Oireachtas Joint and Select Committees
Wednesday, 14 November 2018
Joint Oireachtas Committee on Climate Action
Third Report of the Citizens' Assembly: Discussion (Resumed)
I welcome members and viewers who may be watching proceedings on Oireachtas TV to the twelfth public session of the Oireachtas Joint Committee on Climate Action. At the request of the broadcasting and recording services, members and visitors in the Public Gallery are asked to ensure their mobile phones are turned off completely or switched to flight mode.
We were having an issue getting into public session. I have already welcomed all the viewers watching proceedings on Oireachtas TV and asked everyone to turn off their mobile phones or switch them on to flight mode.
I extend a warm welcome on behalf of the committee to our witnesses from the Department of Finance: Mr. Derek Moran, Secretary General, Mr. John McCarthy, Ms Mary McSharry and Mr. Gerry Kenny. I also welcome Mr. Robert Watt, Secretary General, and his colleagues, Ms Patricia Coleman, Ms Mary Austin and Mr. Ken Cleary from the Department of Public Expenditure and Reform.
I advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing ruling to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.
I call Mr. Moran to make his opening statement.
Mr. Derek Moran:
I am pleased to have the opportunity to participate in the discussion. I will keep my opening comments brief.
The recent report published by the UN's Intergovernmental Panel on Climate Change, IPCC, highlighted the magnitude of the global challenge. Addressing the threat of climate change is a priority for Government as is reflected in the programme for Government. It is a whole-of-government issue that requires joined-up effort.
In her introduction to the Citizens' Assembly's third report, the chairperson acknowledged the topic of climate change is "incredibly broad, wide-ranging and affects us all in one way or another". There is no single solution to addressing the challenge of climate change and a collaborative effort is required across Government involving a range of inter-related actions and actors. A targeted balance between Exchequer-supported expenditure, taxation policies and regulation are necessary to deliver upon our climate change objectives.
Tax policy has an important role to play in contributing to our decarbonisation objective but the complexity and need for balance in policy actions was recognised in the assembly’s recommendations. The qualification of recommendation No. 3 on taxes on carbon intensive activities referred to the need to protect the poorest households and a recognition, in ancillary recommendation No. 3, that the impact of the agriculture sector on the economy, particularly the rural economy, has to be taken account of in transitioning that sector towards models of production.
Taxation and pricing is a significant aspect of the contribution the Department can make in this regard. Other issues include our ongoing work with our agencies such as the launch of Ireland’s sovereign green bond, Ireland Strategic Investment Fund, ISIF, investment supporting green technology and the promotion of the sustainable and green finance sector as part of the work under IFS 2020.
Our existing taxation system is positively contributing to climate change. The extent to which it can, and should, do more is a matter of ongoing policy discussion. Recommendation No. 3 highlights an acceptance of paying higher taxes on carbon intensive activities, subject to the qualifications such as the spending of the increased revenue on measures to support the low-carbon transition. The Government is committed, in the national mitigation plan, to carbon pricing as a part of the suite of policy measures to address and reduce greenhouse gas emissions over time. However, we also need to understand its impact on low-income households, on households for whom at present there is no realistic substitute to the consumption of carbon commodities for home heat and transport. The assembly recognised this challenge for poorer households in its qualifications to the recommendation.
Understanding the impact of carbon pricing on emissions is imperative. In this regard, the Department has worked with the ESRI and published a report in October 2018 that provides a better understanding of the environmental, social and economic impacts of increasing carbon tax rates. It found that a doubling in carbon tax to €40 per tonne would result in less than a 5% decrease in greenhouse gas emissions, which is a positive impact from just one measure. While this would be a positive contribution to our objective, it also underlines the importance of pursuing complementary policy levers in conjunction with taxation policy to support our transition to a low-carbon economy.
To build on this work, the ESRI is currently developing a multi-annual model to better inform our decision-making into the future which will be capable of modelling a carbon tax pathway which captures behavioural change on the part of producers and households alike in response to policy initiatives such as a phased increase in carbon tax rates over time. On budget day the Government reaffirmed the intention to put in place a long-term trajectory for carbon tax increases out to 2030 in line with the recommendations of the Climate Change Advisory Council, CCAC, and this committee. This is an explicit acknowledgement that carbon pricing and carbon tax, in particular, has a key role to play in the transition to a low-carbon economy.
In recommendation No. 9 of the report, the vast majority of members of the assembly recommended the State should immediately take steps to support the transition to electric vehicles. To support the achievement of this goal, a number of tax incentives are in place to encourage the uptake of electric vehicles, EVs, and more carbon-efficient vehicles. For example, in addition to the vehicle registration tax, VRT, relief of up to €5,000 and the Sustainable Energy Authority of Ireland, SEAI, purchase grant of up to €5,000, which are in place, a 0% rate of benefit-in-kind, BIK, on EVs was introduced this year. A new accelerated capital allowances scheme for gas-propelled vehicles and refuelling equipment is being provided for in Finance Bill 2018, designed to encourage the uptake of gas-propelled commercial vehicles as an economic and environmentally friendly alternative to diesel. Ireland's CO2 based VRT and motor tax have been redesigned towards incentivising the uptake of lower emissions technology, whereby the higher the emissions, the higher the tax. This charging system was introduced in 2008. In January 2013, a revised banding structure was also introduced for both motor tax and VRT to take account of technological differences. A zero emissions band for electric vehicles was also introduced for motor tax purposes. The introduction of these measures has been effective in influencing purchasing decisions in favour of more fuel efficient vehicles, with a significant increase in new vehicle purchases in the lower band categories. In 2009, only 13% of vehicles registered were in the 0g to 120g band; it has not increased to 77%. From virtually none, there are now approximately 4,000 electric vehicles on Irish roads.
The launch of Ireland’s first sovereign green bond for €3 billion by the National Treasury Management Agency, NTMA, on 10 October is a significant development, as it will assist in funding the Exchequer investment committed. While the proceeds of the bond are remitted like all other issues to the central fund, the yields will be channelled to projects with environmental benefits. Eligible green project categories for the first Irish green bond issue include sustainable water and waste management, clean transportation, environmentally sustainable management of living natural resources and land use, renewable energy, energy efficiency and climate change adaptation projects. The issuance of the bond was met with strong demand with a total order book of more than €11 billion.
With regard to the imperative of mobilising private sector capital, I note the important work of IFS2020, which has included green and sustainable finance as a strategic priority in the 2018 action plan. Last week, Sustainable Nation Ireland, which has a role under the IFS2020 strategy to support and promote Ireland as a green and sustainable finance hub, co-hosted this year’s EU annual climate innovation summit. The summit was held on 6 to 8 November and attended by more than 600 decision-makers from Ireland and Europe.
Officials from the Department have also worked closely with Deputy Pringle on the Fossil Fuel Divestment Bill 2016, which was passed by the Dáil in July and which I believe is before the Seanad this week. The Bill requires the NTMA, as custodian of the ISIF, to endeavour to ensure it does not directly invest in a fossil fuel undertaking and to divest from an investment which is or becomes a fossil fuel undertaking.
At a micro level but in keeping with recommendation No. 2 of the report on retrofitting and regeneration of public buildings, the recent renovation of the Department's offices in Government Buildings has resulted in annual electricity bill savings in the region of €60,000 per annum. In this redevelopment we were aware of the need to significantly reduce our energy footprint.
I again thank the committee for the opportunity to discuss the report and recommendations of the Citizens' Assembly, which is an important aspect of the national dialogue on climate action. Progress is being made, but we still have a long way to go with significant challenges ahead.
Mr. Robert Watt:
It is a pleasure to be here. As the committee will be aware, we have a significant challenge in respect of climate policy. I will set out why we think this is, what we can do about it and the specific actions that are relevant to our Department. The climate is a public good. The story of modern humanity is one of its ability to conquer the elements but it is hard for us to conceive of a world radically altered by rising temperatures. This perception gap collides with our well-known bias towards the immediate. In general, we are bad at sacrificing now to benefit later. This effect is compounded when it comes to climate change because we have never previously had to deal with a situation where the consequences of a problem are so far removed from the actions we must take to deal with it. The price that will be paid for the emissions we release into the atmosphere today will be borne by our children and their children. Naturally, Departments focus on the interests of the public and society. The determination of the public interest is filtered through the views expressed by their stakeholders and, ultimately, the political system. Due to our biases, we underestimate the impact of our current behaviour on the climate, and continue doing business as usual. This status quobias is reflected in our approach to climate policies.
The actions we have been pursuing to date have evolved to be compatible with existing policy priorities in a variety of areas rather than specifically aimed at delivering the change we need at the scale required. We have pushed open doors in respect of certain policies where the evidence suggests that reductions in emissions on the scale required will involve significant winners and losses and have significant consequences for society. I have described a well-recognised problem. The adverse effects of emissions fall on society collectively rather than on those individually responsible for their emission. They are external to the market or externalities. There is not enough incentive for individuals, whether businesses or consumers, to reduce emissions. The best way to address these externalities is to place a price on them. The Europe-wide emissions trading scheme, ETS, is an attempt to do this for emissions in sectors, such as electricity generation and other high emitting sectors. Given that every installation has to pay a price for every tonne of emissions it releases, it bears a direct cost for its emissions and is incentivised to find new and creative ways of reducing them. Even with the flaws of the ETS, the impact of pricing carbon in power generation has seen emissions from that sector consistently decline across Europe.
With an effective mechanism in place for the ETS, the primary focus of policy is to reduce emissions in the non-ETS sectors where the liability for not compliance rests with the State. Do we have enough least cost abatement options in the policy system? The biases I have outlined translate into a basic principal-agent problem, which is significant in this area because responsibility for climate action rests with the Minister for Communications, Climate Action and the Environment, but responsibility for policies to reduce non-ETS emissions fall across many Departments and agencies. Like other countries, we have structures in place to try to address this problem but we should consider whether these structures are likely to be sufficient or if they need to be complemented by more stringent central mandates or perhaps, even replaced by mechanisms such as making individual Departments or Ministers more directly responsible for specific emission reductions targets in their sectors.
Irrespective of the type of structures we have in place, we need to develop new climate policies and measures and we need methodologies to assess options across sectors. There is no easy way of deciding whether we should prioritise actions in any one given sector. That is why the first question that we should ask of any proposal is how does this initiative help us meet our climate targets and at what cost does it do so. We need to know the marginal cost of abatement for potential options. The committee has been discussing this in recent months. Once we know where the economic opportunities are, we can have a proper discussion about the policy trade-offs and make progress in respect of the options we face. As Mr. Moran outlined, carbon pricing through the ETS or taxation allows market discovery. This mechanism allows market agents to establish least cost opportunities and provides them with the incentives to take appropriate action. These market mechanisms may need to be supported by expenditure measures to encourage, for example, early adopters. It may also be underpinned by regulations that can provide investment certainty to private consumers and businesses. A tangible example in this area is Government policy on EVs. There are generous supports available for such vehicles at the moment, both expenditure and taxation. As the technology advances and the cost of an electric vehicle becomes competitive with that of a fossil fuel vehicle, it will no longer be appropriate to reward early adopters. Instead, the role of Government will be to ensure that the regulatory environment supports EV drivers, ensuring that there is a sufficient supply of charging points available for example and there is competition in the supply of electricity through these charging. In the interim, until there is a critical mass sufficient that the market can provide this EV infrastructure, its development will be funded by Government.
