Govt revenue from taxing fossil fuels expected to drop

New documents published by the Department of Finance have warned that the Government’s revenue from taxing fossil fuels will drop as consumers move to using electric cars and heat pumps.

The Tax Strategy Group paper says that as the reliance on fossil fuels declines for energy and transport, the revenue raised by environmental taxes will also reduce.

The paper takes into consideration Ireland’s legally binding climate commitment to reduce Greenhouse Gas (GHG) emissions by 51% by 2030 and to achieve carbon neutrality by 2050.

It highlights that over the next six years (from 2025 to 2030), it is projected that the net carbon tax volume levels of mineral oils, solid fuels and natural gas usage will fall, and estimates indicate that net carbon tax energy related CO2 emissions will also decline.

In the longer term, this will mean revenues raised by environmental taxes, such as the Carbon Tax, derived mainly from home heating, petrol and diesel, will decrease and will need to be replaced by other revenue raising measures.

The group’s paper notes that while taxation of energy products should incentivise consumers and industry to make better choices for the environment, policy consideration of any tax measure needs also to be cognisant of a range of factors.

These include the impact on the Exchequer, availability of viable alternatives, competitiveness impacts, potential regressive impacts and interaction with adjacent policy measures.

Budget options to raise money

The paper recommends budget options, including fiscal measures, to potentially raise money for the Exchequer and encourage behavioural change linked with reducing road transport emissions.

It suggests if a 1% VRT rate increase was considered across bands 11-20, such as hatchbacks and SUVs, which would only affect cars with above average emissions, then it is estimated to raise €28 million based on 2024 registrations.

While increasing the VRT Nitrogen Oxide surcharge by €5 per mg/km across all thresholds would raise €15.5 million (based on 2024 data).

It also examines emissions-based VRT for Category B vehicles or light commercial vans, suggesting an option for an increased rate of 15% for vehicles with emissions of 261g/km and over.

According to data from SIMI to year end in May, the market share for light commercial vehicles is 93.2% diesel and 4.4% electric.

However, there is growth in the EV market share compared to 2024 figures, although it also noted a year-on-year decline in light commercial vehicle registrations.

Based on Revenue data from 2024, the paper suggests the net impact of the introduction of a surcharge rate of 15%, taking into account the 8% rate effective from July, for vehicles with emissions of >260g CO2 per km is estimated at being in the region of €1 million.

It also outlines an option to reduce the Benefit in Kind (BIK) liability for zero emission vehicles to increase the uptake in the corporate fleet, and future options that may include the introduction of an emissions-based BIK rate for vans.