While I welcome the Minister of State, it is unfortunate we are not joined by the Minister for Finance or the Minister for Communications, Energy and Natural Resources to ensure that this motion is taken seriously. I assume, however, they will be informed of our arguments before they have the opportunity to respond.
Fine Gael is moving this motion in an attempt to introduce new thinking into the policy debate on the energy sector and the economy as a whole. We are proposing that the Government recycle the proceeds from carbon charges on electricity bills, which are paid for by the consumer, into the economy and to consumers so as to cut the cost of living and boost competitiveness. We believe the most appropriate way to recycle the proceeds of carbon charges on electricity to consumers is to cut the 13.5% rate of VAT to 12.5%. To do this, a special windfall levy on unearned gains will need to be introduced for electricity generating companies by virtue of the new carbon emissions regime that applies from January 2008 to December 2012.
Consideration is needed on two issues in this proposal and I ask the Government to consider them on their individual merits as well as jointly. I will speak further on the Government's response to the motion in my conclusion. The first issue is whether the State should recoup money from electricity generators. This money is being earned by charging consumers for the cost of carbon, despite the fact that generators have received an allocation of carbon allowances from the Government that will allow them to emit carbon for free during the period from 2008 to 2012. Is it appropriate that consumers are being charged substantial amounts of extra money for something that is costing energy generators nothing? This is essentially a carbon tax which is being levied by energy generators on top of their existing profits. There have been a number of informal murmurs about introducing a carbon tax during the lifetime of this Government, yet such a tax is already required by the energy regulator with the result that energy generators are earning undeserved profits off the backs of consumers and businesses.
The second issue concerns how, if the money is recouped by the State, we can spend it to best effect in view of the current economic climate, inflationary pressures and environmental responsibilities. We have a number of options in that regard. We could spend the money on a carbon fund, put it into the Exchequer, given that we will need increased revenue streams before the end of the year, or use it to implement targeted tax cuts. I will speak about Fine Gael's preference for the money presently.
I will now deal with the issue of why it is right to impose a windfall levy on power generators. From 1 January this year, electricity generators have been required to have what is called a carbon allowance for every tonne of carbon they emit into the atmosphere. From 2013, companies will have to purchase these carbon allowances on the open market through an auction system that will be in place across the European Union. However, during an interim period lasting from now until the end of 2013, the Government has allocated generators the vast majority of their carbon allowances for free. As part of a welcome policy to attach a cost or price to carbon, the new all-island electricity regulatory system requires power generators, including the ESB and Viridian, to charge for the value of carbon allowances used in producing electricity from fossil fuels. The Commission for Energy Regulation is required to insist that every electricity bill includes an additional charge to take account of the cost of carbon. These additional carbon charges are passed directly to domestic and business consumers.
The regulator estimates that electricity in the Republic is now approximately 10% more expensive than it would be if the cost of carbon was not factored into the price. The claim that energy is becoming more expensive solely due to the international price of oil is, therefore, not true. The price of oil clearly has a substantial impact but every household in the country is also paying a charge which adds 10% to the electricity bill because the regulator requires energy companies to factor in the cost of carbon.
Assuming the price of carbon allowances will average €25 per tonne between now and 2012, which is a very conservative estimate, generators could make unearned gains of almost €1.6 billion over this period, or €315 million per year, without Government action to recoup the windfall. If, as is likely, the cost of carbon increases, that figure could be substantially higher, resulting in even more fuel price inflation. While it is right that the price of electricity produced from fossil fuels reflects its full environmental cost, including the cost of greenhouse gas emissions, Fine Gael believes that it is wrong that power generators, whether publicly or privately owned, can make unearned windfall gains at the expense of consumers.
The single electricity market committee, which is the regulatory body for the all-island electricity market, concluded last March that action to recover the windfall gains from the full pass through of carbon allowances would be a matter for the Government rather than for the regulators but that the recovery of windfall gains could deliver benefits for consumers. We are proposing that the Government should claw back these unearned gains from power generators through a special windfall levy which would be determined each year by reference to the market value of the carbon allowances used up in the course of power generation or sold by companies on the open market. As stated, based on a €25 per tonne price for carbon, this levy could deliver an additional €315 million to the Exchequer revenue per annum. Over five years, it could yield almost €1.6 billion.
