JOINT COMMITTEE ON ENVIRONMENT AND LOCAL GOVERNMENT debate -
Thursday, 18 Sep 2003

Vol. 1 No. 14

Carbon Energy Tax: Presentation.

Chairman

The main purpose of today's meeting is to discuss the proposal for a carbon energy tax. To that end the committee invited officials from the Department of the Environment, Heritage and Local Government and representatives of both the ESRI and the EPA to meet with it today. We will first hear from the Department officials, Mr. Donal Enright and Mr. Conor Barry. Mr. Enright will make his presentation, after which there will be questions from members.

I wish to draw the officials' attention to the fact that members of the committee have absolute privilege but this same privilege does not apply to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice that members should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

Mr. Donal Enright

I am the principal in the air and climate section of the Department of the Environment, Heritage and Local Government. I am accompanied by my colleague Conor Barry who has also worked closely on this proposal. I intend to give the committee a short presentation, after which I will answer members' questions. The areas I will address are the environmental obligations we face and the rationale for the carbon tax, our proposals, how we calculate their environmental effectiveness and international experience with carbon taxation. Of course, there are other issues involved and we will try to answer members' question about them.

Our environmental obligations arise in the international context. The United Nations framework convention on climate change is an effort to address climate changes at global level. There was a commitment in the Rio world summit in 1992 for developed country parties to stabilise concentrations of greenhouse gases in the atmosphere at a safe level and to bring their emissions back to 1990 levels by the end of the last decade. It was generally recognised that this was not sufficient and the Kyoto Protocol was developed as a legally binding protocol to require developed country parties, essentially the OECD and eastern European countries, to reduce emissions by 5% lower than 1990 levels in the period 2008 to 2012. That is generally referred to as the "Kyoto period" and I will probably use that term during this presentation. This is against the background that the intergovernmental panel on climate change has developed the science modelling to suggest that a cut in global emissions of 60% to 70% below current levels is necessary to ensure we prevent dangerous anthropogenic or human induced changes to the global climate. In this context, it is clear that the Kyoto Protocol is but a first step.

With regard to the European Union dimension, the 5% developed country target became an 8% reduction target for the EU generally. As part of that, there was burden sharing within the European Union. We have a charge to limit our emissions to 13% growth above 1990 levels in the period 2008 to 2012. This is within a range of +27% allowed for Portugal, for example, and a -28% figure for Luxembourg. Other countries with bigger economies also have demanding targets. Denmark and Germany have a target of -21%. It is worth noting, in the context of the use of the economic instruments which we are discussing today, that this results in a cost free asset transfer to Ireland within the Kyoto commitment period with a value in excess of €0.5 billion from within the European Union compared to the average reduction of 8% across the European Union. It is a substantial asset transfer to Ireland.

With regard to the national dimension, the Government published a climate change strategy in 2000. It sets out a ten year plan to reduce emissions by 15 million tonnes below business as usual level to comply with our European and international obligations. Carbon tax was seen as part of a suite of measures, including both cross sectoral economic instruments and sectoral level policies and measures, to reduce these emissions. The reason for including carbon tax was to ensure that the environmental benefits reflecting the scarcity of greenhouse gas emissions through price mechanisms was clearly a key element of the strategy. It was recognised in drawing this together that the introduction of such a tax had to be balanced by the need to take the national economic and social policy context into account. Extensive criteria in this regard are set out in the strategy. The intention to introduce the carbon tax is part of the Agreed Programme for Government.

The figures in our submission give members an idea of where we stand. Our emissions in 2001 were 31% above 1990 levels, approximately 70 million tonnes of carbon dioxide equivalent, compared to the +13% figure in the Kyoto period, 60 million tonnes of carbon dioxide equivalent. Projections for 2010 in the climate change strategy were +37% on a business as usual basis. That remains the same.

There are many ways of cutting the comparison and examining this. It is undoubtedly true that we are furthest from the target on a league table that the European Environment Agency produces on a regular basis. This must be considered in the context of our overall economic growth. We have the second best improvement in emissions per unit of output over the same period. Emissions in Ireland by this measure have fallen by 38% since 1990 compared to an EU average of 22%. The average efficiency of economies in terms of emissions is improving and ours is improving faster than the average. Luxembourg is the only country in Europe to have outperformed this rate of efficiency.

Within the sectors in Ireland, agriculture accounted for approximately 35% of emissions in 1990. These were almost entirely non-CO2 emissions. The energy sector, which comprises the electricity sector, has increased its emissions and its share of emissions. Electricity generation is now responsible for a larger share of emissions than it was in 1990. Industrial emissions are also increasing but at a slower rate. Its share is reducing slightly. Transport is the sector with the most dramatic increases over time, both overall and as a share of national emissions. The residential and commercial sector is relatively static in terms of the increase in overall emissions and has a declining share of national emissions.

That sets the context of where the climate change strategy is going with regard to the tax proposal. I will show the committee a table which demonstrates the relative importance of different fuels in terms of their CO2 content. Carbon dioxide emissions derive directly and inexorably from the amount of carbon in the fuel. There is, as yet, no cost effective end of pipe technology to remove carbon dioxide from the chimney of a power plant, a car exhaust or from the chimney of a domestic boiler. The principal means of reducing carbon dioxide with regard to energy generation is to switch towards cleaner fuels. The table shows the relative cleanliness of the various fuels. Natural gas is the cleanest of the fossil fuels, with peat emitting 80% more carbon and coal emitting almost 75% more. Other fuels have different carbon content which are reflected in the carbon dioxide emissions.

The switch towards cleaner fuels is one means of reducing emissions. Another is to improve the efficiency with which useful energy is obtained and used in combustion, improved insulation standards, improved efficiency of burners and boilers or by moving to non-carbon based fuels. It is clear from the table that renewable energies would be preferred and incentivised through a carbon related tax as there are zero emissions from these sources.

Our proposals were for an excise type levy on all fossil fuels proportionate to the carbon content to ensure the greatest environmental gain. It would be payable on all fuels irrespective of their end use. However, companies engaged in emissions trading will be capped through a price mechanism other than taxation so they would be exempt from the tax. This would need to be phased in over a period of years. People cannot switch in one day and time must be given to allow for necessary changes in consumption patterns. However, we consider it necessary and the market responds best to a genuine price signal that is predictable and certain. We considered it most appropriate to begin at a relatively low level of tax and to move to a higher final end tax level in a period of three to four years. We suggested an initial rate of €7.50 per tonne of CO2 emitted rising to €20 per tonne over the period.

The analysis we carried out, which is in the public domain and is part of the consultation process with the Department of Finance, has comprehensive and exhaustive analysis of the environmental impacts, emissions reductions achievable, the price impact in terms of both individual fuels and at sectoral level, the impact on the CPI, competitiveness, revenue streams and so forth. Clearly, the environmental gains are of most relevance to the committee. Our rationale was the principle of pricing environmental damage as a key tool in environmental protection. In other words, it is the polluter pays principle. It seeks to ensure that those who are responsible for the emissions are faced with the costs of their damage.

The aim of the tax is to mirror both the Kyoto process and the emissions trading directive, which is now in place, in introducing the market price for carbon dioxide. This is to ensure that investment and consumption decisions are informed by the need to take environmental considerations into account across society, thus assisting all sectors in making their contribution to our international obligations. The net effect, and this is the analysis we had to undertake, is related to the responsiveness of demand to price over time. This occurs in two ways, first, a higher price for energy is expected to lead to lower overall demand for and use of energy and, second, the relative change in the price of these energy products between different fuels based on the carbon content can be expected to cause a shift to using lower carbon fuels. This is a key element of the difference between what would be a purely carbon based tax or a carbon energy tax and a flat energy tax.

The short run price elasticity of demand for energy products is estimated internationally - there is a large amount of work in this area - and is assumed to be relatively low, at around -0.1; in other words, a 10% increase in price will cause a 1% fall in demand in the short run. In the long run the price elasticity is considerably higher, particularly if the price change is perceived as permanent and predictable. It is estimated at -0.4 or -0.5. International experience is that one will move from the short run elasticities to the higher elasticities over the longer run. That is the basis for suggesting that the tax should be introduced on a phased basis, starting at a relatively low level but increasing to a predictable level in time. We projected that emissions reductions would increase over time for two reasons, the longer run elasticities and the increasing rate of the tax.

The indicative targets in the national climate change strategy, which are under review at present, would require the non-emissions trading sector to reduce emissions by approximately six million tonnes of the 13 million tonnes nationally that is needed. That includes non-CO2 greenhouse gases in the agriculture sector, such as methane and nitrous oxide, which are not addressed in this proposal. There are a range of other policies and measures in other sectors, such as building regulations, public transport investment, etc., which would contribute to the reductions. The contribution of a tax at a rate of €20 per tonne is estimated to be in excess of two million tonnes of CO2 per annum during the Kyoto period. There will be lower rates of tax and elasticities in the initial years. Given the need which will evolve through the longer run elasticities over time, the tax must be introduced in advance of the Kyoto period to be effective for that period.

