the enterprises of revenues
    which would otherwise be available to them to introduce the new technologies etc. which will
    be necessary to enable them to achieve CO2 reductions under Emissions Trading.

    Revenue Recycling
82. The National Climate Change Strategy stipulated that Greenhouse Gas Taxation should be
    revenue neutral. D/ETE would argue that any revenues raised through taxation from the
    Enterprise Sector should be recycled to the Enterprise Sector to help them achieve their
    emission reductions.

    Other EU Countries
83. The DELG Paper refers to Carbon Taxation Schemes introduced in other EU countries. The
    Paper omits to point out that the majority of these schemes, including the UK scheme,
    involve significant exemptions from the tax for certain categories of firms, such as energy
    intensive industry; for firms who commit to agreements to increase energy efficiency; for
    certain sectors of industry; for CHP and Renewable projects. In addition, the tax is recycled
    in many of these countries to reductions in Social Security Contributions, investment grants
    for energy saving measures, grants for audits for negotiated agreements, funds for SMEs etc.

84. In summary, the Department of Enterprise, Trade and Employment considers that, in so far as
    the industry sector is concerned, the rationale for the introduction of Greenhouse Gas
    Taxation has decreased significantly with the proposed introduction of an EU emissions
    trading scheme which will cover up to 75% of industry emissions with effect from 2005.

   It is concerned that the imposition of a Carbon Tax will adversely affect the competitiveness
   of industry, with very little return in terms of reductions of emissions.

85. In the event that a carbon tax were to be introduced, the Department of Enterprise, Trade and
    Employment would be totally opposed to the introduction of such a tax with effect from
    2003. It would also be opposed to the high level of tax rates proposed. It consider it essential,
    in the event of a tax being introduced, that the definitive starting date for the tax should be
    announced at least 2 years in advance, that the rates to be applied in each year should be
    announced at that time, that exemptions be provided for enterprises engaged in either
    emissions trading or legally binding negotiated agreements and that the revenue raised should
    be recycled to industry.

   If a Carbon Tax were to be introduced, we also consider it essential that the tax be applied to
   all sectors and to all fuels.

    Views of the Department of Communications, Marine and Natural Resources.
85. DCMNR is in favour of a Carbon Tax, used in conjunction with Emissions Trading and
    Negotiated Agreements, as foreseen in the Green Paper on Sustainable Energy, The National
    Climate Change Strategy (NCCS).

   However this Department

          does not believe that this proposal is in accord with the NCCS;

          does not believe that there will be any reduction in emissions from the electricity
           sector as a result of this proposal;

          is concerned that the electricity price increase of 6.5% on average implicit in the
           proposal is additional to an average 9.74% increase already announced by the
           Commission for Electricity Regulation;

          believes that the proposal will cause an increase in gas prices of 5% to 8%;

          is concerned that the effect on the competitiveness of energy intensive industry is not
           dealt with explicitly in the proposal

          considers that the cost of reducing CO2 emissions through this proposal is excessive;

          recommends that further work is needed to develop a carbon tax proposal which
           would include flexibility elements such as Emissions Trading and Negotiated
           Agreements and exemptions for CHP and Renewables, and

          recommends that the proposal needs further development to assess the potential for
           Revenue Recycling arising from carbon taxation.

   The National Climate Change Strategy
86. The NCCS stresses the importance of a range of design considerations in relation to
    Greenhouse Gas Taxation some of which are not dealt with in this proposal, in particular
    Revenue Recycling and Alternatives for Firms. It is also reasonable to expect that an explicit
    announcement of such a high impact tax would be made well in advance of implementation
    to enable industry in particular to take some measures to reduce their emissions (and
    consequently their tax burden).

   Electricity Generation
87. Carbon tax on fuels for electricity generation in the period 2003-2004 is highly unlikely to
    achieve any reduction in emissions – the period in question is too short to enable any
    structural response from the Electricity Generation sector, and the increased cost of fuels
    would simply be passed on to customers. While in theory, higher prices should lead to lower
    demand, in practical terms the general demand for electricity continues to rise and new
    generating capacity is needed for the system. Consequently, there will be no effect on the
    running of existing generating stations or in the level of emissions in 2003 and 2004.

   Electricity Prices
88. The D/CMNR has asked the Commission for Energy Regulation (CER) to assess the impact
    of the proposed tax of €7.50 per tonne of CO2 in 2003 on electricity prices. CER has only
    had a brief time to consider the issue in detail and has made a preliminary estimate based on
    the overall rise in ESB’s fuel costs. Further time would be needed to fully assess the impact
    on individual customer categories and to analyse more detailed information on an individual
    power plant basis.

89. The CER has already announced an average increase in the ESB Supply tariff of 9.74%, due
    to come into effect in Jan/Feb 2003. This proposal would impose a further increase of 6.5%
    on average, bringing the average price increase to over 16%.

90. The North/South perspective should also be considered – an upstream tax in the South and a
    downstream tax in the North would mean that customers who were capable of buying
    electricity across the Interconnector from Northern Ireland could avoid a Carbon Tax. While
    there is limited interconnection at present, the Department would not wish to see the creation
    of price distortions in the period up to 2005.

   Gas Prices
91. The D/CMNR estimates that the proposal would lead to an increase in gas prices of about
    5% for domestic customers, 6.6% for medium sized industrial customers and about 8% for
    large industrial customers.

