The Feasta Review, number 2



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Panel: Quotas as an alternative to carbon taxation

In October 2003, Feasta responded to a call from the Irish Department of Finance for submissions on a proposal to introduce carbon taxes. Feasta's submission can be found on the Feasta website here. It is also with all the other submissions on the Department's website at

We gave two reasons for disliking carbon taxes and preferring tradable carbon quotas such as the Domestic Tradable Quotas (DTQs) advocated by David Fleming and described in Feasta Review No. 1. These were:

  1. A carbon tax, however structured, cannot guarantee that any particular level of emissions will be achieved at any given date in the future whereas a quota can. A carbon tax rate which would bring about the required emissions reduction in a booming economy would be too high and thus have a depressing effect on a depressed one. As a result, for a carbon tax to work well, its rate would need to be adjusted regularly to conform with the stages of the business cycle. This would make setting the rate a perennial source of conflict between the government, the consumer and business interests. With a quota, however, the market automatically sets the price to be paid for permits giving the right to burn extra fossil fuel and leaves no scope for argument.
  2. 2. A quota system is much more compatible with international emissions trading arrangements, particularly if long-run ones like Contraction and Convergence (also described in Feasta Review No. 1) involving very deep cuts in emissions are introduced in the post-Kyoto period.

Feasta would like to see Ireland reducing its CO2 emissions by introducing a system under which whatever level of CO2 emissions was set for the country in a particular year was shared out equally amongst all residents. Under the simplest version of this arrangement, everyone would receive a permit entitling them to burn whatever quantity of fossil fuels contained their year's allocation of carbon. The recipients would take their permits to their bank and sell them for cash. The banks would then sell the permits on to importers of fossil fuels who would be required to surrender them to Customs to cover the carbon content of whatever coal, oil or gas they were bringing in. Similar arrangements would be worked out for Irish fossil fuel producers such as the commercial peat firms.

The advantage of this system is that the proceeds from the permit sales would provide everyone with enough extra purchasing power to cover the higher costs of the fuels and (because of the higher energy prices) the other goods and services they bought in the year, provided that their purchases were consistent with their emissions share. If some individuals could cut their direct and indirect fuel use below their entitlement, they would be better off. But if they continued to drive around a lot in their SUV, they would have to pay more frugal people for the privilege. Overall, of course, fossil fuels themselves and goods made with significant amounts of fossil energy would cost more but this would encourage people to find lower-fossil-energy alternatives and enable the transition to renewable energy sources to gather pace.

David Fleming's proposal for DTQs is rather more sophisticated. He would like to see emissions permits covering about 55% of a country's allowable level of emissions being auctioned off to industry and transport companies because that percentage is roughly the proportion of a country's total fossil energy use taken up by these sectors. The income from these permit sales would go to the government, which could pass some of it on to the less-well-off to compensate them for the higher prices they would have to pay for almost everything they bought. Part of the remaining permit sales income could be spent on developing renewable energy sources.

The remaining 45% of emissions would be shared equally amongst the country's residents. Each person might receive their carbon emissions allocation in units on a chip-card which they would use, along with cash, whenever they were buying electricity, petrol or some other fuel. The required number of carbon units would be deducted electronically from the amount on the card, which would act as a purse. They would also be able to sell units from the card for cash, or buy additional ones in exactly the same way that you can top up the call units on a pre-paid mobile phone.

However, there would only be any point in issuing emissions permits on chip cards, with all the expense and trouble involved, if it caused people to behave differently from the way they would if they simply got their allocation as a voucher which they then sold to their bank. Fleming expects that many chip card recipients would set out to live within their allocation and make it a matter of pride not to have to buy extra units during the course of the year. If so, they would become very fossil-energy-use conscious, which ought to accelerate the transition away from such fuels, thus justifying the expense of setting up the system and running it. Feasta member and sociologist Mark Garavan is hoping to conduct an attitudinal study to see whether this might be the case.

It seems unlikely that it was Feasta's advice that led the Irish government to abandon its plans to put a carbon tax into effect. Concerns had already been expressed about the effect that the tax would have on the poor, who spend a higher proportion of their income on fuels than do the betteroff. For example, in a report2 published by the Environmental Protection Agency in July 2004, Sue Scott and John Eakins, both of the ESRI, found that the average low-income household would need to receive compensation of €246 a year through the Social Welfare system or in reduced income tax if it was not to be worse off as a result of a carbon tax set at €20 per tonne. The €246 estimate covers just the first-round price increases - that is, the immediate effects of the carbon tax. When the knock-on effects of the first round price increases had been reflected in a second round of price rises, and those in turn had been used to justify a third, and so on, the compensation would have to be higher still.