The international experience suggests that the introduction of a carbon energy tax or other such measures is not a radical measure. It is a major significant tool of climate policy in eight EFTA countries. The experience in Denmark has been to improve energy efficiencies by 50% over two decades from the 1980s - perhaps there were higher inefficiencies at that time - and to reduce CO2 emissions by 9% in the decade between 1988 and 1999. Denmark has also used the opportunity of pricing carbon into its economy to become a world leader in the export of renewable energy technologies. Energy and carbon taxation in combination has led to reductions in below business as usual projected emissions in Finland and Sweden of 7% and 9% over the decade of the 1990s. Switzerland and Japan signed up to and ratified the Kyoto Protocol. They recently introduced a legal framework for carbon taxation. Swiss tax is likely to be levied from 2004 onwards if the voluntary framework, which they originally hoped would be effective, is ineffective. The indications so far are that it is not as effective as they had hoped and, therefore, taxation seems more effective.

The consultation issue is significant in such an important policy move. The Minister for Finance announced in last year's budget his intention to introduce the tax from late 2004. He recognised and mandated Departments to engage in the appropriate consultations with sectors, policy makers and legislators. Since tax is ultimately a matter for the Minister for Finance in the budgetary context, this consultation process is now under way and is being led by the Department of Finance. The Department has set a deadline for submissions of 30 September. It has already received approximately 30 submissions and there are promises of a significant number more than that from some of the key interests in this area. There is a paper from the Department of Finance which raises questions at a high level and attached to that are two papers which were prepared for the tax strategy group in preparation for last year's budget. The proposal from our Department about which I have spoken is a synopsis which was developed for the tax strategy group. All those papers are in the public domain and are part of the consultation process.

I am happy to try to answer any questions.

Chairman

I thank Mr. Enright for his presentation.

Deputy Kelleher

When the Department of Finance leads the way in relation to tax proposals, we always feel it is another way of raising funds rather than a positive way of trying to address the problems in our environment. If the world is depending on Ireland to address the effects of greenhouse gases, it will be in dire trouble given our small emissions levels compared to the larger industrial countries throughout the world. As regards sinks, which the Americans continually refer to when explaining why they are trying to break the Kyoto Protocol, if we introduce a carbon tax, is it not imperative that countries which make substantial efforts with tree plantations, etc., are also rewarded? One might be trying to reduce emissions through a taxation system, but it will not serve a useful purpose if the State has a policy of deforestation, for example. Perhaps a measure other than taxation could be introduced to help countries which make an effort not only to reduce carbon emissions but also to address the other effects of greenhouse gases on the environment. While the intention may be good, I am afraid the tax will become another way of raising revenue rather than benefiting the environment.

Deputy Gilmore

I refer to the 2.02 megatonnes of carbon dioxide and the €20 per tonne tax. Two-thirds of that will be obtained from the combined residential and transport sectors. It will be obtained from electricity usage, domestic heating, car fuels, etc. How sure are we that that will be achieved? The price elasticity was mentioned. I understood that was based on international studies. To what extent will they be valid here? Electricity generation elsewhere, for example, might have the nuclear option which we would not want to use. There is one big company involved in electricity generation. What is happening here in terms of renewable electricity generation, such as wind farms, etc., is tiny and looks like it will remain so for a long time. How reliable is the projection that the target will be achieved? The same applies to transport. This country is increasingly dependent on the private car. We do not have a particularly good public transport system. We have spent many years trying to get the Luas over the Red Cow roundabout and it looks like we will spend a further number of years doing it. Because of the absence of alternatives to which people may switch, we may introduce a tax but we may not get the results projected from international experience.

Deputy Eamon Ryan

My first question relates to the justification of omitting those companies involved in the emissions trading system from any such tax. The Department of Finance states that those companies account for approximately 70% of our industrial and energy emissions. Based on my back-of-the-envelope calculation, that suggests approximately 26 million or 27 million tonnes will be excluded from the effects of the carbon tax. Given that the emissions trading system is giving those companies a free quota, that is, they will not be charged for their emissions, why should we exclude them from a carbon tax proposal? Is it the case in the UK that its new climate levy is directly targeted at those companies? I do not understand the logic of excluding them.

I support Deputy Gilmore's point and I am glad the Labour Party is coming around to the view that we are spending too much on roads. Has the Department revised its projections in terms of the benefits of public transport given that we are now spending three times more on new roads than on new public transport systems? Has it revised its estimates given the changed spending patterns we have seen in the past year in the transport area?

I presume we need to lose approximately ten million tonnes of carbon dioxide. It was stated that six million tonnes will come from the non-traded sector. I presume it is difficult to change agriculture. The forestry option is not an easy one to change and it is difficult to make reductions in agriculture. We are mainly talking about transport and domestic areas. My interest is in the other four million tonnes which I presume must come from the energy and industrial areas. Given that we do not seem to be about to switch Moneypoint over to gas, which would account for two million to three million tonnes, where will we save four million tonnes in that sector?

Chairman

I ask Mr. Enright to answer those questions.

Mr. Enright

I thank the members for their questions. As regards sinks, the climate change strategy recognises the importance for Kyoto purposes of sinks and enhanced forestry. The Kyoto Protocol provides that afforestation and reforestation since 1990 can be counted towards the Kyoto target. Trees do not grow very fast so one would not have the full benefit of trees planted now in terms of sinks during the Kyoto period. The importance of sinks, however, is recognised in the climate strategy. If the evolution of pricing mechanisms for pricing carbon through emissions trading for the large industrial users through carbon tax in terms of the other diffuse sources of carbon within the economy is successful and useful, it would be a potential option in the future to have carbon pricing on the positive side for carbon sequestered through sinks. These policies can be developed. They are not provided in the emissions trading directive at present. Although there is interest in the sector and internationally, including the US which is outside the Kyoto Protocol, in pricing the beneficial carbon in sinks, we are not aware that that has been successfully implemented as yet. However, it could be considered in the future.

Deputy Gilmore wanted to know if the figure of 2.02 million tonnes can be achieved. One aspect is that we have underestimated the reductions to be achieved through the elasticities and the difficulties in not being able to fully model the fuel switching, which is an element we want to incentivise. The price elasticities are robust in international terms. The international picture is as we have stated in our paper. We would get an additional benefit from fuel switching. However, it is recognised that the elasticities do not happen on day one, but over time. If people see that the price of their transport fuel reflects the price of carbon, they may decide to purchase a more fuel efficient vehicle the next time. They may still drive the same number of miles and have the same comfort levels in the car, but they will emit less carbon during their travels. They will not make that switch the day the tax is introduced, but the price signal will be there the next time they make their investment choice. The same is true of other choices people make in their households. It will create improved efficiencies in households. If people see an element at the bottom of their bill for the price of carbon in their gas which they use for heating purposes, they will turn down the thermostat a degree, install additional insulation and ensure their houses are properly draught proofed. These things will occur over time if the signal is there. That is the international experience and the expectation.

Deputy Gilmore mentioned the electricity sector and this is also related to Deputy Eamon Ryan's question. The electricity sector is excluded from the carbon tax proposal we are making because it is bound by the emissions trading directive which has been agreed at European Union level. Within the electricity sector, the introduction of carbon pricing as a signal will incentivise renewable fuels and wind energy in other sectors and make it more competitive. Operators will get a message through the application of the price signal to the fuels they use.

As regards the point that if companies are engaged in emissions trading they are, by definition, excluded from the carbon tax, they are seen as complementary mechanisms in international terms. International practice is that one uses one or the other. The other major means of applying standards or making improvements is to apply command and control measures. As regards not applying a tax to those engaged in emissions trading, one does not try to be prescriptive in terms of how they meet their targets. One must allow them to identify their least-cost means of meeting the target.

If it is possible to extend emissions trading to the economy, that may be a more pure way of ensuring the actual price of making reductions is reflected in the price of energy and the carbon content of that energy. That is a difficulty. Technically it is not possible to have emissions trading at the level of the householder or the car. A balance must be struck between where one can draw the line in emissions trading. Assuming the companies meet their legal obligation, one is guaranteed to meet the target through the application of the emissions trading. The only thing one is not sure about is what that price will be. Introducing a tax means one knows what the price will be. There is more uncertainty about the reductions one will get. Experience will show that we will get the approximate 2.02 million tonnes we calculated, but the certainty of that is not as good as in emissions trading. The other four million tonnes is largely in the agriculture sector. There are measures in the climate change strategy which address emissions from agriculture. They must be reworked in the context of the current evolution of the CAP reform. The final question that Deputy Ryan had concerned revised projections for transport. My understanding is that the DTO is developing those at the moment.

Senator Brady

Mr. Enright has answered some of the questions I wished to pose but I have a couple of others. To return to the early part of the presentation, Mr. Enright pointed out that our reduction levels are above average, but is that an EU average or a global one?

Mr. Enright

An EU average.

Senator Brady

Mr. Enright said that a 10% increase in the price equates to a 1% reduction. Can he go into more detail as to how that is arrived at?

Mr. Enright

It would probably be better for me to hand this over to my colleague. Basically, that was an example to explain what price elasticity is, rather than saying that this is the particular one we would obtain in any particular circumstances. My colleague can explain it somewhat better.