Regarding investments funded by the taxpayers, decision-makers need to reflect a realistic estimated shadow price of carbon to ensure decisions reflect the future costs of emissions and, of course, the benefits of abatement. The Department of Public Expenditure and Reform is contributing to this policy work with the levers at our disposal. The mission of the Department is to serve the public interest by supporting the delivery of well-managed, well-targeted and sustainable public spending. When it comes to climate change, this means public spending that supports the achievement of Ireland's low carbon transition in the most cost effective manner. It means targeted expenditure while allowing market mechanisms to deliver carbon reductions in the most efficient manner. With regard to project appraisal, we have published some significant proposed reforms to the public spending code. In a major departure, we will now require all Government investment projects to price any future greenhouse gas emissions at the estimated cost that society will have to bear in reaching our climate targets. In effect, this triples the cost of greenhouse gas emissions that applies today, with the price reaching €32 a tonne by 2020, €100 a tonne by 2030 and €265 a tonne by 2050. This responds to a criticism that has been made of the public sector code for some time, which is it is underpricing the future cost of carbon and needs to reflect a much higher price in decision-making, and we have taken steps to address that concern. These moves will reduce the economic viability of certain projects that produce emissions and critically place a high value on projects that cut or abate emissions. We are also lowering the discount rate that applies to Government investment appraisal from 5% to 4% and for long-term projects, this discount rate will decline over time. These reforms mean that investment decisions must fully reflect the climate consequences. Finally, the Irish Government Economic Evaluation Service, IGEES, was created to enhance the role of economics and value for money analysis in public policymaking. IGEES has conducted reviews of areas of climate-related expenditure and will continue to do so in the future. This is a major task for the system in our Department and others to assemble the evidence required to inform Government of the decisions taken. Significant work is required to consider options, how much they cost and what will be the emissions reductions from these options.
In summary, we are supporting policies to price carbon. We believe incentives matter and the best way of encouraging behavioural change is to place a price on the behaviour that we want to change and encourage people towards the alternatives. Applying a trivial charge per plastic bag, for example, lowered plastic bag use by 95%. I know in that case there was a clear significant alternative so the elasticity of demand was high in terms of the response to any price change and that is not exactly analogous or comparable to climate, depending on the type of change we are considering. It shows, however, how price changes can affect behaviour depending on the availability of substitutes and alternatives. On a larger scale, in the UK as recently as 2012, 40% of electricity came from coal. This year, up to the middle of the year at least, just 6% of their electricity came from coal. That is a significant change in fuel mix in the electricity sector.
The second action is having a shadow price for carbon for Government decisions that properly reflects the cost of emissions. Just as prices matter to the individual, so too they matter for Government decision-makers. We are now pricing the carbon emissions of any new Government investment at the price it will cost us to eliminate those emissions at a later date. This raises the bar and will help to avoid investments which may lock us in to high carbon patterns of living. Third, developing least cost options by estimating the marginal abatement cost of options and making effective climate policies will involve hard choices and trade-offs. To enable these choices to be made, we must provide Government with the evidence that allows it to compare and contrast climate measures from across a wide variety of sectors. This means examining the progress each measure will make towards our targets and the potential cost associated with them. We are working with other Departments to ensure that when the Government is considering climate policy, it has the necessary information to make decisions. Fourth, we are examining structures to ensure that we address the principal-agent problem and the Department is working through the existing climate structures established at Government level. We need to ensure that we have the necessary structures to drive this change across Government, reflecting the scale and urgency of this challenge.
Our Department leads in a number of areas on climate change. The Office of Government Procurement is actively working with the Department of Communications, Climate Action and Environment to update our procurement guidelines to ensure that we can source goods, services or works within the public sector, with a reduced environmental impact.
Project Ireland 2040 contains a commitment to the effect that every building in the public stock will achieve an energy efficiency rating of at least B by 2030. To realise this commitment, the OPW is working with the Department and the SEAI on a pilot scheme. In 2012, 12 buildings, including our building on Merrion Street, underwent significant energy efficiency upgrades. A further 50 buildings were upgraded this year and it is planned to upgrade another 40 in 2019. The evidence from the pilot is that this will allow us to develop a programme sufficient to reach the target set out in Project Ireland 2040. These initiatives are primarily financed by the Exchequer.
Ireland cannot solve this problem on its own, particularly in view of our scale and our contribution to global emissions. However, we must show that as a developed country we are capable of making the necessary changes.
Overcoming the various biases that relate to our society and the other societies to which I referred earlier will require the kind of commitment that cross-party committees can deliver. I do not believe this committee should underplay the challenges we face. Addressing our emissions will mean short-term challenges and pain for individuals and groups but it will benefit us in the long term. I have a concern that if we promise a society, people or individual groups that this will be easy or cheap, we will not build the kind of support necessary to deal with the difficult decisions ahead.
I have one question on the national development plan, NDP, before I hand over to my colleagues. Some €22 billion is earmarked for climate action measures and €8.6 billion for sustainable mobility in the next ten years. I understand Mr. Watt is chairperson of the Ireland 2040 Delivery Board. Will he speak to us about the board's work? There are many groups and boards at departmental level. What is the work plan for the delivery of the climate action side of the national development plan? Has the carbon impact of that been assessed?
Mr. Robert Watt:
The delivery board is chaired by myself and the Secretary General, John McCarthy, at the Department of Housing, Planning and Local Government. As the Chairman is aware, Project Ireland 2040 brought together the NDP - the traditional capital plan for Governments - along with the national spatial planning framework that we devised. We believe this is a very important change. For the first time, we have a spatial plan for the country which sets out where we hope new homes will be built and where people will live in the future, along with a capital plan. They reinforce each other so that the decision-making relating to the spatial dimensions of our planning are reflected in capital spending and vice versa. I set up this group, which in effect has the main Departments and delivery bodies that are responsible for delivering the plan. We have met four or five times so far where we discussed the challenges relating to delivering the plan. We have had presentations from each of the Departments and agencies setting out what they are doing and the challenges and timeframes involved. Currently, we are focusing on issues such as those relating to value for money, construction inflation, planning and how to ensure that we can deliver on the targets set out for Government.
That is separate from specific issues relating to climate. There are separate structures within Government in terms of climate. Our focus is on delivering the overall plan of €116 billion. Within that, there are issues relating to climate. There is the energy efficiency measures in terms of the retrofitting scheme. We receive updates on that from the Department and the SEAI. There are other investments relating to public transport, the metro, buses and other matters which fall within that remit. The board is focused on delivering on the plan.
When it comes to all the dimensions of climate action, there is a separate committee which is chaired by the Department of the Taoiseach, at assistant secretary level. It is a senior officials group that is charged with co-ordination and delivery of climate action across the main Departments of Government. They feed into each other in that progress with Project Ireland 2040 has an impact on our various targets. Their view on the evolution of climate policy will have an impact on the way we deliver Project Ireland 2040 in the years ahead.
Mr. Robert Watt:
For example, in the energy efficiency area, there is a budget of €4.5 billion in respect of retrofitting. The Department has to come forward with its plans in terms of how it will ramp up the various schemes and initiatives to retrofit homes and meet our commitments within the plan. In the first instance, it is for the Departments to prioritise. We have set out an envelope of spending for the first five years of the plan which is quite detailed in terms of where we will spend in different areas. The Department is charged with delivering on that. However, that might change. If, for example, there is a delay in some initiative or project, another project might take its place in terms of the queue. Ultimately, however, the Department's programme is based on the allocation it has been given.
How do we climate-proof and prioritise when other Departments are coming to Mr. Watt's Department looking for various amounts of money? Is there an engagement in respect of climate action? How will this project be more environmentally efficient than another project? Does that assessment take place when Mr. Watt's Department is working with other Departments?
Mr. Robert Watt:
When it comes to looking at detail of the climate impact on policy changes, work has been done - more needs to be done - on establishing exactly what the climate impact would be and the cost of those policies. The technical research and modelling group, TRAM, is looking at that in detail. It is fair to say that a good deal of work needs to be done to establish across the system the initiative that will give the greatest bang for our buck, which will reduce emissions and at what cost? A good deal of work needs to be done within individual Departments. For example, within the retrofitting space, what types of initiatives will move us forward in terms of improving the energy efficiency of the housing stock? It is not a straightforward issue. It is a question of financing and whether households have the ability to raise the money required. Are they motivated? Do they see the benefit of retrofitting? Are they willing to overcome the hassle of retrofitting their homes? There is a variety of financial and other barriers that would impact, so it is up to the Department to establish the best options and then debate the case for funding. Within the envelopes we have set out there is significant funding, for example in respect of retrofitting.
The general point I am making is that a particular Department could come forward with a project which might seem like a cheaper option but which, in the long term, might have a negative climate impact. That assessment needs to take place. Every Department fights for its own amount of money. What is the oversight in respect of climate? Who is adjudicating in terms of the long-term effects that will have on the environment, be it transport, education or whatever Department?
Mr. Robert Watt:
One of the issues, which was a gap in the system, was the price we put on emissions. We had a price which was under €10 per tonne of carbon. In the revised public spending code, we have very significant increases in the price per tonne of carbon. That will discourage investment and will lead to an increase in emissions or lock us into a particular pattern of living that is carbon intensive. However, it will also provide clear incentives to prioritise projects that will lead to abatement. That will have a material impact over time on the choice of projects. Ultimately, it depends on whether the system has done the work to establish those right policies and whether we have the right structures to ensure they are fed in appropriately and are prioritised. That comes down to the priorities of individual Departments as well as to political leadership across the system.
I welcome the two Secretaries General to these very important hearings. My first question is for Mr. Moran. What is his view of the taxation system? Does he believe there are environmental goals attached to it? Do we have the vision to move to a low-carbon economy? In other words, what major changes are required in current policy to ensure we can make it more proactive? Do we have that vision in the Department and Government to work towards those issues?
Carbon will be one of the main issues we will discuss at these hearings in the coming weeks and months. The Climate Change Advisory Council made a submission on the price of carbon per tonne.
It was hoped it would come in at approximately €30 per tonne in the budget. It did not change, unfortunately. What will be the trend for carbon pricing in the next decade? There is talk of an increase to €80 per tonne by 2030. Will there be a yearly increase in the price or will it occur only on the final day? Do people believe it will increase to €80 per tonne by 2030? How do our guests envisage the gradual increases in the carbon price being made? How will we deal with fuel poverty and meet the concerns of people of economic need who, unfortunately, require fossil fuels at present? There are two elements to be balanced. This will be important so we can take society with us. I am concerned about how we can move to a low-carbon economy while offering support to those who need it. In the context of the price of carbon increasing to €80 per tonne by 2030, what timeline is the Department considering with a view to having a vision to drive forward? These are questions on which the Department needs to give us guidance.
Procurement is a major issue in the context of public expenditure. It has been a major issue across all Departments for a long time. The lowest-price principle is one we have discussed at several committees with a view to determining how to achieve the best value for money. Where will the environmental factors come into the schedule? The Chairman mentioned schools. The schools we built in the past decade all had oil burners, reflecting the lowest-cost syndrome we promoted in our economy. What will be the guidelines on this? Renewables are more expensive on the first day but there will be a long-term benefit for everyone. Even turning to a gas boiler rather than an oil boiler is significant. This all falls under Government procurement. From where will the vision come? From where will the review and changes come? The Chairman mentioned oil boilers being installed in schools in the past seven or eight years. Do we lack vision in this regard? Do we need to move to a different model of procurement?
