JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Thursday, 18 Sep 2003

Vol. 1 No. 15

Carbon Energy Tax: Presentation.

Chairman

We are now dealing with carbon and a discussion of the consultation document on the proposal to introduce a carbon energy tax. Mr. Frederick Cooper from the Department of Finance, Mr. Donal Enright from the Department of the Environment, Heritage and Local Government and Mr. Conor Barry, an environmental economist are with us for this purpose. I welcome them to the committee and remind them that members are protected by parliamentary privilege but the comments of visitors are not so protected.

I will ask Mr. Enright to give a brief summary of what we are talking about because he gave a presentation to the Joint Committee on the Environment and Local Government this morning and we will then ask questions. As Chairman, I am dubious about what we can achieve in this discussion because the consultation document has been issued to at least seven Oireachtas committees and it would be a futile exercise for each of the seven different committee to go a different way to discuss one issue. There could be duplication or contradiction as a result. After the discussion we must decide a sensible way to handle this. At this stage perhaps Mr. Enright would make a brief presentation.

Mr. Donal Enright

The background to this is that we have international obligations under the Kyoto Protocol to limit our emissions to 13% above 1990 levels by the period set out in the Kyoto accord, 2008 to 2012. We always knew it was going to be difficult to meet that target and we are currently about 31% above the 1990 level of emissions. It is a challenge. Most of the increase in emissions has come from the combustion of fuel and burning of carbon. Fuels come with different levels of carbon depending on the make up of the fuel, peat being the most carbon intensive; it is about 80% more carbon intensive than natural gas and coal is about 70% more carbon intensive. The fuel is burnt and carbon dioxide comes out.

Our proposals were for an excise type tax. We wanted to apply it to all fuels and all sectors. We recognise that the other primary economic instrument for tackling emissions is emissions trading. The emissions trading directive will be in operation in little over 15 months. Our expectation is that companies engaged in emissions trading, of which there are about 70 in Ireland, will not be subject to carbon tax. We recognise that it takes time for the tax to have an impact. One cannot expect to reduce emissions to the levels one would ultimately expect to reduce them on day one. Our proposal has been to phase the tax in over a period of three to four years, setting it at a relatively low level to start with. The figure we suggested was €7.50, rising ultimately to something equating or not too far from the world market price of carbon, about €20 per tonne, so that companies engaged in burning fuels of any sort can predict what is going to happen.

The environmental effectiveness of the tax comes from two main changes. People will use energy more efficiently or will change to more environmentally friendly or carbon reduced fuels. The evidence internationally is that the price elasticity over the long run is -.04 to -.05, which cannot be achieved in the initial period. Reductions are also achievable from fuel switching. The expectation, based on international practice and understanding, is that we would achieve reductions of the order of two million tonnes. Compared with the total reductions necessary for our national climate change strategy, in the order of 13 to 15 million tonnes, this amount is appreciable but not the full whack. Our proposal would do some of the work but not all.

The international experience is that carbon taxes can have positive effects in reducing emissions. Some countries have managed to use the whole process of pricing carbon in their economy to gain leadership in renewable energy markets and technologies. Denmark is the prime example of this. At least eight countries within the EFTA have these taxes at the moment. They are being considered well outside Europe also, in Japan, New Zealand and in other non-EU countries like Switzerland.

The Department of Finance wrote to the committee to outline the consultation process. The public documents available are the Department of Finance synopsis paper, which raises the relevant questions and issues, and, attached to that, the detailed analysis by my Department on the various issues arising. It is not just the environmental issues we have tried to analyse but also CPI, competitiveness, effects on fuel prices in different sectors and so on. Fuel poverty is clearly an issue that arises in this process and our paper has addressed these issues. Clearly, however, in an area where major policy change through the tax system is being contemplated, the value and wisdom of having a consultation process would be recognised generally and we are obviously here to participate in that consultation process.

Deputy Ó Caoláin

I thank the officials for their presentation. As the speaker indicated, the situation was that we had an emissions limit of 13% above the levels that pertained in 1990 under the terms of the Kyoto Protocol which applies in 26 counties. However, by 2000 that had risen to 24%.

Mr. Enright

It had risen to 31% by 2001.

Deputy Ó Caoláin

Is that the most up to date information available?

Mr. Enright

Yes. We would expect figures for 2002 to be available maybe by April 2004.

Deputy Ó Caoláin

Clearly the trend must give rise to real alarm on the part of everyone who wishes to see the unacceptable levels of carbon emissions in this jurisdiction being seriously addressed. We are patently failing to meet our responsibilities under the Kyoto agreement, which brings shame on us all.

That said, I am very anxious to have a clearly defined answer from the Department of Finance and an explanation as to how it believes that imposing taxes on the consumers of energy would create the conditions for the producers of energy to find ways of reducing emissions. This is a very important point and needs to be addressed. How does the Department answer this question? How does it believe that putting taxes on consumers will ultimately encourage the producers of energy to reduce the levels of emissions that their products or supplies ultimately create?

The officials are here today representing the Department of Finance but the Government suggests itself to be a very broad church on this issue. The officials are presumably representative of the Minister for Finance, Deputy McCreevy, and their Department, but are they representative of Government thinking on this issue? There seems to be an entire raft of opinion on this issue right across this Government. The Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, is opposed to a carbon tax and instead favours negotiated agreements, which amounts to buying emission quotas from other European states. That amounts to doing nothing at all and echoes Bush economics in the United States. Is that still the view of the Tánaiste and the Department of Enterprise, Trade and Employment? Is it likely that this significant gulf in thinking within the Government will be bridged?