Mr. Conor Barry

As regards the example of a 10% increase resulting in a 1% decrease, I will explain what that -0.1% means. Elasticity is a measure of the responsiveness of any goods to a change in price. With a low elasticity such as-0.1%, if the price of that goods item is going to increase by 10% because of the carbon tax, one can expect demand to decrease by 1%. The way those figures are calculated on an international level is that past prices are modelled over a lengthy period of time. It is usually best to try to take a number of decades at a time. The International Energy Agency produces energy prices and energy demand, thus one can measure changes in demand that occur after a change in price, allowing for other variables as well in quite complicated models.

To put it in context, the elasticity for cigarettes is often quoted as -0.04%. It often seems to be a very unresponsive goods item to price changes.

Deputy Morgan

Is there a view in the Department that sectors such as electricity, which are not part of the emissions trading, are going to receive a low priority in terms of attention compared to sectors which have significant carbon emissions, simply because they are excluded from the emissions trading sector?

My second question concerns a small point which is nonetheless relevant to the public debate on taxes. Can Mr. Enright give any advice concerning the rate of technological development of, for example, cleaner engines for transport systems that will be available in the coming months or years?

Mr. Enright

The attention being given to the electricity sector is in the sense that, as was pointed out earlier, 100% of its emissions from fossil fuel energy and renewables are clearly outside the range of this altogether. The sector will be engaged in emissions trading. It will get an allocation from the State - probably something less than what it would view as its optimum, given the fact that we must make reductions in emissions to meet our target at this stage. The electricity sector will then be in a position either to make the reductions by switching to cleaner fuels, improving efficiency, and developing and accelerating renewable energy, or if companies elsewhere in Europe can make these changes at a cheaper price, it will buy the allowances from those companies. It would then have the requisite number of allowances to meet the actual emissions from what it trades. If it can over-achieve on its emissions, companies in Ireland or elsewhere will be perfectly free to sell those allowances on.

The intention of emissions trading is to get away from the idea that the State knows best how an electricity company can make its reductions. The State does not know best how an electricity company can best make its reductions but if it incorporates the polluter pays principle and prices carbon pollutant for the emitter, that provides the incentive for that company to identify its least cost options. Similarly, by pricing tax through carbon tax one puts the price signal into the rest of the economy, thus giving more diffuse combustion sources. Rather than telling people exactly how they should do a, b and c, one can provide the signal and let them identify what is of least cost and most comfort to them, whatever their criteria are to meet the overall target. However, it increases choice within society as well as for companies engaged in emissions trading.

Chairman

Are there any further questions?

Mr. Enright

I am sorry, there was another question about cleaner engines. Over the past two decades, the car industry has made substantial improvements involving 90% plus reductions in what one might call other non-CO2 pollutants in terms of urban pollution contributing to urban health problems and health problems generally from car exhausts. They are considerably cleaner than they ever were before. The only problem with this is that there are pollutants other than carbon dioxide and there is no catalytic converter that has yet been invented to clean up carbon dioxide emissions from cars. In transport terms, I do not think the cost is ever likely to be feasible. However, the car industry is moving - and clearly Ireland is a technology taker rather than a driver in this area - towards petrol electric cars, such as the Toyota Pryas for instance, which are 50% more fuel efficient than a traditional petrol or diesel only car. In the longerterm, one is potentially looking at hydrogen fuel cars but that will not happen this year or next.

Senator Brennan

On the Shannon Estuary, there is the Moneypoint power station, as well as Aughinish and an additional proposed power plant. Could the same company get emission trading twice in the one location? How does it work out?

Mr. Enright

The limits set in the directive will make it obligatory both for Moneypoint and all other ESB fossil fuel power plants that are above the threshold in the directive, and companies like Aughinish will receive an allocation of allowances from the State. There are maybe 70 sites in total in the country, 20 of them being ESB or other power generation plants, the rest are large industries, including Aughinish. They will have to surrender allowances equal to their actual emissions. They will be told in advance of 2005. For example, plant A will get half a million tonnes as an allocated allowance. If that company comes in with its emissions at exactly half a million tonnes, it offsets the allowances it has been granted and is clean, clear and has met its obligations. If, however, its emissions ended up being 600,000 tonnes - as could well be the case with increased production, a problem on the site or whatever - would have the option of buying from another company elsewhere across the whole of Europe that had 100,000 tonnes of emissions to spare. It would be good money in terms of compliance with its obligations in an Irish context. It does not matter if Portuguese or Swedish allowances are surrendered. Conversely, if that company manages to come in at 400,000 tonnes because of fuel switching and increased efficiency in production, if it has that 100,000 tonnes to spare, it will look for a company that needs that 100,000 and will sell it to it for the best price. That is how it will work, in principle.

Chairman

That concludes the questions. I would like to thank Mr. Enright and Mr. Barry for their presentation and for dealing with the questions raised by members. We will suspend the sitting briefly while our friends from the ESRI are getting ready.

Sitting suspended at 12.41 p.m. and resumed at 12.43 p.m.

Chairman

We will now hear the presentation by Professor John Fitzgerald and Dr. Mary Keeney from the ESRI. I welcome them both to the meeting. I suggest that we should hear from Professor Fitzgerald before taking questions from members. Before the Powerpoint presentation commences, I wish to draw your attention to the fact that members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I think members have received copies of Professor Fitzgerald's presentation.

Professor John Fitzgerald

I am very pleased to have this opportunity to address the joint committee. I am told by policy makers what they want to achieve and we try to work out how to achieve it at least cost. That is the background to my job. I will skip a number of slides because Mr. Donal Enright has already covered quite a number of the issues I was going to discuss. Mr. Enright mentioned how our emissions have risen more slowly than our output over time. I will show part of the reason, as members can see our GNP is shown in red and our energy demand in yellow. The two kept pace with one another until the 1980s but, as with most developed economies, when people start working in the services sector, designing computer programmes or whatever, they tend to become less energy intensive over time. That is the background to it.

Mr. Enright also showed members of the committee details of where emissions come from. Using the EPA's data for 2000, approximately one third of our emissions are from agriculture and two thirds are from burning energy. As regards that part which is from burning energy, we show where the carbon dioxide emissions came from in the 1990 to 2000-2010 period. Over time, with the carbon tax it is likely that the housing sector will diminish in importance, although still increasing its emissions somewhat. Industry is also likely to show some reduction with transport growing all the time. This is a pattern that is common in most developed economies and it represents a problem in terms of measures to deal with global warming.

We have looked at the effect of a €20 per tonne tax on carbon dioxide. As Mr. Enright mentioned, the proposal is not to introduce it at that level immediately but it might rise to that level over time. I will show here the effect for the electricity sector when it buys fuel. There would be a 103% increase in the cost of coal bought by Moneypoint if it were subject to the tax, but of course it would not be subject to the tax under the proposal.

For households, there would be a 19% rise in the price. The price rise is much smaller for households because so much of the margin is in the margins; the coal delivered in a large ship to Dublin port costs an awful lot less than when it is delivered to a household. There are substantial increases and in particular in the price of peat briquettes for households as a result of such a tax. With emissions trading, it is likely - and the assumption underlying the €20 per tonne tax is - that the price of permits would trade at around €20 per tonne also. Therefore the two would be roughly related. The impact of emissions trading would be to raise the cost of burning fuel in the electricity sector which would also be passed on at the higher price naturally to consumers, discouraging them from consuming as much energy and encouraging them to consume energy that is less carbon intensive. These are the figures which we looked at.

I have been working in this area for some time. We published our first paper on carbon and its effect on the economy 11 years ago, in 1992. Therefore, we have a long track record of looking at this. This subject has become more topical recently.

I show here in yellow, on a business as usual basis, what our emissions would be to 2015. These figures were for a conference in December 2002 and there has been some upward revision by the EPA as a result of applying the latest methodology proscribed for them. There is a gap as a result of carbon taxes and one can see a substantial reduction of the order of magnitude that Mr. Enright mentioned. It will still need other measures, however, to get us down to the red line, which is our target limit under Kyoto.

As regards the effect of carbon dioxide taxes, there will be a decline in emissions of about 9%. Deputy Gilmore already asked what certainty we can have about this. When I began working in the Department of Finance many years ago I was asked by my principal officer if I would go to the stake for these numbers. I was never that happy about the idea of the Department burning people at the stake, although maybe it is normal. There is a wide measure of uncertainty but what is likely to happen is that one introduces the tax and if it is too high one does not bring it up to the full €20 per tonne. To some extent, one must suck it and see. Mr. Enright and Mr. Barry have summarised the evidence on the response and that is our best estimate as to what the reduction would be for that size of tax. As the representatives of the Department of the Environment and Local Government mentioned, there is a chance that it could be higher.

When we estimate the responsiveness, natural gas is a newcomer in this economy. Therefore, we do not know how people will move from natural gas to other fuels in response to price changes because it has only been there for ten years. One really needs 30 years' data to be able to assess things, with an upside that the changes could be bigger.

The structural change will affect particularly solid fuel - coal and peat. In the case of electricity, emissions trading, which in many ways is very similar to taxes, will lead to a substantial switching of fuel. That is where the single biggest improvement in emissions will come from. Our assumption is that, in fact, it will still be economic to keep Moneypoint open at €20 per tonne. The tax would have to rise to €30 per tonne before it would become uneconomic. It would be inefficient to close down Moneypoint as the best way of meeting our target for 2010. One would see all new peat stations close because to keep them open, one would have to raise an additional €30 million per year in taxation to pay for the emissions from those peat stations. Given the numbers employed - there are 45 in the new stations; a total of 90, plus people harvesting the peat - a huge amount of additional tax would have to be paid if one was to keep them open.

