Energy Taxes

Key point

The OECD ‘Taxing Energy Use 2015’ report compares the taxes on energy operating in 41 countries1 . Ireland’s energy taxes are shown to be relatively high, and above the OECD average2 . These energy taxes allowed us to avoid further increasing taxes on labour; such taxes would have damaged economic performance and slowed recovery. They also contribute towards meeting our greenhouse gas emissions reduction obligations under EU law. This note examines the key findings from the report published in June 2015.

Background

The OECD converts statutory tax rates into effective tax rates per unit of energy and per unit of carbon dioxide (CO2). It is found that taxes on energy use across the 41 countries are relatively low relative to the environmental costs of energy use.

Taxing Energy Use

The taxation of energy use is a primary method employed by Government to curtail energy use deemed detrimental to the environment, and conversely to stimulate energy use deemed environmentally sustainable. However, the OECD finds that energy taxes are poorly aligned with the negative side effects of energy use.
Under the heading of taxing energy use, the OECD considers four sectors, namely transport, heating and process3 , electricity generation, and total economy. The average effective tax rates on energy use are calculated based on euro per Gigajoule (GJ) of energy consumed. Table 1 below shows the rankings for Ireland relative to the OECD average in relation to taxing energy use, and the average price per GJ of energy use.

Table 1 – Average effective tax rates on energy use

150715 T1-page-001

(Source: OECD (2015) Taxing Energy Use)
The transport sector in Ireland has the 10th highest level of taxation in the OECD for energy use . It is almost a third higher (31%) than the OECD average at €15.1 per Gigajoule (GJ). Ireland has the highest taxes in the heating and process sector, with a price of €2.6 per GJ . The countries with the highest heating and process sector energy taxes are shown in figure 1.

Figure 1 – Heating and process, euro per Gigajoule – Top ten countries

150715 T2-page-001

(Source: OECD (2015) Taxing Energy Use)

The OECD average effective tax rate for heating and process is €1.9. Ireland is circa 37% above the OECD average in this category of energy taxes. Conversely, electricity generation has a relatively low tax burden in Ireland (ranked 20th) with an average tax rate of €0.2 per GJ. The Netherlands has the highest average tax on electricity generation (€6.4), followed by Denmark (€6.1), and Austria (€2.6). The average rate among the 34 OECD countries is €0.9. Therefore, energy used in electricity generation in Ireland has approximately a fifth (22%) of the tax burden of the OECD average.
As shown in figure 2 below, the total economy average rate of energy tax in Ireland is the fifth highest in the OECD, at €5.4 per GJ. Luxembourg has the highest total economy tax rate (€6.6), followed by Denmark (€6.3), Switzerland (€6.1), and the Netherlands (€5.9). The OECD average is €3.3 per GJ. Therefore, Ireland’s average rate is circa 64% higher than the average OECD figure.

Figure 2 – Total economy rate of tax on energy use – Top ten countries

150715 T3-page-001

(Source: OECD (2015) Taxing Energy Use)

Taxing CO2 emissions

Ireland’s average tax on CO2 emissions from energy use in transport is €209.5 per tonne of CO2. This is the tenth highest in the OECD. Ireland’s average tax rate on CO2 from transport is 30.5% higher than the OECD average (€160.5 per tonne of CO2).
Taxes on CO2 emissions from heating and process are €36 per tonne in Ireland, which is the second highest in the OECD after Israel (€42.2). The average price per tonne of CO2 for heating and process across the OECD is €11.8. Ireland’s rate is over twice this level.
The total economy effective tax rate on heating and process, and transport CO2 emissions is the seventh highest in Ireland at €77.1 per tonne (48% higher than the OECD average). Table 2 below shows Ireland’s effective tax rates per tonne of CO2, and its ranking relative to the OECD average.

Table 2 – Taxing CO2 emissions, euro per tonne of CO2

150715 T4-page-001
(Source: OECD (2015) Taxing Energy Use)

Conclusion

Ireland’s effective tax rate on energy use is above the OECD average across transport, heating and process, and total economy. It is below the OECD average in the electricity generation sector of energy use. Taxes on CO2 emissions in Ireland rank within the top ten countries for the highest tax burden per tonne of CO2 on energy use. The heating and process sector is taxed significantly higher than the OECD average (twice as much). These taxes have made an important contribution to keeping other taxes lower. Alternative taxes such as higher income tax or PRSI could have impeded job creation.

Notes:

1 The 41 countries are the 34 OECD countries and seven selected partner economies (G20 economies) (Argentina, Brazil, China, India, Indonesia, Russia, and South Africa). The energy use figures all relate to the year 2009.
2 It is important to note that the “OECD average” refers to the OECD 34 countries in this note.
3 Heating and process includes energy used for industrial production and energy transformation, as well as energy used for commercial and residential heating.

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2 Comments

  1. Barry Moynihan 16 Jul 2015 at 11:18 am

    Re “The total economy effective tax rate on heating and process CO2 emissions is the seventh highest in Ireland…. ” …. see paragraph before Table 2. Ought this not read “The total economy effective tax rate on heating, process & TRANSPORT CO2 emissions is the seventh highest in Ireland…. ” ?

    Also: am I to deduce that by “Total economy” (in your figures and tables) you mean the sum of the foregoing elements in the respective tables?

    Thirdly: why, if “Total economy” IS equal to the sum of the foregoing constituent elements, is the total not just called “Total” ? If not, are there other elements and, if so, how is “Total economy” defined?

    Finally: in the Background paragraph you state ” It is found that taxes on energy use across the 41 countries are relatively low relative to the environmental costs of energy use”. That is not addressed in YOUR report – are the environmental costs of energy use fully set out in the OECD report to which you refer (I haven’t got around to checking the latter report just yet. Will do later) ?

    Many thanks for your assistance in understanding the above

  2. News Editor 27 Jul 2015 at 11:41 am

    Hi Barry,

    Well spotted on the omission of the word transport. Total economy, by the OECD definition, is the average effective tax rate on energy use. The total economy is not equal to the sum of the taxes as it is the weighted average of the the taxes that gives the final figure.

    The environmental costs of energy use are estimated by the OECD in the report, calculating top-down estimates of marginal external costs of pollution. The OECD admit that these estimates may not be sufficiently precise, but they do provide a guide as to how environmental taxes are internalising pollution on consumers. The costs are not broken down in the report. However, the argument they make overall that taxes do not reflect the environmental costs of energy use holds. For example, taxes which don’t account for place and time e.g. congestion charges in cities, yet fuel taxes are the same in off-peak hours in rural locations.

    See the press release here: http://www.oecd.org/tax/energy-taxes-misaligned-with-environmental-impacts-of-energy-use.htm

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