It comes of course as no surprise to me that IBEC fully agreed with the view of the Tánaiste and the Department, which was very interesting. What is Government policy? The Minister for Finance, Deputy McCreevy, in his last budget, actually removed tax relief for the development of wind farm projects. Will the officials from the Department of Finance undertake to restore tax relief for wind farm projects? I was appalled at the Minister's decision in the last budget. It is impossible to either understand or accept. Can the representatives from the Department of Finance please explain current thinking in that regard and whether it will be restored in the upcoming budget? There are many other questions I could ask but I would be interested in the responses to those initially.

Mr. Frederick Cooper

I am not here as a representative of the Government; I am here to represent the Department of Finance. Government policy on climate change is set out in the national climate change strategy. One of the options contained in that strategy was to look at taxation as a means of helping to achieve the objectives of the Kyoto Protocol. As regards producers vis-à-vis consumers, a consultation paper has been issued to address issues such as those, and the Department of Finance is acting in the role of honest broker in this process. We are aware that there are great differences of view as between Departments and as between sectors of society on this proposal. It would be incongruous of us to issue a consultation paper with our minds made up in advance of getting and assessing the responses to that paper.

Deputy Ó Caoláin

What about the wind farm issue and the Minister's decision in last year's budget?

Mr. Cooper

That is a matter of policy on the Minister's part.

Deputy Ó Caoláin

Perhaps that lies more with the Chairman.

Chairman

I would have thought that the Deputy would support the restrictions on wind farms because a few wealthy individuals were availing of them to reduce their overall taxation bill. I do not believe the people who are promoting it have any commitment to the project except to reduce their tax bill and the Minister was trying to cut off that avenue. Some of these tax shelters have been over-abused in the past and I would have thought the Deputy would agree with that aspect of the restrictions.

Deputy Ó Caoláin

I would see it as an incentive and we should be setting our targets to be implemented within achievable timeframes. There is room to encourage much greater development of renewable energy projects throughout this island and I would be openminded about all facilitation and encouragement in that regard, mindful of the concerns which the Chairman has expressed.

Chairman

I do not know Government thinking on this because consultation is going on but I fail to see the connection between tax and emissions. It is desirable to reduce emissions from an environmental point of view. How anyone thinks that charging a tax is going to reduce them I do not know. Maybe at the end of this process the connection will be made for me. The carbon tax is a method of taxation and it is just a happy coincidence that the Department can pretend to link one to the other. Many documents report that large, inefficient companies which produce high emissions are buying quotas from less developed countries so that they can continue this practice. I am bemused by this debate.

Deputy Ó Caoláin

There are colleagues ofthe Chairman in Government who hold thatview.

Chairman

I am giving my view on the matter.

Deputy Ó Caoláin

The point the Chairman has made is underscored by the fact that the representatives from the Department of Finance are unable to give us a definitive argument.

Chairman

There is no definitive decision on this yet.

Deputy Burton

In the 2002 budget the Minister for Finance, Deputy McCreevy, announced that in the context of Ireland's Kyoto obligations he was proposing to introduce an energy tax, or carbon taxes, of some kind, effective from this year's budget, and becoming operational in 2004. The working papers from the tax strategy group and others suggested that these taxes would take the form of an increase in the rate of taxation on fossil fuels and the more polluting the fossil fuel the higher the rate of additional taxation to be applied. The examples given in the various papers mean that there would be significant increases in briquette prices, followed by coal and oil, with gas as the least polluting fuel.

I have argued many times with the European Union's mantra, the polluter pays, and the way the Government has adopted it. I do not completely disagree with it but the philosophy now being applied bothers me. If one applies the polluter pays principle one seems to let go of any obligation either to reduce significantly or eliminate the pollution. The polluter pays principle is a handy way for governments to raise additional moneys, whether by way of service charges or by taxation. We will not go into the area of service charges now for obvious reasons, and no doubt to the relief of everybody here.

I have several concerns about the schedule of possible actions laid out in keeping with the budget. Am I correct in saying that the aim was to increase taxation on fossil fuels and that the greater the pollutant the higher the level of tax which would apply? This committee's submission to the Department of Finance might cover the impact of this on different ranges of industry, on small and medium sized enterprises and on individual households. If the effect of the carbon taxes is higher on briquette and coal prices the greatest impact will be on people receiving social welfare incomes, particularly elderly people living alone and outside the schemes for gas central heating.

The Department of Social and Family Affairs has already said that if the Department of Finance proceeds with this regime it is not in favour for instance of reducing taxes on employment, such as PRSI, to compensate households for their increased fuel costs. It would favour, as would others, schemes whereby additional insulation measures are given to poorer households and more efficient heating systems are installed. In the context of the Exchequer figures issued at the end of August, there is a large hole appearing in the ozone layer of Government finances which will probably be filled up this year by a donation of €500 million to €1 billion from the National Treasury Management Agency. Next year, with the fall in income tax receipts, the hole in the Exchequer's ozone layer cannot be covered by any other measures. The Minister may see carbon taxes as a way of rescuing the Government's finances in a small way this year but more particularly next year. This committee should be discussing whether the tax is proposed for environmental reasons.

In all the documents circulated by the various Departments, from reducing farting cows to everything else, there seems to be a consensus from Government that this is the correct road to take in terms of the Kyoto proposals and obligations. How do we do this in a way that is fair, particularly to poorer households? How do we do in a way that reduces the pollution rather than simply pays for it? How do we come up with imaginative schemes for pollution reduction? We saw what Mr. Livingston did as Mayor of London regarding congestion charges and reducing vehicle emissions in the centre of London. In Ireland we have seen the enormous positive response to the plastic bag tax. What is the budget strategy and how does it marry with the environmental one? What will be the impact on poor households and small businesses? What imaginative ideas have been drawn up so we can use taxation to reduce pollution as opposed to paying for it?