There will be a big incentive to bring in wind energy. Wind is already economic for small quantities, even without a subsidy, in the Irish electricity market. Our assumption is that in the long run, by 2010 to 2015, we are likely to see a really big increase in wind energy. Since other fuels are so expensive, people will want to buy more electricity from wind not necessarily because they think it is environmentally friendly but because it is the cheapest way of doing it. This would give rise to the tax talked about. My figure of 1.1% is if the tax was imposed across the board without emissions trading. It would probably be about 0.7% of GNP if one leaves out 30% to 40% of emissions in the trading sectors.

An important issue is that if one raises a tax, one has money with which one must do something. We looked at what happens with the revenue. One can lose it somewhere but the Government could cut income tax, cut VAT and increase expenditure over the years. When we looked at cutting income tax and social insurance contributions, the revenue brought in would allow one to have quite a substantial cut in social insurance contributions or income tax. The effect of the cut in income tax would more than offset the negative effects of raising the carbon tax so the economy would be no worse off. There would, however, be people and companies who would be worse off but the economy, as a whole, would not be if one used the revenue in that way.

The problem of emissions trading, as determined by the European Parliament, is that the emissions permits are grand-parented. They are given free to all the companies involved. The companies would get them for free but, in a competitive market, they will put up their prices by the full amount as if they had to buy the permits. They will get from a higher price the amount it would cost if they had to buy the permits but they will get the permits for free. The shareholders will do very well out of it. One is giving away money. If the permits were auctioned, it would be very similar to a tax. The Government would have the revenue and could cut other taxes.

I refer to the impact of grand-fathering. I prefer the term "grandparenting" because I think it is very mean to grandfathers. Fairy godmothers come out well out of things but godfathers are associated with crime. The Government will not have the revenue to cut other taxes while the negative effects will be quite substantial in that case. In the case of the carbon tax, the Government would have the revenue and it would depend on what the Government did with it. It could offset the negative competitiveness effects in the economy by cutting direct taxation or, if it cut VAT, one would see fairly similar impacts.

If the carbon tax was imposed across the board, who would pay? Disproportionately, the poor would pay. Some 10% of the poorest people in the country would have to spend 3% of their income, directly or indirectly, on the carbon tax whereas the richest 10% would pay about 0.4% of their income. There is a problem that the burden would be unevenly shared. It was interesting to note in the United Kingdom that, when the Tory Government tried to impose VAT on fuel, there was uproar on exactly this issue. The income distribution implications of this are quite negative and it is something that needs to be taken into account. A colleague, Sue Scott, has estimated how much one would have to pay to make sure that the bottom 50% of households were not worse off. One would need to increase social welfare payments and provide insulation for old people and so on. Basically, one would need to hold back about 23% of the revenue to offset the negative income distribution implications. That is fine in the case of the carbon tax but there is a big problem in the case of the tradable emissions permits because they are being given out for free. The electricity price will go up and will hit poor households but the Government will not have the revenue to compensate the losers. It may have to use more of the revenue from the tax to compensate the losers which will have a more negative effect on the economy. If the carbon tax is used in the right way in terms of compensating poor households and cutting direct or indirect taxation, the negative implications for the economy can be largely offset. It is more complicated in the case of tradable emissions permits.

There is a range of different instruments. Carbon taxes and emissions trading are too complementary. If one auctions the permits, they are almost exactly the same in terms of their effects. If one has to pay the Revenue Commissioners for a permit - €20 per tonne - or if one has to pay it a tax, what it is called does not matter. If it is a quota, one will not know exactly what one will have to pay to buy the quota when it is auctioned but if it is a tax, one will know how much one will have to pay in the next year. There is a range of other measures which would be complementary. For example, a study done by Teagasc in February showed that decoupling, or the Fischler proposals, if implemented, would have left farmers on average slightly better off and would have achieved a major reduction in emissions with no cost to the economy and no cost on average to farmers. There are measures in other areas where the gap I pointed to earlier can, and should, be met; it need not all be through carbon taxes or tradable emissions permits.

However, fiscal means - either of these means - are much more efficient than the Government telling people what to do. While the Government is very wise, it does not have the wisdom of Job. It does not know who can cut emissions cheapest. One can opt for the Joe Stalin solution where one person does one thing and another does another thing but that will be hugely costly because Governments will get it wrong even with a fair degree of wisdom. However, by leaving it to fiscal instruments, one lets people decide whether they have to pay or they can find a cheaper way to deal with the situation. There is a leaning towards fiscal instruments rather than regulation or voluntary agreements. There are cases where each of these instruments will be valid and necessary but the bulk of the action will be on the first two.

In regard to who pays, it is not necessarily the person who writes the cheque. Ultimately, the ESB might write the cheque to buy the permits but it will pass it on in the price and the household will end up paying. Even if somebody says his or her company will have to pay the tax, one must look to see if it will pass it on through charging a higher price and who, ultimately, will pay. Shareholders gain with grand-parenting because companies in a competitive market at the margin could, instead of producing the electricity, sell off the permits and just make money out of selling them. They will raise the price by the full amount of the permit which they will get for free, so the shareholders will benefit from grandparenting. In the case of taxes, the Government will get the money and can use it wisely. How the Government spends the money is crucial.

My objective is to try to see what the least cost fair solution is so that everybody pays roughly the same price in the economy. EU emissions trading will apply to some sectors and I think Deputy Eamon Ryan asked why they should not also be subject to the tax as they are getting the permits for free. What would happen is that they would pass on the full effect of the excise tax on the fuel but they would also charge for the permit they did not have to sell which they would have got for free. The price would rise by the equivalent of €40 per tonne but they would still benefit by €20 per tonne. Once one decides to grandparent, it is difficult to get the money back from the companies. Even making them subject to the tax, the consumer would end up paying on the double for buying electricity which would be inefficient in that there would be a more efficient way of doing things.

Essentially, sectors should be subject to one or the other but they should not escape paying, that is, there should not be sectors which are exempt from anything if one is to try to reach an efficient solution. Agriculture and forestry have a role to pay in a least cost fair solution. Nobody is suggesting taxing but it is a question of whether one can restructure things so that farmers and landowners will be at least as well off as they would have been without it and the environment would be better. Teagasc has shown that there are options in that area where we could do better.

Deputy Eamon Ryan

I thank Professor Fitzgerald. For the first time, it has made sense why one cannot have a tax and be part of the emissions trading system. When one is into the virtual world of trading systems, sometimes it takes a while it get one's head around it. I have finally got my head around it.

In the Department of Finance's consultation paper, one of the questions asked - one of the roles of this committee is possibly to answer questions and give views in some other way or forum - was whether we should enter into legally binding negotiated agreements with other companies in terms of emissions reductions, so that they could get a rebate on the tax. Is that a good system or would we be better off providing a grant based system where, to a certain extent, it would be up to companies to apply for it and we would not necessarily be getting into negotiated contracts? I would be interested to hear your views on that submission.

I do not want to put you to the stake on this issue but in regard to the emissions trading system, how do we know it will reach €20 per tonne? I saw a startling graph the other day on our position versus that of the new accession countries. Almost every country is at the opposite end of the spectrum to us in that they have a 30% reduction in what they were expected to have. They would be very keen to trade in any such trading system and would do very well out of it. The availability of allowances in eastern European countries is such that we might not necessarily get a €20 per tonne permit. Even under the emissions trading system, we may not even get a market. This seems to be an absolutely unproved economic instrument and we do not have any foreknowledge as to how it may work. I would be interested to hear how close you would go to the stake in terms of what the emissions trading system will actually bring.

When we allocate our quota to those companies in the trading sector to which the carbon tax will not apply - I will ask the Environmental Protection Agency this question as well because it has an interest in it - should we take that into account and then allocate them a much lower quota as a percentage of our overall national quota in recognition that if we give them a high quota close to their current trading emissions, householders will end up paying everything in terms of our reductions? How would you advise the EPA in terms of what allowance it would allocate to companies and how it would allocate?

Deputy Gilmore

As Deputy Eamon Ryan said, it is a case of getting our head around this. The Department of the Environment, Heritage and Local Government's figures for the reduction in emissions show that if the carbon tax was at €20 per tonne, the emission reduction from the electricity sector would be in excess of five million tonnes. Because electricity is not proposed to be covered by the carbon tax, it will be dealt with by way of the trading regime. Is the proposal that the woman in Ballyfermot, who cannot afford central heating and who has a coal fire, will pay more for her bag of coal? All of the women in Ballyfermot and elsewhere will contribute 0.664 million tonnes to our reductions. The Government will give a pot of money to the ESB to buy its way out of burning coal in Moneypoint, although it will continue to burn coal there and that five million tonnes of carbon will still be emitted into the atmosphere but will not appear in our figures because they will have been bought out. I appreciate that is put in simplistic terms but is that what is being proposed?