Mr. Derek Moran:
Going back as far as 2008 and 2009, we have taxed motor vehicles on the basis of carbon emissions. We introduced a carbon tax in 2010 and 2011. We saw progression in both of these areas until approximately 2012. The carbon tax increased from €15 initially to €20, but it has been flat ever since. With regard to motor vehicles, excise duty and so on, the rates increased but they have been unchanged since 2012. With regard to using fiscal instruments and taxation for the purpose in question, there has not been any change over time.
The speed at which the carbon price will rise over the next ten years will ultimately be a policy matter for the Government. There are examples of where governments have set out a trajectory for a carbon tax. In France, for example, there is to be a rise from approximately €30 to €85 over a period of five or six years. The fuel poverty implications for the French are quite different because it does not affect households as much. This is because 75% of French energy is derived from nuclear power. It is much less fossil-fuel intense. The reality is that if one increases the carbon tax, one generates revenue. By generating revenue, there is revenue to recycle to mitigate some parts of the problem. One cannot mitigate all parts but where there are fuel poverty issues one can address the points where the pressure is greatest, including through the winter fuel scheme, for example.
Some of the important work we have done is reflected in the report. I would recommend it. We worked jointly with the ESRI and we published the report in October. For the first time, for any given increase in carbon tax, we can calculate the likely impact on emissions. For a €20 impact, a doubling of the carbon tax, there would be a reduction in emissions of about 4.7% in emissions. That is very significant in light of the overall target of a 30% reduction over the next decade or so. The Climate Change Advisory Council talks about achieving a figure three times that. The likelihood is that it will not be linear. We are doing some work over the next 12 months as a priority considering the multi-annual impact and how it will be phased. Even if it is not linear, and if it is not a case of three times 4.7% but somewhere between 10% and 15%, it would be a very significant contribution to meeting the decarbonisation goals. I view those points as important. The work will inform how we map out the trajectory over the coming period. Mapping out a set of steps over the next ten years will be important. If if is not done, the chances are that if one picks off issues on an annual basis, with an annual budgetary cycle, one will not make a huge amount of progress.
On vehicle taxation, there are fairly fundamental changes happening over the next 12 months. The emissions measurement for new vehicles is changing. According to the EU Commission, if we move to the worldwide harmonised light vehicle test procedure, on which Mr. Kenny can provide detail, a much more realistic measurement of the actual emissions from vehicles would be given. One would see the emissions measurement going up by 20%, on average. That will result in a significant behavioural change. We already saw that with the changes we made in 2008.
It is a question of having a plan and marking it over time and of the recycling of revenue to the pressure points. The interesting piece concerning the work done with the ESRI concerns a 20% increase. Its overall impact on the economy was not that significant, it is fair to say.
Mr. Derek Moran:
It was very trivial.
On the impact on households, the energy costs for the lowest-income households went up by about 2.9%, and by about 4.5% for the highest-income households. The effect on net income was such that those in the lowest category saw their income drop by about 0.7% and the highest by about 0.3%. That defines the space one has to address and mitigate. The mitigation would have to be at the lower end. One is generating revenues that permit one to do this, however.
Mr. John McCarthy:
I have a follow-up point to emphasise what the Secretary General said about the carbon tax pathway and the importance of signalling future trends. It is important because it creates certainty. It means economic agents do not lock into expensive systems right now. It creates certainty regarding what the future price will be, which will help reduce emissions directly, but it will also signal to economic agents that it will be increasingly profitable to invest in low-carbon and zero-carbon alternatives, and that it will be profitable to invest in carbon capture, carbon storage and so forth. By creating certainty now and setting out a medium-term trajectory, one can overcome some of the issues associated with the cliff-edge effect.
Mr. Robert Watt:
Procurement raises a big issue in terms of whether we have an approach based on regulation whereby we can be prescriptive and say that we support a particular technology or whether we ensure that decision makers reflect the higher price of carbon. We have in the public expenditure code new estimates for the future costs that will incentivise renewables and more efficient forms by comparison with those of the past. That will send a price signal to decision makers.
The use of heating oil in schools raises an issue. If ten years ago a school decided on a much more expensive option, based on a given view on energy costs, another committee of this House would have criticised the Secretary General in the Department of Education and Skills for allowing schools to misspend public funds. Heat pumps and the renewable alternatives would have been much more expensive. If, however, one has a different view on emissions and energy costs, one does not just calculate the cost of heating for the first few years but also for the next 20. That requires the wider system, not just ours, to reflect upon the cost of each choice.
We might be saying that in the short run, we will have school buildings that are more expensive but will lead to more efficient use over their life cycle. That comes down to difficult choices. In the short run, other measures will have to be foregone in the education system to afford such buildings. We have to face the policy decisions and choices that are raised in that context. Our approach involves the accommodation of regulations. All public buildings will have to adhere to the standards of the near-zero emissions directive from 1 January next. We have to ensure we look at the overall cost over time in the hope that it reflects what the true cost of carbon will be in the future.
I cannot ask Mr. Watt to speak on behalf of individual Departments, but I would like to know whether he believes a vision of procurement that involves taking a longer view, rather than focusing on the cheapest price, has taken hold across the Government as a whole. Is such an ethos apparent across Departments? If not, how much change is required to bring it about?
Mr. Robert Watt:
When we talk about the lowest cost, we are talking about something that reflects the lowest costs of build and the life cycle costs as well. The evaluation should, and does, reflect that the lowest cost is not just about the build costs. It is a question of ensuring the inputs are appropriate. A judgment call has to be made regarding future energy bills and the price of carbon into the future. We have put forward a view on the price of emissions. We are waiting to hear back from those involved in the system about their views. This is not cost free or risk free for the public sector when it makes decisions.
I thank Mr. Moran and Mr. Watt for their presentations. I will begin by asking Mr. Watt about the potential for the State to be fined if it does not reach its targets by 2020 and the impact of that if it happens. We have heard about different costs. This is something that the Department of Public Expenditure and Reform is good at. It is not about spending money. The Department is good at planning and estimating what certain costs will be. I hope it can identify its best guesstimate at this stage. If we recognise that the cost is X, we have to move along from there by accepting that we have slipped in the areas of heat and transport. We have had our own interactions with various Departments. Perhaps some Departments are better than others at addressing the climate change element of their work. What role does the Department of Public Expenditure and Reform play in encouraging other Departments to assist it in saving the State from having to pay these fines? I appreciate that the Department's overall role from a budgetary point of view involves making the most of loaves and fishes and identifying the projects that will give the best bang for their buck. In the absence of such projects coming forward, can Mr. Watt give us an insight into the role played by the Department in trying to get the Government as a whole to try to move this agenda forward?
My questions for Mr. Moran relate to taxation. He has covered the carbon tax, which is well recognised. At the time of last year's budget, I was vocal about the one-year benefit-in-kind exemption. The Minister indicated in his Budget Statement that it was more than likely that there would be a review, that everything would be fine on the night and that the exemption would probably be extended for two years. That happened and was accounted for this year. When measures like that are not sufficiently concrete at an initial stage, it does not instil confidence in the sector to invest. People will not change from petrol or diesel vehicles to EVs unless there is certainty. If there is one thing the officials before us know about, it is the importance of certainty. I thought at the time that it was remiss of the Government not to nail it down clearly in the Finance Bill that this would be a five-year project. I do not know how companies do it, but most people try to see what value their cars have after three years, or perhaps five or seven years if they are not doing a great deal of mileage. We need to be upfront about measures that are important signals. Does Mr. Moran have any other ideas about how we can use taxation to improve the uptake of EVs? It has been mentioned that we now have more than 4,000 vehicles, having come from a relatively low base. When Fianna Fáil and the Green Party were in government, it was projected that the figure would reach 50,000. I accept that many things have happened since then. We are a long way short of the critical point where second-hand cars are coming on the market. Cars need to be rolling over in the marketplace. There is no way we could suggest that 4,000 or 5,000 vehicles make much of a difference in the marketplace. If the witnesses have any other ideas, I would be interested to hear them.
Mr. Robert Watt:
That might be a pedantic point, but it is critical here. It is a compliance cost. I do not want to contradict my colleagues in the Department of Communications, Climate Action and Environment because they are the experts. There is a shortfall of 17 million tonnes for 2020. We have bought approximately 5 million credits. The market price per tonne up to 2020 is negligible. The price has fallen through the floor. The compliance costs for this period are negligible. They are neither here nor there. Based on the projections we are looking at, there will be a shortfall of approximately 100 million tonnes for 2030. We do not know what the final figure will be, but that is not a bad estimate based on business as usual and where we are. We need to work through the full impact of some of the measures being taken by the Government to see what level of abatement they will deliver. We are looking at a shortfall of 100 million tonnes. One's estimate of the compliance cost depends on one's view of what the price will be.
Mr. Robert Watt:
Perhaps I would be off trading futures in the cost of carbon. If we knew, we would be doing great. Who knows? The obligations will be tighter across Europe next time around, so there will not be as much to go around. Many of the lower-cost options have been taken. It is fair to assume that the price per tonne of carbon will be an awful lot higher during the next period than it is during the period we are going through now. If we take it that the figure will be €10, €15 or any-----
They are important. We need to do some scenario planning. I am sure the Department is doing some. Mr. Watt might not be in a position to make guesstimates too far ahead. It is better that we spend money now on trying to develop programmes and plans that will reduce our compliance cost.
We can be pedantic about these matters but, in essence, it will be money out of the Exchequer. When that point is reached, the loaves and fishes that have been mentioned will be much more scarce. It would be helpful to advise other Departments about making moneys available now rather than having to-----
Mr. Robert Watt:
This is the critical issue. If Deputy Ryan is correct when he says that the cost is €32, we should pursue all options that have a marginal abatement cost of less than €30. Somebody might come into this committee, say it will cost €25 to abate a tonne of carbon and claim that is expensive. That might look expensive, but it is cheaper than the compliance. That is the decision we have to take. That is the metric. This cannot be planned centrally within our system.
Mr. Robert Watt:
We have to tell Departments what the price is. That is what we are trying to do with the spending code. We are trying to say what the likely price is and remind Departments that they need to reflect it in their decision-making. If a project has a positive cost-benefit analysis based on a price of €30 a tonne in 2030, it is worth pursuing. However, the price might not be €30. Deputy Ryan might be wrong. If it transpires in 2030 that the price is €10, we might have done a lot of things that we would have been better off not doing. In such circumstances, we would have been better off buying compliance rather than taking expensive action. If the price goes the other way - perhaps to €50 - there will be a variety of other things we should have done which would have been expensive but would still have been cheaper than €50 a tonne. That is the policy choice.
Mr. Robert Watt:
We have our target to keep the temperature below the level but the key issue for the Department of Public Expenditure and Reform is the estimated cost for the Department to meet the target. For example, let us take a figure for the cost of €32 per tonne, then policy decisions which cost less than €32 are worth taking, if that figure is correct.
Mr. Ken Cleary:
Just a point of clarification, the figure of €32 per tonne is the figure for 2020. The figure for 2030 is €100, rising to €265 by 2050. We have an entire range of figures and put an estimate for each year into the public spending code now based on the new mechanism for calculating the cost of carbon, which as Mr. Watt said will be based on the estimated cost of reaching our climate targets. We have come up with those figures, based on the modelling work that was done for the national mitigation plan by the technical research and modelling group.
Mr. Robert Watt:
Let us tease this out a bit more. The cost of compliance is borne by all the taxpayers in the country. We collectively have to pay for this. The impact of a given decision in any sector will have an impact on particular groups. It is not uniform across the taxpayer base and that is a major policy challenge as well because the cost of compliance will be borne by all of us as a society but the cost of actions will be more concentrated in particular groups in society.
