Oireachtas Joint and Select Committees

Tuesday, 18 June 2019

Committee on Budgetary Oversight

Budgetary and Fiscal Implications of Climate Change: Discussion

Mr. Frank Maughan:

I thank the select committee for the invitation to appear before it to discuss the budgetary implications of climate change and answer questions members may have.

The Government's new climate action plan which was published yesterday is a major milestone in Ireland's climate policy and represents a step change in our response to climate change. The plan sets out how Ireland will, at the very least, meet its targets for the period to 2030 and puts us on a trajectory to achieve net zero carbon emissions by 2050. The plan will have a strong focus on implementation, setting out more than 180 actions with clear timelines and steps needed to achieve each of them. It will follow a similar approach to that of the Action Plan for Jobs model and include annual updating of the plan with new actions, quarterly reporting on delivery, the establishment of a climate action delivery board to be chaired by the Department of the Taoiseach to hold Departments and public bodies to account, ongoing consultation and feedback which will inform each subsequent plan and ongoing review of changing costs and technologies to inform new actions being developed.

The goals and targets set out in the plan are informed by analysis of the most cost-effective choices currently available to reach our 2030 targets. By articulating a decarbonisation ambition range for each sector, the framework provided by the plan will enable each sector to identify and put in place the most appropriate policy tools to deliver the stated ambition and enable Ireland to meet its 2030 targets.

As the committee will be aware, an objective of the Minister in finalising the plan was to follow closely the recommendations of the report of the Joint Committee on Climate Action, published in March of this year. That report was informed by the earlier work of the Citizens' Assembly, which reported in 2018. I will refer briefly to the main points mentioned in the committee's letter of invitation to the Department.

The first issue we considered was the revenue implications of increasing the price of carbon. The Government is committed to carbon pricing as a core element of the suite of measures to reduce greenhouse gas emissions in a sustained manner over time. Ireland is one of a minority of countries globally to have already implemented economy-wide carbon pricing, through its implementation of the EU's emissions trading system, ETS, for electricity generation and large industry and through a national carbon tax that applies in other sectors of the economy. The climate action plan, while recognising that taxation decisions are primarily a matter for the Minister for Finance, commits the Government to implementing a carbon tax rate of €80 per tonne by 2030, with a trajectory of increases over successive annual budgets. This was recommended by the Climate Change Advisory Council in its 2018 annual review and was also broadly endorsed by the joint committee in its report. There is a clear rationale for both increasing the rate and for clearly signposting the desired future rate of carbon tax, as these actions provide a strong signal to households and firms of the need to invest in low-carbon alternatives where possible.

I will not dwell on the potential additional revenue that may be raised through the carbon tax. As the committee will be aware from tax strategy group analysis, each additional €5 in the rate of carbon tax could raise in the region of an additional €100 million per annum. The Government is, of course, concerned about the distributional implications of increasing the rate of tax. I understand the Department of Finance is considering a number of options in respect of the use of any additional carbon tax revenue in this regard. In addition, the Department is consulting on how additional revenue raised by increasing the carbon tax could be used. My colleagues from the ESRI have provided information on their detailed research programme examining both the revenue and emissions impacts as well as the distributional aspects of increasing carbon tax.

Another issue we considered is the medium-term expenditure requirements to achieve our EU 2020 and 2030 targets. The overall quantum of capital resources available to Departments and agencies is set out in the national development plan, NDP, for the period to 2027 in the context of the Project Ireland 2040 framework. The NDP allocates approximately €30 billion in Exchequer and non-Exchequer resources to climate action and sustainable mobility over the decade, the allocation of these resources to individual Departments being subject to the normal Estimates and budgetary process. However, achievement of the Government's climate policy objectives and the particular targets set out in the plan as published will not only rely on Exchequer funding. The plan also foresees a role for taxation policy and regulatory measures to bring about reductions in our emissions. These include setting a long-term trajectory for the carbon tax to change long-term behaviour and decision-making to encourage investment in more sustainable choices, and new regulations to end certain practices, such as phasing out oil and gas boilers in homes or banning the sale of new petrol or diesel cars from 2030.

The low-carbon transition will require significant private investment alongside Exchequer expenditure on a sustained basis over a number of decades. The Government will seek opportunities to leverage private finance with its Exchequer funding. For instance, in the first call of the climate action fund, which has an overall envelope of €500 million, a €77 million commitment from the fund was able to leverage a total investment of €300 million. NewERA will continue its work with the commercial State companies to identify priority opportunities in key sectors to mobilise private investment towards assisting in meeting our climate objectives.

The plan also envisages new ways of spending the Exchequer resources we do have. To maximise the impact of the €3 billion that was allocated to home energy retrofits under the NDP, we are reforming the current system to create a new retrofit delivery model. This envisages grouping houses together so that one contractor would retrofit batches of homes in the same area, developing smart finance products, with low-cost financing linked to energy performance improvements, and easy payback methods whereby households can pay back the cost over a longer period through, for example, a voluntary increase in their local property tax or electricity bill.

Another issue to consider is the cost of missing our targets. Ireland is required under EU rules to reduce emissions covered by the non-ETS sector by 20% relative to 2005 levels by 2020. Current projections by the Environmental Protection Agency, EPA, indicate that relevant emissions could remain at between 0% and 1% below 2005 levels by 2020. The relevant EU legislation does allow member states to meet their targets by means of unused emissions allowances from earlier years or through purchasing credits from other member states or on international markets. This will allow Ireland to remain compliant with the EU rules even though our emissions will not have reduced to the mandated level by 2020.

The Government spent approximately €120 million in total on the purchase of credits between 2007 and 2009, for which sum approximately 8.5 million credits were received by the State. Some of them were used towards Ireland's compliance with the Kyoto Protocol first commitment period in the period 2008 to 2012. On the cost of purchasing additional credits to meet our targets, the Department currently estimates the cost to be in the region of €6 million to €13 million, depending on the price and final quantity of allowances required. On 2030 compliance, the same arrangements in regard to purchasing credits will apply under EU rules. The Government’s objective, however, is to avoid having to rely on this option.

With regard to other channels through which the budgetary process could assist in addressing climate change, robust rules on how we value the shadow price of carbon, as part of project appraisal for all public capital investments, are essential to avoiding expenditure that locks in long-term fossil fuel consumption. To that end, the Government, through the Department of Public Expenditure and Reform, is currently reviewing the PSC to improve the calculation of a shadow price of carbon. This proposal would see future Government capital investments valuing carbon at a level which will see the shadow price increase to €32 per tonne by 2020, €100 per tonne by 2030, and €265 by 2050.

The climate plan also includes a new commitment to ensure that all Government memoranda and major investment decisions are subject to a carbon impact and mitigation evaluation. The objective is to incorporate this requirement into Cabinet procedures, regulatory impact assessments and project appraisal processes. Consistent application of these rules will allow decision-makers to better understand and appreciate the climate consequences of their investment options.

That concludes my opening statement. My colleagues and I are available to answer any questions members of the committee might have.


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