Oireachtas Joint and Select Committees
Tuesday, 21 September 2021
Joint Oireachtas Committee on Climate Action
Scrutiny of EU Legislative Proposals
We have apologies from Deputy Bríd Smith.
On behalf of the committee, I welcome Mr. Frank Maughan and Mr. Noel Regan from the Department of the Environment, Climate and Communications to today's meeting and thank you for coming before us to share your expertise on these important EU legislative proposals. The purpose of this meeting is to have a discussion on this package of proposals. Following this engagement, the committee will make a decision on whether it is necessary that a reasoned opinion be sent to the Dáil on some or all of these proposals.
I will read out a note on privilege. I remind witnesses of the long-standing parliamentary practice to the effect that they should not criticise or make charges against a person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. If their statements, therefore, are potentially defamatory in regard to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
For witnesses attending remotely from a place outside of the Leinster House campus, there are some additional limitations to parliamentary privilege and, as such, they may not benefit from the same level of immunity from legal proceedings as a witness who is physically present does.
Members of the committee are reminded of the long-standing parliamentary practice 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 also remind members that they are only allowed to participate in this meeting if they are physically located on the Leinster House complex. In this regard, I ask all members, prior to making their contribution to the meeting, that they confirm that they are on the grounds of the Leinster House complex.
For anyone watching this meeting online, the Oireachtas members and witnesses are accessing this meeting remotely. Only I, as Chair, and the necessary staff essential to the running of the meeting are physically present in the committee room. Due to these circumstances and the large number of people attending the meeting remotely, I ask that everyone bear with us should any technical issues arise.
I now call on Mr. Maughan to make his opening statement.
Mr. Frank Maughan:
I thank the committee for the opportunity to address the members today on behalf of the Department regarding the committee's scrutiny of proposals in the European Commission’s Fit for 55 legislative package, published in July. The package collectively aims to make the EU’s climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, in line with the decision of the European Council. The European climate law regulation, adopted in June 2021, has now given legal effect to the targets adopted by the EU Heads of State and Government. The package is extensive and is currently being analysed and considered by both our Department and other Departments that have a role in it. In parallel, the recent enactment by the Oireachtas of the Climate Action and Low Carbon Development (Amendment) Act 2021 sets Ireland on a similarly ambitious decarbonisation trajectory for 2030, but it must be stressed that there are two distinct targets, each with its own measurement and compliance regimes. The committee has indicated it wishes to focus specifically in its session today on the proposals to extend the EU emissions trading system to new sectors, COM (21) 551, and to establish a social climate fund, COM (21) 568. The committee has received information notes from the Department on both of these proposals but I will briefly set out the key elements of each.
The EU emissions trading system, ETS, is a key pillar of EU climate policy architecture. The sectors it covers, primarily electricity and heavy industry, are obliged to achieve a 43% reduction in their emissions by 2030 relative to 2005 levels. The new proposal seeks to increase this target to 61% and to incorporate emissions from maritime transport within the overall cap. This will be achieved by a steeper annual reduction in the available allowances of 4.2% instead of 2.2% per year under the current system, following a one-off reduction of the overall emissions cap by 117 million allowances, also known as "re-basing". The Commission also proposes to gradually remove free emissions allowances for the aviation sector, which is already covered by the EU ETS for domestic and intra-EU flights, and to move to full auctioning of allowances by 2027 to create a stronger price signal to drive emissions reduction in the sector. Accompanying changes to the system’s market stability reserve will allow the system to absorb the historical surplus of allowances more quickly to help achieve this more ambitious overall cap.
The Commission is also proposing to extend the ETS to fuels used in road transport and buildings and for these to be covered by a separate cap, with distinct trading arrangements to the current system. The new system will operate at the point at which transport and heating fuels are placed on the market rather than at the point of end use. This will place the obligation on fuel suppliers, rather than households or drivers, to hold a greenhouse gas emissions permit, to report their emissions and to hold and surrender allowances to cover those emissions. It is proposed to become operational from 2025, with a cap on emissions set from 2026 and with the objective of reducing emissions annually to yield an overall reduction of 43% in 2030 compared to 2005. The Commission proposal indicates that the overall objective of this proposal is to ensure that sectors other than those currently included in the ETS contribute cost-effectively to the emission reductions needed in line with EU targets and Paris Agreement commitments, while ensuring synergies with other policies targeting those sectors.
To address the potential impacts arising from the fact that the fuel suppliers subject to this new regime are likely to pass on some of their costs to consumers buying road transport and heating fuels, the Commission has also presented a separately legislative proposal for a new social climate fund. This proposal recognises that increases in the price for fossil fuels will have social and distributional impacts that may disproportionately affect those households, microenterprises or transport users who spend a larger part of their incomes on energy and transport and who may not have access to alternative transport solutions. This could be achieved through temporary income support or investments intended to reduce, in the medium to long term, the reliance on fossil fuels through improving the energy efficiency of buildings, decarbonisation of heating and cooling of buildings, integrating energy from renewable sources and the provision of improved access to zero- and low-emission transport. The proposal anticipates that a portion of the auctioning revenue from the new ETS for buildings and road transport will be allocated to the EU budget and from there to the member states for expenditure through the social climate fund.