I endorse Deputy Ó Caoláin's remarks on emissions trading. I notice from the latest IBEC bulletin that they seem to be fine about all of this because they are happy that trading permits will get most of the big industries out of the problem. That does not address how we make the tax system more directed to reducing pollution as opposed to paying for it.

Mr. Cooper

On a point of correction, the Minister in his Budget Statement said not say anything about introducing tax in the 2004 budget. He referred to an announcement at the end of 2004, so effectively we would not be talking about a tax before budget 2005.

Deputy Burton

I know Mr. Cooper is not talking about the Minister's policy. What he is saying is that carbon taxes are unlikely to feature in next year's tax regime.

Mr. Cooper

Extremely. The second point that was raised regarded carbon energy tax. As far as the Department of Finance is concerned, and probably the Department of the Environment, Heritage and Local Government, the purpose of carbon energy tax is not to raise revenue. If we wanted to raise revenue, we have other easy means to do so. The purpose of carbon energy tax is to reduce pollution in line with our Kyoto obligations.

The Deputy made comments on fuel poverty and what can we do to get people to switch from "dirty" fuels. The ESRI has addressed this issue which is why it is suggested that not alone might compensatory payments be necessary, but people should be encouraged to move away from these fuels through insulation schemes.

The issue raised by the Deputy about industry and compensation for the less well off are precisely the issues that we have had some comments on already. These were addressed in the taxation strategy group paper which is attached to the consultation paper. These are issues that are going to have to be thrashed out when it comes to assessing the responses to the Department of Finance consultation paper. There are many different issues on it and we will have to attempt to reconcile these, as far as they are reconcilable, and bring the results to Government.

Mr. Enright

From the perspective of the Department of Environment, Heritage and Local Government, our purpose, as Mr. Cooper for the Department of Finance said, is to reduce emissions. For this purpose we have proposed that the rate of tax be linked directly to the carbon content of the fuel. That means, as Deputy Burton said, a higher rate of tax applies to fuels with higher carbon content such as peat and coal. There are relative incentives for fuels that are cleaner such as natural gas and LPG. There are also incentives towards biomass which is carbon neutral and would not be subject to the tax. The other incentive is that it is renewable energy. The structure is a simple one. It looks far too simple to actually have the outcome one would want but because there is this distinction in the carbon content of fuel, it can have that effect so long as the rate of tax is applied equally to the carbon dioxide emission from it when it is consumed.

The question was raised by the Chairman that this will not actually eliminate pollution. Under the Kyoto Protocol it is not envisaged that we will cease carbon dioxide or greenhouse gas emissions. The ultimate aim over a long number of years - most of the century perhaps - will be to reduce global emissions of carbon dioxide to the order of 60% to 70%. That is not achievable by any economy in a short timescale. Kyoto and beyond are long haul projects. The aim will not be to eliminate this source of pollution but to start us on the road to reduce that pollution initially for Kyoto purposes and ultimately to meet more intense obligations we are likely to face over time.

It is useful to say on emissions trading that in terms of overall pollution, carbon dioxide is a global pollutant. It matters not a whit ultimately to global atmosphere and climate whether it is emitted here or in Timbuctoo. Within the EU 25 area in the case of the emissions trading directive which is coming into law in January 2005, there is a set amount of carbon dioxide allowed for the trading sector. The electricity companies and large scale industries will all be capped to conform as a whole with the overall allowable cap. From an environmental perspective the existing emissions from those plants should be getting lower over the long-term horizon that I have mentioned. Within an overall cap for 12,000 or so companies that will be involved in emissions trading across Europe, the ultimate benefit to the environment will be the same as the reductions made at Moneypoint, Portugal or Sweden, so long as the system as a whole caps the emissions at a certain amount.

The benefit of emissions trading from an economic and competitiveness perspective is that those companies that have high costs to make these reductions can buy allowances from Portuguese or Swedish companies. This can make the reductions cheaper. The overall economic costs for Europe, for individual countries and companies in Europe, is reduced and one gets a given environmental improvement for the least economic cost. That is the purpose and aim of it. Obviously getting this right on day one in year one will be difficult. Prior to the Kyoto legally obligatory regime, the pilot emissions trading scheme starts in 2005 for three years until 2007. There will likely be more onerous targets for industry across Europe for the Kyoto period from 2008 to 2012, ultimately be getting more difficult as time goes on.

Deputy Burton

I am concerned that although this represents a major and important shift in taxation and environmental policy, little research has been done on the subject. For example, in the Department of the Environment, Heritage and Local Government, and perhaps also in the Department of Finance and at the Revenue Commissioners, would the witnesses have a profile of the impact on environmental pollution of the various types of cars, lorries and other vehicles sold in this country, and their contribution to CO2? We have all been very aware in recent years of the dramatic increase in the sale in Ireland of four-wheel drive utility vehicles. My understanding is that many of these are registered as business vehicles, attracting lower rates of VRT. As a non-technical person I also understand that the level of emissions from such vehicles, and the amount of fuel they consume, is very high. Is there research available which would show us, for example, an interaction or integration between the various types of vehicle, both for commercial and family use, and the kind of VRT tax regimes applied, and which would show us if and how they are integrated?