Professor Fitzgerald

On behalf of the UNFCCC, I went to Belgium and Poland to look at their compliance with the climate change protocol. One of the interesting things was that our concern in Belgium was that it had signed up lots of negotiated agreements with companies. Maybe they were very wise agreements but it meant that the rest of the economy would have to bear all the burden of adjustment. It could have considerably increased their cost because before knowing whether an agreement is good value, one has got to know a lot about the company. Generally, when one signs the agreements, one does not know a lot about them.

However, I can think of one example where a negotiated agreement might be valid, that is, in the case of Aughinish Alumina. One must first decide whether it is in Ireland's interest that it continue in operation. It may not be because it will need a lot of emissions permits. If, on balance and even given the cost of the permits it will have to be allocated, it is worth keeping it in business, it could put in place a combined heat and power plant which was mentioned earlier but it will not because it is uncertain as to what the tax will be and about its future. One could have a negotiated agreement where one says one thinks a company should be in business in a decade's time and that if it puts in a combined heat and power plant, one will exempt it or provide for it in such a way that it will get its money back from that combined heat and power plant. If one left it to an uncertain market in which it did not know what the tax would be, it would be too uncertain to invest a large sum of money in the combined heat and power plant. That is an example where voluntary agreement could give one a better and a more efficient outcome but it would be most unusual. One would be better to leave companies to decide on the efficient solution.

In terms of the emissions and what the price will be, there is huge uncertainty on this for two reasons which have been identified. The first relates to who is involved in trading. The EPA may well be able to elucidate more on this but assuming it is the existing EU, to understand what the price will be, one must understand a lot about the economics and energy sectors of the others to know what they will do. There are estimates of between €5, €20 or even €30 per tonne as to what the price will settle down as. The experience in the US, which is not really valid with SO2 sulphur dioxide trading, was that it came in much less than people expected, that is, that people could make the efficiency gains more easily. That is not likely to be the case with carbon, although we do not know.

In principle, the tax should be at the same rate as the tradable permit in the long run, so that in the sectors covered by the permit, one will pay €20 per tonne for a permit if one cannot save. In the other sectors, one will pay €20 per tonne in tax if one cannot save. The cost would be the same across sectors. The two should be linked in the long run, that is, there should be the same rate. There is, however, considerable uncertainty. The uncertainty is greater, particularly if one extends the trading to all parties. For example, if Russia was to sign the Kyoto Protocol and eventually be included in trading, the additional permits it would have would bring a very low price. Poland and the Polish energy sector should have a lot to trade because there have already been huge energy savings. I think all its coal powered stations are on the way out, or are gone. It would be able to make money out of this. Because it is selling more on the market, it will bring down the price.

There is, however, a concern, certainly in the short-term, about the liquidity of the market. A number of people here were on the committee which looked at the issues in emissions trading in 1999 and we came to the conclusion that if we had emissions trading in Ireland, the ESB and one or two other companies would totally dominate the market and there would not be liquidity. Similarly, at a European level, will there be enough companies buying and selling to make it a liquid market? Firms are unhappy about this - investing in electricity. If one invests, will one be able to buy the permits if one does not get allocated them for free? Will there be a market? As Deputy Ryan said, it is untried and many people have been trying to get their heads around it but have not really done so, although it is better than going to the stake.

The original proposal from the Commission in 1990-91 was a tax across all countries. That would be a much simpler and more efficient way of doing it. With trading, we are likely to be buyers of permits from other countries in which case we will be paying other countries. It is like negative Structural Funds whereas with a tax, one would know that no country would be a donor or a recipient and it would be internalised. A tax would probably have been better but the EU, as a body, has decided it will trade. In the long run the tax should be roughly equal to the price, whatever that price is.

Allocating how much quota to give to the firms is a difficult job and contractor consultants will be appointed to advise the EPA and the DoE on this issue. Depending on how much you decide to allocate in permits to the trading sectors, as you say, the rest of the economy has to make up the difference. It could be that if you are too generous to these sectors, households such as that of the woman in Ballyfermot, for example, might have to do an awful lot in terms of getting rid of their coal fires, etc., in order to bring us within the permit. This could be extremely difficult for such people whereas in the electricity sector it might not be that difficult to make the changes. Therefore it is an important issue but it is a difficult issue to get right. I would have preferred either trading across all sectors or a tax across all sectors, but once again we are stuck with this regime by the EU.

You are going to see under-allocation of permits to firms. You are not going to give them as much as they need because we are 25% above our limit. If everybody had the same price, you would give them the same quota. Therefore the firms will have to buy permits.

What is interesting is that this will lead to significant distortions in trade and we are going to see new power stations built on this island every three or four years for the next decade or so. If you are building a new power station and you decide to build it in Dundalk, you may be told that you will get threequarters of the permits you need and you will have to buy the other 25%. However, if you base yourself in Crossmaglen - Britain is largely compliant and may give everybody what they want - then you will get all your permits. That will mean that you should set up all the power stations just across the Border. There is nothing we can do about it because it is part of the EU regulation, but there will be many problems in this area and I do not envy the EPA in their job of making this allocation.

Deputy Gilmore asked if the Government gives permits to the ESB and what happens vis-à-vis the householder burning coal in Ballyfermot. It is easier to take this in the case of ESB than of Veridien, or other such companies involved, because the people of Ireland are the shareholders in ESB and if there is a benefit to the shareholders, it should come back in terms of a dividend to the State. If, for instance, you give a private sector company - there are many such companies involved - a permit worth €20 million, which would be enough to cover all its emissions, the company then must decide to continue in business or to expand the business. If it expands the business, it must buy more permits than it has and charge €20 for each additional tonne of cement or whatever it is selling to pay the additional cost of producing it. But the company would not sell the first five bags of cement at €10 and the second five bags at €20; instead it would increase the price to €20 a tonne. What will happen is that the cement company will increase the price by the full amount of the permits it would need if it had to buy them so that in all the company’s revenue it gets back the total cost of the permits, and on top of that the company has been given the permits for free so the shareholders get the money in a higher dividend - it is a wealth transfer to the shareholders. If the State is the shareholder, then there is a transfer back to us. There would be argument. Firms will say that is not so and the points I have made may make the difference between whether the power station is located in the Republic or in Northern Ireland. Therefore it is not clearcut. The Deputy is right to be confused; I am confused on this issue, but it looks as if the price in the bulk of incidents will go up by the full amount and the grandparenting will end up with the shareholders of the recipient companies doing well out of it whereas the consumers will pay no matter what, either through a higher price for their electricity or their cement or through a higher price for the coal because of carbon taxes.

Deputy Gilmore

The net effect, in terms of the environment, is that the emissions are still there.

Professor Fitzgerald

Yes, the emissions would be the same. If all the quotas were tradable, obviously the price would rise until you had compliance, certainly at EU level. It looks as if Ireland may be a net buyer of quota but one cannot be certain at this stage.

Deputy Eamon Ryan

On a point of clarification, the inequity of the grandfathering system is not a case against the application of carbon taxes. What I mean is there are signals we need to give in the transport and other sectors which a carbon tax will give. It is just that there is an injustice, which is a separate issue, in the trading.

Deputy Morgan

I assume it is not possible therefore to put conditions on the granting of the permits. I expect that a tome the size of a bible, which probably still would not cover everything, would be needed to combat the situation Professor Fitzgerald has predicted.

Professor Fitzgerald

I cannot work out a way of doing it but the committee can ask the EPA. The EPA does not have the answers yet but it is commissioning consultants to look at this issue. There may be ways of doing it, I am not sure. It is a really big issue in Northern Ireland. Northern Ireland is paying through the nose for electricity because the generators were given an incredible privatisation deal in the early 1990s. It would be rather nice if a condition of their getting the free allocation of permits was that they had to give up these wonderful contracts, but we do not have the same leverage here in the Republic. I cannot think of a way of doing it but it would be nice if we could.

Deputy Eamon Ryan

A thought occurs to me about what Professor Fitzgerald has described in terms of the net marginal cost applying to the whole market. That, in a sense, is what has happened in the electricity market in recent years where we have seen a 23% increase to pay for the best new entrant, which might be described as the worse new entrant from the public's perspective. Does it not also make a strong case here? The difficulty will be in something like power generation particularly. An all-Ireland electricity market would get around that particular problem. We might still have a problem with, say, cement, but electricity is an area we could deal with on an all-Ireland basis.

Professor Fitzgerald

The emissions trading will not prevent an all-Ireland market. There would be complications because the UK has a crazy environment policy. The UK has all sorts of taxes and very complicated trading which may make for difficulties in Northern Ireland. They have a climate change levy and they may have a renewables obligation, which, depending on how it is implemented, could actually have a negative effect on renewables in Northern Ireland.

Therefore there are problems in the environmental area but I think the emissions trading is broadly neutral because they will charge, in the price, the full cost of the permit and the cost of the permit would be the same whether you are in Dundalk or in Crossmaglen, that is, the marginal permit will cost the same amount. It will not distort the actual trade in electricity and therefore you could have an all-Ireland market even with trading, even if there were distortions in where you locate the generation.

Chairman

As there are no other questions, I thank Professor Fitzgerald and Dr. Keeney for their presentation and for dealing with the questions. The committee will suspend briefly while the officials from the EPA prepare to make their presentation.

Sitting suspended at 1.19 p.m. and resumed at 1.20 p.m.