Each member state will be required to develop a social climate plan, which will set out the measures and investments that will be financed from the new fund, as well as their expected costs and milestones and targets to achieve them. Each social climate plan should, first, provide vulnerable households, vulnerable microenterprises and vulnerable transport users with the necessary resources to finance and carry out investments in energy efficiency and decarbonisation of heating and cooling in zero- and low-emission vehicles and mobility, and, second, mitigate the impact of the increase in the cost of fossil fuels on the most vulnerable and prevent energy and transport poverty. It is proposed that €737 million will be allocated to Ireland over the period for the first social climate plan from 2025 to 2032.
Member state allocations are calculated under the proposal according to an allocation key, taking into account population at risk of poverty living in rural areas, emissions from fuel use in households, households at risk of poverty with arrears on their utility bills, gross national income, GNI, and the member state’s share of reference emissions for the buildings and road transport sectors. Member states will be required to contribute at least 50% of the total costs of their social climate plan, with the costs of this expected to be borne by member states’ share of auctioning revenues from the buildings and road transport sectors. A total fund of €1.474 billion would, therefore, be required for Ireland’s social climate plan over the seven years concerned.
The proposal to apply a separate trading system to road transport and buildings and to use revenues from the new system to finance the social climate fund would potentially reduce the funding available for Ireland’s own measures to reduce greenhouse gas emissions. In accordance with the programme for Government, revenue from increases in carbon tax is to be ring-fenced for climate purposes and is a key part of funding a just transition through targeted social welfare measures that protect vulnerable households against fuel poverty, fund socially progressive retrofitting schemes and partially fund a rural environment protection scheme 2, REPS 2, encouraging the uptake of greener and more sustainable farming methods. Government policy is not to levy a carbon tax in sectors of the economy included in the emissions trading system as this would amount to a form of double taxation. As the sectors proposed for inclusion in the new ETS for road transport and buildings are also subject to a carbon tax, this would require the Government to reduce the scope of application of this tax, therefore affecting expected future revenue from the carbon tax.
While a share of auction revenues from the new ETS would accrue to the State and funds would be made available to Ireland from the EU budget under the new social climate fund, these revenues are likely be significantly lower than those raised by the carbon tax. It might be noted in this context that the full year yield from carbon tax in 2020 was approximately €495 million, when the applicable rate was €26 per tonne. As the committee will be aware, the Oireachtas has also legislated for an annual schedule of increases in the rate of carbon tax through the Finance Act, which provides that the rate will reach €100 per tonne by 2030. I should stress that the Department and several other Departments are continuing to examine the implications of both proposals in light of the issues that have been identified and in the context of the wider Fit for 55 package. The Minister proposes to brief the Government on the Department’s initial assessments with a view to informing the position to be taken during the negotiations on each of the proposals in the coming weeks.
That concludes my opening statement. We are very happy to take any questions the committee members might have.
I thank Mr. Maughan. This meeting is confined to two hours so I propose that each member be given two minutes to address their questions to the witnesses, to ensure that all members get an opportunity to pose their questions. Is that agreed? Agreed. If members will indicate, I will call them in order. As there are no indications yet, I will go first. I have two questions. One is in respect of your final comments, Mr. Maughan, on the carbon tax. Is this an either-or situation or would it be the case that this climate fund could co-exist with the carbon tax, the schedule of which is planned through to 2030? He might elaborate on that.
Second, perhaps he could give some clarity on how an ETS for transport and buildings might work. It is not particularly clear to me. I am quite familiar with the ETS that has been in existence for a long time at this point. It is very much about incentivising the end user to reduce emissions and reducing a cap in that market gradually over time. That has been successful, but I am not clear how it would work where it is essentially the producer or fuel suppliers, as I read it, that would be required to operate in this new proposed ETS. Perhaps he would elaborate on how that might work versus the existing system.
Mr. Frank Maughan:
Before I begin, for the information of the committee, Mr. Regan and I are both attending to cover each of the proposals. I will aim to address any questions relating to the climate fund proposal and Mr. Regan will deal with any questions that arise relating to the extension of the EU ETS.
I will aim to address any questions in regard to the social climate fund proposal, and Mr. Regan will deal with any questions that arise in regard to extension of the EU ETS.
On the Chair's first question on whether it is, effectively, an either-or, the challenge that has been identified in the scrutiny note and again in the opening statement is that Government policy to date on the application of carbon tax in Ireland has been that it will not apply in the sectors which are covered by the EU ETS in Ireland. The EU ETS covers electricity generation and large industry, and the carbon tax is not levied in those sectors, but is levied in other sectors of the economy where fossil fuels are used. By extension of that policy, it would have implications for the future scope of the carbon tax. That is not necessarily to say it is automatic. This is a policy question and Government has not taken a policy position on it yet. It is to draw the attention of the committee to this issue which arises by virtue of the proposal to extend the ETS into the road transport and heating sectors where the carbon tax currently applies.
The second question relates to the operation of the ETS in the new sectors and I will pass over to Mr. Regan.