Mr. Enright

Under current car registration rules the manufacturer is obliged to provide to the Revenue Commissioners the CO2 emissions per kilometre for the urban, extra-urban and combined cycle. That information is meant to be displayed on the windscreen of every car in the sales room. The customer can therefore see that a car will, for example, be producing 250 grammes of CO2 per kilometre. In the case of the SUVs mentioned by Deputy Burton——

Deputy Burton

I am asking a slightly different question. I know that last year, for instance, there was a move, which I welcome, towards reducing VRT on smaller cars rather than bigger cars. In addition, the VRT for commercial vehicles is for obvious reasons somewhat different. Quite a number of commercial vehicles particularly in the four-wheel drive category are used - certainly by legend - for non-commercial purposes. Does that mean they attract the commercial level of VRT? If so, can we have some information on this? I would have imagined that the general principle would be that the vehicles which cause more pollution and consume more fuel would attract the higher VRT levels. It is very hard to get any detailed information on this. One sees a great many of these commercial four-wheel drive vehicles.

Mr. Cooper

I will try to partially answer that question. Regarding cars, there is a relationship between the emission level and the VRT applied. Generally speaking, the higher the emission level the higher the VRT. The same applies in the case of motor tax, in the sense that motor taxation increases with the size of the engine, and generally speaking the bigger the engine the higher the emission levels.

There is a low rate of VRT on commercial vehicles for reasons related to competitiveness. My colleague from the Revenue Commissioners, Mr. Brendan Sherran, may be able to elucidate, but I am not aware if there is a particular profile out there. The information about emission levels of various commercial vehicles is certainly available. I am not sure if the Deputy is proposing that on that basis there might be a gradated level of VRT applied.

Deputy Burton

The point I am making is that I do not know if that information is easily available, but it is the kind of information that would impact on policy. If the information was made available to us in a form easily understandable for non-experts, that would help us to get a sense of what direction taxation changes should take.

Mr. Brendan Sherran

Some studies have been done by the Revenue Commissioners on the possibility of moving the VRT rate structure to a more emissions related basis. I am not a VRT expert and am more involved in energy taxation. We could check the studies available. The issue has been looked at. At this stage I cannot say how detailed or sophisticated a breakdown of information may be available in terms of private and commercial vehicles. Some studies have been done by the Revenue Commissioners on the relationship of the type of vehicle to emissions.

Senator Mansergh

I am very glad there is healthy debate in Government on this very important economic and environmental issue. If ever there were a case of looking before one leaps, this should be it. I have to admit that during the five years I was a member of the tax strategy group, from 1997 to 2002, most of us gave the Department of the Environment, Heritage and Local Government a hard time and asked some fairly searching questions.

I will mention a couple of points raised in previous questioning. I and others have obviously been subject to lobbying by people on behalf of wind power projects. We have to be very careful about the proliferation of tax incentives, which as has been pointed out have mainly been availed of by fairly wealthy interests. Wind is something that occurs naturally and I am far from convinced that incentives are needed in the wind power area. There are a lot of projects that seem to be going ahead quite well without incentives. I am sure that Deputy Ó Caoláin was tongue in cheek in expecting an official to volunteer information as to what might be in the next budget.

With regard to the so-called ozone hole in the public finances, nothing could be further from the truth. I recommend that Deputy Burton read the IMF report on the Irish economy, which is absolutely glowing in its commendation of the management and kicks for six the notions that one reads in newspapers, with politicians saying the economy has been handled in an incompetent manner. The report says that we "have achieved a soft landing". That is a very big achievement and is what we have been aiming to do over the past two years. As opposed to the French and Germans and others, we have had an overall borrowing deficit of about 1%. We are well within any advised limits. There have been alarmist statements made for the past year or so, but all the evidence is that this has been well balanced.

Deputy Burton

Maybe the people in Government who manage the economy could have managed Luas. If they did such a great job on the economy——

Senator Mansergh

Luas will be brilliant and will be immensely appreciated by the people of Dublin, just as the tram system is in Vienna. It will be an immense asset. What the Deputy is talking about is a teething problem.

Following my experience with the tax strategy group, and despite listening to the answers given, I have no reason to believe there have been any changes in relation to carbon tax. This is not being looked at as a fiscal matter, a money raiser, as something to fill a gap. It is being looked at strictly from an environmental and overall economic point of view. The Chairman may have a point with regard to adding tax to energy and what effect that might have. In the short-term it will just displace other expenditure. It may not necessarily reduce expenditure on energy but structurally, over a period, the case is that people, and particularly firms, gradually adjust to incentives. That is the objective. In my experience with the tax strategy group there has been a gain. There was an attempt in the five years to adjust VRT so that those that emit more and cause more pollution would significantly be more heavily taxed than lighter vehicles. The crunch issue, it seems to me, has always been this - and it is not really covered in this paper when you refer to other countries: it is the competitiveness of the European Union as a whole, vis-à-vis America in particular. Before we take decisions, I should like to see this examined in great depth. My reading of it - and this may be a simple reading of it - is that part of the success of the American economy over the past 50 years at least has been based on a cheap energy policy. Energy prices are way below those that obtain in any European country and that gives them a distinct competitive advantage. As we know, they are not signed up to Kyoto, so that makes it worse in some ways. Will Europe if it goes down the carbon tax route - and there may be all sorts of environmental reasons we should do that - become even less competitive vis-à-vis the US economy? That is an issue we have to confront. I would like to see papers produced on this. What will the impact be on the competitiveness of the EU, in particular vis-à-vis North America?