Chairman

I welcome Dr. Mary Kelly, Director General, Dr. Michael Lehane and Dr. Ken Macken from the EPA. Before you commence, Dr. Kelly, I wish to draw your attention to the fact that members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses, or an official by name, in such a way as to make him or her identifiable.

Dr. Mary Kelly

Thank you, Chairman. Deputies, Senators, thank you for the invitation to come before the committee. We sat and listened to the two previous presentations and I will try as much as possible not to repeat what was said because it has been a long morning for the committee. I also must apologise for not bringing a Powerpoint presentation. We did not know the committee had facilities for such presentations.

Chairman

It is nice to be different.

Dr. Kelly

It is. We have a full paper presentation for the committee which can be read at leisure. To introduce the Environmental Protection Agency, as the committee will be aware it is an independent public body set up under legislation in 1993. We are charged with a number of responsibilities involving protecting Ireland's natural environment and therefore our perspective on this is entirely environmental.

I outlined in the paper some of our duties which include licensing and regulation of large industrial processes; monitoring of environmental quality and the publication of periodic reports on the state of the environment, which is very salient to the committee's discussion today; the provision of information and advice to Government on relevant national and international environmental issues, including climate change; generally overseeing local authorities in their performance of their statutory duties and also licensing and regulation in the waste area.

On climate change, we have an important role to play in a number of key activities. Those are matters such as the compilation and reporting, mainly to the EU and to the UN, of the national greenhouse gas emission inventories. We report on behalf of Ireland on our Kyoto targets and how we are achieving them.

We have very recently been charged by the Cabinet with implementation of the national emissions trading scheme. We have various duties under it on emissions trading and perhaps we will talk a little more about emissions trading later. We also have a role in the area of climate change, in terms of developing a strategic research capacity, and I will say a few words about that later too.

One of the main global environmental concerns is climate change resulting from the emissions of greenhouse gases. The EPA identified it as being one of the five main environmental challenges facing Ireland when we published our state of the environment report Ireland's Environment - a Millennium Report in 2000. We have a new report coming out at the end of this year and I have no doubt that climate change will still be one of the main challenges for Ireland.

The committee has already looked at the gases - carbon dioxide, methane, nitrous oxide - and I will not go through that. Ireland is not immune from climate change. Research we published earlier in the summer predicted that Ireland will not escape the impacts of climate change. This research predicts that over the next 50 to 100 years there will be dramatic changes in rainfall patterns, with winter rainfall increasing by up to 10%. Sea level rises and predicted increases in the frequency of extreme weather events will mean that low lying areas are very vulnerable to flooding. In addition, summer and winter temperatures will increase and changes in the growing season are likely to be experienced. One of the implications is that during the summer months it is likely that there will be problems for water supply schemes in the eastern half of the country, particularly in the greater Dublin area. Sometimes people talking about climate change forget that Ireland may be negatively affected - we tend to think it is a nice summer's day. Some of these impacts have potential implications for the supply and quality of water, the types of crops and agriculture, and, importantly, the location of residential developments.

The nature of climate change is such that those predictions relate, as I said, to the next 50 to 100 years and it is difficult to get people to make policy today for which they will not see an impact, either perhaps in their lifetime and in their children's lifetime. One of the difficulties of climate change, from an environmental perspective, is that it is not immediate and neither is any of the solutions. Perhaps that is why we are not doing as much as we could on it.

On the Kyoto Protocol, the committee has heard, from both the earlier submissions this morning, that we are above our levels. The EPA collects these figures and reports them, as I said, to the UN. Our latest report to the UN showed that levels had risen to 31% above 1990 levels - instead of heading for the increase of 13% allowed. Rather than restricting increases, we must achieve considerable reductions in emissions in order to meet the Kyoto target.

In a European context, Ireland has the greatest distance-to-target to overcome in order to meet its international obligations. The diagram by the European Environment Agency, on page 4 of the paper, shows Ireland clearly much further from the target than other member states. We have a fair mountain to climb.

The Government has tackled the issue of national climate change by publishing a National Climate Change Strategy in 2000. This was referred to earlier. It sets out a framework for achieving the reductions in some of those greenhouse gas emissions to meet the obligations. The strategy includes a range of cross-sector and sector-specific measures. The cross sectoral measures are those we are talking about today: the introduction of appropriate tax measures for which the committee has the consultation paper from the Department of Finance; and also the participation by Ireland in the pilot EU emissions trading scheme, which, as I said, the EPA has been given the responsibility of implementing.

In the paper, I have given the committee a list of the key sector based measures in the strategy - I will not go through all of them. They hit quite a number of different areas, including negotiated agreements with industry, which was mentioned already; rebalancing of vehicle registration tax; expansion of renewable energy; and review of building regulations. There is quite a long list of key sector based measures and they hit every sector in the economy.

To date, a limited number of the measures identified have been put in place, although much progress which has been made on some of them. One of the reasons they have not been put in place is that they are medium to long-term measures and one cannot see a result from them until they have been in place for some time. Sustainable Energy Ireland, for example, has completed a pilot project on negotiated agreements with industry and I understand it will publish the results of that next week - at least I saw something to that effect.

The VRT tax has been restructured to favour cars of lower engine capacity. As Donal stated earlier, therefore, when people are making choices about investment in cars in the future that may be a measure which will move them in the right direction.

Similarly there have been a number of alternative energy requirement - AER - projects which have been funded. Some of them have come on stream and some are in the process of coming on stream. It will be a little while before we measure the impact of those.

Since the climate change strategy was introduced, the EU emissions trading directive has been agreed and there have been quite a number of studies for various bodies on carbon taxation, leading to the proposal by the Department of Finance which the committee is looking at. In the agriculture sector, the national herd has been decreasing over the past number of years and, as Professor Fitzgerald pointed out, that trend is likely to be maintained if the CAP reforms continue and are implemented. These measures are medium to long-term in nature, however, and will take some time to kick in.

I want to say something about the inventories because it is one of the areas where we have responsibility. On continuing to do those inventories and actually to look at them on a much more sectoral basis, at present we can look on an aggregate basis and break out some sectors, but we do need to get it down to a more dis-aggregated look at what is going on if we are to really measure whether the policies and the measures that are outlined in the climate change strategy, and indeed others that may come on stream are having an effect. Therefore one of the EPA responsibilities in this respect is to measure whether there is success or whether we are achieving anything by these measures.

I apologise for not being able to project the graph outlined in our paper. Fig. 3, on page 6, shows that the lower line is where we should be. It shows our 1990 levels if we had stayed constant at 1990 levels of greenhouse gas emissions. The middle line is a straight line trajectory to achieving +13 under the Kyoto commitments and, unfortunately, the top line is where we are headed. Ireland is not moving towards Kyoto. Our inventory work also examines an in-depth analysis of key sources of emissions and provides an input into assessing and evaluating the implementation of sectoral aspects, apart from our national targets. Figure 4 compares sectoral contributions. Transport increased by 124.2% between 1990 and 2001. There was an increase in most sectors. The residential sector is the only one that decreased.

During the period, energy emissions increased by more than 50%. The growth in emissions in the transport sector is due almost entirely to road traffic as a result of vehicle ownership and usage. An anomaly is hidden within the increase in that a percentage of that can be attributed to cross-Border purchase of fuel because of the price differential between the North and the South. Dr. Fitzgerald referred to other cross-Border effects earlier. There is an advantage in purchasing fuel in the North from an environmental point of view because the carbon dioxide emissions would be attributable to the North. However, the Department of Finance would not be too pleased if the excise duty went North. These balances must be examined.

A diagram on page 8 relates to the small decrease in the residential sector. It is significant, however, because house building between 1990 and 2001 increased dramatically. Coal, peat and briquettes accounted for more than 60% of residential fuel usage in 1990 whereas it had reduced to less than 33% by 2001. There has been a major shift in the types of fuel we are using. The use of gas, LPG and kerosene is increasing. That structural change in the economy has been successful in regard to greenhouse gas emissions.

One of the main roles of the EPA is to license industrial activities under the IPPC directive, which was known as the IPC directive in the past. The licensing regime specifically requires licensees to conduct energy audits on their sites to improve energy efficiency at facilities. We have some command and control over companies in terms of the energy they use and energy efficiency. As time goes on with the full implementation of the IPPC directive, we will do that across the entire industry. The Protection of the Environment Act 2003 further strengthens the EPA's remit in regard to the release of greenhouse gases at these facilities because it defines the release of a greenhouse gas as an emission.

The introduction of emissions trading is salient to the introduction of a carbon tax. The EPA was given responsibility in July to implement the EU emissions trading directive in Ireland. The directive establishes a cap and trade scheme to reduce carbon dioxide emissions across the EU in the most cost efficient manner. The new regime will commence on 1 January 2005, whether anybody is ready, and it will cover carbon dioxide emissions from large point sources initially such as the powergen industry and large industry. One third of greenhouse emissions will come under emissions trading, which comprise 50% of carbon dioxide emissions because of the structure of our economy.