That is why we have to get the activity on the heating and transport area rather than the productive side, such as agriculture. Yesterday, Bord na Móna appeared before the committee and it had some exciting new opportunities in addition to its decarbonisation programme. Bord na Móna has a remit to try to stabilise the economy in which it is based and to create employment. It has some good ideas and it would be preferable that Bord na Móna would get support to manage the carbon sequestration and planting of certain species.
Mr. Robert Watt:
There is a major challenge in terms of managing that transition because in that case it could hit the economy in the midlands. There is a role for the rest of society to try to mitigate the impact on particular regions, which might be disproportionately hit by a transition to a different carbon climate.
Mr. Derek Moran:
Yes, the point is very well made in terms of certainty. The benefit-in-kind has been extended for three years. Normally we put tax expenditures on a three year review cycle, but when one is trying to change behaviours it may well be necessary to give it a longer lead in time. The point is well made.
In terms of the number of electric vehicles on the roads, I agree it is a start but it has a long way to go. In terms of the incentives, the carrot, there is a list of seven or eight subsidies or supports that are there from the purchase grant of up to €5,000, the VRT reduction of up to €5,000 and the grant for putting in the charger. That is probably as much as one can do on that side; the stick element is to rebalance and discourage the use of other heavy carbon using vehicles by making it more costly to use them and the changes that will come in during the next 12 to 18 months will help to tilt that balance. It is a carrot and stick approach.
I have some concern about that. When one sees the fluctuation in the price of fossil fuel at the pumps at present, it does not seem to be enough of a deterrent. In Ireland we are quite used to massive fluctuations in oil prices. The Government has to go further with the carrot in the initial stages to try to achieve that change.
I thank the witnesses for their presentations. I will address my first question on governance to Mr. Watt. It has been good to read Mr. Watt's presentation to see how he identifies and addresses the attitudes that have led Ireland to be known as the climate laggard. That is where we are at present. The Oireachtas considered the best legislative approach to ensuring the Government and Civil Service gave the necessary priority to climate change and so enacted the Climate Action and Low Carbon Development Act 2015. However, the legislation has not put us on the path of transition in line with the national transition objective and the Taoiseach has acknowledged this. NGOs have said that we are second worst in Europe and the Climate Change Advisory Council states we are going completely in the wrong direction and the State is facing legal action because we are not meeting our obligations. Some 97% of the members of the Citizens' Assembly recommended that there would be some kind of governance body set up and that we would look at specific functions, including the setting of a body of five year targets and a function of pursuing the State in legal proceedings to ensure legal obligations would be met. In the course of his opening address Mr. Watt referred to some of these issues and I would like him to go into more detail on governance and how he sees a governance mechanism as supporting Ireland in this regard.
The Climate Change Advisory Council has been modelled in part on the UK climate change committee and in part it was modelled on the Irish Fiscal Advisory Council and both of these bodies have been far more successful in getting the British Government to take advice. Has Mr. Watt any insight as to why they are making more progress than we in Ireland are making?
On Project Ireland 2040, Mr. Watt's statement emphasises the importance of public spending that supports the achievement of Ireland's low carbon transition. Did the Department produce an analysis of the climate impact of Project Ireland 2040 in order to enable the Government to ensure its decisions in that major plan will support the achievement of the low carbon transition? None of us has seen an analysis and we have been told that 20% of the plan will support low carbon transition but, of course, if much of the remaining 80% of the plan is undermining transition, it will not work. Does Mr. Watt have an analysis of the greenhouse gas emissions which will result from the implementation of project Ireland 2040? If not, is the Department prepared to do a retrospective review so that we can see what the impact of Project 2040 will be?
Mr. Robert Watt:
To respond to the Senator's first point, I do not agree with the recommendation of the Citizens' Assembly. I do not know if we are allowed to say that, but I do not agree with the proposal for an independent body. That is a bit of a cop out. It is for the Government and the Oireachtas to decide what decisions will be taken because the decisions have significant implications for society and citizens. The notion of an independent body that will suggest that to an official such as Mr. Derek Moran or to the Minister for Finance that a carbon tax will be €200 by 2030, or whatever, will not work. These involve political decisions that have to be decided by the Oireachtas and the Government in the normal course. This comes to the essence of public policy and politics. I do not agree with the recommendation of the Citizens' Assembly. We already have an independent body the Climate Change Advisory Council which has many good things to say, but this involves having to make difficult decisions. Whether we can change the structures in the system to help us make difficult decisions is something we can do and it comes down to the issue of how we are organised in the system and the relationship between the Department of Communications, Climate Action and Environment and the other Departments. I mentioned the difficulty that whereas the Department of Communications, Climate Action and Environment is responsible for the targets, it is not responsible for the levers. How does one have proper structures in Government, Cabinet committees or the structures to ensure that the genuine responsibility is taken here? I think it is about different options. In my statement I set out some options about ascribing target savings to sectors that are responsible for them, for example that one says to the agricultural sector that it must deliver "X" and that transport needs to deliver "Y". The challenge with that approach is that flat rate reductions across each sector, reflecting their contribution does not necessarily reflect the marginal cost of different options. That might be an inefficient way of doing it and might lead to higher costs than we have to incur. We need to look at different ways to ensure the system is galvanised to deliver on this.
It is within the Government and not externally that we need to look at the governance. I do not think an independent body will help. What was the Senator's second question?
Mr. Robert Watt:
If other countries are making more progress than us it is because their policy options are easier and their costs are lower than they are here. This reflects the fact we have an agricultural sector that takes a significant share of the non-ETS. We have homes that are bigger than in other countries and per home they produce 58% higher emissions than other countries. We have a spatial structure that is different from other countries where we have more reliance on private cars. It is a function of the nature of our economy, society and emissions. It is not because other countries are doing more; it is because it is easier for them to do more relative to us because of the particular challenges we face. Agriculture accounts for two thirds of the non-ETS. The herd has increased by 22% over the past three years and milk production has increased by 27%. There are very clear decisions and consequences. The fact that the UK or another country is doing better than us reflects the different structure we have compared to them. It is not because they are being braver, doing more or taking more action; I have not seen this in any event but I am happy to be contradicted. I do not necessarily believe it is because they have an independent body that is forcing their system to act in a different way. Our performance reflects the difficult structures and emissions nature of how agriculture has evolved.
With regard to Project Ireland 2040 I stated it has not been gone through in detail with all of the options being examined. This work must be done. We need to go through all of the options. Project Ireland 2040 includes spending that would have an impact on emissions. The challenge is to ensure this spending reflects the cost of future emissions. There will be a lot of school building and renovation of the school stock. None of this is earmarked as related to climate but how we build schools in the future will be very important in terms of ensuring they are energy efficient and minimise the impact on emissions. There is a lot of work to be done in all of these policy areas to ensure we take decisions that will not make the problem any worse and will reduce emissions. The Government has committed to producing another mitigation plan in the coming years and that will have more detail on what the precise impact will be of a variety of issues that are floating around.
Ms Patricia Coleman:
To support what Mr. Watt has said, analysis is being done on how much the national development plan will help us achieve our targets for 2030. This will feed into the development of the national climate and energy plan. It is important to remember the national development plan is a financial plan. It supports the national planning framework. This is why, as Mr. Watt said, the Project Ireland 2040 board is an oversight group that is bringing the two strands together. When it comes to public investment under the plan, every element of spend will be assessed using the public spending code and the appraisal. The new provisions on the price of carbon will be captured. We will get a better understanding of the climate impact of investment and the cost of carbon will be priced accurately.
Ms Patricia Coleman:
Working out how far the national development plan will bring us towards reaching our target is being done at present and it will feed into the national climate and energy plan, the first draft of which is to be available by the end of this year. The analysis will be available shortly.
With regard to other countries, we have economic growth and Mr. Watt mentioned the rise in milk and dairy production. How does he see us decoupling our carbon emissions from economic growth given the scale of the dilemma we face?
Mr. Robert Watt:
My view, which I hope is consistent with Government policy, is that the only way to achieve progress is the electrification of transport and heat, which will involve significant decarbonisation of electricity and more renewables. There is a technical challenge in how much more intermittent power we can put on the grid. Deputy Ryan was involved in these debates when he was the Minister a few years ago. It is not entirely clear or straightforward in terms of what the share of renewables in the network can be. It is a difficult issue. As well as the further decarbonisation of the electricity sector we also have the electrification of heat and transport. Transport will involve electric vehicles becoming more widespread. I presume when it comes to heating residential buildings that the price of heat pumps will have to reduce with a combination of renewables. It will be done through technology over the coming years if we have the right structures in place and the right pricing. I do not know about heat pumps but certainly the price of batteries is falling quite dramatically. If we can store all of this cheap electricity in batteries it will have a transformative effect when it comes to climate and society. The big change will be falls in the price of batteries and the extent to which devolved electricity networks can ensure we decarbonise. Then we will have the electrification of the heat and transport systems. It will look very different in the coming 20 or 30 years.
It is deeply frustrating that nine years after a previous Government introduced the carbon tax we have issues including ensuring low-income households benefit rather than lose from the carbon tax and that the carbon tax is complemented. Other policies are still being treated as conundrums to be solved or works in progress. Two decades ago, Feasta, the Foundation for the Economics of Sustainability, developed its proposal for cap and share and has repeatedly brought it to the attention of policy makers ever since. In essence, it proposes that the revenue from carbon be returned to people on an individual basis. As low-income households use far fewer fossil fuels they would be net beneficiaries of cap and share. In 2008, Comhar Sustainable Development Council commissioned a study on cap and share proposals. Similar initiatives, such as cap and dividend, are prominent in policy discussions in the US. All of this is in a situation where the carbon price needs to go well beyond the €40 per tonne to which the Department referred. Mr. Watt referred €100 per tonne in 2030.
Mr. Derek Moran:
I do not believe there is a conundrum. I have already said we take the revenues and recycle them into targeted supports for low-income families to mitigate some or all of the impacts on them. We have made a certain degree of progress and this progress stopped in terms of carbon taxation generally. Whatever we do it is important that we have a multi-annual plan that deals with increases in taxation and the ways in which this can be done. Having a plan means things get done
I welcome the Secretaries General and their colleagues. I have a number of questions for each group. Mr. Moran mentioned the incentives already in place and stated there are enough incentives at present. There has to be behavioural change in the climate discussion and debate and for this to happen we must have more incentives. Has the Department looked at other incentives such as tax credits? We have tax credits in a number of areas throughout the system.
Has the idea of a tax credit for doing X, Y or Z been looked at as an incentive in that regard? There has been a lot of talk in different areas of late about low-cost loans. The cost of refurbishing a house to bring it up to whatever standard is required is going to cost a lot of money. If an analysis on the figures was done, it might cost €50 billion over a period of time to bring the entire housing stock in the country up to a standard that would be required to be carbon-efficient, which is a lot of money. The State is never going to be in a position to do this for everybody. We have had low-cost loans from a Brexit point of view and in different sectors in recent times. Has that been looked at?
In general, there must be more carrot than stick in the whole debate. That has to be the whole selling point. The communications strategy in both Departments is crucial. In terms of selling the message of what is coming down the line, the consequences and implications of it and what it is going to cost - Mr. Watt referenced earlier the costs, differences and so on - this has to be done in a language that everybody understands. If we do not do that, we are losing the battle straight away. It would seem that most of the time, we are playing catch-up and it is a fire-fighting process. A very straightforward communications strategy needs to be developed. What communications strategy do both Departments have in place?