To conclude, I would make two small points. I am glad you are staying away from agricultural emissions. I think that an effective CAP reform will not mean increased stocking and in fact will probably mean a significant reduction. I hesitate over the proposed tax on certain types of fertiliser, which of course would not be popular. The farming sector would be well advised to be more sparing in its use of fertilisers, for economic reasons. Finally, I agree entirely with "the polluter pays" principle. It is a great pity that we see one small militant group in Dublin pursuing the obverse of that. It strikes me as the very tired politics of ten or 15 years ago by groups who in general believe the tax level should be much higher and only in this context is there double taxation. This argument does not seem to hang together in any shape or form. A basic first principle is that legislators should obey the law.

Deputy Eamon Ryan

I would like to reassure Senator Mansergh, if I can, with reference to a report by the European Environmental Bureau, published in June 2003, when he had left the tax strategy group. It cites a World Bank study which shows that out of the 103 cases of environmental fiscal reform they examined across the world, 73% showed a positive influence on employment, 24% showed a negative influence while 3% indicated no change. That sort of study across the world from an organisation such as the World Bank might reassure him. Senator Mansergh is right when he says we should not jump before we leap, but the problem I have is that the Minister for Finance has approached the fence five times, in each of the last budgets, and has refused on each occasion. He has about 15 faults to his name at this stage. It is long past time we introduced this carbon tax, which for the first time costs the environmental externalities - the environmental costs the market system cannot include. Until we start to do that we are not going to address our environmental problems. It is the most important environmental measure we are facing at the moment and it is vital that we proceed with courage.

I have a couple of questions for the Department of Finance officials because I was at the presentation from the Department of the Environment and Local Government earlier. They may not have the figures with them, but one of the strong arguments in favour of this tax shift is that we need to reduce our taxes on labour and instead tax our use of natural resources - in soundbite, to tax the "bads", and not the "goods". Do we know what percentage of our overall tax take is on labour and also on natural resources? If the Department does not have the figures to hand it can send them to me.

Mr. Cooper

I will send them to you.

Deputy Eamon Ryan

As to my second concern, if as you say that the purpose is not a revenue generating exercise, and that the concept of revenue cycling, therefore, is agreed within the Department and is pretty much a given, why, under 12.1 in the consultation paper do you raise it as a question for the consultation process? You cite three countries, Sweden, Finland and Norway, where the money was not recycled and was used as a revenue generation process as against the UK, The Netherlands and Denmark where it was fiscally neutral. If that is so set in policy - in that, the Department is not an honest broker, that is the actual policy - I am concerned why that clause is in there and why the question is put in the consultation paper as to whether we should or should not recycle the revenue. I will ask the third question and then come back: again, referring to the consultation paper from the Department of Finance, in sections 9.1 and 9.2 the question is asked whether we should consider the use of possible negotiated agreements with individual companies for tax rebates in exchange for certain emission projects that they would undertake. I would be keen to hear whether there are any examples of the type of companies we would be dealing with or how the arrangements would work. Are we talking about companies that are operating in the traded emissions sector or is the reference to those who are outside and do not benefit from the emissions trading system being contemplated on the basis of negotiated agreements? How could one be assured that would not become an excessively bureaucratic process which would involve the State taking an examining role, as it were, in each individual company? I would have thought one of the benefits of a carbon tax would be to allow Adam Smith's hand to be put in play in economic terms, but not necessarily mean the State would have to engage in detailed negotiation with each individual company. I would appreciate any further details on precisely what it is we are talking about when we refer to negotiated agreements. Is that with small or big Irish businesses? Is it with companies that are internationally trading or is it with those that are within or without the emissions trading system? Thank you.

Mr. Cooper

Donal and myself will probably answer the Deputy's points. On the first point, about the revenue from carbon tax and why we are making various statements about it, we simply cannot ignore it. Just because the purpose of the carbon energy tax is primarily to reduce pollution, if the side effect of trying to achieve that is revenue, obviously a decision has to be taken on how it is spent and to whom it is allocated. That is the answer to that particular question. It is there, so we have to deal with the issue of how it is actually allocated and spent.

Deputy Eamon Ryan

Just to clarify that, I fully agree that there are many questions as to how it is allocated but is it absolutely clear that it will be all reallocated, either in terms of tax reductions in other areas or increased social welfare contributions?

Mr. Cooper

No, it is not. That is why there is a consultation process; there are obviously different views on how this money should be spent - whether it should be redirected to those sectors most affected by it or not, as the case may be, or whether it should be directed into general revenue and spent as Government policy so decides.

Deputy Eamon Ryan

If I could clarify? If it was to be taken into the general Government revenue and spent on school building or other projects, that would not be the common definition of revenue recycling.

Mr. Cooper

No, we are talking about the non-hypothecation of taxes there. The hypothecation of taxes means that a tax would be set on something or other and the revenue would go back to the Department. In the case of the Department of the Environment and Local Government, for example, which has the plastic bag levy, that would be an hypothecation of taxes in a particular sense. I agree the recycling issue is different, the question is once revenue is raised from a particular tax - as in this case, a carbon tax - how and with whom should the revenue proceeds be split? That is an issue which has not been decided.

Deputy Burton

In regard to Deputy Ryan's question about recycling to reduce taxes on labour, the common understanding of how that works in the tax system is through the social welfare contributions of employers and employees. The Department of Social and Family Affairs, in its submission, argues that we have some of the lowest taxes on labour in Europe and appears to be putting a strong case to reject the notion of recycling to reduce taxes on labour. The Department is among those concerned about the impact of the tax on low income people who tend to use coal and briquettes, particularly older people. So far the only way mentioned of addressing the impact of the tax on low income households talked about identifying people with medical cards. Perhaps low income families outside of Dublin qualify for medical cards but in the greater Dublin area they do not - I mean low income at work families. FIS applies to very few low income families and individuals. Could Mr. Cooper clarify his answer to Deputy Ryan's question on recycling? If it is to be a taxation on labour, how will it work?