The industries required to participate in the scheme will include the cement, lime and glass industries, ceramic plants, oil refineries and paper mills. Many of these hold an IPC licence from the EPA and we know a great deal about them. There are approximately 70 sites in Ireland and 12,000 across the EU. Our understanding is 25 member states will trade from the beginning of 2005. Each participating installation will be given an emission limit or cap in the form of a certain number of tonnes of carbon dioxide by the EPA, which can be emitted over a calendar year. At the end of the year, they must surrender allowances equal to the emissions. If they exceed the cap, they will have to buy emissions to meet the cap and if they are below it, they can sell their allowances to meet the balance.

There is a reduction target of 8% in greenhouse gases across the EU under the Kyoto agreement. The EU is currently at -1%. There will be overall reductions across the EU. It is not a matter of having the same amount of carbon dioxide emitted in the EU because there must be a reduction. However, the EU is not prescriptive about whether the reduction should occur in Ireland or elsewhere.

It is anticipated that industries participating in the trading scheme will be exempt from the proposed carbon tax, which greatly complicates the issue, as Dr. Fitzgerald outlined. One of the key tasks assigned to the agency is to design, implement and monitor a national allocations plan for distributing the allowances, which must be submitted to the EU by March 2004. A national allocation advisory group, comprising Forfás, Sustainable Energy Ireland, the NTMA and the Commission for Energy Regulation has been set up. The group will give us advice and help us to do the work.

There is also a separate task, which is to assign an overall allocation of emissions to the trading sector and it will be decided at Government level who will do that work, with the Department of the Environment, Heritage and Local Government as the lead Department. Two separate exercises are involved, one to decide how much of the overall national allocation goes to the trading sector while the EPA's job is to decide how much is allocated to the various industries within in. We have established an emissions trading unit to carry out the new function, headed by Dr. Ken Macken, and we have initiated consultancy work to inform our decisions in this regard.

A number of options are possible as the basis for the allocation of allowances to firms and the study will evaluate them. It will be up to the agency then to decide which to use. There is a consultation period and a great deal of consultation is built into this process. However, the directive requires free allocation of at least 95% of allowances during the the pilot period, 2005-07. There is a possibility that member states could auction 5% during that period and from 2008 to 2012, the first Kyoto period, up to 10% of the allowances may be auctioned. No decision has been taken on that and it is something we must examine.

Work carried out by Indecon Economic Consultants for IBEC suggests that for a range of emissions caps, which they used in certain scenarios, and predicted allowance prices, Irish industry would meet the majority of its burden through abatement and the balance through purchase. There are abatement opportunities for industry and for the powergen sector. These are based on complicated economic models and it is not clear what are the opportunities on individual sites. However, when the modelling is done, there are abatement opportunities on the basis of the range of options and prices the consultants examined.

A great deal of uncertainty remains regarding the price at which allowances will trade and the liquidity of the market. There is uncertainty on both sides. People are uncertain as to whether there will be liquidity in the market and Deputy Gilmore queried whether there will be too much gas in the market. It is difficult to know. The introduction of emissions trading on 1 January 2005 complicates the debate on carbon taxation. It is anticipated 50% of carbon dioxide emissions will be excluded from the taxation regime from that date and that will have to be taken into account when it is considered how the tax will work and what will be taxed.

The EPA has also been designated competent authority for issuing the permits for participation in trading and for monitoring, overseeing and verification of emissions by companies. The agency has a significant role in terms of the EU directive. Operators of plants must hold a permit, which requires them to record their emissions and submit a yearly report to the EPA. Each installation will have to surrender emission allowances at the end of the year for each tonne of carbon dioxide. Even though the first three years comprise a pilot phase, if companies do not have their allowances at the end of each of the three years, there will be a penalty of €40 per tonne and they will have to buy the allowances. This a major incentive for companies to have allowances. The penalty increases to €100 per tonne during the first Kyoto period. Companies will be forced to buy permits under those circumstances.

The agency must also set up a public registry to facilitate and track the trading of allowances. The issue of joint implementation and the clean development mechanism, which are two flexible mechanisms under the Kyoto Protocol, is another complication. These will enable governments to meet part of their greenhouse gas reduction commitments by developing emissions reduction projects in other countries. JI projects are to be undertaken in industrialised countries and CDM projects, which are similar, will be undertaken in developing countries that do not have quantitative targets under Kyoto. The application of those mechanisms will be begin in 2008 provided that Kyoto will have entered into force, about which there is minor uncertainty

The European Commission published a directive in July linking the emissions trading directive to the joint implementation, which makes everything even more complicated. A number of EU member states have decided to use JI-CDM projects to obtain credits to meet their targets. Ireland has yet to take a decision on this matter and it will be examined in terms of the Department of the Environment, Heritage and Local Government's consultancy study on its allocation.

The other area in which the EPA is involved in terms of climate change is the administration of the national environmental research programme on behalf of the Department under the national development plan. To date, we have invested approximately €6 million in large scale capacity building projects in the area of climate change to bring an Irish dimension to what is happening. We published a number of research projects in the interim, one of which highlights indicators that show climate change in the national meteorological and ecological records. One does not have to rely on what is happening elsewhere.

The scenarios and impacts study conducted by John Sweeney in NUI Maynooth suggest there will be significant shifts in weather patterns during this century, which will present challenges in water management, spatial and infrastructural planning. We are involved in a range of other research projects, some of which relate to the agricultural sector, soils and biomass. We have also part-funded two projects, one of which was presented to the committee by John Fitzgerald earlier on the macro-economic effects of carbon taxes and the other conducted by Sue Scott of the ESRI on the distributional effects. Mr. Fitzgerald gave an excellent presentation but the main finding of his work was that a tax of €20 per tonne would make a significant contribution to achieving Ireland's target on emissions reduction. If that tax is applied to carbon emissions in all sectors, they will be reduced by 4.4 million tonnes, which is significant in terms of the target of 15 million tonnes agreed in the climate change strategy.

The study points out that in the industrial sector, a number of heavy energy users may need special treatment to ensure they do not experience unfair competitive disadvantage in international markets. It is also recognised that the transport sector is least amenable to taxation and would show the smallest reduction in emissions. Other policies would be needed in the transport sector. Since the initial findings, the EU trading directive has been agreed. Once that is implemented, the carbon tax would only apply to smaller businesses, transport and residential use of carbon. That must be considered in terms of savings.

Dr. Fitzgerald also stated a €20 tax will not change the investment profile at Moneypoint, which will continue to burn coal at that rate, and families on low incomes will need help. He referred to a range of issues regarding the recycling of revenue; a number of others include whether part of the revenue would be used to buy credits under the JI-CDM scenario for use in the economy.

The EPA recognises that Ireland has a significant task to respond the threat of climate change. Ireland needs to significantly reduce greenhouse gas emissions and move generally to an economy with lower energy consumption per unit-GDP or buy credits to cover that to meet its international obligations within the required timeframe. No single policy will achieve this and a range of policies and measures are required in all sectors of the economy. Appropriately designed carbon based taxes coupled with emissions trading have the potential to give a price signal to encourage efficiency and limit carbon dioxide.

The Departments of Finance and the Environment, Heritage and Local Government consultation paper indicates a potential carbon dioxide reduction of between 750,000 tonnes and 2.5 million tonnes by 2010, depending on the rate of tax introduced taking into account exemptions for emissions trading. It is not an inconsiderable reduction from an environmental point of view given that Ireland will have to work on all fronts and the scale of the problem that it faces. However, environmental policy is never drafted in a vacuum and the overall impact of the combined emissions trading and carbon tax regime needs to be considered while taking into account the impact of emissions on competitiveness and issues such as fuel poverty and equity and the need for a sustainable and secure energy supply. If taxation is limited, as it seems it will be, to the smaller business, residential and transport sectors, the policy makers need to be sure that these areas will respond to taxation by cutting emissions. Otherwise one is just increasing the costs. There is also a need to assess further the best use to which the revenue gained from a carbon tax is put.

The Environmental Protection Agency, through its various roles which I have outlined to the committee, will have a major part to play in assessing the impact of a carbon tax or other policies and measures on emissions levels. We will have a major role in the emissions trading in setting the allowances, monitoring, verification, etc., and also in promoting energy efficiency throughout the industrial sector through our licensing. We will continue to compile and report to the European Union and the United Nations on national greenhouse gas inventories and on progress towards achieving Kyoto targets.

The scale of the problem should not be underestimated. All policies and measures must be kept under review to ensure they are achieving results.

Deputy Gilmore

I think this is Dr. Kelly's first appearance before the committee since her appointment, in which case I send a special welcome to her and congratulate her on her appointment as director of the EPA.

Dr. Kelly

I thank the Deputy.

Deputy Gilmore

The last figures for the extent to which we are overshooting our targets are for 2001. Are there more recent figures or, in the absence of figures from the information available to the EPA, will Dr. Kelly inform the committee of the status of the graph at present and the direction it is taking?

Is there an audit of the national climate change strategy? I know the EPA has responsibility for the inventory. Do we have information or what is the latest information on each of the areas where reductions were to be achieved under the national climate change strategy?

Dr. Kelly's conclusion includes the two issues about which the committee is concerned after its previous discussions. She stated:

If taxation is limited, as it seems it will be, to the smaller business, residential and transport sectors, the policy makers need to be sure that these areas will respond to taxation by cutting emissions . . . There is also a need to assess further the best use to which the revenue gained from a carbon tax is put.

