 Good afternoon ladies and gentlemen. You're all very welcome to the Institute for International and European Affairs. Many of you will know today's speaker. Some of you may not, so I will introduce Joe after I say something about the topic. It seems to me that the topic has a very particular time in us. You get the sense that having some here indeed in this room have talked about this topic for decades. But Shakespeare has something about the tie, but I can't remember it. Oh dear. It'll come to you. It's because I did it at Osgoelga. But you know we've we've had them that recent budget decision which attracted a fair bit of comment. I think our speaker won't however follow entirely orthodox thinking on carbon taxation and he will argue I suspect that policy analysis is not providing the adequate tools to overcome the political and social resistance to carbon pricing. And he's going to draw on some international experience as well as cutting-edge research. What other kind of research is there? It's a very overused adjective isn't it? And he's going to explore things like strategic revenue recycling in order to build new constituencies in favour of a carbon tax. Leave something for me to say would you? Joseph Carton is senior fellow here at the Institute. He leads the Client Policy Area. He's just finished a research fellowship at UCC focused on mobilising investment in low-carbon technology for citizens, community groups and professional investors and on stranded assets. He's previously worked for the SEAI, the OECD and NESC. That's for climate and energy policy issues. He is a member of the Government's Climate Change Advisory Council but I have been asked to emphasise he is not speaking on behalf of that council today. Joe Carton. Thank you very much. You're on the record at this stage now right? That's right. And then we go into Chatham house rule. Sounds good. So thanks a million everyone. I appreciate everyone coming today. It's great to see a lot of familiar faces. It's a great honour to be invited here to this Auguste house to speak. Somewhat perhaps undermined by the fact that I invited myself but still a great honour. And as Owen said I'll be speaking about how to make a carbon tax more amenable to politics and to citizens. So the background I think most people here would be familiar with Ireland has performed poorly some might say shamefully on climate change over the past two decades. You can see here that our emissions per capita are significantly above the EU average. You can see here how we're doing in relation to our EU partners. Ireland's emissions are 13 percent above 1990 levels compared to minus 22 percent is the EU average. And we've been ranked as the worst performer on climate change in the EU or the second worst performer on climate change in the EU by reports over the last 12 months. And so the most recent wave of climate policy began with the publication of the National Mitigation Plan. And being honest the plan was fairly forthright about its own shortcomings. There wasn't a lot of new things in there. It itself set out that it would miss our carbon budget. This plan would miss our carbon budget by some 100 million tonnes by 2030. So you know billions of euros worth of carbon fines potentially awaiting. But the one thing it did set out was we're going to increase or look at increasing the carbon tax by a miserable 10 euro per tonne you know in the next period. Then the Citizens Assembly the Climate Change Advisory Council supported this idea that carbon pricing should be at least part of Ireland's response to the climate challenge. And then the T-shock in what I thought was a very important turning point in Ireland's climate policy story stood up in front of the European Parliament and said yes I am actually ashamed of Ireland's performance. And that for me was kind of that was a change in narrative. And it was different to what we've been hearing across the entire political administrative system for the last 10 years which is all about the excuses and why we haven't do well and how the Faraj-esque statements about how Europe is doing something to us by giving us all these targets and about Irish exceptionalism. So I thought this was a really important acknowledgement by the T-shock. And I myself was kind of given a bit of a fill up by this. And then the T-shock and then the Minister for Finance in the last budget reiterated that not in this budget but budget 2019 we'll certainly be looking at a carbon tax. And then the ESRI even published research about how carbon tax might work. So it was all this mood music was kind of creating this sense of expectation that budget 2019 was finally going to do something even if a little bit tokenistic about Ireland's climate policy and the huge gaps to target. And then as if to kind of re-emphasize this sense of expectation that very day before the budget we had this report by the UN which was the most really kind of shocking report yet which stated the urgency of the climate challenge. But then unfortunately on budget day as you all know the Minister for Finance he said I made a decision not to do it. And he defends. Whoa what's happening to that image. So that wasn't supposed to happen. So anyway the Minister decided that he wasn't going to introduce a carbon tax and I would be okay with that. I'm not a carbon tax fundamentalist. Some people are and they say that all we you know we have to do is a silver bullet solution or whatever. But if the toolbox was going to be if there was some other things in the toolbox that we were going to use whatever it might be technology specific supports regulations you know give me something give me anything. But unfortunately the toolbox was empty