92. While the proposal presents in general terms the estimated effect on competitiveness, it
    would benefit from a more in-depth examination of the effect on energy intensive industries.
    The D/CMNR is concerned that the general approach of the paper may be disguising effects
    on particular firms which might no be able to respond to this taxation measure by fuel
    switching in the short term.

   Cost of CO2 Reduction
93. The D/CMNR believe that the cost of CO2 reduction suggested by this proposal is excessive.

   The proposal indicates that the market price of a tonne of CO2 is estimated to be between €2
   and €20 per tonne. The proposal suggests that the revenue raised in 2003 from a tax of €7.50
   per tonne of CO2 would be €316m, achieving a reduction in emissions of 0.64m tones of
   CO2. This represents a cost of €493 per tonne of CO2.

   Even by 2010, when the price elasticities referred to in the proposal could be expected to
   have an effect, a tax of €20 per tonne of CO2 would raise €508.8m, achieving a reduction of
   2.02m tonnes of CO2. This would represent a cost of €251 per tonne of CO2.

   Negotiated Agreements
94. The paper proposes that parties engaged in Negotiated Agreements should only obtain
    exemption from Carbon Tax for the amount of emissions reduction achieved. Taking away
    the exemption awarded to firms meeting the agreed actions in a negotiated agreement would
    take away all basis for negotiation and reduce the exercise to one of information
    dissemination. Experience in Denmark, and projections made in analysis by Sustainable
    Energy Ireland, based on experience with the voluntary Self-Audit Programme, show that
    including Negotiated Agreements with Exemptions actually results in greater CO2 reduction
    than a Carbon Tax without Negotiated Agreements and Exemptions.

95. The D/CMNR welcomes the proposed treatment of Renewable energy, but considers that
    the paper should also include provision for a lower level of carbon tax on natural gas for
    CHP – this should reflect the additional energy efficiency of the technology and would go
    some way to addressing the gas price disparity faced by small CHP operators. The
    Department believes that this is essential from the point of view of promoting CHP in the
    context of climate change and with a view forward to the CHP Directive.

   Revenue Recycling
96. The D/CMNR considers that further examination of the possibilities for Revenue Recycling
    are necessary in order to capture the full potential of measures already referred to in the

97. The Department considers that this proposal needs further development and is prepared to
    support that development with a view to introducing a carbon tax which would be in

    accordance with the NCCS as a least cost mechanism, taking into account Emissions
    Trading and incorporate Negotiated Agreements and exemptions for CHP and Renewables.

   Views of the Department of Agriculture
   Cost of Carbon Tax on Agri-food sector
98. Initial analysis within the Department of Agriculture and Food estimates that the proposal
    could lead to an increase in the region of 10% in energy costs and other indirect price
    increases. These are similar to the energy cost increases of 9.32% to 11.83% specified for
    the agriculture sector on page 14 of the proposal.

99. Using the CSO, Output, Input and Income in Agriculture statement a 10% increase in
    energy costs alone would increase intermediate consumption in the agriculture sector by
    €29.8m and decrease gross valued added by an equivalent amount or over 1%. In contrast,
    Annex 8 of the DOELG proposal shows a cost of €16m for the primary agriculture sector.

100. The potential for producers to invest in new equipment to improve efficiency or switch to
    cleaner fuels is unclear. It would undoubtedly be producers on the lowest income margins
    who would be most severely affected by the proposal.

101. For the food, drinks and tobacco sector a 10% increase would raise energy costs from
    €138m to €150m and reduce gross value added by about 0.4%22. As the dairy processing
    sector is a high energy user relative to output, gross value added would decrease by
    approximately 1%23. These costings do not take into account any savings from increased
    fuel efficiency, etc.

   Livestock Tax
102. While the paper is not proposing specific taxes on the agricultures sector Annex 16
   sets-out what equivalent rates of taxes on emission from animals would be - €34.20 for dairy
   cows and €17.20 for other cattle. Research is currently being undertaken in UCD to
   determine emission rates for animals under Irish conditions and the scope for their reduction.
   Without the availability of such data it is impossible to predict what the likely outcome of a
   headage tax would be other than to reduce farm incomes.

        Estimated using the Census of Industrial Production 1998
        Estimated using the Census of Industrial Production 1998

103. More importantly the National Climate Change Strategy already includes a list of strategies
     to reduce methane emission. Last year livestock numbers were 2.8% below 1999 levels and
     only 6.8% above 1990. The business as usual projections set out in the NCCS for 2010 are -
     5% on 1999 levels and +9.6% on 1990 levels.

   Fertiliser Tax
104. Annex 15 estimates that an equivalent rate of tax on fertiliser would be €18 per tonne of
     nitrogen but again DOELG are not proposing such a tax. Without data on the likely impact
     of such a tax on emission and given the inconclusive evidence on the success of fertiliser
     taxes in other countries such a proposal is pointless. There are a number of measures set out
     in the NCCS aimed at reducing fertiliser usage and improving application techniques which
     are taking effect. Total fertiliser usage in 2001 was down 11% following a decline of 6% in
     the previous year. Since 1990 total fertiliser usage has fallen by 14%; in terms of tonnes of
     nutrient, nitrogen has fallen by 3%, phosphorus by 34% and potassium by 33%.

