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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 carbo
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  • di Cosmo, Valeria & Hyland, Marie, 2013. "Carbon Tax Scenarios and their Effects on the Irish Energy Sector," Papers RB2013/2/7, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:rb2013/2/7
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    References listed on IDEAS

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    1. 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).
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    3. 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).
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    Cited by:

    1. Nolan, Sheila & Devine, Mel & Lynch, Muireann A. & O’Malley, Mark, 2017. "The effect of Demand Response and wind generation on electricity investment and operation," Papers WP577, Economic and Social Research Institute (ESRI).
    2. Alberto Gago & Xavier Labandeira & Xiral López Otero, 2014. "A Panorama on Energy Taxes and Green Tax Reforms," Hacienda Pública Española, IEF, vol. 208(1), pages 145-190, March.
    3. Nolan, Sheila & Devine, Mel & Lynch, Muireann & O'Malley, Mark, 2016. "Impact of Demand Response Participation in Energy, Reserve and Capacity Markets," MPRA Paper 74672, University Library of Munich, Germany.
    4. Devine, Mel & Lynch, Muireann Á., 2015. "A Menu Approach to Revealing Generator Reliability using a Stochastic Bilevel Mathematical Program," Papers WP518, Economic and Social Research Institute (ESRI).
    5. Walsh, Darragh & Malaguzzi Valeri, Laura & Di Cosmo, Valeria, 2016. "Strategic bidding, wind ownership and regulation in a decentralised electricity market," MPRA Paper 71502, University Library of Munich, Germany.
    6. John Curtis & Brian Stanley, 2016. "Analysing Residential Energy Demand: An Error Correction Demand System Approach for Ireland," The Economic and Social Review, Economic and Social Studies, vol. 47(2), pages 185-211.
    7. Lynch, Muireann Á. & Devine, Mel, 2015. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Mixed Complementarity Problems With Endogenous Probability," Papers WP507, Economic and Social Research Institute (ESRI).
    8. John Curtis, Valeria Di Cosmo, and Paul Deane, 2014. "Climate policy, interconnection and carbon leakage: The effect of unilateral UK policy on electricity and GHG emissions in Ireland," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    9. Muireann A. Lynch and Mel T. Devine, 2017. "Investment vs. Refurbishment: Examining Capacity Payment Mechanisms Using Stochastic Mixed Complementarity Problems," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    10. repec:eee:eneeco:v:64:y:2017:i:c:p:186-195 is not listed on IDEAS
    11. Sebastian Miller & Mauricio Vela, 2013. "Are Environmentally Related Taxes Effective?," Research Department Publications IDB-WP-467, Inter-American Development Bank, Research Department.
    12. Walsh, Darragh & Malaguzzi Valeri, Laura, 2014. "Gaming in the Irish Single Electricity Market and Potential Effects on Wholesale Prices," Papers WP488, Economic and Social Research Institute (ESRI).
    13. Miller, Mark & Alberini, Anna, 2016. "Sensitivity of price elasticity of demand to aggregation, unobserved heterogeneity, price trends, and price endogeneity: Evidence from U.S. Data," Energy Policy, Elsevier, vol. 97(C), pages 235-249.

    More about this item

    Keywords

    Carbon Tax/scenarios/taxes;

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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