Mr. Noel Regan:
I will describe what the European Commission is proposing in terms of road transport and buildings. First, it is important to say that the current EU system for road transport and buildings falls within the effort sharing decision. Those two sectors plus agriculture and some others fall within the effort sharing decision which essentially means that each member state has a binding national target by which to reduce its emissions. Ireland's current national target is 30% by 2030. The Commission is proposing to keep the effort sharing decision and the national targets for these areas, but in addition it proposes to add this new system which provides carbon pricing for road transport and buildings. It is essentially a separate emissions trading system from the one currently in place for electricity generation and industry. It is completely separate with no linkages.
It is intended to commence from 2026 and, as pointed out by the Chair, it will not be applied at the point of emission as is currently the case for the ETS. Rather it is applied at the point of release of consumption of fuels. Essentially at the same place excise duty is applied, this new ETS system will be applied. That is where the monitoring and accounting would take place. What it does is that if a fuel supplier releases their fuel, they must have an equivalent certificate from the EU scheme, equivalent to the amount of emissions caused by that fuel. The certificates available will be limited over time, and they will reduce each year in order to reach minus 43% emissions reduction by 2030. This is a market which gets more scarce over time for the emissions to be released, which essentially puts a price on the carbon.
Another important point is that there will be a separate market stability reserve which will be used to dampen price fluctuations because it will be a market based mechanism so, unlike the carbon tax that is in place at the moment where there is price certainty, we can expect that carbon prices will fluctuate. That market will be in place from 2026. There will be a trial period of reporting only in the years 2024 and 2025. That is two years of testing followed by implementation from 2026, with a reducing amount of allowances available each year to 2030. Unlike the current system for large industry there will be no free allowances. Everybody must get an allowance for the fuel when it is released.
The emissions savings as a result of this will count against each member state's target but it is a separate complementary mechanism, as proposed by the Commission. It is not intended to replace the current member states' national targets for these sectors. That is an overview of the current position. I would note that member states have many questions in regard to how this will be applied and how it will work in practice, because it is quite a complex system to implement.
I thank the Chair and both of our witnesses. My question is for Mr. Maughan. I would like to tease out where he got that 737 million allocation for Ireland under the social climate fund. Why is only 25% of the ETS going to be allocated to the social climate fund? On the allocation key Mr. Maughan referred to in the opening statement, we do not really know the extent of fuel poverty in Ireland so how have we identified those households? I know the 2015 report commissioned by the Department, when it used the objective indicator, said that fuel poverty could be as high as 28% and even as high as 50% in the north west. The later report from the Department of Public Expenditure and Reform in 2020 said we actually do not have sufficient data to use that objective measure from the 2015 report. The fuel poverty strategy lapsed in 2019. We were told we would have the Central Statistics Office, CSO, indicators to better measure fuel poverty by the close of 2020. How have we arrived at the figure of 737 million and what indicators did the Department submit to the EU to get that figure? I also ask Mr. Maughan to touch on why it is only 25% of the ETS that is going to the social climate fund.
Mr. Frank Maughan:
The first part of the question relates to the amount of 737 million. This is an outcome of the key that has been set out in the legislative proposal for assessing the distribution of the revenues that will accrue to the EU budget from the social climate fund, and that amount is included as an annexe to the legislative proposal. It is broken down to 242 million in the three years 2025 to 2027 and a further 495 million in the years 2028 to 2032. The reason it is broken down in that way is that the Commission is proposing that the revenues will be allocated to the EU budget, and the budget runs on a seven-year cycle which ends in 2027. I understand that, from a legal point of view, the Commission needs to separate everything out into two separate sub-periods. That explains that.
As a share of the overall total available for the social climate fund, Ireland's allocation would approximately be just over 1% of the overall fund and that is broadly in line with Ireland's share of population. I will reiterate the elements of the allocation key: population at risk of poverty living in rural areas, emissions from fuel use in households, households at risk of poverty with arrears on their utility bills, gross national income, and the member state's share of reference emissions for the sectors concerned, that is, buildings and road transport sectors.
Thus the Commission does not specifically look at fuel poverty per sebut it does take data which is published data and which is available to it and to everybody else from EUROSTAT and other published sources. Data on utility bills, for example, will be available to the Commission for the Regulation of Utilities, CRU. This is based on the Commission's own examination of the data, not on data submitted by the Department. This is obviously one of the things we will drill further into as the examination of this proposal progresses.
As to Senator Boylan's question on why limit it to 25%, that is not something I can answer too specifically. It is what the proposal states. The expectation is that of the share of revenues from the extended ETS, 25% will go to the EU budget. Another portion will be allocated to an EU-managed innovation fund, which is an existing fund in place as part of the EU ETS competitive fund for the promotion of new technologies. The remainder will be allocated to member states' budgets as auctioning revenues. That is the broad breakdown of how the revenues will be allocated. The Commission has chosen 25% for its own reasons. It does not make a clear justification for that in the proposal but clearly the higher you go in terms of the percentage the more fluidity there is going to be about the revenues coming from the new ETS because as a market-based mechanism, the price of allowances in the scheme is likely to fluctuate, as is the case in the existing scheme. In principle it would be difficult to fix a total amount that could or would be made to the social climate fund at a higher percentage. I hope that answers the Senator's questions.
I just want to clarify something. Mr. Maughan is saying the allocation is 1% of the overall fund because it is based on population, so is it population or the allocation key which is deciding how much money Ireland would get? To reiterate, if Ireland is expected to submit a social climate plan to be eligible to access that social climate fund, how are we going to do that if we do not the have accurate statistics on how many households are in fuel poverty? How we are going to be able to prioritise those households if we cannot identify them and we do not know the extent of the problem?