and carbon tax was not brought forward and the toolbox was empty. Now I wouldn't it would not be for me to speculate about why the carbon tax wasn't brought forward. But I would say the makeup of the current oil could have been something to do with it. The fact that there was a general election potentially on the horizon may have had something to do with it. The experiences we've had with pricing initiatives in the past may have had something to do with it. The water tax for example may have had something to do with it. And those experiences and the potential to be outflanked by those who would use the imposition of carbon pricing or a carbon tax and to score political points in a potential general election. So I don't know if that's true or not. And we can ask you know those of you who are who are connected can maybe ask for the inside story but that's I suppose my guess in terms of you know why the carbon tax wasn't brought forward. So after a week of you know depression and really sort of feeling like we were never going to get on top of this challenge I thought well what what role has the kind of policy want community expert community how much responsibility can we take for this failure. And what I thought was I started exploring was how to design a carbon tax for citizens and when I say for citizens I mean to win votes and when I say to win votes I mean to make it politically acceptable. So how would you design a carbon tax if you wanted to make it politically effective. And the most recent research is particularly focused on using strategic revenue recycling not just the price side of the equation but the revenue side of the equation to meet that objective. And so what I want to focus on today is four possible carbon tax designs that are first two are fairly much from traditional environmental economics. The first one is that the revenue increased the price on carbon and you make the polluter pay. I think we would all agree that makes sense. You make the polluter pay for the damage they're causing and that reduces obviously makes carbon more expensive reduces emissions and creates an incentive for technological change and transformation over time. But the first option would be to the revenue go straight into the Exchequer and I'll come back to that but that's what Ireland did in 2009. The second option is a revenue neutral carbon tax which has also been very much part of the environmental economics orthodoxy over the last 40 years. But what I want to focus on today in particular are two new models that are emerging. So the fee and dividend model and targeting green investment and these models are emerging from behavioral economics and political economy research more than environmental economics. So I'm going to go through each of those. Sorry this slide may be very small especially for the people at the back but I'll try and talk to it so you don't necessarily need to be able to read it. So the first one is the revenue flows to the Exchequer and this was in a sense proposed by the climate council which I'm part of in its recent report. It proposed an increase in the carbon tax of 10 euro. Now it didn't say that the revenue should go straight to the Exchequer but by not saying not making any recommendations about the revenue perhaps that's how it was interpreted. And it's what Ireland did as I said in 2009 when we introduced the carbon tax it went straight to the revenue. And so in terms of economic efficiency if you do it this way it increases the tax burden over time so there is a potential a potential impact on the economy. In terms of environmental effectiveness the second criteria it depends on the rate. It depends how high how high you put the tax and I'm going to get back to the rate in a separate slide at the end. But in terms of social and equity well we know that rich houses pay more overall of the carbon tax from ESRI research but poor houses pay relatively more. In other words doing it this way is regressive. And it could also affect rural households who tend to be trapped into longer commutes and more carbon dependent lifestyle so there may be a regional impact which is not necessarily fair also. So in social equity terms it scores fairly poorly. In terms of political viability which is incredibly important. This tends to be extremely unpopular particularly in countries where distrust of government is an issue like Ireland a post-colonial country. And it's greeted in countries like Ireland with distrust and you'll all have heard on the radio commentator saying this is a scam it's just raising tax it's got nothing to do with carbon this is just about feeding government ejector revenues it's going to go into a black hole etc etc. And it could be called a levy to escape the perception of a tax but you know the perception of a tax is hard to dispel and as we know voters hate taxes that's pretty much a maximum that I think most people would agree with. So in terms of administrative considerations so how would the administrative system see this? Well it's very easy to do you literally just flick you just put you have a dial and you put it up and that's it the collection mechanism is in place everything is in place so from an administrative perspective it's very likely to be favored for its simplicity and the examples are Ireland in 2009 and in fact most countries that have implemented a carbon tax have just increased the carbon tax and haven't hypothesized or done anything special with the revenue. Now the second option as I said is also very much part of the environmental economics orthodoxy and it's a revenue neutral carbon tax and this is the one I would have supported up until maybe about a month ago and in fact I wrote an article