   Vies of the Department of Transport
105. The Department of Transport have made the following comments. With regard to the
     minimisation of competitiveness and economic impacts, the Road Haulage Division of the
     Department of Transport would be of the view that more analysis would need to be done in
     respect of the assessment of overall national competiiveness in the transport sector. It is not
     clear that the statement in paragraph 50 takes into account the competitive implication of
     taxes on fuels used in commercial road haulage and passenger operations. Road Haulage
     Division considers that any fuel tax proposals in the context of greenhouse gas mitigation
     would have to pay particular attention to the effects on commercial transport operations and
     in turn their ultimate effect on the competitiveness of the economy.

     Views of the Department of Social and Family Affairs.
106. The Department of Social and Family Affairs supports the conclusion reached in the paper
     that action is needed in the short term in relation to greenhouse gas taxation, given the
     commitments in the Government Programme, the current and prospective levels of CO2
     emissions and the expected costs of dealing with any failure to meet Kyoto Protocol targets.
     It is not within the competence of this Department to comment on the details of what to tax
     and by how much.

107. In relation to competitiveness and revenue recycling, the Department supports the view
     (Para 40) that the "double dividend" referred to may be best achieved through capital

    investment rather than by reducing taxation or social insurance (PRSI) contributions. PRSI
    contributions and unemployment are already very low in Ireland compared to the position in
    other OECD States. The objective of any reductions in social insurance contributions in
    other States is to approach the levels that are already in place here. For that reason, the
    "double dividend" issue does not arise in relation to reductions in PRSI.

108. In any event, as there is no link between PRSI and energy use, reductions in PRSI cannot
    encourage fuel switching. Any reductions would necessarily apply to all contributors within
    any given PRSI category regardless of their energy use status or behaviour. Furthermore,
    the amount of revenue recycled would be in direct proportion to wage levels and also, in the
    case of Employer's PRSI, the numbers of employees. Apart from being incoherent from a
    policy perspective, reducing PRSI to mitigate the impact of greenhouse gas taxation would
    lead to perverse outcomes in terms of the net revenue effect at the level of the individual or
    firm, in the case of enterprises that are both relatively labour intensive and relatively low
    energy users (e.g. financial institutions, supermarkets, contract cleaners).

109. The Department notes the projected CPI impact (Para 45 and subsequent). It welcomes the
    statement in Para 61 that "consideration will have to be given to meeting increases for those
    living in fuel poverty both through, for example, weekly social welfare payments and
    through assistance with the capital costs of fuel switching". In that regard, programmes to
    address the causes of fuel poverty, for example by improving home insulation or heating
    systems, should receive priority over increased payments in winter time to compensate
    people for the higher cost of inefficient fuel use.

110. However, it will not be possible to rely solely on such fuel poverty eradication measures,
    given the scale and complexity of need that exists at present. Almost 300,000 households
    are currently in receipt of Fuel Allowance payments in wintertime - these payments are
    subject to means and household composition conditions. It can be taken that the people
    concerned are at risk of being disadvantaged in the event of fuel price rises and they may not
    be in a position to take action within their own resources to mitigate the effect of fuel price

111. The level of Fuel Allowance payments was held constant in nominal terms from the 1980s
    until Budget 2002, primarily for social welfare policy reasons. During that time, social

    welfare recipients were compensated for fuel price increases within the general increase in
    primary payments announced in each year's Budget.                     That remains the Department's
    preferred approach to compensating social welfare recipients for fuel price inflation but it
    may be necessary consider recycling revenue through Fuel Allowances that are payable in
    winter only to ensure that social welfare recipients do not suffer hardship as a result on fuel
    price increases.

112. With regard to the Free Electricity and Free Gas schemes, these provide beneficiaries with a
    credit of a fixed number of units/therms on their utility bill. Any cost increases within those
    fixed allocations will be charged by the utility to this Department, not to the beneficiary, so
    the issue of inappropriate cost compensation at the level of the consumer does not arise.
    However, the cost to this Department will have to be financed from some source and it may
    be appropriate to use greenhouse taxation revenues for that purpose.

                            h:\common\words\conor barry\taxes\carbon tax paper\doelg carbon tax paper for tsg (2).doc

                 Annex 1: The potential ranges of CO2 reductions by fuel

Table A.1.1.: Immediate CO2 reductions (Mt) in 2003 (low elasticity of –0.1)
Fuel          €7.5             €10             €15             €20             €25
Peat             0.13061             0.17414         0.26122         0.34829         0.43536
Coal             0.28266             0.37688         0.56531         0.75375         0.94219
Oil              0.15432             0.20576         0.30864         0.41152         0.51440
LPG              0.00326             0.00434         0.00652         0.00869         0.01086
Gas              0.06987             0.09316         0.13974         0.18632         0.23289
Total            0.64071             0.85428         1.28142         1.70856         2.13570

Table A.1.2: Potential CO2 reductions (Mt) by 2010 without trading (elasticity –0.5)
Fuel          €7.5             €10             €15             €20             €25
Peat                 0.94682         1.26242         1.89363     2.52485             3.15606
Coal                 0.62053         0.82737         1.24106     1.65475             2.06844
Oil                  0.64910         0.87982         1.31973     1.75964             2.19955
LPG                  0.01529         0.02038         0.03058     0.04077             0.05096
Gas                  0.53525         0.71367         1.07050     1.42734             1.78417
Total                2.76699         3.70367         5.55551     7.40734             9.25918