Mr. Frank Maughan:
On the Senator's first question, what I said was the share of the overall fund Ireland would be allocated according to the proposal is roughly in line with our share of the EU population, but that is not a determining factor in the allocation key. The second question is really a matter of which statistics we would be expected to use in the preparation of the social climate plan to justify the proposed interventions. The Commission has chosen a number of different statistics to go about constructing the allocation key. The Senator is correct in identifying issues around the identification of households in fuel poverty. The data on that is not as clear but there is clearly much work to be done to negotiate this proposal and to determine how member states should be able to prepare a social climate plan and to justify their proposed interventions to the Commission as part of that social climate plan.
It is very early days in terms of the questions the Senator is raising about the statistics. This is one of the issues the Department will be delving into further in the months ahead as the negotiation progresses.
I thank the officials. I have a couple of questions on a broader level. Perhaps Mr. Maughan or Mr. Regan will outline the timeline for negotiations, where we are in that process and where this meeting sits in terms of the overall adoption of this. I appreciate we are, as Mr. Maughan said, at an early stage. I also have a question on the relationship of this proposal and suite of measures to the recently-adopted climate Bill here. The officials were saying they are completely separate but obviously there are implications for the climate Bill and I understand some road transport measures may now be monitored at a more European level. What are the implications of that for our own targets in the climate Bill? Is there a perfect alignment there? Perhaps it is not a matter for the officials but on the relationship between the EU's 55% by 2030 target and Ireland's commitment to 51% by 2030, I am aware there are different baselines but how do they compare?
Senator Boylan raised the quality of information that we do or do not have on that allocation key and matters of demographics, fuel poverty, rurality and deprivation. That is something we must improve on and address.
What are the implications for the carbon tax, from the officials' own perspective? Is it the case that a number of pieces subject to the carbon tax will not now be part of that? There is then the question of the future of the tax itself. What is the officials' sense of the options there for Government to continue with it in relation to other areas, to phase it out, reduce it or change the approach to it? What is their sense of how Governments will be considering it given in future it will not be as applicable to these areas as it might have been in the past?
Mr. Frank Maughan:
I thank the Deputy. I might lead off in responding and ask Mr. Regan to come in on the relationship to domestic legislation.
On the overall schedule, it is very early days. The package was only published in July. It contains 13 proposals in total, five of which are completely new, eight of which are amending existing pieces of legislation, and more proposals are to follow later in the year. They are spread across a number of Council formations in Brussels, including the Environment Council, the Energy Council and the Economic and Financial Affairs Council. The two proposals before the committee today are being dealt with at the Environment Council. Member states have really only started the process of examining the proposals. There has been an initial round of meetings, probably on most of the proposals, at this stage.
That includes the Commission presenting the proposals and initial questions. This will roll out over the next 18 months to two years. There is a long agenda of negotiations. The negotiations which took place a number of years ago to adopt the current 2030 climate targets took up to three years to complete, so it is a long process. The Deputy made a point about data, supporting Senator Boylan's point. I have addressed the implications for the carbon tax in response to an initial question from the Chair already. This will potentially have implications for the scope of the carbon tax but these are early stages. These are policy decisions for the Government. I will restate what I said in my opening statement. The Oireachtas has legislated for a schedule of carbon tax increases up to 2030. That will take place. The interplay between that legislation and these proposals needs to be carefully thought through.
Mr. Frank Maughan:
It will be done. We have clear data on carbon tax revenues and on the share of those revenues across different fuel types, whether petrol, diesel, kerosene or marked gas oil. Those data are prepared by Revenue based on the revenue coming to it. I have referred the committee to the tax strategy group paper published by the Department of Finance last week, which sets out these data in some detail, as part of the annual pre-budget consideration of taxation options. On the other side of the equation, we have clear data from the Commission proposal about how much of an allocation Ireland would be expected to get over the seven years of the proposal. There is a difference between the two figures. The annual carbon tax revenues are much higher than the average annual allocation Ireland would receive under this proposal. It is not necessarily the case that all sources of carbon tax would be supplanted by this. There are potentially other sources of carbon tax application which would not be covered by the EU emissions trading system, EU ETS, proposal. The big issue that will be at play in the negotiations will be precisely where the EU ETS will land and what sectors it will cover. That will impact on this too. There are a number of different elements to this, which are all moving parts as the negotiations under the two proposals progress. We will examine these things in some detail in the months ahead.
There was a question about the relationship between the Fit for 55 targets and the climate legislation that the Oireachtas enacted in July. I will pass over to Mr. Regan to address that question.
Mr. Noel Regan:
Fundamentally, both the EU package and Ireland's climate Act are based on the same 2050 target of having a climate neutral or net zero economy. The final goal is the same for both. Before I get into the detail, our emissions profile differs considerably from the EU average for two key reasons. We have a lower amount of heavy industry than is typical and our agricultural emissions are higher than the average of other member states.
