Darren O'Rourke (Meath East, Sinn Fein)
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98. To ask the Minister for Public Expenditure and Reform his views on the Economic and Social Research Institute report entitled Carbon Taxes, Poverty and Compensation Options 2020 cited by his Department as proof that carbon tax increases leave the lowest income fifth of households on average better off and reduces poverty, fails to take into account the huge increase in energy prices since its publication; and if he will make a statement on the matter. [51562/21]

Michael McGrath (Cork South Central, Fianna Fail)
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In summer 2020, the Government asked the ESRI to undertake analysis to determine whether the Irish carbon tax could be increased in a progressive manner, with impacts on lower-income households and poverty offset through additional spending on social welfare supports. The resulting report entitled "Carbon Taxes, Poverty and Compensation Options" paper examined how the Irish carbon tax can be raised without increasing poverty and disproportionately affecting low-income households.

The paper stated that expenditure levels of just €50m - €55m, less than one third of the expected revenues raised from a €7.50 increase, were sufficient to counteract the regressive nature of the increase. Allocations of this level would result in a reduction in the poverty rate and could leave the lowest two income deciles better off than before the increase.

In light of the ESRI research and the commitment to ensure that the carbon tax is progressive, the Government has committed to very significant increases in a targeted package of social protection supports in Budget 2022. These supports were selected to counteract the impact of the increased carbon tax on low income households. The specific measures are: 

- An increase to the a Qualified Child Payment of €2 per week for children under 12 and €3 per week for children over 12 - This protects low income families and will reduce child poverty; 

- An increase in the Living Alone Allowance of €3 per week - People living alone are often the elderly most at risk of poverty or people suffering from a disability. These groups are likely to have higher energy needs than average; 

- An increase to the Fuel Allowance of €5 per week - This will compensate a broad range of lower income households (since the Fuel Allowance is means-tested) for the additional energy costs they are likely to incur due to an increase in the carbon tax. This will be combined with a broadening of the threshold for Fuel Allowance eligibility and an increase in the income allowed for the means test that is applied to applicants;

- An increase in the income threshold for the Working Family Payment of €10 per week – Research has found that children in energy poverty have a greater likelihood of respiratory illness. Using carbon tax funds to compensate low paid employees with children will lead to improved health outcomes, particularly when combined with the qualifying child payment.

The total cost of these interventions is projected at €146m in 2022. This will be funded by the additional carbon tax funds of €105m that have been allocated to the Department of Social Protection, with the remaining €41m cost met by the Exchequer.

The focus of the paper was exclusively on addressing the impact of carbon tax increases. However, the 2022 allocation is nearly triple the level of expenditure recommended by the ESRI to ensure that that carbon tax increase is progressive and follows a similarly sized package in Budget 2021. 

This allocation of carbon tax revenue usage was announced in the context of a social welfare budget package worth an additional €558 million in 2022, with total spending on social protection measures expected to reach €23.3 billion. This is supplemented by a 100% Christmas bonus double payment to be paid in December 2021 at an estimated cost of over €313m and immediate implementation of the Fuel Allowance increases.

Analysis undertaken in my Department before the publication of Budget 2022 using SWITCH, the ESRI tax and benefit model, to simulate the impact of the carbon tax increase and the specific compensatory welfare package, estimates that the net impact of the combined measures is progressive. Households in the bottom four income deciles will see all of the cost of the carbon tax increase offset, with the bottom three deciles being better off as a result of these measures. 

I also note that the ESRI in their analysis of Budget 2022, have stated that the budget measures overall will compensate most households for rising prices and will result in lower levels of poverty. The ESRI also specifically noted that the Budget contained well-targeted reforms with clear policy objectives,