In his opening statement Mr. Watt stated that the evidence suggests that reductions in emissions on the scale required will involve winners and losses and have distributional consequences for society. This is obvious. Has an analysis been done in Mr. Watt's Department of the winners and losers and the potential costs involved?
Mr. Derek Moran:
There are a lot of incentives for electric vehicles but there can always be more. If one takes the total, there are seven or eight. Perhaps they need to be coalesced into a single, bigger and more transparent piece. There are two parts to the equation; there is the carrot and the stick. The carrot is the incentive and the stick is how one treats other vehicles with-----
Mr. Derek Moran:
In general, we need to get the balance right. It has to be remembered that there are incentives and grants on the expenditure side and not just on the tax side and it about getting the best value out of both.
On low-cost loans, that is certainly worth looking at. On tax support for renovation, we have had the home renovation incentive for a number of years. This essentially refunds the VAT content on the changes carried out. It is a model that could be developed further, if that is what is wanted. It is a refund of income tax but it is just the additional VAT component of it. There are a number of aspects.
On communications strategy, every summer we publish a paper on environmental taxation through the tax strategy group. It receives a fair amount of attention and it is right that we keep these things to the fore in terms of what we are doing and can potentially do. Each July we publish and this in addition to the work Mr. McCarthy is doing with the ESRI on the research and the analysis.
Would there be any impact in terms of having a low-interest loan because Marie Donnelly was here talking about the State not being able to do it all and that private individuals will have to find ways of retrofitting their own homes? For example, a credit union could offer a low-interest loan. Has Mr. Moran an opinion on how that might affect the State's books as opposed to an income tax credit? Is there any preference from his point of view?
Mr. Derek Moran:
On low-interest loans from credit unions or banks, that is ultimately a matter for them. On targeted instruments that allow people reduce cost, there is a benefit as whether it is a loan, a tax incentive or an expenditure measure. We need to bring as much coherence to all these approaches as we possibly can.
Mr. Robert Watt:
That is probably the culture of the organisations going back a long time. If one thinks about the retrofitting challenge for a moment, one needs a combination of policies. On average it costs about €1,000 per year to heat a home with gas. With larger homes, the cost is obviously greater. In terms of retrofitting, heat pumps cost €8,000 to €9,000. Significant retrofitting can cost €10,000, €15,000 or €20,000, which can be significant. There is a variety of different elements. One has to have the incentive. If it is more expensive, ultimately, people will look over time about making savings. If there is an incentive, they will not have to endure the hassle. Can they access the finance? There might be an issue then for low-cost loans. Who is subsidising the loans? Ultimately, we are talking about the State doing this, which is a cost to the generality of taxpayers.
There are distributional issues as well. If one is talking about providing subsidies for better off households to insulate larger homes, that has a negative redistribution effect since the rest of are paying for higher income groups. There has been a lot of work done in the UK on why people do not retrofit. When it comes to attics, for example, this work suggests that the major challenge is people could not be bothered cleaning out their attics. They decided to give grants to declutter attics. This is what the nudge unit came up with. Rather than giving very elaborate grants to retrofit, they gave a grant for someone to declutter one's attic, which was much more effective. There are a variety of different instruments here, including nudges, regulations, taxes and financing instruments. The State, as the Deputy said, through general taxation or Exchequer funding cannot do this job. It is just not possible. It is too expensive and it would also be wrong from a distributional aspect to try to do so.
On a communications strategy, if any society is going to engage in this type of enormous change, it requires a wider political consensus, which has other implications which are not my business. I do not think it makes sense to think about a particular part of a State talking about a communications strategy because the changes that are required are so enormous that there has to be consensus among political groupings and other civic society groupings, like trades unions, about how we do this. This change can take place incrementally without that wider support.
On winners and losers, we do not know all of the policy instruments. If we had a greater sense of the policy changes, then we could look through and have a better sense of the winners and losers. In the absence of that-----
Mr. Robert Watt:
Some of the work has been done. Mr. Moran and Mr. McCarthy mentioned taxation. We have work done by the Department of Finance and the ESRI on the distribution impacts of carbon tax. We know from the Living in Ireland Survey how much people spend in different types of households as per different income deciles so we can work out the distributional impact of a carbon tax without changes to the fuel allowance, which has been mentioned.
It depends on the nature of the policy. If one was to say to us here are five or ten policies and go off and figure out what the effects would be, we would have a reasonable stab at working out what the distributional effects would be. That is the ongoing work.
On that point, one of the recommendations of the Citizens' Assembly was that there should be a carbon tax on the agricultural sector, for example. Has there been any analysis done on the consequences and the potential consequences of that? I believe Mr. Watt is wrong on the 22% increase in livestock numbers in the past period of time. That figure is exaggerated. There has been an increase in the dairy sector and a reduction by the same amount in the beef sector to compensate. The figure is more in single figures than 22% that Mr. Watt referenced.
One of the recommendations of the Citizens' Assembly was that there should be a carbon tax on the agricultural sector. Has there been analysis done on the potential implications of that for the whole sector? We hear on a daily basis about rural Ireland. The agricultural sector, as Mr. Watt referenced earlier, is crucially important to the rural economy.
It looked at different sectors of the economy in granular detail. The ESRI does not look at the agriculture sector per se. However, it concludes that at an aggregate level there is a very limited impact. It has considered a €5 and a €20 increase in carbon tax. While the aggregate impact is minor, the most exposed sectors are the transport and the natural gas supply sector. The sectors that drive Irish exports, including the high-technology multinational sector, would not be affected greatly. As such, the overall competitiveness of the economy is unaffected. To come back to the Deputy's earlier point and something Mr. Watt was discussing, the ESRI looks at the impact on not only the productive sectors of the economy but on households in the ten different deciles from poorest to second poorest and on to the richest. It concludes that a carbon tax would be regressive and recommends flanking policies, as Mr. Moran says, to address those distributional issues. That is just the first stage in the research we have commissioned from the ESRI. We will work with the institute as it looks at how things evolve over time. In other words, it will not just look at a static impact, but at what the behavioural impacts will be if one has a carbon tax pathway from now to 2030 and how different sectors would be affected. It is probably possible to have a more in-depth look at the agriculture sector within that analysis. This time next year, I will probably be in a better position to quantify certain things for the Deputy.
Mr. Robert Watt:
Before thinking about the taxation of agricultural emissions, if that is what the Deputy is suggesting, one would look at the subsidies in place. There is already negative taxation and activities which subsidise the production of greenhouse gas emissions in the agricultural sector, which I am sure the Deputy is aware of. I am happy to check the numbers I have. I am not that close to herd numbers. However, in the five year period, the number of dairy cows, which I acknowledge is not the totality, increased by 22%.
I thank Mr. Watt, Mr. Moran and their colleagues for attending. I address my first question to the Department of Public Expenditure and Reform. It is emerging that a whole-of-Government and whole-of-society approach must be adopted to address this as a matter of urgency. I heard the officials mention the Citizens' Assembly recommendation and their views on whether there should be a separate body. Does the Department have a view on the type of leadership required? Has it examined that question with reference to what other states are doing around governance? There has been plenty of discussion here about whether it should be led by the Taoiseach's office or the Department of Public Expenditure and Reform.
On the national mitigation plan, there is a proposal for a review of public expenditure. It is an appraisal and evaluation. Does the Department have plans for when that will take place? Climate action is a strategic investment priority in the national investment plan. I was wondering how the Department intended to prioritise climate action expenditure. Funding is provided for climate action through the disruptive technologies innovation fund and the €1 billion rural development fund. What type of evaluation framework will be put in place around this type of expenditure?
My next question is directed to the Department of Finance and it is on hypothecation, that dreaded word which is not in the dictionary of finance officials. There has been some discussion around whether funding raised through the carbon tax should be ring-fenced. Does the Department have a view on that? What is the Department doing to invest the money it is collecting from the carbon tax? Is it being used to transition to a low-carbon economy in some shape or form? Should there be further incentives to encourage the public to move to low-emission vehicles and electric cars? There seems to be a view that we must do a lot more there. I acknowledge Deputy Pringle's excellent Bill which has been accepted. What is the Department going to do with the divested proceeds? Is it going to be invested in green and low carbon investments in order to accelerate to a more sustainable economy?
Mr. Robert Watt:
We have an open mind on the governance structure and I set out in my opening remarks some possible ideas. Having a Department responsible for climate action is important but I would be interested to hear from the political side what the view is. It is a good change to bring together within one Department. Of course, that Department does not have responsibility for agriculture, transport, housing stock and other issues we are talking about. It is about a combination of making that work effectively. There are different options in the UK, including centrally-mandated targets from the Prime Minister's office. Other countries have that too. There might be a combination of a climate Department plus more centrally-mandated targets from central Government. The UK allocates sectoral targets to different sectors and Ministers and their departments are responsible for delivering them. There is merit in looking at all of those options and we have an open mind in doing so. While I do not know what the best approach is, we have an open mind about the structures we have and need to be honest about whether they are working and whether they can deliver on a challenge of this scale. Ultimately, it is a political question of the interaction between Departments. That is a matter for the Taoiseach.
I have already spoken about the appraisal. We published the revised appraisal of public expenditure setting out the revised price of carbon, increasing that price into the future compared to where we are. That will feed into the final issue raised on assessing priorities and strategic investments. An appropriate carbon price will ensure Departments face the right incentives and costs when they evaluate a variety of potential projects. A lot of work has to be done to look at the best options for the future. A more realistic price of carbon will help us get to the right decisions. The two questions are interlinked. It is about having that code and adopting it, which we hope to do in the new year, and then ensuring it is reflected in decisions taken across Government. A whole variety of issues relates to that.
Mr. Derek Moran:
The Deputy is right that the Department of Finance hates hypothecation. However, I said at the outset that we have a multi-annual trajectory for carbon taxation and recycling some of the revenues to mitigate some of the distributional issues would be worth doing. It has better links to ensure some of the money is going back. The €430 million or so which we collect in carbon tax now goes into the general taxation pot. However, it is part funding a lot of stuff in the national development plan in that area. Whether some or all of the carbon taxes collected go back to mitigation will ultimately be a decision for the Government of the day. We have touched on further incentives on and off. There will always be an argument for incentives. However, there has to be a balance between the carrot and the stick to incentivise changing behaviours.
On Deputy Pringle's Bill, the ISIF investment mandate will change in line with the legislation. It is an amendment to the NTMA Act. That is the material effect. The NTMA's investment strategy changes in line with the legislation. If I am right, the Bill goes to the Seanad this week and, with a change to the Title, it will be done.
I thank the witnesses for their presentations.
We are in a bubble here and we are not dealing with reality in the way we are talking about this. I remind everybody that we are talking about climate change. Has the Department studied the recent IPCC report? This conversation does nothing to deal with the urgency of the situation we are facing. That report warned us that within the next dozen years or so, we are in danger of overheating the planet to a degree where we will put species and human life in danger. We have done enough damage. My first question is on the carbon tax because Mr. Moran said that the ESRI study demonstrates that even if we double the tax to €40 per tonne, it would only result in a 5% decrease in greenhouse gas emissions, which, while welcome, goes nowhere near dealing with the challenges we face.