Looking at how they compare, 2030 is a key staging point for both. The EU target is at least a 55% reduction compared with 1990 levels. The climate Act states that there should be a 51% reduction from 2018 emissions. The Deputy has correctly pointed out that the bases are different and, therefore, a comparison is difficult. It is important to state that the emissions target for the ETS for large industry and electricity is an EU-wide target, so the 61% is not for member states but for the EU. All that said, this depends on what assumptions are applied. It is safe to assume that the climate action policy will be as ambitious in 2030 as the EU package. Certain assumptions could be changed but that is safe to say at a high level.
On the Deputy's question about the sectors and how we track them, it is important to state that both our inventory for the national system and the EU system will be based on the IPCC guidelines. The EPA manages our inventory of greenhouse gas emissions and follows the international guidelines. That can be broken down into considerable detail. Depending on the Government's decision on sectoral ceilings, granular information is available from the EPA to satisfy both the national system and the EU accounting system, which essentially follow the same methodology from the bottom up.
My question is about the timeline for the social climate fund. Will there be a scenario where the social climate plan, with in excess of €700 million allocated, and carbon tax coexist, with ring-fenced revenue collected from carbon tax for some of the same intentions as the social climate plan? Carbon tax funding will go to sustainable farming, retrofitting, warmer homes, and to address fuel poverty. If they coexist, is there a possibility of significantly increasing the funding to address fuel poverty and increase social welfare payments, including fuel allowance, living alone allowance and others? Is that the intention and will the witnesses cover that point?
My second question is about the sectors being addressed by the ETS. The witnesses mentioned building and transport. When they say transport, are they referring to haulage? Will they elaborate on that and on what they mean by building?
Will someone give a brief overview of the success or challenges of the ETS so far in decarbonising various sectors in Europe?
Mr. Frank Maughan:
I will deal with the question of the timeline and potentially overlapping application of the social climate fund and domestic measures, then I will ask Mr. Regan to take the questions on the ETS. The proposal as published by the Commission envisages that member states would prepare and submit a social climate plan by the end of 2024. It has directly linked that to an existing deadline for member states to update their NECPs, which are in place to set out how they will meet their current climate and energy targets under the pre-existing 2030 targets framework.
The NECP has to be updated by mid-2024 and the Commission is proposing that the social climate plan will be submitted alongside that. There is then a process whereby the Commission assesses the plan alongside the NECP. Clearly, they will be looking for coherence between the two. They will also be looking for coherence with member states' planned use of other EU funds, be it the Structural Fund or the Recovery and Resilience Facility, Ireland's plan for which has now been approved by the Commission. There is a fairly extensive process envisaged on the Commission side and then the Commission will formally adopt a decision to approve the plan for the member state after which it can commence expenditure.
On the second part of the question regarding the overlap, the Commission is presenting the proposal effectively as if nothing is happening in the sectors already in terms of the types of interventions. It does not address the question of whether member states can continue to do what they are doing. This is one of the points that needs to be teased out. What they say is that the funding can be used for two types of measures. The first of these are temporary income support measures. That is the type of measure the Deputy raised in respect of current types of social welfare supports. That is the type of measure that is contemplated there. The second type of measure is more in the line of household investments. That will be issues such as energy efficiency - retrofitting of buildings, installing zero-carbon heating or, as the case may be, cooling systems such as heat pumps - installing renewable energy, for example, photovoltaic panels on the roofs of houses, and supports for access to zero-emissions mobility, which could be, for example, supports for the uptake of electric vehicles along the lines of the grants that are currently available from the SEAI.
It is clear that, across the various types of interventions, the Commission contemplates that Ireland is already doing a lot of these things. The question we cannot answer right now is to what extent they will continue in parallel. On the face of it, they could because if it is not separately being funded by the EU budget, there is nothing to prevent the Government continuing to fund those measures domestically. It would give rise to questions of alignment and coherence. One thing that comes out from the Commission proposal is that it anticipates that member states, through their social climate plans, will establish clear targets and indicators for what they will achieve by their proposed investments under the social climate plan and the release of funds from the Commission to the member states is contingent on the achievement of those targets. It entails quite a degree of oversight by the Commission in terms of the expenditure of funding under the social climate plans and that would, in turn, give rise to questions about how money is spent in parallel through the Exchequer. These are all issues that will have to be teased through in understanding how the types of interventions under the social climate plan would fit into the policy interventions and funding interventions the Government has in place or has planned over the coming years.
The other questions are related to the scope of the sectors that are proposed to be brought into the ETS. I will ask Mr. Regan to take those.
Mr. Noel Regan:
I will speak to the scope of the sectors and I think the Deputy also asked about the success of the ETS to date.
In terms of the scope of the sectors, its is buildings and road transport. That is an important delineation. It is road transport.
There are separate proposals in this package for both aviation and maritime transport. Aviation is already in the current emissions trading system for intra-EU flights and flights within the EU are in the ETS. However, there are considerable free allowances to the airline operators and a proposal now is to phase them out by 2027 so that, essentially, airlines would pay the full price of carbon from 2027. For international flights outside the EU, there is a new agreement being put in place, called Carbon Offsetting and Reduction Scheme for International Aviation, CORSIA. That is a worldwide system and that would be for flights outside the EU.
In terms of maritime transport, the Commission in its impact assessment has identified that, in the absence of an intervention in the maritime transport area, essentially emissions will not drop by 2050. This is largely an oil-based system. They have a new proposal to include maritime transport within the main ETS, but not in the buildings and road transport one. The existing ETS will be extended for aviation in terms of free allowances being reduced, maritime transport will go into the existing ETS, and the new ETS will cover road transport. Those are the three parts.
