The effects of an incremental increase in the Irish carbon tax towards 2030

This paper investigates the economic and environmental impacts of an incremental increase in the rate of Irish carbon tax. For this analysis an intertemporal computable general equilibrium (CGE) model, namely Ireland Environment-Energy-Economy (I3E), is developed. This model allows for the investigation of industry level impacts as well as economy wide impacts by explicitly modelling sectoral interlinkages. We examine two potential future paths of carbon tax increases and the impacts of recycling carbon tax revenues through a lump sum transfer to households. Our results show that LPG, diesel and gasoline prices will be impacted most with increases of up to 10% in 2020 compared to a baseline scenario. The energy and transport sectors will be hit the hardest with losses of up to 4% of value added in 2020. Households face higher overall prices, with an up to 2.4% increase in the CPI in 2020 which lowers household real disposable income by 0.24% in 2020. Though income increases as prices rise, households consume less and save more in the medium-run. Driven by this decline in real private consumption, real gross domestic product declines, though at a negligible rate of 0.4% in 2020. Overall emissions in 2020 fall by 18% compared to the baseline. However, this is still far short of EU targets.