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Carbon Tax Scenarios and their Effects on the Irish Energy Sector

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  • Di Cosmo, Valeria
  • Hyland, Marie

Abstract

In this paper we use annual time series data from 1960 to 2008 to estimate the long run price and income elasticities underlying energy demand in Ireland. The Irish economy is divided into five sectors: residential, industrial, commercial, agricultural and transport, and separate energy demand equations are estimated for all sectors. Energy demand is broken down by fuel type, and price and income elasticities are estimated for the primary fuels in the Irish fuel mix. Using the estimated price and income elasticities we forecast Irish sectoral energy demand out to 2025. The share of electricity in the Irish fuel mix is predicted to grow over time, as the share of carbon intensive fuels such as coal, oil and peat, falls. The share of electricity in total energy demand grows most in the industrial and commercial sectors, while oil remains an important fuel in the residential and transport sectors. Having estimated the baseline forecasts, two different carbon tax scenarios are imposed and the impact of these scenarios on energy demand, carbon dioxide emissions, and government revenue is assessed. If it is assumed that the level of the carbon tax will track the futures price of carbon under the EU-ETS, the carbon tax will rise from ?21.50 per tonne CO2 in 2012 (the first year forecasted) to ?41 in 2025. Results show that under this scenario total emissions would be reduced by approximately 861,000 tonnesof CO2 in 2025 relative to a zero carbon tax scenario, and that such a tax would generate ?1.1 billion in revenue in the same year. We also examine a high tax scenario under which emissions reductions and revenue generated will be greater. Finally, in order to assess the macroeconomic effects of a carbon tax, the carbon tax scenarios were run in HERMES, the ESRI's medium-term macroeconomic model. The results from HERMES show that, a carbon tax of ?41 per tonne CO2 would lead to a 0.21 per cent contraction in GDP, and a 0.08 per cent reduction in employment. A higher carbon tax would lead to greater contractions in output.

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Bibliographic Info

Paper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP407.

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Date of creation: Sep 2011
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Handle: RePEc:esr:wpaper:wp407

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Keywords: CO2 emissions/Energy demand/Environmental tax/income distribution;

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References

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  1. Wissema, Wiepke & Dellink, Rob, 2007. "AGE analysis of the impact of a carbon energy tax on the Irish economy," Ecological Economics, Elsevier, vol. 61(4), pages 671-683, March.
  2. John FitzGerald & Jonathan Hore & Ide Kearney, 2002. "A Model for Forecasting Energy Demand and Greenhouse Gas Emissions in Ireland," Papers WP146, Economic and Social Research Institute (ESRI).
  3. Annegrete Bruvoll & Bodil Merethe Larsen, 2002. "Greenhouse gas emissions in Norway Do carbon taxes work?," Discussion Papers 337, Research Department of Statistics Norway.
  4. Reyer Gerlagh & Bob van der Zwaan, 2006. "Options and Instruments for a Deep Cut in CO2 Emissions: Carbon Dioxide Capture or Renewables, Taxes or Subsidies?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 25-48.
  5. Ghalwash, Tarek, 2004. "Energy Taxes as a Signaling Device: An Empirical Analysis of Consumer Preferences," UmeÃ¥ Economic Studies 646, Umeå University, Department of Economics.
  6. Hennessy, Hugh & FitzGerald, John, 2011. "The HERMES model of the Irish Energy Sector," Papers WP396, Economic and Social Research Institute (ESRI).
  7. Ekins, Paul & Barker, Terry, 2001. " Carbon Taxes and Carbon Emissions Trading," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 325-76, July.
  8. Thomas Conefrey & John FitzGerald & Laura Malaguzzi Valeri & Richard S. J. Tol, 2008. "The Impact of a Carbon Tax on Economic Growth and Carbon Dioxide Emissions in Ireland," Papers WP251, Economic and Social Research Institute (ESRI).
  9. Lin, Boqiang & Li, Xuehui, 2011. "The effect of carbon tax on per capita CO2 emissions," Energy Policy, Elsevier, vol. 39(9), pages 5137-5146, September.
  10. Ghalwash, Tarek, 2007. "Energy taxes as a signaling device: An empirical analysis of consumer preferences," Energy Policy, Elsevier, vol. 35(1), pages 29-38, January.
  11. Devitt, Conor & Diffney, Seán & FitzGerald, John & Lyons, Seán & Malaguzzi Valeri, Laura, 2009. "The Likely Economic Impact of Increasing Investment in Wind on the Island of Ireland," Papers WP334, Economic and Social Research Institute (ESRI).
  12. Richard S. J. Tol & Tim Callan & Thomas Conefrey & John FitzGerald & Seán Lyons & Laura Malaguzzi Valeri & Susan Scott, 2008. "A Carbon Tax for Ireland," Papers WP246, Economic and Social Research Institute (ESRI).
  13. Lu, Chuanyi & Tong, Qing & Liu, Xuemei, 2010. "The impacts of carbon tax and complementary policies on Chinese economy," Energy Policy, Elsevier, vol. 38(11), pages 7278-7285, November.
  14. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July.
  15. Seán Diffney & John Fitz Gerald & Seán Lyons & Laura Malaguzzi Valeri, 2009. "Investment in electricity infrastructure in a small isolated market: the case of Ireland," Oxford Review of Economic Policy, Oxford University Press, vol. 25(3), pages 469-487, Autumn.
  16. Rapanos, Vassilis T. & Polemis, Michael L., 2005. "Energy demand and environmental taxes: the case of Greece," Energy Policy, Elsevier, vol. 33(14), pages 1781-1788, September.
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Cited by:
  1. Curtis, John & di Cosmo, Valeria & Deane, Paul, 2014. "Climate Policy, Interconnection and Carbon Leakage: The Effect of Unilateral UK Policy on Electricity and GHG Emissions in Ireland," Papers RB2014/1/7, Economic and Social Research Institute (ESRI).

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