Now that the tax has been dropped, the only emissions control system in operation in Ireland will be a rudimentary emissions quota system imposed on the country by the EU. A more deeply-flawed system is hard to imagine. Under it, major industrial emitters such as the ESB and the cement companies are to be given permits for 5.8 % more emissions than they are currently releasing presumably to allow them to grow. It is therefore hard to see how Ireland will get its emissions down.

The EU insisted that 95% of the emissions permits be given to the companies rather than auctioned, but the Irish government is doing better than that and is giving over 96%, leaving it with less to give away to start-up companies or to auction itself to bring in revenue. Quite why the EU insisted on the permits being given away is unclear as no economist, conventional or otherwise, would recommend that course. Presumably, naïve politicians were persuaded by corporate lobbyists to believe that, if the permits were given out rather than sold, it would enable electricity and cement to be cheaper. Not so. The fact is that the permits will acquire a market value if the industries covered by the scheme increase their output faster than they restrict their greenhouse emissions. And once the permits can be sold, firms will factor in the price they could have obtained by selling them as the cost of using them in their production process. In other words, even though the necessary permits came free, the price of electricity and cement will still go up by just as much as would have been the case if the permits had been sold to them by the state. The only difference is that the companies receiving the permits make a big windfall gain, while the state will not have the revenue it will need to compensate the less-well-off for the higher prices they will have to pay. Fortunately, this scheme runs for only three years and there is some chance - not a big one because it has already been announced that 90% of the permits will be given away in the next three-year period - of changing it after that.

The free permits constitute a massive subsidy to the industries concerned. John Fitz Gerald of the ESRI, in a strong attack3 on the arrangement, estimates that they would be worth €1, 350 million if the price being put on the right to emit a tonne of CO2 rises to €20. This is money lost to Irish residents. Moreover, the fact that it has been announced that the permits will be given away next time encourages the owners of polluting plants to keep them open so that they can benefit from the subsidy again. If the plants had had to buy the permits, however, the dirtiest ones would have had to close.

The permits will also encourage the construction of more fossil-fuel power plants rather than the development of renewable energy sources. This is because, although wind farms will benefit from the higher electricity prices that will result from the permit scheme, so will the promoters of, say, new gas-fired power stations, because they will be given the permits they require to buy their fuel. This will, effectively, reduce the costs of constructing their new power station. "For a new combined cycle gas turbine electricity generator, the subsidy in the period 2005-2012 could amount to at least 50% of the capital cost of the new plant" Fitz Gerald says.

Eco-taxes can be useful in reducing demand for such things as road space, plastic bags, chewing gum and non-returnable bottles. However, whenever it is critical that the pressure being put on a resource stays below a particular limit, quotas have to be used instead because of the greater certainty they provide that the limit will not be breached. The proposed carbon tax was not even a suitable tool to use to reliably keep Ireland's emissions of carbon dioxide below the level needed to avoid paying €100 per tonne fines to the EU because the country has overshot its emissions target. The fine is explained in the caption to the bar chart below. - The Editors

Ireland agreed with its EU partners to allow its greenhouse gas emissions to rise by no more than 13% above their 1990 level so that the EU-15 as a whole could honour its commitment under the Kyoto Protocol and reduce its total emissions by 7%. If Ireland fails to keep its emissions below the target, it will be able to cover some of the over-run by buying emissions permits from Britain, Sweden, Luxembourg and Germany which, as the chart shows, have some to spare because they have cut back more than they promised. However, these permits are likely to be expensive given that other EU countries are having problems meeting their commitments too. Moreover, European Commission restrictions mean that permits can only be bought to cover emissions up to 10 per cent above the target. After that, the country will be fined €40 per tonne for every tonne of carbon dioxide in excess of the limit between 2005 and 2008, and €100 a tonne from then until 2012.

A €100 per tonne fine would increase the cost of a kilowatt-hour of electricity from Ireland's two new peat stations by 14.3 cents, from Moneypoint, a coal-burning station by 9.2 cents, and by 4.6 cents from a typical gasfired station.

The above chart is based on 2001 data. Irish economic growth will have worsened the situation since then.

This panel is from
Growth:The Celtic Cancer,
the second Feasta Review. Copies of the Review can be ordered online from Green Books, priced at £9.95 plus postage and packaging
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