Annual State subsidies for fossil fuels came out at €2.9bn in 2021, according to a report released last September from the Central Statistics Office (CSO) and which attracted headline treatment. It cautioned that 2021 was the second year of COVID-19 restrictions and data for the more normal year of 2022 will not be available until the autumn.

They could show a return to a higher figure, probably above €3bn, and it is natural to question why the State should be subsidising the use of fossil fuels when cutting carbon emissions is the priority.

It depends what you mean by ‘subsidy’ and the CSO explains that it includes concessionary indirect tax rates like excise duty as well as direct subventions.

Fossil fuel

If there is a standard rate of tax applicable to a fossil fuel (coal, gas, oil) but the rate of tax is lower in certain favoured uses, the tax income foregone is regarded as a subsidy to the activity concerned. An example is the exemption from excise for jet kerosene, the most common fuel used by airlines. The CSO reckons the tax foregone, comparing aviation’s zero charge to the rates levied on other sectors which use fuels with similar emissions, is around €300m a year.

By coincidence, the tax revenue foregone through the lower tax rate on green diesel, used mainly in farming, is also around €300m a year, and it is inevitable that there will be calls for a reduction in these tax concessions.

For aviation, an even bigger anomaly is the absence of VAT on airline tickets and the European Commission is seeking to increase the rates within the EU. What about green diesel? Is the lower tax rate really a subsidy? If green diesel paid the same excise as ordinary motor fuel and was also liable to VAT, the retail price would be higher by perhaps 60 c/l. But the rationale for equalising prices is not clear-cut.

Road system

Motorists pay directly and indirectly for the costs of the road system, including construction, maintenance, renewal and traffic policing. Direct charges such as tolls raise only around one-tenth of the total cost and are applied at only a handful of locations around the country. Much of the annual revenue comes from fuel taxes, both excise (including the carbon tax and VAT) but also from vehicle purchase taxes and the annual licence fee. As it happens, the total annual cost of the road system is roughly in the range €4.5 to €5bn and so is the annual revenue from road tolls, parking fees, taxes on vehicles and taxes on fuels. So road users, as a group, pay roughly what it costs to provide and maintain the system. The taxes related to usage, principally levied on fuel, do not reflect the externality of congestion: replacing them with a per-kilometre charge would be only a small improvement, since kilometres travelled in built-up areas create far more congestion costs than the average.

Many cities are considering, or have already implemented, congestion charging schemes and the issue will inevitably enter the political agenda in Ireland, especially for Dublin and the larger provincial centres.

In the meantime, the fuel tax revenue is under pressure. Reports from the Department of Finance’s Tax Strategy Group and from the Fiscal Council have drawn attention to the erosion of fuel tax revenues as the fleet converts to electric traction. Climate policies, if they are successful, have a sting in the tail, since they discourage demand for high-tax products and services. The retail price of motor fuel in most European countries is more than double the ex-refinery price, so there is a tax mark-up exceeding 100%. This helps to wean road-users off high-emission behaviour but at a cost in revenue foregone. It also threatens the recovery of road system costs from users, which is achieved, if imperfectly, by the current range of taxes and charges.

When the taxation of motoring is viewed as a cost-recovery exercise, the preferential excise rate for green diesel no longer looks like a handout to farmers. Tractors are not significant users of the road system. Indeed many tractors rarely leave the farm at all, and there are no costs to recover. It would be interesting to know what is the average annual mileage travelled by tractors on public roads. It may have been greater 40 or 50 years ago, when farm households owned fewer vehicles and were more inclined to use the tractor for non-farm journeys.

Whatever mileage is still clocked up must be largely on minor and uncongested country roads. The farm organisations should be concerned that the Irish arrangements for green diesel are being characterised as a subsidy to farming. Perhaps they could arrange a survey designed to quantify the limited use farmers make of the public road system.