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Potential fiscal impacts of the transition to a lower carbon economy in Ireland

Indirect Tax Matters | September 2023

On 20 July 2023, the Department of Finance published a paper which examines the potential fiscal impacts of the transition to a lower carbon economy in Ireland. The aim of this publication is to provide timely analysis of current domestic climate change policies.

As set out in the Climate Action Plan 2023 (CAP23), the Irish Government is planning a reduction of 51 per cent of Ireland’s total greenhouse gas (GHG) emissions by 2030 relative to 2018, as an intermediate step towards carbon neutrality to be achieved by 2050. Fiscal measures, which help to incentivise the use of greener fuels and technologies and a move away from more pollutant fossil fuels, can play an important role to achieve these climate goals.

Current taxes implemented in Ireland that have an environmental impact, such as carbon tax, excise duty and Value Added Tax (VAT) on fuel, Vehicle Registration Tax (VRT) and motor tax, are significant sources of revenue for the State. At present, they account for just under €5.3 billion annually of overall exchequer tax revenues in 2022, having risen from €4 billion of overall exchequer tax revenues in 2012. However, their share of total overall exchequer taxes has fallen from around 10.8 per cent in 2012 to currently stand at just around 6.4 per cent in 2022. This reduction is also due to the significant increase of other tax streams’, such as Income Tax and Corporation Tax, contribution to the overall exchequer tax receipts in the last ten years.

According to the paper, the transition towards a lower carbon economy over the next seven years will have a significant impact on exchequer finances. The changes are likely to lead to lower revenues, if current taxation policy remains unchanged, and if the necessary actions as set out in the CAP23 are successful in bringing about the appropriate levels of emissions reductions. Exchequer revenues raised by way of taxes on fossil fuel including transportation are estimated to fall over the medium term by around €1 billion, from around €5.3 billion in 2022 to around €4.3 billion in 2030. This potential reduction in exchequer tax revenue over the medium term would mean environmental taxes, could fall from around 1.1 percent of GDP (or 2.1 percent of domestic growth in Gross National Income “GNI” terms) currently in 2022, to around 0.6 percent of GDP (or 1.4 percent of GNI) in 2030. Furthermore, if Ireland is successful in moving to a low and ultimately zero-carbon economy over the medium to long term, there will be a further substantial decline in these revenues.

On that basis, the Department of Finance underlined that to ensure the sustainability of tax receipts overall, consideration will need to be given to alternative sources of tax revenue. Tax policies will need to consider how to replace these revenues in a fair and sustainable way. For example, tax revenues generated through transport measures may need to be redesigned focusing on road use or based on the weight of the vehicles.

The Department also mentioned that public finances in Ireland will also come under increasing pressure from factors other than climate change, such as an ageing population and demographic changes. Therefore, changes to the tax regime in isolation cannot achieve the necessary GHG emissions reductions by 2030, as the transition to a lower carbon economy is an economy–wide problem.

Conclusion

As noted above, certain taxes in Ireland are likely to be subject to relevant changes over the short and medium term to counterbalance the reduction of the related exchequer revenue due to the transition towards a lower carbon economy. It is also likely that more new and more targeted tax measures may be introduced.

It is therefore important to keep informed about these changes to reduce tax burdens and to plan business activities in a potentially new manner that should be efficient and environmentally friendly at the same time.

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