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.