in The Irish Times calling for a revenue neutral carbon tax in January and what is in the literature says that this will be economically efficient if taxes are too high so if labor taxes are set above their optimal level this can be economically efficient and because you're reducing labor taxes to increase the carbon tax but it's sort of what environmental economics often neglects is what's your starting point so you have to generally the starting point is that you assume that the system is designed optimally already but in Ireland you could argue that our labor taxes are quite high after the crash in 2008-2009 so it may be still a logic for reducing some of our labor taxes. Again the environmentalist depends on the rate sorry the environmental effectiveness depends on the rate which I'll come back to and social equity so using the tax system to offset the negative impact excludes the most vulnerable so a lot of people don't have an income so if you're using the tax system to address the social and equity concerns you're leaving the potentially the unwell the elderly out of the net and so you would have to use some of the revenue from the tax specifically to increase social supports in some other way but just doing a revenue neutral isn't enough to deal with the social equity concerns. So from political viability perspective it could suffer from the same distrust as one as just putting the revenue into the extractor finances and internationally it tends to be the least popular according to kind of survey data and research papers recently published in nature climate change etc and it's especially the case because it's kind of hard to sell this people don't necessarily see the relationship between one tax going up and another tax going down so the political communication needs to be really strong selling those two things together as a sort of a package and it requires adjustment to two or maybe three systems that we already have in place so the administrative system would be likely to favor this kind of approach because you can increase income taxes very easily you can reduce income taxes very easily increase carbon taxes very easily and benefits can be played around with with relative ease so this is likely to be favored by the administrative system especially compared to the options we're about to come to and this type of approach has been used in Germany which introduced environmental tax reform in the 1990s somewhat along these lines and British Columbia where tax credit is used to recycle some of the revenue and to make it revenue neutral and so when I was writing the article in the Irish Times I proposed a 50 euro increase to the carbon tax which would be roughly equivalent to a 1.5 percent reduction in the 20 percent tax rate so that's kind of one approach to doing this but of course there's many taxes you could play around with to deliver this kind of revenue neutral approach and by the way 50 euro a tonne raises approximately a billion euro for the extractor not including elasticities I'm sure Barack and get back to me on that one so the third option the kind of exciting one in my view is lump sum transfers and I think a lot of people have explained this to to they've been kind of there has to be a catch it's it's almost sort of too good to be true and because essentially what this involves is writing a check to every household in the country the check is more or less the same for every household in the country with the revenue you could do it quarterly or you could do it annually so if we take that 50 euro a tonne example every household in the country would get about 500 euro so that would say carbon dividend on the top of it and they would get that check in the post you still get the price effect because carbon is still more expensive heating fuel is still more expensive transport fuel is still more expensive and so you still get the response what people get get compensated and the check says carbon dividend so people are getting an actual tangible salient benefit in the post so let me just go quickly through this sort of arguments on this one so if labor taxes are set up optimally you don't want to touch your labor taxes because they're already perfect so if that's your starting assumption then this is a very efficient way to go in any kind from an economic efficiency perspective environmental effectiveness comes depends on the rate we'll come back to that social equity this is perceived as the most equitable it might necessarily be the most equitable if you think about it but it's perceived as the most equitable equitable because everybody received an equal share now you can adjust to share in fact I would suggest in Ireland you might want to give an extra small premium to rural households maybe 10 percent extra like they have done in British Columbia somewhere and I think it's British Columbia they've done that and so as I said there the dividend could be moderately higher for rural households actually that was the Canadian federal proposal that was introduced a couple of months ago that they had a supplement for rural households and households with more children get more that's kind of part of the design so it is adjusted according to household size so political viability well ask yourself how do politicians generally think about giving people checks in the post and how do people generally respond to getting checks in the post and how salient is a check in the post that says this is your carbon dividend for doing your bid on climate change and how hard do you think that would be for politicians to sell to say to the peace to say to citizens that not one penny of this revenue would go to roads or go to schools or go to the extractor that