Mr. Noel Regan:
Essentially, petrol and diesel that is used in the system. It would be applied at the same place where the excise is applied currently - petrol and diesel, practically speaking. If you are running a zero-emissions vehicle, clearly it would not apply because there would be no emissions. It is petrol and diesel, essentially, that is used.
Mr. Noel Regan:
Exactly. In terms of the Deputy's second question as to whether the ETS has been a success, the current target is a 41% emissions reduction and the Commission's own impact assessment states that it expects to exceed that without further intervention. It will say absolutely it has been successful. In fairness, it has been complemented by a renewables target which has been particularly successful in increasing renewables but the ETS has certainly played a role. At a high carbon price, we will switch coal to gas which can reduce emissions.
The Commission essentially is saying that a price signal is needed to complement the transport and buildings sector and that, in the absence of it, the existing policies are not working. It has said - it is the case in Ireland too - decarbonising transport and buildings is difficult. Buildings offers many cost-competitive ways to decarbonise, but in the absence of a price signal, that can be quite difficult.
The Innovation Fund is a feature of the ETS. Basically, money goes to large industry to innovate and decarbonise large factories etc. That is a key part of the proposal. To date, most of the emissions reductions in the ETS have been in the electricity sector. Industry is more challenging. They have the Innovation Fund, which they will increase funds to. Recently, the Commission announced Aughinish Alumina has been successful in an application for that very fund.
I thank the officials for their presentation. As a society, we must be very careful about this transition and make sure it is fair and manageable for people who are already finding it difficult to exist financially.
I refer in particular to situations where people spend a large proportion of their incomes on heat and light and, especially in Ireland, an even larger proportion on rent and mortgages. This crisis is coming straight at us and it is urgent given the financial impact that it will have on people. It will be a double whammy of higher bills combined with possible electricity outages. Do the witnesses believe that the outline in this regard in respect of support is in any way timely or adequate? Is it a true recognition of the urgency that we are facing in respect of this issue? It seems to be like offering someone who is drowning a voucher for swimming lessons instead of throwing them a lifebuoy.
Regarding what Mr. Maughan said when he was talking to Senator Boylan, the social climate fund is calculated at 1% based on the share of the population. This allocation is not, therefore, linked to economic and social needs. In situations where people may already be paying a high proportion of their incomes towards the costs of accommodation, is this type of allocation leaving people in precarious living situations in respect of essential services such as light and heat? That is before we even consider the situation with transport needs. It was mentioned that it was early days in this context, but I regard this as more like the end days. People have to live with this detail and plan their day-to-day lives. The abrupt nature of climate change, which was made clear to everyone during this summer and again in recent reports, requires an equally abrupt reaction. Is the current approach fit for purpose?
Mr. Frank Maughan:
To clarify my previous response to Senator Boylan, the proposed allocation takes into account different poverty indicators. I listed them and they are also contained in the scrutiny note the Department submitted to the committee. The reference to 1% was only to indicate that, as a share of Ireland's proposed allocation, such a figure is broadly equivalent to our share of the population of the EU. To clarify, it is in no way how the proposed allocation was calculated.
Some of the issues raised by the Deputy are questions of policy and I will not be able to respond to them in the way that the Deputy has requested. I recall, though, that the programme for Government has a statement regarding the use of carbon tax revenues over the coming decade and the decision taken in the context of budget 2021 to introduce several changes to social welfare supports as a direct response to the increase in the rate of carbon tax in that budget. Those changes included increases in qualifying child payments, living alone allowances and fuel allowances and they were introduced specifically to respond to the increase in the rate of carbon tax, with a specific intention to counteract the effects in different household types. They were based on an analysis undertaken by the Economic and Social Research Institute, ESRI, prior to the budget. Those interventions, if I can term them that, were made in the context of budget 2021 and the programme for Government has a statement of policy concerning how increases in the rate of carbon tax in future years will be dealt with through similar mechanisms.
I thank the witnesses for the presentations. This is a complex issue, primarily because we seem to be in the early stages of developing this policy.
Where are we with this undertaking from a process perspective? How will this committee be asked to engage in the future? Has the Department done any analysis on the potential impact of these proposals? Regarding the emissions trading system, ETS, for example, if we are going to move non-ETS industries over into a European ETS scheme, what will be the cost in euro of doing that? From an accounting perspective, the Department must have some idea at this stage of what such a change would mean in the context of transport and buildings.
I may be wrong about this point, but the suggestion seems to be that we will be moving industries and sectors now participating in our carbon tax scheme over into a European tax scheme. In that context, it will then be directed at a European level how those moneys will be spent when the funds come back to Ireland through the social fund. Does the Department have concerns regarding subsidiarity when it comes to this aspect? I ask that because I assume that we are already collecting carbon taxes from these industries and that revenue will now go to Europe and then be funnelled back to us, but with specific conditions attached concerning how we can spend the money. Has any work or analysis been done on that aspect of this process? There is a broader concern in this respect regarding the principle of subsidiarity, the collection of taxes and how we determine where we are spending our money.