If the residential sector is the only one where emissions are being reduced, as evidenced by the graph in Dr. Kelly's presentation, how do we explain to the woman in Ballyfermot the reason she is paying more for her coal? Why is she being taxed to reduce emissions into the atmosphere while we allow a regime to be put in place which effectively allows industry to buy the right to pollute?

The ESRI has some recommendations for the purpose to which the revenue from a carbon tax might be put, especially how it might be used to address issues of equity. I know this issue may be strictly speaking outside the remit of the EPA, but since Dr. Kelly raised the issue, does she have recommendations or ideas on how the revenue might be put to use?

Deputy Eamon Ryan

I understand the Kyoto Protocol is due to be reviewed or updated in 2005. A recent royal commission of the United Kingdom Government examining this area has, like the UN committee on climate change, produced recommendations for even more dramatic reductions than we can possibly comprehend. They are of the order of 40% to 60%. We have seen the difficulties we have had in reducing our rate of increase, and other governments are discussing the possibility of setting strategies for major reductions. Does the EPA, which I presume will act on behalf of the Government in such negotiations, have an analysis or is it developing one on how we would achieve those larger decreases to which other countries refer? Do we have a Government position or are we formulating one similar to the UK or German governments?

I note and Dr. Kelly must be very pleased that the poisoned chalice of deciding how much allocation is given to industry has been taken away from the EPA and, I hope, lies with the Department of the Environment, Heritage and Local Government rather than the Department of Finance. On that point, as Deputy Gilmore said, it is incredible that industry yet again is getting away without bearing any real cost while the public must pay to ensure we meet our Kyoto commitments. On the specifics of allocation, does the EPA have the freedom to allocate a different quota to certain companies with better energy efficiency than to an older company with older plant or will it apply a baseline figure to all firms?

Dr. Kelly

Deputy Gilmore asked where the graph is going. Our latest figures for the UN are 2001. This is the protocol. We report for 2001 in 2003. We will have the next figures next April. However, the graph is going up and is not coming down; there is no evidence to show that it is coming down. We have not compiled our figures for the next report yet, but it will not be seen to be coming down. The rate of increase may slow a little because the economy has slowed down, but the graph will not be heading in the right direction.

On the issue of whether there is an audit of the national climate change strategy, the strategy was developed by the Department of the Environment, Heritage and Local Government and is being reviewed. We do not have a role in auditing it. However, the Department issued a progress report in 2002 setting out where it had made progress and where it had not. As I said when I gave the presentation, some of the measures and policies in place take a while to get into place and take another while to act. Therefore we are not going to see much reduction into the medium term. I understand the Department will produce a revised climate change strategy towards the end of the year.

On the issue of where the carbon tax will apply, the emissions trading regime has been decided at European level and we are obliged to implement it in its current form. I presume it was decided at that level to allow the industrial sector time to get up to speed on how to do this trading. It is a pilot scheme in the first three years. The ability to auction 5% is in place and it will increase to 10% later. There could be a move towards full auctioning. One cannot tell what will happen in a directive but there is some thought that there may be and the intention probably is that there will be a move to full auctioning at a later date. It may be the case that, while industry is not paying at present, it will begin to pay.

Trading is not without cost for the industrial sector. Some companies will be able to pass on the costs while others will not. That is why people need to look closely at where the tax applies and whether emissions levels targets can be achieved. It appears from the figures economists have produced in both the Departments of the Environment, Heritage and Local Government and Finance papers that, if a carbon tax is applied to this sector apart from the emissions trading, between 750,000 and 2.75 million tonnes of a reduction in carbon dioxide will be achieved over the period. That is a significant amount in terms of what can be done.

How to put the revenue to use is strictly outside our remit but I thought I would raise the issue because it is one of the conclusions of the ESRI and there are equity issues around the lady in Ballyfermot or anywhere else in terms of whether it is right that the tax applies to them and that they pay. There are many ways of giving it back to that sector or to the industrial sector but it needs to be thought out thoroughly.

Deputy Eamon Ryan asked about the current Kyoto agreement. More dramatic cuts are envisaged - one hears of 60% to 70% deeper cuts than we have at present. The Environmental Protection Agency does not act on behalf of the Government in these discussions. The Department of the Environment, Heritage and Local Government does that. The Deputy is right in saying that, given our current difficulties, it will be even more difficult if we have to make deeper cuts. That is one of the reasons we must start taking measures now and at least get on to that treadmill of reducing the emissions or stop them rising at the very least. It will cost us more later if we do not. We really must start to take action.

The Department of the Environment, Heritage and Local Government is deciding what portion of the overall cake, so to speak, goes to the industrial sector, and we will allocate slices out of that. The emissions trading directive has a detailed annexe which gives a number of criteria that can be taken into account when deciding and developing the allocation plan. Better energy efficiency, clean technologies and early action are just a few items in a long list of criteria that can be taken into account. We will ask our consultants to look at all those and tell us how best we can take those into account in promoting the use of clean technology and trying to give credit where it is due for early action. I think I have covered the questions.

Deputy Cregan

I welcome Dr. Kelly and her colleagues. I am not sure I am aiming my question in the right direction, but I would like her to comment.

I understand that tenders are being invited for the provision of one or more new power stations to try to keep up with the demand for electricity and maintain supply to the market. It was the intention that the electricity would be provided in the cleanest and most efficient manner possible. At the same time, I am led to believe the incentives that should be in place for people to tender to provide the cleanest form of electricity are not coming on stream hand in hand with the tendering process. Therefore, those who wanted to tender to provide electricity cleanly and efficiently are deprived of doing so because the obvious tendering advantage has not been brought on stream hand in hand with the tendering process. Perhaps Dr. Kelly would comment on that.

Deputy Morgan

Will Dr. Kelly commenton the conditions that might apply to the permitsthe EPA would issue to the emissions tradingsector?

Senator Brady

I welcome Dr. Kelly. All the presentations have pointed out that time is running out and that, even if we pitch the carbon tax at a certain level, we will still by no means reach the required standards. Should we at this stage be investing more heavily in research and development to pre-empt costs which may be incurred at a later date? We will have to pay if we do not meet our targets. Will Dr. Kelly comment on that?

Dr. Kelly

I am not qualified to talk about power stations. The Commission for Energy Regulation would look after that. It seems that most of the new plant that comes on now is usually CCGT - combined cycle gas turbine - plant which, from a gas point of view, is very clean and efficient and much cleaner and more efficient than coal or peat in environmental terms. The Commission for Energy Regulation has to take a lot of other things into account, apart from the environment. I am not really aware of what specific incentives the Deputy is talking about in terms of that. My understanding of the economics of it is that the CCGT plant is the most environmentally efficient. There are CHP plants as well; perhaps they are what the Deputy is referring to.

Deputy Cregan

Yes.

Dr. Kelly

I would not be fully aware of the economics of the energy side of things to comment on it. From our point of view in the Environmental Protection Agency, we think that all incentives that could be given to CHP plants should be given, but I am not sufficiently aware of the economics of it to be sure what the answer is.

Deputy Cregan

Not all the incentives were given. It is incumbent on the EPA as protector of the environment to ensure that the most efficient production of electricity takes place from now on and that any incentives to make that happen are given.

Dr. Kelly

Regarding what conditions might attach to the permits, we have not devised the permit system yet. We have only just been given responsibility for the national allocation plan and the permits that will stem from it. I was interested in what John Fitzgerald said that he had not thought it out. We will all have to give some thought to how we will do it.

In the first instance, it was envisaged that the permit would be a simple one allowing a certain number of tonnes of carbon dioxide to be emitted and giving allowances for that which the company would have to surrender at the end of the year. We intend to integrate this with our integrated pollution and prevention control licences. That gives us much greater scope for laying down conditions for companies than the allowance permit. We will look at what we can do in terms of our licensing and the integration of this permit into it. It gives us a lot more scope than the permits.

On research and development, the answer is yes. We should invest to pre-empt later cost. That said, part of the rationale for using either taxation or emissions trading and market instruments to effect change is to give an incentive to companies. Once the system gets going, they will have certainty about a tax on price and will know that every tonne of carbon dioxide they emit is going to cost them money from a certain date onwards. By using a fiscal instrument, an incentive is being created for people.

Donal Enright made the point about Denmark where they have introduced carbon and energy taxation over the past two decades. They have invested some of the proceeds of that in research and development and have become world leaders in some energy saving technologies. It is a valid point.

Chairman

I thank Dr. Kelly and her colleagues for attending and making a presentation to the committee. I also thank the Department of the Environment, Heritage and Local Government and the ESRI for doing likewise. The purpose of our meeting was to discuss the proposal to introduce a carbon energy tax. While we appreciate that the issue is a complex one, we have a greater understanding of the subject as a result of the presentations made. I am sure the lady in Ballyfermot will be embarrassed by the attention we have given her in the meeting.

Deputy Eamon Ryan

I know we are very close to the deadline for submissions but we have received some very good information today. It would be useful for the committee to meet once again next week if possible.

Chairman

We will discuss that matter presently. We will suspend briefly and return to that subject.

The joint committee went into private session at 2.09 p.m. and adjourned at 2.20 p.m. until 11.30 a.m. on Tuesday, 23 September 2003.