Table A.1.3: Potential CO2 reductions (Mt) by 2010 with trading (elasticity of –0.5)
Fuel          €7.5             €10             €15             €20             €25
Peat                 0.05097         0.06795         0.10193     0.13591             0.16988
Coal                 0.02280         0.03040         0.04559     0.06079             0.07599
Oil                  0.55566         0.75523         1.13285     1.51047             1.88808
LPG                  0.01003         0.01337         0.02005     0.02673             0.03342
Gas                  0.10726         0.14302         0.21453     0.28604             0.35755
Total                0.74671         1.00997         1.51495     2.01994             2.52492

               Annex 2: The potential ranges of CO2 reductions by sector
Table A.2.1: CO2 Reductions (Mt) in 2003, by Sector at various tax rates
                     €7.5            €10            €15            €20            €25
Residential        0.052           0.069          0.104          0.138          0.173
Commercial         0.028           0.037          0.055          0.074          0.092
Agriculture        0.006           0.008          0.012          0.016          0.020
Transport          0.041           0.055          0.083          0.110          0.138
Industry           0.054           0.073          0.109          0.145          0.181
Electricity        0.460           0.613          0.919          1.225          1.532
Total              0.641           0.854          1.281          1.709          2.136

Table A.2.2: CO2 Reductions (Mt) in 2010, by Sector at various tax rates without trading
                       €7.5           €10            €15           €20            €25
Residential           0.249         0.332          0.498         0.664          0.831
Commercial            0.149         0.199          0.299         0.399          0.498
Agriculture           0.022         0.043          0.065         0.086          0.108
Transport             0.258         0.344          0.516         0.688          0.860
Industry              0.203         0.271          0.406         0.541          0.677
Electricity           1.886         2.514          3.771         5.029          6.286
Total                 2.767         3.704          5.556        7.407           9.259

Table A.2.3: CO2 Reductions (Mt) in 2010, by Sector at various tax rates with trading
                       €7.5           €10            €15           €20            €25
Residential           0.249         0.332          0.498         0.664          0.831
Commercial            0.149         0.199          0.299         0.399          0.498
Agriculture           0.022         0.043          0.065         0.086          0.108
Transport             0.258         0.344          0.516         0.688          0.860
Industry              0.068         0.091          0.137         0.182          0.228
Total                 0.747         1.010          1.515        2.020           2.525

 Annex 3: The potential ranges of CO2 reductions due to carbon tax with low elasticity

Table A.3.1: Potential CO2 reductions (Mt) by 2010 without trading(elasticity of –0.1)
Fuel          €7.5             €10             €15             €20             €25
Peat                 0.18936         0.25248         0.37873         0.50497         0.63121
Coal                 0.12411         0.16547         0.24821         0.33095         0.41369
Oil                  0.12982         0.17596         0.26395         0.35193         0.43991
LPG                  0.00306         0.00408         0.00612         0.00815         0.01019
Gas                  0.10705         0.14273         0.21410         0.28547         0.35683
Total                0.55340         0.74073         1.11110         1.48147         1.85184

Table A.3.2: Potential CO2 reductions (Mt) by 2010 with trading (elasticity of –0.1)
Fuel          €7.5             €10             €15             €20             €25
Peat                 0.01019         0.01359         0.02039         0.02718         0.03398
Coal                 0.00436         0.00582         0.00872         0.01163         0.01454
Oil                  0.10427         0.14190         0.21285         0.28380         0.35475
LPG                  0.00152         0.00203         0.00305         0.00406         0.00508
Gas                  0.01668         0.02224         0.03336         0.04448         0.05560
Total                0.13703         0.18558         0.27836         0.37115         0.46394

                 Annex 4: The potential ranges of revenue from a carbon tax
Table A.4.1.: Immediate revenue raised (€) in 2003 (low elasticity of –0.1)
Fuel    €7.5                €10                 €15                 €20                 €25
               26,760,538          35,245,357          51,561,953          67,007,827          81,582,979
               49,310,898          64,805,675          94,381,946         122,073,839         147,881,355
           175,092,346            232,942,061         347,869,892         461,768,924         574,639,156
                3,007,967           3,999,764           5,967,070           7,912,657           9,836,526
               62,541,988          83,156,423         124,035,951         164,449,691         204,397,643
         316,713,737              420,149,280         623,816,811         823,212,938    1,018,337,660

Table A.4.2: Potential revenue (€) stream by 2010 without trading (elasticity of –0.5)
Fuel    €7.5                €10                 €15                 €20                 €25
Peat        23,617,673            28,334,174          33,033,091          31,419,895          23,494,587

Coal        19,255,672            23,605,792          29,203,376          30,664,087          27,987,923

Oil       174,729,359         230,665,296         339,399,292         443,734,185         543,669,977

LPG            2,718,236           3,573,353           5,207,145           6,739,013           8,168,957
Gas         91,912,866        120,766,317         175,796,963         227,259,268         275,153,231

Total     312,233,805         406,944,932         582,639,867         739,816,448         878,474,674

Table A.4.3: Potential revenue (€) stream by 2010 with trading (elasticity of –0.5)
Fuel    €7.5                €10                 €15                 €20                 €25

Peat            6,790,311           8,883,865          12,816,146          16,408,659          19,661,404

Coal            4,007,112           5,266,828           7,672,278           9,925,752          12,027,250

Oil         162,944,518           215,263,641         317,231,207         415,422,602         509,837,828