Mr. Cooper

No decision has been taken about how the revenue from anti-carbon tax would be recycled. There are different views. One view, in the context of people who would be affected by the tax, is that some of the revenue would be directed to the less well off. In John Fitzgerald's study of the issue he suggested that up to 25% of the taxation collected might have to be allocated to those people affected by the fuel poverty issue.

Deputy Eamon Ryan

I agree with Deputy Burton that we must see some of it recycled towards social welfare contributions rather than just reduce taxation. I have a concern about the response to an earlier question where it was said that the purpose of this tax was not to raise revenue. There is debate regarding what percentage should be allocated to reduce VAT or employers' PRSI or increase social welfare contributions and that is a separate issue. If some of the revenue does not go towards that but into the general Government coffers, it will then be seen as a tax with the purpose of raising revenue. As Senator Mansergh said, over the five years of the tax strategy group it was very much a given that a carbon tax would not be a revenue raising exercise, regardless of what percentage of it goes to revenue. Is Mr. Cooper saying that this is still open to question?

Mr. Cooper

I see the Deputy's point. The logic is that if the purpose of the tax is not to raise revenue then the tax should be neutral. However, if for example all of the money was not directed back to particular sectors and some of it went into general Government coffers, this does not mean that it cannot be spent within that area for purposes which would offset the effect of the tax in the first instance. For example, it could be spent to improve infrastructure to offset competitiveness issues raised by the imposition of the carbon tax in the first instance. It is not irreconcilable.

Deputy Eamon Ryan

Spending on infrastructure would be seen as revenue raising even if it was building windows——

Mr. Cooper

It would be spent to compensate for the imposition of the tax in the first place. For example, in industry there may be ways to spend it - I just took the example of infrastructure which may not be the best example - in a non-specific way which could still be justified as being revenue neutral.

Deputy Eamon Ryan

I suppose an example of that is the negotiated agreement.

Mr. Cooper

Mr. Enright will speak further on that but I will just make a brief comment. Negotiated agreements are seen as an alternative to emissions trading and by some companies as a desirable alternative. There are different views on the issue. Some feel that negotiated agreements are less onerous than emissions trading. Therefore, they must be carefully monitored before one agrees to them. The EU recognises that legally binding negotiated agreements which result in positive outcomes for the environment can be acceptable. One cannot dismiss them out of hand and that is why they are referred to in this particular paper even though there are different views in Departments as to their efficacy.

Mr. Enright

I will flesh out the negotiated agreements a little. Sustainable Energy Ireland, which has been put on a legal statutory basis by the Minister for Communications, Marine and Natural Resources, is finishing a job of work on pilot negotiated agreements. We expect that will be published during Energy Awareness Week - next week. The work looks at three models of negotiated agreements - one model looks at large individual point sources, one at sectoral level negotiated agreements with a number of companies within the same sector and the third is cross sectoral and looks at boiler use in the economy - mainly in the SMEs. As we go through the levels we go from large single industry sites to diffuse types of negotiated agreements.

The purpose of the study is to develop our understanding of negotiated agreements in an Irish context. They are quite popular in a number of countries and have been in place for a good number of years. We need to understand how they would work here. As Mr. Cooper said, there are different perspectives on this. The rationale behind emissions trading is that one does not end up with a command and control approach to telling or negotiating with industry as to how it is to reduce emissions. Rather, one gives industry a price signal and lets it make what it knows from its bottom line will be the least cost choice either internally or externally. Similarly, the price signal through carbon tax provides consumers of energy with information with which to develop their choices for whatever purchases in terms of energy they wish to make, or investment in terms of energy improvement they wish to make over a number of years. They are not incompatible but work together. For instance, exempting the SME sector from the tax, assuming it would not be involved in the emissions trading regime, would require negotiation of genuine additionality in a negotiated agreement and that would be——

Deputy Burton

Could we have clarification on that? Is the Department thinking of exempting SMEs from carbon taxation?

Mr. Enright

There may be SMEs interested in exemption from some or all carbon taxation. If they were able to persuade Government or Sustainable Energy Ireland, or whoever operates and manages the process, that they can make greater or similar reductions to reductions made by the tax, but cheaper to them than having to pay a tax——

Deputy Burton

Does that mean by investing in more energy efficient plant or something?

Mr. Enright

Yes, whatever it may be and depending on what the negotiated agreement says. Transaction costs are attached to that. Rigorous checks will apply and the company must be able to show that it can actually make the reductions and that it is not simply dressing up business as usual as sufficient to give it an exemption. From our perspective, if the negotiated agreement was to get an exemption from tax we would want to see sufficient additionality to make it worth everybody's while in the transaction costs to go down that route. That is still to be finalised.

Deputy Eamon Ryan

Mr. Enright will be aware that under the emissions trading system 70 of the most energy intensive companies will not take part in the system. If we extensively provide negotiated agreements across other corporate sectors the public will develop a sense that this is a tax which purely hits at the householder and which businesses do not pay. That perception would damage the whole concept of environmental fiscal reform.