Later he said that he does not agree with the Citizens' Assembly's recommendation regarding an independent body. Yet there is a joke around this building that this is the committee on climate inaction. That is often said to me. This committee is getting that name because the Government's inaction on dealing with climate change is apparent. If I was Mr. Watt in his Department, I would seriously examine what I do to double or treble public transport provision to get cars off the road and to end that culture that he talked about of us driving everywhere and to get rid of the idea that fuel poverty is acceptable. MABS conducted a study recently on the constituency I live in, and one quarter of households live in fuel poverty. They spend more money trying to keep themselves warm than they do on food. In doing so, they are burning more gas and coal. These are the issues that his Department should be tackling. He uses the unfortunate example - given what has happened recently in education - of the choices we make about the types of school buildings that we decide to spend money on. Given the disaster that those choices have proven to be in the recent past, it was an unfortunate choice. Nevertheless it does not go near-----
Fine, but it was still an unfortunate choice for Mr. Watt. I know schools where the kids are trying to get money from the Government to invest in solar power and they are knocking on doors and nobody is listening to them. I would welcome the establishment of an independent overarching body that would listen to communities and put pressure on officials such as Mr. Watt and Mr. Moran to say that their spending decisions are wrong. They are not doing enough to address the urgency of the situation and we have to start tackling climate change in a different way. Mr. Watt quoted the Stern Review: The Economics of Climate Change, which states, "Climate change is the greatest market failure the world has ever seen". Yet at no stage does his briefing document move outside the parameters of the free market and market mechanisms. He referred to cost abatement, carbon pricing, market discovery but presents no idea about how to tackle this except within the parameters of the market that has failed us, in the first instance. The fact that their submissions arrived late made it difficult for me and my staff to challenge them in a more comprehensive way. It is an impediment to the work of this committee that we continue to receive submissions at the last hour. Nevertheless, they are hollow, shallow and do nothing to deal with the urgency of the situation.
I ask Mr. Watt to answer that whether he has he read the IPCC report and whether he is aware of the urgency of the situation we are facing.
Mr. Derek Moran:
I referenced the IPCC report in my opening statement. I recognise the urgency. On carbon tax, the 4.7% reduction for a €20 increase is an illustration of the potential of this as a measure for decarbonisation. The climate action commission is talking about €80. I spoke about mapping that type of change over a period and bringing certainty and focus to the fact that this will increase over time. While the net impact on emissions may not be linear, as in three times 4.7%, in terms of what we are trying to achieve over the next decade or so, it will solve not all of it but it could go a long way. That is why having a multi-annual trajectory for this becomes important.
I refer to the Citizens' Assembly recommendation for an independent review body. If, on the one hand, the Department of Agriculture, Food and the Marine and farming organisations are encouraging farmers to rear more cows and herds for dairy and for export, at no stage would the Department of Finance step in to say this will cost a significant amount in the long run because of carbon emissions. Where is the joined-up thinking? I do not believe there is joined-up thinking in the Government or in the State. That is why I agree with the Citizens' Assembly recommendation that we need an outside independent body that keeps an eye on all these Departments and tries to force through that joined-up thinking about the size, challenge, seriousness and urgency of the situation we are facing.
Mr. Robert Watt:
I have read the report. I have been involved in climate issues for 20 years. I worked for the European Commission a good many years ago on the ETS and carbon tax and on other initiatives. I am well aware of the issue. Nobody should downplay or trivialise the challenge we face. I have seriously engaged with this committee for the past two hours, as has Secretary General Moran. I am happy to do it another time and provide a briefing. We have been fairly upfront and honest about our views. We have set out where we think we need to go on policy. It involves difficult decisions and policy choices, and that is for political leadership. It is nor for myself and Mr. Moran. We are here to provide advice and to implement policy and that is what we do. There is a wider political challenge that has to be addressed.
Mr. Watt's comments and this discussion are appropriate because they get to what I was going to ask. I have a wee bit of sympathy for the witnesses because the impression one would get is that they are the decision-makers. Perhaps they are but if the Ministers were before us, they would tell us that the Secretaries General were telling them that they cannot do a particular thing. I want to get to who makes the decisions and how they are informed. Perhaps I am naive and I will be put right on this but I presume the Minister says he or she wants to introduce a carbon tax of €100 a tonne and departmental officials will say this will do "X", "Y" and "Z", these are the options. The Minister is asked what he or she wants to do and then goes along with what the officials want. Is that how it works? For example, the former Minister for Communications, Climate Change and the Environment who resigned said that he had recommended that the national development plan co-ordination group and the technical research and modelling group, TRAM, considered a form of carbon-budgeting as a climate policy management tool to aid in decision-making and that went nowhere. Where did that stop? Was it with the Ministers or with officials?
Mr. Robert Watt:
It is our job to put in place the correct structures to ensure that the system is in a position to gather the evidence and provide policy advice to Government. It is for Ministers and Government to then decide ultimately on that advice. When they make decisions, we go off and implement them. That is what we do. We are not decision-makers but we are responsible for putting in place the structures, the process and furnishing the evidence.
Mr. Moran and I have spent a lot of time talking about that issue.
I am not quite sure what point Deputy Naughten made. I know that there are various discussions about how decisions on spending and tax in the budget impact on the climate and how Departments feed into that but I am not quite sure if I understand the point the former Minister was making.
The question was about how the decisions are made. I want to get at whether the officials or the politicians make the decisions because the politicians will sit here and tell us that the officials make the decisions.
Mr. Robert Watt:
I suggest that for the sheer fun of it, the Deputy ask Deputies Noonan and Howlin to come in and give their views on that because Mr. Moran and myself work with those two gentlemen. The Deputy could ask the Minister for Finance and Public Expenditure and Reform, Deputy Donohoe as well.
Mr. Ken Cleary:
No, it was a commitment by Government in the national mitigation plan to say the Department of Public Expenditure and Reform should review the appraisal guidelines to make sure the carbon price was as accurate as it could be. Following that review we have recommended a change in methodology that leads to about a tripling of the carbon price that is in use in this framework.
Mr. Derek Moran:
One of the contributions that we can make is to produce as much publicly available analysis and research as possible to inform the debate around these issues. We have prioritised various issues in our mutual research partnership with the Economic and Social Research Institute, ESRI, and that research gets published and informs the debate. The work we have done around carbon that was published on budget day and the work that we have planned for next year around the multi-annual trajectory is an important contribution, but at the end of the day politicians make the decisions.
I have an important question. The witnesses are saying that this is very urgent and we have to make the decisions. Climate change has been around for a long time. Mr. Watt himself mentioned that he has been working on it for 20 years or so. What has changed?
I apologise for being late, I was at another meeting. I thank the witnesses for their time and for the documents they provided for us.
Mr. Watt stated that we should not underplay the challenges that we face. We require changes to society on a scale not seen since the Industrial Revolution. We need buy-in across all sectors - political, departmental and throughout the country. The committee has previously raised concerns that there is a patchwork approach to climate actions across many groups and bodies working away in their area. A more unified and co-operative approach is obviously required to deal with these issues. Is this an issue that the Departments are looking at and have they looked at examples from other states that are meeting their climate change targets to see what improvements we could make?
We had the ESRI in here at previous meetings. They informed us that 88% of houses were constructed before energy efficiency measures were put in place. We spent a lot of time teasing out the Sustainable Energy Authority of Ireland, SEAI, better energy home grants and we learned from the statistics provided that the cavity insulation grant is the most popular grant, followed by the grants for the boiler, the heating control and finally solar panels. Dealing with constituents week on week, I put that down to the cost associated with solar panels or heating controls whereas most people can make up the difference when it comes to cavity insulation, or even if they have to change their boiler. The other heating measures are a step too far for many people. I ask the witnesses to discuss that point.
Mr. Robert Watt:
We have discussed some of these issues already so I apologise if I go over old ground again.
On insulation, there is a big question over whether people have the right incentives to insulate. There is also a lot of hassle involved in doing it and then there is the financial issue. A household might think it has a strong incentive to retrofit but it might not have access to the financing. SEAI could play a role there and we mentioned the potential for low cost loans earlier. The incentives, the hassle factor and the funding are different issues which might prevent people from insulating.
As the Deputy is aware, it is an enormous challenge and it will take a generation to retrofit homes. It is interesting to see the different types of options that people go with. I know that SEAI is doing a lot of work to try to figure out what is working and what is not, why is there a variability in take-up among different income groups and what is causing that. There is much work to be done there which will feed into policy in the future.
On climate change, we set out that there are governance challenges and a principal agent problem that we face and that other countries face. The problem is that the Minister is responsible for delivering the targets but the levers are with a whole variety of other Departments and agencies. Trying to have that co-ordinated approach is the job of the Department of Communications, Climate Action and Environment but there is an issue over which mechanism that should happen through. There is a Cabinet committee on climate change and there is a senior officials' group but are they operating to the best of their capabilities and there is the question of whether it could be done differently. We have an open mind on that. I mentioned in my remarks that some countries have mandated targets. For example, sector X would be mandated to deliver on a certain target and that would then be driven from the centre. This is something that we must look at and there are certainly ways that we can improve the co-ordination challenge that exists.
On Wednesdays we flit in and out of committee meetings so I apologise if I repeat anything that was said or asked previously.
This is all about behavioural change and one of the Citizens' Assembly's recommendations sought the establishment of an independent oversight body. Mr. Watt has used language here today of considering what structures might be necessary. Is there an articulation of that vision across Government about what type of structure could be created or would it continue to be housed in a particular Department looking across other departmental silos? Do we need an overarching structure that would benchmark the actions of individual Departments because I take some solace from the two interventions that we have had here today and the fact that there is a clear outlining of a vision in respect of what needs to be done and the urgency of the problem?
Frankly, it is the first articulation that I have heard from Departments on the urgency of this. I am trying to deconstruct some of the language that was used. I do not mean this in a pejorative sense but some of the language can be coded such as: "more stringent central mandates" and "least cost abatement options". This language needs to be simplified if we are to produce a report that is fit for purpose and reflects the Citizens' Assembly's report.
The Citizens' Assembly made a recommendation on the establishment of a central, independent body. Are we moving towards a similar structure across Government that would kick the tyres on what individual Departments are doing?
Mr. Robert Watt:
It would be a mistake and we would not get anything done. There is only so much we can say and it is not our job to decide the responsibilities of Departments. That is the job of the Taoiseach. Ultimately, in any system there is the question of whether Minister X pays much attention to Minister Y. The Deputy will know this from his time in government.
Mr. Robert Watt:
If a carbon budget can lead to better decision-making ,it could be good. However, it is not the most important thing on which to focus. I would concentrate on getting the right measures and then on getting the structures to ensure that these are brought forward and implemented. I am not really sure about a carbon budget. I am always sceptical about saying a budget is a housing budget or a health budget because I do not know what it means in reality. Does it make sense for us to collate the measures each year to see if they help? The answer is "Yes", and we do a bit of that. We can look at the spending and tax measures that affect climate but I would not spend too much time worrying about such things as it is the policies, the structures, the mandate and the implementation that matter. It is a question of how we get things done.
We have spoken about reaching targets and we are already surpassing the 5% reduction in emissions there need to be each year between now and 2050. We are just looking for help in producing the best report we can produce in order that the Government might map onto it.
Mr. Robert Watt:
If we had to reduce emissions next year by 1 million units, we could agree to do that. The next question concerns which of the sectors has to do it and how we share the burden? It can be done on a pro ratabasis or relative to the cost of abatement, which is the more efficient way. We could also say that, because agriculture is responsible for 40% of emissions, that sector should reduce by 400,000 units. That, however, is just to set the top-down target. The next question is how we are going to get there. We need to consider what options there are and how we would enforce them.