LPG             1,858,283           2,444,292           3,566,182           4,621,236           5,609,452

Gas            24,772,952          32,673,053          47,936,932          62,485,713          76,319,396

           200,373,176            264,531,678         389,222,744    508,863,962              623,455,330

       Annex 5: The potential ranges of revenue from a carbon tax with low elasticity

Table A.5.1: Potential revenue stream (€) by 2010 without trading (elasticity of –0.1)
Fuel      €7.5                €10                €15                €20                €25
Peat             29,298,575         38,433,555         55,756,698         71,817,419         86,615,717

Coal             22,978,858         30,224,790         44,096,123         57,140,081         69,356,665

Oil          178,623,972        237,703,859        355,236,058        471,888,437        587,660,995

LPG               2,809,967          3,736,431          5,574,069          7,391,323          9,188,191

Gas              95,124,373     126,475,663        188,642,993        250,096,654        310,836,646

Total        328,835,745        436,574,298        649,305,941        858,333,914       1,063,658,215

Table A.5.2: Potential revenue stream (€) by 2010 with trading (elasticity of –0.1)
Fuel      €7.5                €10                €15                €20                €25
Peat              7,096,102          9,427,493         14,039,309         18,583,172         23,059,081

Coal              4,145,373          5,512,625          8,225,321         10,908,941         13,563,483

Oil          166,329,944        221,396,982        331,031,225        439,955,968        548,171,211

LPG               1,922,047          2,557,651          3,821,241          5,074,673          6,317,949

Gas              25,452,348         33,880,869         50,654,519         67,316,978         83,868,247

Total        204,945,814        272,775,621        407,771,615        541,839,731        674,979,970

               Annex 6: Cost effects of uniform tax and taxes with exemptions

Assuming a desired reduction of 300 tonnes of CO2 from three firms, a flat charge will give a
significantly lower average cost per tonne than a charge with exemptions, regardless of which
sector receives the exemptions. This argument is therefore provides a rationale against both
exemptions for industry and for the fuel poor. In fact it is probable that command-and-
control regulation could deliver cheaper average costs than a tax with excessive exemptions.

Reductions of CO2 emissions achieved (in tonnes) at given costs per tonne
              €10            €15           €20            €30            €35
Firm A        100            150           175            200            250
Firm B        10             50            75             100            150
Firm C        50             100           125            200            300

Method One – Uniform Charge (i.e. a tax of €10 per t)
                      Cost/ tonne           Total Cost            Reduction
Firm A                €15                   €2250                 150t
Firm B                €15                   €750                  50t
Firm C                €15                   €1500                 100t
Total                                       €4500                 300t
Average €/t           €15

Method Two (A)– Exemption (Firm A is given an exemption)
                      Cost/ tonne           Total Cost            Reduction
Firm A                €0                    €0                    0t
Firm B                €30                   €3000                 100t
Firm C                €30                   €6000                 200t
Total                                       €9000                 300t
Average €/t           €30

Method Two (B)– Exemption (Firm B is given an exemption)
                      Cost/ tonne           Total Cost            Reduction
Firm A                €20                   €3500                 175t
Firm B                €0                    €0                    0t
Firm C                €20                   €2500                 125t
Total                                       €6000                 300t
Average €/t           €20

Method Two (C)– Exemption (Firm C is given an exemption)

                   Cost/ tonne         Total Cost         Reduction
Firm A             €30                 €6000              200t
Firm B             €30                 €3000              100t
Firm C             €0                  €0                 0t
Total                                  €9000              300t
Average €/t        €30

Method Three – Command and Control (all firms given an equal target)
                   Cost/ tonne         Total Cost         Reduction
Firm A             €10                 €1000              100t
Firm B             €30                 €3000              100t
Firm C             €15                 €1500              100t
Total                                  €5500              300t
Average €/t        €18.33

                 Annex 7: Profile of Carbon Taxation in Other Countries

The initial catalyst for energy taxation in Denmark was the severe impact of the oil shocks in
the 1970s. Up to this time Denmark had a 95% dependency on foreign resources. As oil
prices subsided in the 1980s taxes were scaled up in order to maintain the incentive for
energy efficiency. Over the early 1990s Denmark began to phase out exemptions from the
energy tax and refocus it on CO2 emissions to form the basis of Denmark’s efforts to tackle
climate change. The result of these policies has been to improve energy efficiency by 50%
over the two decades from 1980 and to reduce CO2 emissions by 9% between 1988 and 1999.
Furthermore the Danish Ministry of Economic Affairs does not believe that the taxation had
any negative impact on competitiveness, due to new export markets being developed and
improved energy efficiency.

First introduced a CO2 tax in 1990. This tax has fluctuated between a CO2 tax and energy tax
over the 1990s to accommodate the Nordic electricity market. This lead to a reduction in
emissions of 7% from BAU estimates by 1998.

A general energy tax of c €5 per tonne of CO2 was introduced in 2001.

Begun a tax reform in 1999 aimed at reducing taxes on labour by increasing taxes on mineral
oils (0.031c per litre) and electricity (€1.636/ MWh).

Tax applied to fuels in relation to a combination of energy content and carbon content.
Estimates show that the tax reduced emissions from BAU by 1.7 million tonnes in two years.


Taxes CO2 emissions at c. €12 per tonne. There are still no comprehensive estimates of the
effects of this measure.