Mr. Enright

That is implicit in some of what I was saying. There are perceptions and arguments in both directions. Ultimately, from an environmental perspective of meeting Kyoto obligations, if society can be satisfied that SMEs, or whoever is engaged in negotiated agreements, are actually going to produce the same reductions as would result from paying a tax or making reductions through the obligations of tax, that is fine - it is a good outcome. There are issues around the transaction costs and the difficulties attached to negotiating them but they are being looked at in the context of the Sustainable Energy Ireland study which will be out next week.

Deputy Burton

Does the Department have a list or any indication of the companies which would be exempt?

Mr. Enright

The list of companies that will be engaged in emissions trading, which are the only ones the current discussion paper says quite specifically would be exempt from the tax, has been developed. In fact it is still being developed as work is ongoing within the Environmental Protection Agency which has the responsibility for managing and implementing the directive in Ireland. The sites involved are all of the fossil fuel burning power plants, the cement plants, Aughinish, some of the larger co-ops and food plants. Perhaps Mr. Barry knows of others.

Mr. Conor Barry

There are some breweries and wood, paper and glass manufacturing——

Deputy Eamon Ryan

I cannot remember the name of the New York lady who made the point that tax is for the little people.

Deputy Burton

Was it Nora Holmes?

Mr. Enright

The point in regard to emissions trading is that there is a cost attaching to participation and a cost implicit in having to buy the allowances that companies have not got in order to meet their emissions. The aim of both of these instruments is to price carbon into the economy as it is not priced in at the moment. The emission of too much carbon has a price in a Kyoto context. We seek to find mechanisms to price emissions into the economy. Emissions trading does that for large point sources. Emissions trading would do it for the whole economy if it was possible to do it for each individual source of combustion. Technically that is an astronomically difficult task but taxation does it for the diffuse sources. We seek to address both sources of emissions through the use of these fiscal instruments.

Deputy Burton

Is there a picture of the overall amount of taxation or valuation, say from 2005 on, that we are talking of in terms of complying with our arrangement? The notion which people find quite difficult - making an allusion again to the debate about service charges - is that the charges are often levied in a way that bears as heavily on a poor household as on a more prosperous household. If, as is proposed, large significant industrial polluters are exempt from the structure, how will the person who faces big price rises in the bale of briquettes and the bag of coal develop an understanding of this as a fair imposition? This goes back to my original question - what is in the Irish policy that will assist people not simply to pay for pollution but to reduce pollution?

Mr. Enright

I am not sure how much of that question I can answer. The cost of non-compliance with Kyoto is indeterminate at this stage. Ultimately it depends on the price of carbon on the world market. Modelling it on the basis of €20 a tonne for the price of carbon on that market, and on us not taking any action to meet our Kyoto obligations, by the 2012-13 timeframe we would be looking at €1.4 billion or €260 million a year to meet our shortfall if we were to buy at those rates for the full amount on the world market. That is a fairly large sum of money. There is extensive information and analysis in the consultation documents regarding the revenue stream from taxes, depending on the rate of taxes, etc., and the elasticities and the effectiveness of the tax in actually reducing emissions. I am not sure there is anything more I can say in answer to the question or that I have answered the question.

Chairman

I have what may be a basic question. Are we essentially rewarding the dirty industries, the heavy polluters, by giving them a large CO2 allowance and quota which they can ultimately sell? The dirty industries will get a big allowance or pollution quota which they can then sell, in other words, we will reward them for being dirty. Will industry have an incentive to pollute more before quotas are introduced in order to get a bigger quota when the quota is introduced? That is human nature. It has happened every time there has been CAP reform. When there is talk of changing quotas in agriculture farmers try and build up their quota before the date comes in. Will that happen here? What measures can we introduce to prevent this?

Mr. Enright

I and my colleague will try to answer that. The simple answer to the first part of the question is that companies will get an allowance. The emissions trading directive provides that at least 95% of those allowances must be handed out for free. There is an option for 5% auctioning but it is not clear which governments will choose that. That will rise to 10% in the second phase of emissions trading. The companies will get that allocation for free but they must surrender those allowances to cover the actual emissions 12 months later. They get an up front allocation of, say, 500,000 tonnes in respect of their emissions in 2005. If their emissions are at 600,000 tonnes at the end of that period they have to surrender that 500,000 tonnes plus another 100,000 tonnes. If the company, God forbid in an Irish context, closes down, it then has an asset for that year which will go onto the market.

Chairman

Is it an annual quota?

Mr. Enright

It is. They will be told three years in advance for the pilot phase, and five years in advance for the Kyoto phase, what their allocation will be for the period. They will get it in annual sums.

Chairman

How can businesses plan long-term projects if they only know their carbon pollution quota for a three year period? Investment decisions have a longer timeframe than that.

Mr. Enright

The investment decision will be driven by the knowledge that no matter what allowances they get they will have to price in carbon at the market price for all of their emissions. They get a free allocation which covers some of those emissions but they must price all of the carbon into their investment decisions and cycle.

Chairman

Trading of emissions was mentioned. I presume American companies which will not want to reduce their emissions will just come to Europe and buy allowances from companies in Poland or some of the newer EU countries. We talked about emissions trading within the EU but is there anything to prevent American companies buying them? It was said that it makes no difference whether the reduction to the ozone layer comes from Ireland, Timbuktoo or California so there is no reason emissions cannot be internationally traded from the environmental point of view.

Mr. Enright

The ultimate aim of the Kyoto Protocol, and further iterations of it, is to create a truly global market in emissions so that the least cost emissions reductions are found, wherever they are in the world. The corollary is that one can then maximise the targets for economies across the world to maximise the reductions. The emissions trading directive is starting with the European Union. There are options to link it to emissions trading schemes outside the European Union. The particular example of the United States is not likely to arise because the US has decided not to ratify the Kyoto Protocol, therefore, there will not be US companies in the market looking for allowances but New Zealand, Japanese and Canadian companies want to link their emissions trading regime to the European scheme. Overall, therefore, we maximise economic efficiency by minimising the price of the allowances and that is also a greater assurance that the overall target is met.