Many people will ask whether the levy, if introduced, will impact adversely on the price of electricity. That would not be the case and it has been confirmed by the regulator. The price of carbon has been factored into the price of electricity. We are, therefore, only recouping money that is being paid by consumers to electricity generators. This money is additional to that which they earn in respect of the cost of generation and the set price they are allowed to charge by the regulator and into which a profit margin is factored.
The second matter to which our motion refers is how a windfall levy could be spent and why we propose to cut the 13.5% rate of VAT to 12.5%. Members do not need me to tell them that the Irish economy is threatened by recession. Due to the collapse of the house building sector and a sustained loss of export cost competitiveness, jobs are being lost and business confidence is at a ten-year low. High rates of consumer price inflation, as a result of global energy and food price rises and domestic policy failures in regulation, competition and public sector management, are making for very difficult social partnership talks. The major questions revolve around how we can turn things around and what we can do domestically to reduce inflationary pressures, improve competitiveness and put a definite policy in place to help to get the economy back on track.
We believe that reducing the 13.5% rate of VAT to 12.5% will have a positive impact on the economy in general and on hard pressed homeowners who are struggling to meet rising bills. This is the most appropriate way to recycle the proceeds of windfall gains to consumers, for a number of reasons. Reducing the rate of VAT would: support overall competitiveness by reducing inflation — by an estimated 0.2% this year; give a direct stimulus to the domestic economy — the 13.5% rate applies mainly to domestically provided, labour-intensive services; give a direct boost to the flagging construction and housing sector — of the total €39.6 billion in spending that is expected to be taxed at the 13.5% rate this year, almost €26 billion relates to construction; help the competitiveness of the tourism sector, in the context of accommodation, car hire etc.; cut fuel poverty by reducing home heating bills; and reduce the income gap — low income households would benefit more than higher income households because they spend more of their income on services taxed at this rate.
The Department of Finance estimates the cost of reducing the 13.5% rate of VAT to 12.5% at €396 million in a full year. Taking into account buoyancy — that is, the additional spending and economic activity resulting from the tax cut — we estimate that the net cost for 2008 would be approximately €300 million. The latter would be comfortably covered by the levy we propose to introduce.
The Government's response to the motion is surprising. The first three paragraphs of its amendment have absolutely nothing to do with the motion. These paragraphs refer to the Government's long-term strategy, as set out in the energy policy framework. The latter is welcome but it has nothing to do with the motion. The second paragraph in the amendment refers to the need for Sustainable Energy Ireland to deliver on a range of domestic schemes. Again, this is welcome but it has nothing to do with the matter under discussion. The third paragraph calls on the Minister for Transport to introduce a new transport action plan that will prioritise sustainable transport. The latter is needed but it also has nothing to do with the subject matter of the motion.
The fourth paragraph of the amendment refers to fuel poverty. What we are proposing would contribute to addressing issues relating to fuel poverty by reducing the fuel bills of households and businesses. The amendment also refers to the ESB's €22 billion strategic framework up to 2020. There may be a concern that the introduction of our proposed levy might have an impact on the ESB's plans to invest in the future. However, we must ask who should be asked to pay for the ESB's future capital investment programme. Should it be households, through a stealth carbon tax, or should the company be obliged to make its case, in the context of normal margins, to the Commission for Energy Regulation when seeking price increases.
If we are going to introduce a carbon tax, we should be honest about it. We should tell people what they are paying and why they are paying it. The stealth tax to which I refer is paid to energy generators, not the Government. It will be spent in the way the ESB, Viridian or whomever else is making gains they would not otherwise make want it to be spent.
Our proposal is well thought out and costed. It is being introduced in other countries such as Spain and it is being considered in the UK. Ireland, Spain and the UK have similar energy markets. The Government states that it is considering the proposal but that it is complex. While we wait and do nothing, consumers pay 10% extra on their energy bills and that money goes to the ESB. There is a sense of urgency in the context of trying to address the real problems we face with increases in energy bills. Let us take back some of the money to which I refer — this would not impose a cost on anyone — and use it to reduce costs for households and businesses.