Has had a CO2 tax since 1992, in addition to general energy taxation since the 1970’s.
Energy consumption in Sweden has therefore remained roughly constant in Sweden since the
70s with significant real economic growth. Estimates place emissions at roughly 9% lower
than business as usual due to the tax.

Introduced a climate change levy in April 2001 to effect demand side changes in energy

                   Annex 8: Cost implications on a sectoral basis in 2003
Table A.8.1: Revenue Raised (€) in 2003, by Sector at various tax rates
                       €7.5            €10            €15             €20               €25
                49,806,738      66,236,369      98,836,709     131,091,818    163,001,697
                25,725,032      34,207,751      51,034,749      67,677,163     84,134,992
                  6,112,465      8,130,085      12,135,522      16,101,221     20,027,182
                87,504,037     116,534,199     174,387,748     231,965,596    289,267,745
                31,989,983      42,471,968      63,163,923      83,493,191    103,459,774
               115,575,480     152,568,907     224,258,161     292,883,949    358,446,270
              316,713,737      420,149,280     623,816,811     823,212,938   1,018,337,660

Table A.8.2: Revenue Raised (%) in 2003, by Sector at various tax rates
                        €7.5            €10            €15             €20              €25
Residential            15.73          15.76           15.84          15.92             16.01
Commercial              8.12           8.14            8.18           8.22              8.26
Agriculture             1.93           1.94            1.95           1.96              1.97
Transport              27.63          27.74           27.95          28.18             28.41
Industry               10.10          10.11           10.13          10.14             10.16
Electricity            36.49          36.31           35.95          35.58             35.20
Total                    100            100            100             100              100

Table A.8.3: Sectoral incidence of tax with full pass through in electricity prices
                        €7.5            €10            €15             €20              €25
Residential            27.17          27.15           27.11          27.08             27.04
Commercial             17.75          17.72           17.66          17.60             17.54
Agriculture             2.86           2.86            2.86           2.86              2.86
Transport              27.68          27.79           28.01          28.23             28.46
Industry               24.55          24.48           24.36          24.23             24.09
Total                 100.00         100.00         100.00          100.00            100.00

              Annex 9: Cost implications on a sectoral basis by 2010 without trading
    Table A.9.1: Revenue Raised (€) in 2010, by Sector at various tax rates and no trading
                          €7.5           €10            €15            €20              €25
                    49,157,944     64,713,388     94,578,468    122,782,472   149,325,400
                    28,459,816     37,448,195     54,677,613     70,910,579    86,147,092
                     5,580,178      7,224,974     10,514,567     13,588,897    16,447,965
                   107,700,837    142,740,621    211,529,448    278,597,285   343,944,133
                    28,113,948     36,808,606     53,182,933     68,203,943    81,871,636
                    93,221,082    118,009,148    158,156,838    185,733,272   200,738,449
                   312,233,805    406,944,932    582,639,867    739,816,448   878,474,674

Table A.9.2: Revenue Raised (%) in 2010, by Sector at various tax rates and no trading
                           €7.5           €10            €15            €20             €25
Residential               15.74          15.90         16.23          16.60            17.00
Commercial                 9.11           9.20           9.38          9.58             9.81
Agriculture                1.79           1.78           1.80          1.84             1.87
Transport                 34.49          35.08         36.31          37.66            39.15
Industry                   9.00           9.05           9.13          9.22             9.32
Electricity               29.86          29.00         27.14          25.11            22.85
Total                       100           100            100            100             100

Table A.9.3: Sectoral incidence of tax with full pass through in electricity prices
                           €7.5           €10            €15            €20             €25
Residential               24.83          24.73         24.49          24.23            23.95
Commercial                17.20          17.05         16.73          16.38            15.99
Agriculture                2.37           2.35           2.34          2.33             2.32
Transport                 34.53          35.11         36.34          37.69            39.18
Industry                  21.07          20.77         20.10          19.37            18.56
Total                    100.00         100.00        100.00         100.00           100.00

              Annex 10: Cost implications on a sectoral basis by 2010 with trading
Table A.10.1: Revenue Raised (€) in 2010, by Sector at various tax rates with exemptions for
                         €7.5           €10            €15             €20           €25
                   49,157,944     64,713,388     94,578,468     122,782,472   149,325,400
                   28,459,816     37,448,195     54,677,613      70,910,579    86,147,092
                    5,580,178      7,224,974     10,514,567      13,588,897    16,447,965
                  107,700,837    142,740,621    211,529,448     278,597,285   343,944,133
                    9,474,401     12,404,500     17,922,648      22,984,729    27,590,741
                  200,373,176    264,531,678    389,222,744    508,863,962    623,455,330

Table A.10.2: Revenue Raised (%) in 2010, by Sector at various tax rates with exemptions
for trading
                          €7.5           €10            €15             €20          €25
Residential              24.53          24.46         24.30           24.13         23.95
Commercial               14.20          14.16         14.05           13.94         13.82
Agriculture               2.78           2.73           2.70           2.67          2.64
Transport                53.75          53.96         54.35           54.75         55.17
Industry                  4.73           4.69           4.60           4.52          4.43
Total                      100           100            100             100          100

