Tax breaks can have an unintended negative impact on the environment

A new ESRI study examines the environmental effects of 142 existing and potential fiscal measures including reduced tax rates, tax exemptions, tax allowances and direct subsidies. The study, which was commissioned by the Environmental Protection Agency, examines if these measures lead to behaviour changes that impact on climate change, air quality or land pollution.

It finds that while individual measures can have a relatively small impact, together they have a significant impact on the environment. The most widespread impact is on climate change and emissions, with 98 measures having impact. The least common impact is on water, with just 23 measures having an impact. Just over half of these measures had a positive impact.

The study examines four measures in more detail to quantify their environmental impact: the difference in tax rates between petrol and diesel; VAT on fertiliser; the rebate scheme on diesel tax for the haulage industry; and the possible introduction of an air passenger duty.

The research finds that these individual measures have a relatively small effect but they combine to produce a negative effect. For example, the combined negative effects of the transport measures suggest that total Irish carbon dioxide emissions could be reduced by 1.1 per cent, nitrogen oxide emissions could be reduced by 1.34 per cent and particulate matter emissions could be reduced by 1.47 per cent if the current policies changed.

The study points to the importance of considering the potential environmental impact of all fiscal policy changes, in the context of Ireland’s climate change objectives.

Edgar Morgenroth commented, “The unintended environmental effects of tax breaks should be studied more carefully, as some measures have significant environmental costs. Appropriate reform of these measures could make a significant contribution to reducing Ireland’s greenhouse gas emissions and reduce local pollution.”