I am sorry I missed the earlier part of the meeting. I was discussing heritage, which is also important, at the meeting taking place next door. Do the Department of Finance officials have any plans for the long-term macro-analysis of the tax system? Are they looking at stabilisation within the system, such as by using tax to enable the transition to a low-carbon economy? Currently, we tax fossil fuels heavily and do not tax EVs. What is the timeframe for taxing EVs as revenues from fossil fuels decrease? The revenue from fuel is significant. Has the Department considered a carbon price floor for electricity, as has been done in the UK?
Mr. Derek Moran:
We spoke about the importance of the development of a pathway over the next eight or ten years. I referred to the research which suggests that there is a potential return from carbon tax increases in the shape of the reduction of emissions. It is important that we have a good trajectory as we move forward. We have published stuff on what the pathway may look like and its implications.
Mr. Robert Watt:
In the current phase, at one point there was such a supply of allowances that the price collapsed. Given the fact that the target is so difficult to reach and that we are going to see significant reductions in emissions and, therefore, allowances in the ETS, a credible price will be sustained during the period. Given that a lot of the cheaper abatement options have been pursued, we will see a higher price ETS.
Mr. John McCarthy:
One of the flaws of the ETS sector is that there was an excess supply of credit following the collapse of the European economy after the crisis of 2008-2009. The price of carbon fell by approximately €5 per tonne within the ETS. An argument was made by some economists that a floor should be introduced but, in the past 12 months or so, there has been a move by the European authorities to mop up some of the excess supply of credits, as a result of which the price has moved from €5 per tonne to over €20.
In the context of the carbon tax, there is an OECD hierarchy of taxes. The OECD and the IMF tend to suggest taxing bad things and outcomes, and not taxing good ones. This mean taxing negative externalities but we have models which show that, if one increases carbon tax and uses the proceeds to reduce labour tax, it is a win-win situation, because reducing the tax burden on labour is positive for labour supply and creates growth. We are conscious of this sort of thing when we provide our analysis, although, as Mr. Watt said, we do not make decisions.
I have a couple of questions on public expenditure. How do we ensure that Departments climate-proof major actions and investment projects? I am mindful of Project Ireland 2040, the delivery board of which is co-chaired by Mr. Watt. How much is the carbon impact of the plan factored in? Being in control of the purse strings, the Department has a lot of influence in determining if other Departments are not giving enough consideration to it. Are there plans for a cross-departmental spending programme on climate action? It would make a great deal of sense.
Mr. Robert Watt:
We are in the process of revising the guidelines setting out the per-unit price of carbon to be used as a shadow price when it comes to investment decisions. Our draft consultation paper is out there for discussion and we have set out the price we think it should be in the future.
It will incentivise projects that have significant abatement potential and discourage investments that lead to higher emissions. That is the main way by means of which we will influence decisions over time. When Departments are making decisions about investment, they will reflect a higher price for carbon.
In terms of cross-departmental spending, a variety of spending initiatives are assigned to different Departments. Some Departments work together in a collaborative sense but individual Departments have responsibility for their programmes and within that there are elements that are related to climate. In the context of the carbon budget, we pull together the different strands of spending related to carbon as we set out the measures. It is about public transport, energy efficiency and retrofitting and all the standard type of options and measures relating to the ETS scheme with regard to supports for renewables and so on. There are a variety of initiatives.
My point follows on from the previous one. The general approach we need to take is that the country turns and changes when we are all working in a certain direction. We need to triple the level of ambition for climate action in the same way we have just tripled the price for carbon in our public procurement assessment in the political system. We need to triple our level of investment on this issue in our public administrative system. If we do that collectively, we can turn things around. We are showing that we are good at it.
What is the role of Mr. Watt's Department in the assessment or drafting of the new energy and climate action plan that we have to do under EU governance?
Mr. Robert Watt:
It is led by the Department of Communications, Climate Action and Environment. We will be involved with helping the latter assess the options, based on the public spending code, which we believe will deliver abatement at the lowest cost. We will engage in conversations and discussions. One of the challenges we have is to beef up the capacity. The Deputy is aware of the IGEES work we have been doing and the papers we have been publishing, which try to improve our analytical capacity. That is what it comes down to. There are lots of options. People talk about a specific option leading to emissions reductions but when it is investigated, it does not deliver or is too expensive. We have to consider what will actually work and make an impact. Our role is to work with the Department in assessing options that come from it and the other options and engaging in a constructive discussion about the options that should be put to Government for decision.
Mr. Watt correctly stated that we already know there is at least a 100 million tonne gap in what we need to do in the next decade or 12 years. The potential cost of not closing that gap is at least €3.2 billion. It could be between €6 billion and €10 billion, depending on the price of carbon. With regard to his responsibility to assess the options of how to close the gap, has Mr. Watt received from the other Department details of what those options might be?
Mr. Robert Watt:
We do not know the price. The Deputy has got this from discussions with Secretaries General. We have not worked through all the options that establish which decisions we will have to take in this area. We have some ideas. We have Project Ireland 2040. We have views about carbon tax and future pricing. We do not have the full suite of measures. That work is ongoing. Those are the challenges we face.
This is about working in a collaborative way. I am not trying to be smart. Before Mr. Watt came in, the committee made a decision to write to all the Secretaries General in order to get them to assist our work and to acknowledge that the Government has to have the first draft of its answer to that question ready by Christmas. To assist us in that work, we were going to write to all the Secretaries General to ask if they could provide us with an outline of what options are on the table, how much carbon abatement they would achieve and what the timelines would be by 30 November. It would assist us. The Minister, Deputy Bruton, is due to come before the committee on 5 December. As Mr. Watt has that central co-ordinating role, could he ensure that the other Departments and his own provide the committee with a detailed options paper by 30 November?
We have to do this for Europe by Christmas and we have known that for three years. The European package was agreed by the Government in October 2014. I have seen up close the Departments' work up in providing analysis ,in a really heroic way, within short timelines. We need that level of ambition and heroic endeavour here so that by 30 November - in advance of Christmas because it is not that far away - we can look at some of the options. Could we commit to that?
We know from the modelling that has been done that the national development plan does not close the gap. Much of what it does takes us in the wrong direction or does not take us far enough. I will provide a number of examples. We have heard here about the importance of retrofitting. It is a brilliant investment. It is the lowest cost abatement curve. I can say that in advance. There is an endless number of reports that I could wheel out to show that retrofitting of energy efficiency buildings is the lowest cost carbon. We have €4 billion in the budget for that. Andrew McDowell, the head of the EIB, was in Dublin last week and stated that we need a budget of €50 billion. John FitzGerald stated that for social housing alone we need a budget of €5 billion. The OPW has stated that we are nowhere near meeting our energy efficiency targets in respect of public buildings. The numbers that were mentioned in Mr. Watt's presentation are a minute percentage of what we should be doing. That €4 billion will not be enough. We will have to change the national development plan.
I am speaking as a Dublin person but what is going on in transport is an absolute crime. It is a continuation of what Mr. Watt said about our sprawl because in Dublin we are widening the N11, the N7, the N6, the N4, the N3 and the N2. Mr. Watt correctly stated that the big problem is the sprawl model. The national planning framework said the right thing, which is that we were going to move away from it. The national development plan forgot that and threw it out. The only thing we are building this year is roads. We have no public transport projects in train. There is not a single cycling project under construction. It is the same again next year. That has to change. There is nothing about forestry or the new circular economy in the national development plan. Does Mr. Watt agree if we are going to be serious about our climate task that the national development plan will have to change?
Mr. Robert Watt:
I do not agree with the characterisation of the plan in the context of public transport. There are significant investments planned in BusConnects, the cycleways and the metro. As the Deputy knows, in Dublin it is about the future planning of the city. We have a model of development of unplanned urban sprawl which is not sustainable. It is not sustainable from a congestion or climate perspective. That needs to change. A significant development in recent months is the Land Development Agency whereby the Government sets out its plans to enable much more compact development. A key part of Project Ireland 2040 is that there is alignment between a spatial view, which is a land view, of the country and the capital plan. They are aligned. We can do more and we will see as the plan is being implemented how we can support the objectives of having a much more compact city.
On retrofitting, the plan sets out a significant investment programme, which is a start. It is on its way. We will see. Nobody would underestimate or downplay the enormous challenge we have in retrofitting because 88% of our houses were built before we had the energy rating system in place. We have significant challenges. We have discussed the costs already today of different insulations and options. We will fund it through a mix of tax incentives, tax increases to incentivise people to take the retrofitting, direct Exchequer grants, loan guarantees, low-cost funding and a variety of different options. There is no doubt that as we start the retrofitting programme and see how we are going that we will have to look at other instruments and mechanisms to accelerate the programme.
My view is that Project Ireland 2040 is the right plan in terms of the ambition and types of initiatives. There is a strong focus on compact cities and it is a question of us delivering on that. It is a big change from where we were before.
If I was in government tomorrow, I would switch all the road spending - widening the roads to Dublin is only going to make it a more difficult task for BusConnects - and spend it on public transport. I would also commission Bord na Móna to buy 10,000 heat pumps - in order that we might get a better price - and to introduce apprenticeships for young people in the midlands to start retrofitting houses.
I will ask two other questions.
I agree with what has been said about the governance issue. It has to belong to the centre of the State and the Government cannot be told what to do. The wording in the Citizens' Assembly's recommendation called for us to improve or resource the existing independent bodies. I would, therefore, resource the climate advisory committee more. I would have a commission to deal with transition and a green investment bank. There are loads of ways to do this. I agree that the centre has to be where this responsibility lies.
Last Monday, we made our submission on the consultation paper. Should we change the delivery board to be a climate action delivery board? Should we get Mr. Mark Griffin to co-chair with Mr. Watt and put climate at the centre of our decision-making process? That body has a responsibility because that is where the power lies, working with other Departments. Would Mr. Watt make that change in the governance structure?
I shall ask Mr. Moran the same questions. I ask him to come back to the committee by 30 November, in the same way that I have asked Mr. Watt, with an analysis of how we could introduce a cap and dividend scheme on the additional carbon tax that we raise. It should be assumed that we add another €20 in carbon tax under the current charging regime but return the revenue to the citizens in the way that Senator Grace O'Sullivan has set out. It is fine if Mr. Moran has to get the ESRI to assist him with the analysis. I ask him to supply a paper that will assist the committee in writing its paper on the implications, costs, opportunities and obstacles in that process.
Mr. Robert Watt:
I do not disagree with what the Deputy has said about the heat pumps and widening of roads.
The structural change may mean having the Secretaries General group chaired by Mr. Mark Griffin who will take that responsibility. That might be comparable with the governance structure for the delivery board.
I have seen it and I have faith that the Department can do the same.
Mr. Watt is right that the responsibility lies with politicians, so we have a responsibility. Interestingly, he cited the former Ministers of Finance and Public Expenditure and Reform, Deputies Howlin and Noonan, and the current Minister for Finance, Deputy Donohoe, as examples. Everyone who has been in government knows that the power lies with the Minister for Finance and whether one is a Minister with responsibility for energy, agriculture or transport, one must overcome that obstacle. It has been an obstacle in getting to decarbonisation. There was always a sense that the officials in the Department of Finance and Public Expenditure and Reform did not understand that decarbonisation is an economic opportunity for this country, that we can and will be good at it, that this is where the new economy is going and that retrofitting is not a burden or high risk. That attitude must change. We must give power to line Ministers, local authorities and mayors in order that everyone in this country has the opportunity to experiment and show off how we can make this shift. That is one of the changes that has to happen.