                      Annex 11: Increases in Residential Energy Prices
Table A.11.1: Residential energy price increase (%) by fuel type in 2003
                         €7.5             €10             €15               €20             €25
                        10.49           13.94           20.76              27.48         34.10
                         7.91           10.52           15.70              20.82         25.89
                         7.21            9.59           14.31              18.99         23.62
                         7.34            9.76           14.56              19.32         24.03
                         6.10            8.12           12.13              16.10         20.04
                         4.46            5.88            8.65              11.29         13.82
                        5.81             7.70           11.42              15.06         18.60

Table A.11.2: Residential energy price increases (%) by fuel type in 2010 with no trading
                         €7.5             €10             €15               €20             €25
                        10.04           13.14           18.96              24.28         29.10
                         7.55            9.93           14.48              18.76         22.76
                         6.72            8.85           12.95              16.84         20.51
                         7.12            9.37           13.69              17.77         21.60
                         5.95            7.85           11.52              15.03         18.37
                         2.90            3.67            4.92               5.77            6.24
                         4.57            5.93            8.41          10.57             12.40

Table A.11.3: Residential energy price increases (%) by fuel type in 2010 with trading
                         €7.5             €10             €15               €20             €25
                        10.04           13.14           18.96              24.28         29.10
                         7.55            9.93           14.48              18.76         22.76
                         6.72            8.85           12.95              16.84         20.51
                         7.12            9.37           13.69              17.77         21.60
                         5.95            7.85           11.52              15.03         18.37
                            -               -                -                 -               -
                         2.90            3.82            5.58              7.24             8.80

                 Annex 12: Increases in Commercial Sector Energy Prices
Table A.12.1: Commercial sector energy price increase (%) by fuel type in 2003
                         €7.5            €10            €15             €20                €25
                       14.60           19.37           28.76          37.96             46.96
                            -              -               -               -                 -
                         8.72          11.60           17.29          22.92             28.48
                         7.96          10.59           15.79          20.94             26.03
                         4.86           6.47            9.67          12.86             16.02
                         3.46           4.57            6.72            8.77            10.74
                        4.59            6.08            9.00          11.84             14.60

Table A.12.2: Commercial energy price increases (%) by fuel type in 2010 without trading
                         €7.5            €10            €15             €20                €25
                       13.72           17.81           25.25          31.71             37.20
                            -              -               -               -                 -
                         8.08          10.61           15.45          19.96             24.17
                         7.70          10.13           14.76          19.11             23.17
                         4.77           6.30            9.29          12.18             14.96
                         2.25           2.85            3.82            4.48             4.85
                         3.50           4.52            6.35           7.90              9.16

Table A.12.3: Commercial energy price increases (%) by fuel type in 2010 with trading
                         €7.5            €10            €15             €20                €25
                       13.72           17.81           25.25          31.71             37.20
                            -              -               -               -                 -
                         8.08          10.61           15.45          19.96             24.17
                         7.70          10.13           14.76          19.11             23.17
                         4.77           6.30            9.29          12.18             14.96
                            -              -               -               -                 -
                         1.85           2.44            3.56           4.62              5.61

                     Annex 13: Increases in Agricultural Energy Prices
Table A.13.1: Agricultural energy price increase (%) by fuel type in 2003
                         €7.5             €10             €15               €20              €25
Peat                        -                -               -                 -               -
Coal                        -                -               -                 -               -
                         7.21            9.59           14.31           18.99             23.62
LPG                         -               -               -               -                 -
Gas                         -               -               -               -                 -
                         4.46            5.88            8.65           11.29             13.82
                        6.01             7.97           11.83           15.62             19.33

Table A.13.2: Agricultural energy price increases (%) by fuel type in 2010 with no trading
                         €7.5             €10             €15               €20              €25
Peat                        -                -               -                 -               -
Coal                        -                -               -                 -               -
                         6.76            8.76           12.74           16.47             19.94
LPG                         -               -               -               -                 -
Gas                         -               -               -               -                 -
                         2.90            3.67            4.92               5.77           6.24
                         5.09            6.55            9.35          11.83              13.99

Table A.13.3: Agricultural energy price increases (%) by fuel type in 2010 with trading
                         €7.5             €10             €15               €20              €25
Peat                        -                -               -                 -               -
Coal                        -                -               -                 -               -
                         6.76            8.76           12.74           16.47             19.94
LPG                         -               -               -               -                 -
Gas                         -               -               -               -                 -
Electricity                 -               -               -               -                 -
                         3.83            4.96            7.21            9.32             11.29

                       Annex 14: Increases in Transport Energy Prices
Table A.14.1: Transport energy price increase (%) by fuel type in 2003
                         €7.5             €10             €15             €20              €25
                            -               -               -                -                -
                            -               -               -                -                -
                         3.52            4.69            7.01             9.33            11.63
                         7.34            9.76           14.56            19.32            24.03
                            -               -               -                -                -
                         4.46            5.88            8.65            11.29            13.82
                        3.52             4.69            7.02             9.33            11.64

Table A.14.2: Transport energy price increases (%) by fuel type in 2010 with no trading
                         €7.5             €10             €15             €20              €25
                            -               -               -                -                -
                            -               -               -                -                -
                         3.47            4.60            6.81             8.97            11.08
                         7.12            9.37           13.69            17.77            21.60
                            -               -               -                -                -
                         2.90            3.67            4.92             5.77             6.24
                         3.47            4.60            6.81            8.97             11.07