this will go into your back pocket for doing your bid on climate change so from my view and the international research would support it that this is an extremely popular and it much easier thing for politicians to sell and also what the behavioral economics says is don't talk about taxes talk about fees and dividends so this is a fee and dividend model people don't like taxes if you start with tax you turn people off so used a nomenclature of fee and dividend administrative considerations okay well a whole new system needs to be established for this so the administrator system may not be as favorably disposed to this because they don't just have to use their existing toolbox they have to create a new toolbox having said that Switzerland has done this British Columbia has followed a model like this Canada has now introduced a model like this Washington State had a model I know that was it wasn't actually the Washington State model was a different model it was model four we'll come back to that so it can be done but what I would say to the political class is that they need to present this to the administrative class as something that needs to be done not as you know what do you think about this if you know what I mean and so as I said be about 500 euro per household probably four quarterly checks would be good and what's really good about this is it ties this in over electoral cycles people get used to receiving their check in the post and so if you know the what's the UKIP branch in Ireland called if they came came to power in Ireland by some freak of nature and they wanted to take this away or if some other political party decided that they were going to you know continue Ireland's journey as being laggards on climate change and to reverse this decision you have to take those checks off people and as we know it's much harder to take things off people so this gets locked in politically and people tend to like it and tend to get used to it so and the fourth option is spending at a revenue on green and green investments and particularly targeting affected communities so from an economic efficiency perspective you could say it depends on what the revenue is spent on if it addresses a market failure and everybody's everybody's definition of a market failure is different but if it can be spent on a market failure where you could specifically identify a market failure where the market isn't working well then it could potentially improve economic efficiency environmental effectiveness this is a very important point the environmental effectiveness of this measure is better than any of the other measures because you get an extra dividend you use some of the revenue to spend on green projects so that has a double sort of environment you make carbon more expensive but you also supply subsidies or whatever it is for various kinds of green investments so that drives and low carbon transition even faster so this is the most environmentally effective of all of the four options so if the revenue is used to alleviate poverty this can enhance social equity for example if you supported home retrofit in the fuel poverty sector and to take one example or a just transition fund we've heard a lot about the midlands you could use some of the revenue to set up a just transition fund for communities that are particularly affected by the phase out of peat and coal which is inevitably going to happen in the next decade and or you could set up a retrofit fund as I said there so in terms of political viability or attractiveness to citizens what the literature says is that citizens don't get this pigoovian thing that economists love to talk about the price effect oh no but we're going to make this more expensive so you're going to use less people are like I don't know I don't know what you're talking about but if you say we're going to raise tax and we're going to spend it on green investments people actually get that they understand that they want more renewables they buy into that more they can understand that it's more tangible so from a social acceptability perspective ring fencing the revenue again and using it on green spending makes more sense than options one and two and so it could be called a fee or a climate contribution as well because it's your your fee is being used to sponsor these green investments so again from an administrative perspective this is the dreaded word that dare not ever be uttered in the Department of Finance this is a publication so this means that we're ring fencing the revenue and we're using it for a specific purpose now if every tax that was ever raised was apothecated for a specific purpose you would lock in the least efficient most terrible kind of public approaches to public finance as possible but I would ask you is climate change an exceptional issue and has our failure to deal with this issue been exceptional I would say the answer to both of those questions is yes and in that sense apothecation may be justified in this case and so whereas it's been done Norway Alberta and Washington State a proposal actually was rejected in Washington State when I was doing the presentation that hadn't been rejected yet and so along these lines where the green revenue is specifically apothecated for for green spending and but what I think it's important to understand is that these can be hybrid models and I'll come back to that later these are being presented as distinct but actually you can you can combine elements of these models so I said I'd come back to the rate so there's a good bit of evidence from behavioral economics and a political economy to introducing the at a low rate initially and ratcheting the rate up over time is good for so enhancing