Those are most of my points. I am interested in how we can input into this process, the level of analysis that has been done and if the committee can see that analysis. Do we have any authority or remit in directing that work? It would be interesting to know some of that information.
Mr. Frank Maughan:
I thank Deputy Whitmore for the questions. I reiterate the point that Mr. Regan and I made already. This process is at an early stage and analysis is under way in the Department and in other Departments of all the Fit for 55 proposals. This work is ongoing. These are complex files on detailed proposals with impact assessments underpinning them. I think I saw an estimate recently which suggested that there are approximately 3,000 pages of proposals overall. It is a lot to get through.
Regarding engagement with the committee, the Department has no issues in that regard. It is a matter for the committee, I guess, to assess how engaged it wishes to be throughout this process. Turning to issues with subsidiarity, this was identified in the Department's scrutiny note for both proposals. The Deputy summarised it very well in respect of pinpointing the broad thrust of what will happen in this process. As a result of these proposals, revenues being raised domestically through our taxation system may in future accrue, at least in part, to the EU budget and then be funnelled back to the member states. Those revenues will also be distributed to the member states in a different way. That is where there are concerns on our side about the overall thrust of the proposal and whether it will achieve the outcomes we are seeking as effectively as through our own taxation and expenditure policies. I cannot offer a final judgment on that aspect today. We are not at the stage where we can offer a definitive conclusion on this process one way or the other. We are simply identifying the issues that this proposal raises for Ireland and other member states. We are not alone in having a national carbon tax in place.
Mr. Frank Maughan:
My opening statement mentioned that the Minister intends to bring a memo to the Government shortly to set out the overall position that Ireland will take on the various files. It is fair to say, and the Minister has it said already, that Ireland welcomes the overall package and its ambition but within that there are elements in individual proposals that are currently being scrutinised and a policy position on them needs to be taken by the Government.
I will pick up on questions by Deputy Whitmore and O'Sullivan and go beyond the issue of revenues and the change this proposal could bring and the issues of subsidiarity. I refer to moving road transport and buildings. You are probably talking about something like 30% of Ireland's overall emissions. I think transport is 40% of energy-related emissions into another system. Are we saying those sectors would be pulled outside of the effort-sharing system we have at the moment and does that effectively undermine the work that we have done to date, the Climate Act and the work that the Climate Change Advisory Council are doing, and the work to establish the sectoral emission ceilings? Am I correct in understanding that those two big parts would no longer be under the jurisdiction of the Climate Act?
Mr. Noel Regan:
On the first point, the Chair is correct that buildings and transport amount to approximately one third of Ireland's emissions. The effort-sharing decision is the piece of legislation that covers targets for buildings, transport and agriculture. Ireland's current target is minus 30% by 2030 and the proposal is a new target of minus 42% by 2030, so that is a considerable increase. The Commission is not proposing to amend the effort-sharing decision to any significant degree. It is one of the smaller files in this package. It is not proposing a major restructuring of that legislation. Essentially, it is proposing the new emissions trading system for buildings and road transport to complement the effort-sharing decision and not to put it aside.
Finally, I do not think it undermines the Climate Act. Clearly the package is very complicated and is likely to change as it is negotiated over the coming years but the Act is clear and crisp about what needs to be done in Ireland, namely, overall carbon budgets and sectoral ceilings. I do not think this package would undermine the Climate Act emissions targets, sectoral ceilings, etc. The Climate Act is very well developed and will work in a clear way. As I mentioned before, in the EU system targets for industry and electricity are on an EU-wide basis where the Climate Act puts them on a national basis and gives Ireland its own clear targets for all sectors.
I want to pick up again on the 25% to the social climate fund. To put aside the fact that I and my party have issues around the emissions trading scheme, is it not the case that under the current emissions trading scheme 50% of the revenue raised is supposed to be allocated for climate projects? Ireland is an outlier in that we do not ring-fence and we have been called out by the Comptroller and Auditor General because of that and the failure to provide a high level of detail on how we use that revenue. If it was 50% under the existing emissions trading system and is now only 25% under a measure that will clearly impact on households rather than industry, would the Government's position going into the EU Council negotiations be that it would call for a higher percentage of the revenue to at least be targeted in that social climate fund? Mr. Maughan said the memo is going to the Department but will this be considered by the Government? It seems odd that it is 25% in this but they are asking for 50% in the existing ETS for climate-related issues.
The officials may not be able to answer this and I can refer back, but we were promised CSO indicators would come into place in 2020 to better identify those households which would be impacted by energy poverty. Is there any indication of when we will see those CSO indicators as they are a crucial part of our doing those climate plans? The programme for Government commits social transfers to address fuel poverty but we need to be able to identify the households which are most at risk and which would most benefit from retrofitting. The Department of Public Expenditure and Reform admits that we do not have that data and that is why the CSO was asked to do that.
Mr. Frank Maughan:
On the 50% versus 25%, the current emissions trading directive requires that at least 50% of revenue generated from auctions must be used by member states to finance climate-related activities. I understand that Ireland has assigned pretty much all revenue from auctioning in recent years to climate-related activities. However, that is not directly comparable with the 25% figure in the current proposal because that figure relates to the amount of revenues that should be effectively diverted to the EU budget for the social climate fund. The remainder of the revenues from auctioning, apart from the innovation fund, are to be allocated to the member states. However, in its proposal, the Commission says that those revenues which go to the member states should be used to co-finance their social climate plans. Therefore, I would not characterise it as a reduction in the threshold amount by any means. The figures are not directly comparable.