Table A.14.3: Transport energy price increases (%) by fuel type in 2010 with trading
                         €7.5             €10             €15             €20              €25
                            -               -               -                -                -
                            -               -               -                -                -
                         3.47            4.60            6.81             8.97            11.08
                         7.12            9.37           13.69            17.77            21.60
                            -               -               -                -                -
                            -               -               -                -                -
                         3.46            4.59            6.80            8.96             11.06

                       Annex 15: Increases in Industrial Energy Prices
Table A.15.1: Industrial energy price increase (%) by fuel type in 2003
                         €7.5             €10             €15               €20              €25
Peat                         -               -               -                 -                -
                        47.67           62.44            90.31            115.93           139.31
                        11.48           15.25            22.69             30.02            37.22
                         8.70           11.57            17.25             22.86            28.40
                         9.04           12.02            17.92             23.74            29.49
                         7.78           10.27            15.10             19.72            24.13
                         8.82           11.67            17.24             22.63            27.84

Table A.15.2: Industrial energy price increases (%) by fuel type in 2010 with no trading
                         €7.5             €10             €15               €20              €25
                             -               -               -                 -                -
                        35.12           42.23            49.58             47.76            36.76
                        10.52           13.74            19.79             25.28            30.23
                         8.39           11.02            16.01             20.67            24.98
                         8.71           11.43            16.59             21.37            25.79
                         5.06             6.40            8.58             10.08            10.89
                         6.33             8.13           11.27            13.79             15.69

Table A.15.3: Industrial energy price increases (%) by fuel type in 2010 with trading
                         €7.5             €10             €15               €20              €25
                             -               -               -                 -                -
                        35.12           42.23            49.58             47.76            36.76
                        10.52           13.74            19.79             25.28            30.23
                         8.39           11.02            16.01             20.67            24.98
                         8.71           11.43            16.59             21.37            25.79
                             -               -               -                 -                -
                         1.12             1.47            2.12             2.72              3.27

              Annex 16:Greenhouse gas taxation in the Agricultural Sector

Agricultural emissions are disproportionately high in Ireland compared to other EU and
OECD countries due to the size of the sector, giving rise to the methane emissions from the
national cattle herd and nitrous oxide emissions from spreading slurries and fertilisers to land.
Agriculture accounted for 34.6% of all greenhouse gases in Ireland in 1990 falling to 32% in
1998. The share of agricultural emissions by 2010 under a business as usual scenario was
predicted in the NCCS to be 25.6%. The high level of agricultural emissions is a factor of the
high global warming potential (GWP) of methane and nitrous oxide. A tonne of methane and
a tonne of nitrous oxide cause 21 and 310 times as much global warming as a tonne of CO2.
All greenhouse gases are expressed in terms of CO2 equivalent (CO2E) for ease of

The NCCS provides for a range of sector specific measures in the agriculture sector to reduce
emissions.    In addressing the sectoral emissions, it does not provide for taxation.
Nevertheless, the NCCS commitment to greenhouse gas taxation, prioritising CO2 emissions,
allows for the development of taxation for non-CO2 emissions in due course.             For the
purposes of completeness of analysis, Table A.15.1 contains methane and nitrous oxide
emission projections

Table A.16.1: Emission Projections for the Agricultural Sector
                                                           Emissions in CO2E (‘000 t)
Source                        Gas                   2000                 2010
Enteric Fermentation          Methane               11,060               9,523
Manure Management             Methane               1,395                1,385
Manure Management             Nitrous Oxide         679                  676
Agricultural Soils            Nitrous Oxide         6,665                6,774
Total                                               19,799               18,358

The agricultural sector has been set a target of reducing emissions by 2.41 Mt from this
business as usual projection, a target which is to be achieved through reducing the emissions
from the national herd, reducing fertiliser use and other sector specific measures. Applying a
tax of €20 to the business as usual projection provides a revenue stream of c. €370m by 2010.

Assuming the sector specific measures are successful in reducing emissions the revenue
stream fall to c. €320m.

The figures in Table A.15.1 indicate that livestock will contribute 63%24 of emissions in 2010
with the remaining 37% arising from fertiliser use. Using BAU projections this would
suggest that livestock owners would pay €233m in 2010 while fertiliser users would pay
€137m. However if measures identified in the NCCS were undertaken the corresponding
figures would be c. €20625 and c. €114m.

Livestock emissions arise primarily from dairy cows and other cattle, roughly in the ratio 2:1.
Teagasc estimate that dairy numbers will be 1,112,000 by 2010 and that the corresponding
figure for other cattle will be 5,784,000. This would amount to a tax of €34.20 per annum per
head of dairy and €17.10 per head of non-dairy cattle. Extending any tax to pigs and sheep
would reduce the taxes on cattle by c.13%. The tax per sheep would be €2.48 and would be
€0.45 per head of swine.

DAFRD estimate that 368,667 tonnes of nitrogenous fertilisers were applied to Irish farmland
in 2000. This would imply a taxation rate of c. €18 per tonne of nitrogenous fertilisers.

Estimates have not been made of the elasticities applicable in the agricultural sector and thus
the emissions reductions potential of a taxation approach cannot yet be calculated.

This paper does not propose taxes on the agricultural sector, as while emissions can be
readily estimated at an aggregated level (albeit with less certainty than energy related
emissions) there can be difficulties in calculating emissions at farm level.

         This assumes that livestock owners are accountable for N 20 emissions from manure management on
         The percentage share of revenue is not the same for the two scenarios as the emission reduction targets
are not shared precisely equally between the two sources.


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