social acceptability but the downside of this approach is of course that Ireland has targets to meet by 2020 so there is a counter argument for one big bang approach in you know as soon as possible I don't think that's gonna happen to be honest I would that's what I would do if I was emperor of the world that's why I would never get elected and so you know I don't think that our our leaders will go for that and there is some wisdom to doing it incrementally over time and so the the downside of course to doing it incrementally over time is that we will have to pay compliance costs for our failure to meet renewable and emissions targets by 2020 and potentially by 2030 but the other thing this is a slide that Kelly de Bruin had in her presentation she allowed me to use today the ESRI report will be forthcoming but what it shows is this pink line here is our current trajectory and this Fitzgerald proposal is what the climate change council proposed and what it shows is that if you increase the carbon tax to 70 euro a tonne our emissions increase dramatically between now and 2030 so I just want to see whether I put in the other slide now it didn't okay so what this shows is in theory in the economic model that they're using which to be honest I would have various questions about but I think the overall message is clear a carbon tax even one set at an extremely high level of they estimated a carbon tax would need to be set at 450 euro a tonne compared to 20 euro a tonne to meet our 2030 targets so this says a couple of things to me first of all it says we need a high carbon tax second of all it says that a carbon tax is never going to do all of the heavy lifting for us and a carbon tax needs to be part of a broader policy package which perhaps brings us back to option four which is the most environmentally effective what this research didn't look at was what would happen if you strategically recycled some of the revenue for green investments so for me the rate should be somehow linked to the target and it should increase automatically if the target is not being met this is what was in the Washington State proposal it's what's in the Swiss proposal and our automatic increase is in the French carbon tax as well so that needs to be part of the design but as I said the and the carbon tax would need to rise significantly whether you believe the 400 euro a tonne figure or not I would personally have reservations there's certainly no exposed evidence and about carbon taxes that high or what what they would deliver and this could reflect to some extent modeling constraints on their part but what it says to me most of all is that a carbon tax will never be a silver bullet solution and that we need major policy policy initiatives for example into retrofit EVs public transport agriculture etc so a carbon tax is not the silver bullet solution it's only part of one and package of measures and it underlines as I said the importance of revenue recycling so on last two slides I don't know how I'm doing for time on okay grant so I'll finish in four minutes and so so my conclusions are so in terms of design a strategic revenue recycling has to be considered to build new constituencies political and social constituencies supporting a fee or a levy but never attacks and so suspicion of government in Ireland is high and suggests a fee with a quarterly carbon dividend recycled each household and with a slight premium for rural households just like the Canadian proposal may be optimal for Ireland and as I said 50 euro a tonne would be about 500 euro per household and so coverage part of the problem here of course is that the biggest sector is still excluded the agriculture sector and but the power generation and heavy industry sector are covered by the ETS of course so they would not be covered so we're really just left with buildings and transport which at least means that these are sectors that are not exposed to competitiveness impacts so I don't think we need to be concerned about the competitiveness impacts and so a hybrid design I think it's very important that we would look at the hybrid design and that we would potentially trade off elements of three and four so the Swiss carbon tax I think is a good model in this respect it uses the revenue to pay some of it is to pay out a dividend to households and the rest is used to support green investment so I think that that could potentially be a useful model for Ireland and I think what it allows is political horse trading so Finafall might say to Finagate well we don't like you know this revenue recycling idea why don't we you know use it to support this constituency in the midlands where you know where people are suffering because of this high carbon price or something like that so it allows for this political horse trading so once you lay out the options then there can be a political negotiation on the final design and I certainly wouldn't be purist in terms of which of these options I think what I've shown today is that any of these options can be potentially justified so in terms of communications you have to avoid labeling the tax if at all possible but I think it really requires strong kind of political leadership and skilled communications to sell there is an act of political salesmanship involved especially in options three and four and so the rate as I said it's going to be hard for the carbon tax to do all the work by itself that suggests that we need to look at strategic revenue recycling for green investments it suggests that we need a high carbon tax but it also suggests that we need a lot a range of other measures and I had one more conclusions slide but I think I'll leave it there anyway thank you very much