Dr. Ivana Capozza:

I thank the Chair and members of the committee for the opportunity to speak about the cost of climate action in Ireland. I also thank the committee for its interest in the OECD's work and, particularly, in the recently released Environmental Performance Review, EPR, of Ireland.

As our report indicates, Ireland's emissions of greenhouse gases have broadly followed the economic cycle over the past decade. They declined during the recession of 2007-2012, but rose by 3% with the fast economic growth in the second half of the decade until the Covid-19 pandemic hit the world economy, and the Irish economy as well. Significant underinvestment in the wake of the recession affected the quality of infrastructure and slowed down environmental progress. Environmental pressures, including greenhouse gas emissions, are likely to intensify with population growth and increasing urban sprawl, road traffic and livestock. The positive environmental effects of the Covid-19 crisis are expected to be temporary.

This is why more determined action is needed to tackle emissions from buildings, transport and agriculture. We welcome the Government commitment to phase out coal and peat electricity generation during this decade. While the share of renewables in the energy mix has more than doubled since 2010, fossil fuels still dominate the energy mix. In particular, coal, peat and oil provide approximately half of home heating. Hence, our review suggests that Ireland needs to phase out residential fossil fuel boilers more rapidly, while considering fuel-poverty risks. Ireland should focus support for energy efficiency on deep building renovations. Decarbonising transport is also crucial and it was a focus of our report. Ireland's dispersed settlement pattern and low population density imply that road transport is by far the dominant transport mode.

The EPR welcomes the climate action plan of Ireland as a major step towards bringing emissions down and meeting the European cap-and-trade system target by 2030 which requires the cutting of emissions by 30% compared to 2005. This plan would also put Ireland on the path to the net-zero emissions goal by 2050. However, we also highlighted that the plan's implementation requires considerable investment and financial resources, but these resources are not been sufficiently assessed. Given public finance constraints, engaging the private sector and financial markets is crucial. For example, the climate action plan contains actions such as massive home retrofitting and expansion of the use of electric vehicles and these actions call for households' willingness to invest.

This brings me to talk about climate change and transport. The target of almost 1 million electric vehicles by 2030 is the main pillar of Ireland's strategy to decarbonise transport. Generous subsidies have supported sales of electric vehicles but their share in the fleet remains negligible. Our report notes that these grants are a costly way to decarbonise mobility. Ireland should consider complementing these subsidies for electric vehicles with travel demand management, which would include road pricing, and also higher taxation of conventional vehicles and a more extensive charging network. The planned increase in the share of electric vehicles will also contribute to a significant loss of public revenue from motor fuel taxes and motor vehicle purchase taxes, which are linked to the CO2 emissions of vehicles. Therefore, there is a need to shift the focus of road transport taxation from fuel use to road use over the medium term. Such road pricing would help raising revenue on the one hand and better address congestion on the other.

More generally, better incentives are needed to manage travel demand. Reducing reliance on private vehicles and providing credible alternatives remains a challenge.

Congestion and the costs relating to it have grown and are expected to increase further, especially in the greater Dublin area. Except for the Dublin Port tunnel, Ireland does not use road-use charges to manage travel demand. Hidden car-use subsidies, such as free parking at a workplace, provide implicit incentives to commute by car. Our report recommends that Ireland consider congestion charges alongside investment and policies to enhance travel conditions for pedestrians, cyclists and public transport users. Revenue from charges of this kind could fund such investment and provide income support to vulnerable households.

As I touched upon revenue, I will now talk about taxes and revenue. A credible trajectory of carbon prices is essential to encourage low-carbon consumption, investment and innovation. It is welcome that the Government has committed to continuing to increase the carbon tax to reach €100 per tonne by the end of the decade. There are doubts, however, as to whether this would be sufficient to achieve the target of a 51% reduction in greenhouse gas emissions by 2030.

We welcome the fact that the carbon tax receipts are to be used to prevent fuel poverty, ensure a just transition of displaced workers and fund climate-related investment. The allocation of part of the carbon tax revenue to enhance some social welfare schemes this year is expected to mitigate the impact of the carbon tax on vulnerable households and even contribute to reducing poverty. Such earmarking of revenue can help create political support for tax increases but, on the other side, it may limit the flexibility to adapt public spending to changing needs.

It is very positive that Ireland extended the carbon tax to coal and peat in 2013 and, more recently, discontinued support to peat-fired electricity generation. In general, to maintain a consistent signal, Ireland should gradually remove remaining tax exemptions and rebates that encourage wasteful fuel use in agriculture, fisheries, heating and transport. For example, there is a cap on diesel prices for all hauliers. This limits operators' incentives to shift to more fuel-efficient vehicles, driving habits and logistics systems. Diesel is taxed at a lower rate than petrol, which is in common with many other countries, but this continues to give an incentive for using diesel vehicles, which can have negative consequences for local air quality and animal health.

There is a fuel allowance to help vulnerable households with heating expenses. This tends to support the use of fossil fuels, which are the main source of residential heating. We are aware that the allowance is a means-tested lump sum that is not required to be spent on heating. Nonetheless, its name is unfortunate and may have some undesirable behavioural effects. This is why we recommended the rebranding of the allowance and spreading it throughout the year, as opposed to just paying it in winter.

Let me move now to the need to steer the recovery towards the green transition. Our report highlights that, as part of its response to the crisis, the Irish Government provided sizeable funding to accelerate investment in sustainable transport, energy efficiency, water infrastructure and peatland rehabilitation. The EPR notes positively that in 2020, the Government's climate-related capital and current expenditure increased by 23% from the previous year to reach 3% of total budget expenditure. The report also notes, positively, that the national development plan allocates around €30 billion, or more than a quarter of its total outlay, to the climate and energy transition. We see that the in-depth review of the national development plan, to be completed this year, provides an opportunity to further align investment priorities with climate mitigation goals.

The OECD welcomes Ireland's ambition in transitioning towards a low-carbon economy. However, we have some concerns about its effective capacity to deliver. The scale of the investment needs is remarkable, while additional sizeable fiscal spending is required to support the economic recovery from the effect of the pandemic. There is a need to mobilise the private sector and financial markets, increase efforts on eco-innovation, provide stronger price signals and remove harmful subsidies to encourage businesses and households to take action. At the same time, there is a need to take into account affordability, the employment impact and regional disparities. This is not at all easy.

I thank the members for their attention. My colleague, Ms Samsonova, and I will be happy to answer members' questions.