Green diesel has traditionally been around half the price of ordinary road diesel, due to favourable tax treatment. The price goes up in line with the oil market and there had been an upswing earlier this year, moderated in recent months. But it also rises with the carbon tax, currently €33.50 per tonne. The tax was increased by €7.50 in the budget last October and green diesel rose 1.5c/l as a result, as did other fuels. Another increase in carbon tax is highly likely in Budget 2022. How far could the carbon tax go?

Chances are there will be an increase at about the €7.50 level every year for the foreseeable future. Calculations of the ‘correct’ level for a universal carbon tax, if there were ever to be one, often come in at around €100 per tonne, believed to be the figure most consistent with a net zero target for carbon emissions, and it would take nine budgets to get there at an annual pace of €7.50 per budget. Last year’s increase of 1.5c/l could be repeated each year to the end of the decade.

Diesel vs MGO

There is a temptation, to which some environmental campaigners are prone, to see the full differential between road diesel and the green variety – called MGO for ‘marked gas oil’ in the language of the Revenue Commissioners – as a special deal for agriculture, but this is not the case.

The full rate of excise on road diesel is best seen as a charge for road use, along with purchase and annual taxes. Diesel used off-road, on construction sites and in stationary engines, for example, does not pay the full whack either. Building, maintaining and policing the road system is costly and the user is expected to pay.

Tractors and other agricultural vehicles do almost all their mileage on the farm – some never leave the farm at all – and are not significant road users. Nor are diggers and other construction vehicles. They should pay the carbon tax element, since carbon emissions are the same on- or off-road, but not the component that is a charge for road use.

Most of the gap between the price of road diesel and green diesel is not a subsidy to farming, construction or to the operators of stationary engines.

‘Motor’ tax

Of the three motoring taxes, the purchase tax, annual tax and fuel tax, it could be argued that the tax on petrol and road diesel is the closest to a user tax, since it varies with mileage, while the other two are invariant.

The road diesel tax has attracted attention in the recent reports of the Tax Strategy Group at the Department of Finance (the next one will be published within weeks in the run-up to October’s budget) because it is levied at a lower rate than the tax on petrol.

The difference, adding in the VAT effect, has been around 15c/l. The discount was originally intended to assist the commercial vehicle fleet, but diesel subsequently became the most popular fuel for private cars and the Exchequer has lost more revenue from the discount than had been intended.

There is no discount in the UK, so road diesel is cheaper in the Republic, giving rise to ‘fuel tourism’ and making the Republic’s emissions look somewhat higher than they really are. The price differential for petrol is lower and fuel tourism barely worthwhile for Northern Ireland motorists.

There is a further issue about taxing diesel. Diesel gives off other pollutants in addition to carbon dioxide, including particulates and nitrogen oxide.

Health officials believe diesel usage in cities should be discouraged and the Tax Strategy Group has outlined a path towards the equalisation of the excise on petrol and road diesel.

Last October’s budget, when prices had fallen, presented an open-goal opportunity to commence the process, unfortunately fluffed. Since agricultural users do not operate in urban areas where air quality is a health concern, this equalisation would not affect the excise on green diesel.

Taxing diesel

Longer-term, there is, at some stage, going to be a reconstruction of the taxation regime for motoring. If the car and light commercial vehicle fleet is electrified, the Department of Public Expenditure and Reform has estimated that the loss of revenue could range up to €1.5bn per annum.

The most obvious way to replace the lost revenue is to tax road users directly, via some form of electronic road pricing, which would collect per kilometre travelled with an extra charge for peak-time usage in congested cities and towns.

Rural dwellers should not get too nervous about their higher car reliance and higher annual mileage – urban motorists would likely end up paying the biggest share, the penalty for congestion.