Mr. Robert Watt:
My comment was in response to Deputy Pringle's suggestion that perhaps it was civil servants around the country. That is why I suggested that Deputies Howlin and Noonan should be invited here to give their views on the matter.
I do not disagree with what has been said about opportunities. I am sure that the Deputy gets a sense from our contributions that we made this afternoon that we believe the urgency and scale of this challenge. It will involve enormous societal change which, in turn, will provide enormous opportunities. It will involve difficult decisions. Some sectors will go into the decline while others will grow and prosper. I do not look on this negatively; on the contrary, there will be great opportunities. However, it will involve the pain of transition. We should be upfront about some of those issues and not try to duck them. I believe that this is an opportunity for sectors to grow, prosper and provide employment.
Mr. Watt talked about the pain of transition, which is clear. However, we need to know the cost. He emphasised in his presentation that we need to know whether we will achieve the objective, which is a reduction in carbon emissions, and the cost of same. At every stage that is what we need to do here. The boat must be able to float in the end as well as us building it so when compiling a report, we must aim for something that will work.
Aside from the pain of transition, hitting targets and reducing carbon emissions, what will the economy and our lifestyles look like? I refer to economic forecasting and growth areas in general.. For instance, will consumers have access to cheaper electricity? Will we embark on a crusade of innovation, research and intellectual property for new technology solutions to displace fossil fuels? Will we be leaders in this area? Does the Department of Finance consider this an area where we can glean economic benefits in the long term? We can encourage businesses and innovators. We must let them know that we will prioritise our spending on innovative ideas and that we will have a new economy.
Mr. Derek Moran:
There is a cycle. Economic growth in itself without being moderated leads to increased emissions, which we have seen over the recent period. We must get to the conceptual idea of putting growth on a much more environmentally sustainable path. The OECD has conveyed a strong message that this is where countries should be going.
Mr. John McCarthy:
The focus of the EU, OECD, IMF, and so forth has moved away from just looking at GDP as a measure of our living standards, etc. The indicators tend to complement GDP with fiscal and environmental sustainability measures, inclusiveness and so forth. There is a work stream at a European level in Eurostat looking at some of these issues. Every two years we get together with the OECD to compile a report on the economy and consider sustainability as being more widely defined than just simply GDP. It is an area that a lot of work is being done on both in the Department and internationally.
Mr. Robert Watt:
I shall outline the Department's vision. How we heat our homes, transport ourselves and what we eat will be very different in the future. Earlier I mentioned big system changes. We will have a decarbonised electricity system. We will also have heat and transport electrified to a significant extent.
In terms of changes in the cost of batteries and power, the battery will change our society in fundamental ways. In ten or 15 years, there will be plenty of electric cars. Mr. Moran mentioned that there are 4,000 electric cars now. I firmly believe that the number will dramatically increase as the cost of batteries falls and we are seeing that. Some studies suggest, even in the absence of subsidies, that electric cars could be cheaper than fossil fuel combustion engines in four or five years. There will be dramatic changes but no one knows exactly.
Diesel engines are a mainstream technology and people buy diesel engines.
What distance does one need to be driving these electric vehicles compared to diesel cars for them to be beneficial as to the objectives that we are seeking to achieve?
Mr. Robert Watt:
I do not think there is an answer to that question. The issue of electric cars and the range anxiety - which is about a distance of 320 km without being recharged depending on the latest Tesla which go far - is that they are expensive. The issue is about the price of batteries which is coming down even in the absence of the subsidy the Department of Finance provides. There are very significant falls in the cost of batteries and significant improvements in their power. That is the big issue that drives the change. It only works if the electricity system is fundamentally different and is more decarbonised. That is another challenge which the Department of Communications, Climate Action and Environment can talk to the committee about.
Looking at the vehicle charging structure for electric vehicles, at the moment the regulator has said that the charging points must be moved from the ESB. The ESB has been providing these points free of charge. That will not go on for ever. Progress on that needs to move ahead of the take-up of EVs, because if the charging infrastructure is not there, this take-up will not happen. While we do have some at the moment, they are thin on the ground. In places there may be one in a major town of probably 20,000 people, at a railway station or some such point. There would be a need for five, six or seven such points. What is the view of the Department of Finance in that regard? We tried already to get the views of the Minister on this.
On renewable energy, we have huge potential here with wind and wave energy and even solar and other forms, such as biomass and biogas and indeed hydro. The climate action fund of €500 million over ten years does not reflect that we are making a major priority of this issue. I note that the national development plan has a €116 billion programme underpinning that. There is €7.6 million Exchequer and €14.2 billion non-Exchequer funding. Can Mr. Watt tell me where the €14.2 billion non-Exchequer is coming from?
While the €50 million a year is welcome as a starting point, the fact that it does not escalate from €50 million as we move on from 2020 and 2030, would not give hope that there will be any significant change as a result of that fund.
What is pertinent here is to look at the case of Bord na Móna and its transition from brown to green. We had that discussion again yesterday with Bord na Móna. In the constituency where I live and which I represent this is of huge concern to us. To move from brown to green, there is a huge area there for investment. Does the Department see that Bord na Móna would need a significant piece of that investment to help it with that transition?
The other question on funding for transition relates to the approximately €105 million that comprises the public service obligation, PSO, subsidy for peat. Is it possible within the rules of the Department and European Union for that or part of that to be used to help assist with that transition? The climate action fund of €50 million does not appear to escalate as we move on over the next decade to decade and a half. Could part of the PSO levy be brought into play?
My other question is on the disruptive technology fund of €500 million. What is that; where is it coming from and what can it be used for? If it is disruptive technology does that mean moving from one technology to another? Could Bord na Móna and the ESB, for example, use that type of funding?
Overall, what I am trying to get to is that we have a lot of bits and pieces happening around the place. A person was in contact with me today about solar power. LEADER seems to be handling some funding for it. SEAI has some elements of grants as well. The public find it very hard to get plugged in - pardon the pun - to all of this as to what is available. As a public representative who follows this, which I do, I want to know what is available and how to access it.
Mr. Robert Watt:
I thank the Deputy for his valid questions. Most of the issues on SEAI schemes are for the Department and the authority. Our remit does not extend to publicising the benefit of schemes. That is for the different agencies.
On the question of funds, the Minister and the Government decided than it would be very useful, rather than allocating money to the Departments, to allocate instead to a fund and encourage different players inside and outside the system to come up with ideas.
There is a fund on sub-technology, which could be climate-related or outside the climate field. There is a direct fund for climate initiatives. We have received lots of submissions and those ideas are being looked through, evaluated and assessed. The Government will make announcements on those in the coming period. We will see how we get on with these funds. It is an area we are interested in because it creates that competitive tension and it encourages innovation across the system. What they will fund at this stage, we do not know, but we will make an announcement shortly.
On renewables, I could be mistaken - Mr. Cleary might be able to confirm this - but they now make up 40% of peak demand for electricity depending on which time of the day or year it is. That is fairly significant. When the former Minister, Deputy Eamon Ryan, was there it was only 15% or 20%. That is not too long ago.
Mr. Robert Watt:
On certain days, if it gets very windy and it is cold there is a demand. A lot of the time when it is very windy there is not the demand for it. There are times, however, when the renewables can contribute a lot to the grid. Most of that is onshore wind. There is an issue about other sources of renewables and the extent to which they will compete. Onshore is the cheapest. Offshore is much more expensive. The last numbers I saw never really convinced me of the significant impact that solar was going to make in Ireland but then again I am not the expert here. There are others who are experts-----
Mr. Robert Watt:
-----who might know more about it than me. Solar works in hotter climates where the solar panels generate electricity for the air conditioning systems. When it is nice and sunny here it is not too cold or there is not that same demand for electricity. It depends.
Renewables are a positive story. When one thinks about how renewables penetration in the electricity system has evolved over the past five or ten years, it is a very significant change. If does show, as Deputy Ryan has mentioned earlier, that when the system becomes galvanised it can deliver very significantly. There are big issues on peat extraction which Deputy Stanley would know more about than I would I suspect. Then there is the issue of Moneypoint and what happens there.
Mr. Robert Watt:
The PSO is levied on consumers to pay for the higher costs of electricity related to peat extraction because it is inefficient compared to other forms of energy generation. I believe that would require the European Commission to consider how that would operate in the future in the absence of peat extraction. It is a charge that is currently charged on household bills and everything else being equal these would be lower in the future as we move to a different form of fuel mix without peat. There is a potential saving there.
On the final question, the first point I made about charging points is an interesting one. That is part of the public infrastructure that we are going to have to improve. If we are going to have a significant increase in the number of electric vehicles then there are going to have to be more charging points around the country.
The range anxiety issue can be addressed in a few ways. One is for car manufacturers to extend the distance that can be travelled without needing to recharge the battery. There is obviously considerable research to be carried out on that. The only thing we can do in the interim is to have more charging points. Even if it is extended, we will need a significant number of them, with one in every parish and every village.
I am asking the representatives of the Department of Public Expenditure and Reform about the funding for this. The ESB has been carrying this. The Department of Communications, Climate Action and Environment officials will approach officials in the Department of Public Expenditure and Reform. Have Mr. Watt and his colleagues had discussions with officials in the Department of Communications, Climate Action and Environment on this specific matter?
It is a really serious matter. We are talking about eliminating diesel and petrol by 2030. If between those two key Departments, the Department of Public Expenditure and Reform and the Department of Communications, Climate Action and Environment, we have not even got around to putting the charging infrastructure in place except what has been put there by the ESB, a stand-alone semi-State company, we are not in a good place. That needs to happen. The Ministers need to push it with the officials.
I asked about the disruptive technology fund. Is that aimed at, for example, Bord na Móna? If it or the ESB had to change from one technology to another-----
The only other question not answered fully related to renewable energy. While the €50 million has been announced and is in the capital programme, do the senior officials in the Department see any need to escalate that fund as we move along to 2021 and 2022 because we have a lot of catching up to do here?
Mr. Robert Watt:
The renewable side is funded through the electricity system. It is funded by user charges and the PSO as appropriate. It is not directly funded by the Exchequer; the Exchequer does not have a role. Through the REFIT scheme there is a floor - a guaranteed price. There is a subsidy, but not direct Exchequer funding.
I understand that clearly; I am not confused about that whatsoever. I am asking a different question. We have €500 million earmarked for climate action that goes alongside the national development plan. Are there any discussions at senior level in the Department to increase that fund between 2020 and 2030? It is a specific question.
Mr. Robert Watt:
We have not made a decision on the future fund because we are just looking at the applications now for the first tranche of funding. As I mentioned earlier, we are positively disposed towards these funds. We think they are a good idea because they encourage people to come forward with ideas. We will see. There is no reason we should not do it.
We have heard much about the electric vehicles initiative. I feel there is insufficient buy-in from people. I take the officials' point that the infrastructure is being developed further. In my constituency of Laois-Offaly there are very few charging points and the same is true in the wider midlands region. Are there any projected targets? What would the projected target for increasing the number of points in the midlands by 2030 be? Has the Department prepared a target plan?
Mr. Robert Watt:
As the Deputy is aware, there is a significant target for increasing the number of electric vehicles. It is 4,000 now, but it is due to go up to 500,000 by 2030. We will need a massive increase in the number of charging points. I believe the ESB produced a paper recently - I am not familiar with the details. It outlines how this will be implemented. It requires considerable infrastructure.