Unfortunately, I do not have an update on the CSO indicators on fuel poverty. I can come back to the committee with any information on the current status of that.
I thank my colleagues as they have asked several of the questions I was going to ask which is probably no coincidence. How much of the carbon tax taken in last year, in 2020, which was €495 million, was taken from building and road transport?
Mr. Frank Maughan:
As I mentioned earlier, the breakdown of the carbon tax revenue is compiled by Revenue and is set out in the Tax Strategy Group paper on environmental and carbon taxation which was published by the Department of Finance last week.
That levies carbon tax on fuel-type rather than on sectors. It breaks down the revenues between diesel, petrol, kerosene, marked gas oil, natural gas, solid fuel and other fuels and it indicates how much revenue is raised from each fuel type. Diesel makes up the most significant share of those because it makes up a very large share of car transport and is the main fuel used in commercial transport. That is followed by kerosene, which is the primary fuel used in home heating. The figures are there to see but, in principle, quite a large share of the total carbon tax revenue could be covered by the sectors we are taking about in these two proposals.
This question was asked but I ask Mr. Maughan to expand on the point. I share the concern that has been expressed about the constraints on the 25%, in terms of the ability to decide on the important priority areas of focus, on a year-by-year basis. Mr. Maughan said the 75% is to be distributed between member states. Is there an allocation key for that? On what basis will that be allocated and will there be constraints on how it is used?
Mr. Noel Regan:
I will start on the overall allocation. Of the revenues from both the current ETS and the buildings and transport, the proposal is that 25% the new buildings and transport goes to the social fund outlined by Mr. Maughan. It is proposed to reduce the remaining 75% in three areas. The first is to the innovation fund, a cross-EU fund to which large industry, such as cement and steel, can apply to try to reduce their emissions. It is open to all member states. That gets subtracted first. The second is a modernisation fund, which is only available to member states whose GDP is 65% lower than the EU average and especially to support countries with a large coal power generation sector in which significant transformation has to take place. The third subtraction is EU own resources for the funding of the EU institutions, for which a proposal is expected in the coming months. What is left is allocated among member states and that cuts to Deputy's question. That is based on the emissions from the member states. It is carved out on where the emissions occurred. It is a complex methodology but, in principle, that is how it follows. It follows the same principle as the current system. That picks up Senator Boylan's point, in that of the money left to the member state, the current rule is that 50% must be submitted to climate-related projects. The new proposal is 100% must be submitted in a proposed strengthening of the EU legislation.
I was going to pick up on that because I hoped for a figure on the cost to the carbon tax revenue we get versus what would be going through Europe. The witnesses are talking about 70% or 80%, which is a considerable amount.
At present, only the increase in carbon tax is ring-fenced for environmental issues. That reduction in the carbon tax will affect many more areas than just the environmental sector. Where else is that money spent? Not looking at the carbon tax increase or the ring-fencing, what kinds of initiatives and such is the carbon tax in general spent on?
Mr. Frank Maughan:
Government policy on this, which is a Department of Finance policy, is that the additional amounts, rather than the total amounts, are ring-fenced into climate-related expenditure programmes, which implies the amount that is not ring-fenced goes into the Exchequer. The Departments of Finance and Public Expenditure and Reform do not identify how the remainder is allocated to expenditure programmes.
To follow up on Deputy Whitmore's question about the additional amount being ring-fenced for the carbon tax, has any data been collected by the Department? Given that carbon tax is supposed to be a behavioural tax, you should be seeing the revenue decreasing as it is having the effect it is supposed to have. Is any modelling being done by the Department on that? Mr. Maughan gave the figure of €495 million and noted the carbon tax goes up to €100 per tonne by 2030, but surely there should be at least an equalisation or decrease in the revenue coming up. Has that modelling been done?
Mr. Frank Maughan:
Quite a lot of work has been done in recent years by the Economic and Social Research Institute, ESRI, in looking at a number of aspects of the carbon tax, such as the potential contribution to emissions savings, the potential impact on different household income categories and the buoyancy of carbon tax revenue over time. That is being done based on models of the Irish economy the ESRI has. I would be cautious about inferring from those numbers because carbon tax is always only one of a number of policy tools in place across government to try to reduce emissions in the sectors on which it is levied. You would expect to see the revenue raised on the carbon tax being susceptible to reductions in emissions over the coming years, relative to how quickly emissions are reduced, be it in our buildings or transport use, and relative to the growth of the economy.
A number of variables inform this and they are changing all the time in terms of the outlook for the economy, progress in reducing our emissions in the sectors concerned and the rate at which the carbon tax is applied. Work has been done, from which the ESRI has produced a number of publications. There is an overall estimate for total carbon tax revenues for the decade, which is published in the programme for Government, as the Deputies will probably be aware, but that is just an estimate and the year-on-year revenues are subject to all those variables I mentioned.
That concludes questions. I thank our guests for attending today and for a very worthwhile engagement; it will certainly greatly assist us in our consideration of these proposals.
Is it agreed that we now go into private session to consider our next steps? Agreed.