The benefits of action on implementing carbon taxation in Ireland

The benefits of action on implementing carbon taxation in Ireland. A
demand system approach.
Miguel Angel Tovar Reaños (miguel.angeltovar@esri.ie) and Muireann Lynch
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The benefits of action on implementing carbon taxation in Ireland. A demand system approach.
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“.. Climate change is not science fiction. This is a battle in the real world, it is impacting
us right now”(Arnold Schwarzenegger)

International research shows that climate change will impact households income. There
are many channels through which this can manifest such as losses in agricultural
productivity, increases in crime, coastal storms, disruption in energy supply and human
mortality, Hsiang et al. (2017)

Motivation
What are the net distributional effects of can carbon taxation?
How is the tax burden experienced by different household types?
How large is the burden?
Which compensatory measures (e.g. lump-sum transfers) can benefit different
groups?
How to evaluate the effectiveness of these measures?

Literature review
Hsiang et al. (2019) estimated the income losses due to increases in global
temperature
Streer et al. (2021) show that carbon taxes can help to keep increases in
temperature below 2◦
C
Poterba, 1991; West, 2004, 2005; Fullerton and West, 2000 and Tovar and Wolfing,
2018 analyse the distributional effects of carbon taxes

Data and methodology
Data
Estimation: Household Budget Survey (1994, 2000, 2004, 2009, 2016)
Price indices for different commodities
Simulation: Household Budget Survey (2015-2016)

Data and methodology
Arthur Lewbel and Krishna Pendakur (AER, 2008)
Commodity prices Household income
Changes in consumption
patterns
Food
Transport Services
Energy
Housing

Data and methodology. Engel curves
0
5
10
15
%
4 6 8 10
log(total household expenditure)
Transport
0
2
4
6
8
10
%
4 6 8 10
log(total household expenditure)
Heating and Lighting

Simulation
Hsiang et al. (2017) estimated that an increase in 1◦
C would imply a decrease in
gross domestic product of 1%.
Streer et al. (2021) show that if carbon taxes are high enough the temperatures well
below 2◦
C
Benefits of action are allocated: equally, disproportionally impacting low income
households, and according to willingness to pay for environmental protection

Simulation
We analyse the effects of an additional tax of 80 Euro per CO2 tonne.
We analyse the effects of a lumpsum transfer of 40% of carbon tax revenues

Results: Changes in energy demand
Table: Uncompensated own price elasticities ( statistically significant at 1% level)
Elasticity: Heat. and light. Transport
First quartile
Own Price -0.456 -0.439
Fourth quartile
Own Price -0.546 -0.714

Results: Additional cost
Figure: Hicks’ equivalent variation (in % of total expenditure) across expenditure deciles.
Scenarios: tax and benefits.

Results: Emissions reduction w.r.t to the base scenario
-12
-10
-8
-6
-4
-2
0
1st
decile
2nd
decile
3rd
decile
4th
decile
5th
decile
6th
decile
7th
decile
8th
decile
9th
decile
10th
decile
%
Tax(%) TaxRev (%)
Figure: Emission reduction w.r.t. to the base scenario

Results: Coefficient of variation in HEV
-25
-20
-15
-10
-5
0
5
10
1 2 3 4 5 6 7 8 9 10
%
CV_Flat CV_Pro-poor
Figure: CV across income deciles

Conclusions
Carbon taxation is indeed effective in reducing energy demand
Once the benefits of action are considered, low income households are not
disproportionally affected. In particular when the benefits accrued to low income
households.
It is important to consider several channels where inequality could appear.
It is important when designing carbon taxes to balance short (i.e.boost the incomes
of less affluent households) and long run objectives (i.e. encourage substitution away
from carbon intensive consumption)

Thanks!
We acknowledge funding from the ESRIs Energy Policy Research Centre

The benefits of action on implementing carbon taxation in Ireland

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