Chairman

We have been asked to send our observations on this submission to the Department of Finance by 30 September but we are not due to have a meeting between now and then; the timescale is very short. Do members have any suggestions as to how we should respond to the invitation from the Department of Finance?

Deputy Nolan

When is our next meeting?

Chairman

It is scheduled for 1 October so the deadline is very tight. Would the officials indicate if there is any leeway in that regard?

Mr. Cooper

One possibility is that we can take into account the members' views expressed today as part of a submission. That is one aspect.

Chairman

I appreciate that.

Mr. Cooper

Alternatively, if you wish we can give you a grace period.

Deputy Nolan

May I ask a question before the officials leave? The US is not ratifying the Kyoto Protocol and there is talk that the Russians do not intend to ratify it. Where stands the Kyoto Protocol if it is not ratified?

Mr. Enright

Technically, the Kyoto Protocol requires either US or Russian ratification to enter into force. The US has said it will not ratify. The reasons for that are understood and are fairly trenchantly expressed by the Administration, so they are not likely to change. The Russian Administration has not yet determined what it will do. There is a vigorous internal debate in Russia as to what to do. The European Union is engaged in highlighting the benefits, both environmental and economic, to the Russian Federation if it were to ratify the Kyoto Protocol. Assuming Russia does ratify, it will enter into force and it will be a legally binding agreement on Ireland and other countries which have ratified it.

Deputy Nolan

Is there a specific date bywhich Russia must ratify it or the Kyoto Protocol falls?

Mr. Enright

The Kyoto Protocol does not provide for any dates for ratification but it does provide for legally binding targets in the period 2008 to 2012. To take it at an extreme, there is no point in Russia ratifying in 2014 but the earlier Russia ratifies before 2008, the more scope there is to ensure that the emissions trading arrangements being put in place can work most effectively with Russian involvement.

Deputy Nolan

Chairman, we should take into account the observations of the Department of Enterprise, Trade and Employment which is concerned about the proposed introduction of a carbon tax and the effect it will have on industry. If we are making a submission, we should take cognisance of that. I agree with the Minister that we should not gallop down the road towards a proposed carbon tax and I am glad the officials have confirmed that nothing will happen in the December budget.

Chairman

Yes. The document before us states that the Minister will take full account of the input received in framing measures as part of the 2005 budget measures. I suggest, first, that we send the transcript of today's proceedings to the carbon energy taxation consultation budget and economic division in the Department of Finance. Second, we should point out that it did not give us sufficient time to supply a more detailed submission. Third, we should state that because this is being put together by the Department of Finance, we would like the people involved in receiving all the submissions from all the interested parties to report back to our committee by the end of November. We will review progress at that stage. As the Oireachtas committee dealing with the carbon tax issue, it is not enough for us to make a submission. We would like to receive an interim report on progress.

If members agree, I believe there should be a full Dáil debate on this issue in the next session. This issue has already gone before seven Dáil committees. Deputy Ryan had to go to one committee this morning, another later today and an agriculture committee next week. Sending the issue to seven Oireachtas committees is not an efficient way for Dáil Members to deal with it. I suggest that the Government should give time for a full debate on this issue in the Dáil. They are just suggestions.

Deputy Burton

Chairman, we are not taking a view of opposing the notion of carbon or energy taxation in the context of trying to reduce the amount of pollution.

Chairman

Mr. Enright is excused at this stage. Thank you very much.

Deputy Eamon Ryan

I would have thought there could be common agreement which perhaps could be included in the presentation to the Department. I am sure we can all agree that if it is introduced, the revenues would be recycled to either lower certain taxes or increase social welfare benefits to cover the concerns expressed by certain members regarding the effect on those poorer sections in our society. I imagine that is a non-contentious position of this committee.

Chairman

Recycling appears to be a very broad concept, as we are beginning to learn this afternoon. I think it is broader than you had anticipated.

Deputy Burton

Chairman, the bigger picture is the impact on Irish industry where there are heavily polluting industries and where the plans impact on reducing the output of pollution, whether by fiscal or other means. We have not had a clear answer to that question.

Deputy Eamon Ryan

The environmental committee, to be fair, outlined extensive international experience which indicates that carbon taxes led to a reduction in emissions by about 9% over a ten year period.

Deputy Burton

We have not gone into that today but I accept your suggestion. We will have to come back to this issue but other than sending the transcript of the proceedings, as our opening thoughts and questions, this committee is not in a position to reach a conclusion.

Chairman

We will send our submission and we will request a full Dáil debate. We will also invite the people who are collating all the submissions in the Department of Finance or the Department of the Environment and Local Government to report back to this committee two months after the closing date.

Mr. Cooper

Chairman, you will appreciate that the deadline is 30 September. I will have to extend that deadline for certain persons, where necessary. Given the number of submissions, therefore, the two month deadline might be rather short. You might allow some leeway because we have to decide in the Department of Finance what the next step is internally in regard to the submissions. I ask you to bear that in mind.

Chairman

I would be keen for this committee to have an opportunity to discuss it before this Dáil session ends. That allows a little flexibility.

I thank the officials for coming in today and for their assistance. As there is no other business the meeting is adjourned until 1 October.

The joint committee adjourned at 4.30 p.m. until 3 p.m. on Wednesday, 1 October 2003.