Professor Michael McMahon:

The council is grateful to the Chair and members of the committee for inviting us to appear before it again. As members know, we value these engagements and see them as an integral part of our work. I apologise that I cannot attend in person but I am sure my two colleagues will represent us perfectly in the room and I will try to answer whenever I am needed.

This meeting is a welcome opportunity to discuss our recent work on what climate change means for Ireland’s public finances. The committee is interested in what the estimated effects are and how these were arrived at, and we are happy to shed light on this. First, I want to make a few general points about Ireland’s climate. Ireland’s climate is changing. Temperatures are increasing, rainfall is rising and extreme weather events are becoming more frequent. We have seen striking evidence of this, with significant flooding in Midleton this winter. Severe weather events also appear to now be more common, albeit this may be partially due to improved record keeping and weather instruments.

As the EPA recently highlighted, these events are exposing an adaptation deficit in Ireland. Keeping global temperatures below 2°C of warming relative to pre-industrial levels appears to be unlikely. There is uncertainty over the impact this could have. There is the possibility that the impacts of climate change could be more severe than current studies imply. This is because of what are called tipping points, which are the threshold beyond which more catastrophic outcomes can occur. We may now be close to, or at, these tipping points.

Ireland has two key climate targets. Ireland’s legally binding carbon budgets require a 51% reduction in greenhouse gas emissions relative to 2018 by 2030. Any emissions over the carbon budget limits will have to be made up through lower emissions in later periods. Ireland also has a legally binding target of climate neutrality by 2050. Projections from the EPA suggest that, based on plans to date, Ireland will only reduce greenhouse gas emissions by 29% in 2030, rather than 51% and, therefore, current plans and policies will be insufficient to meet Ireland’s climate objectives. If Ireland fails to meet its climate targets, there will be fiscal implications. Recent work by officials in the Department of Public Expenditure, NDP Delivery and Reform and the Department of the environment suggests that, based on current plans, the cost of non-compliance by 2030 could be up to €3.5 billion cumulatively.

Our own work, led by Killian Carroll, who is with the committee today, and Eddie Casey, has focused on trying to estimate the fiscal impact of the climate transition. Notwithstanding the aforementioned risks of Ireland not meeting its climate goals, our estimates assume Ireland achieves them. Not achieving climate targets today would likely result in much greater fiscal costs in later years. To model the impacts of the climate transition on the public finances, we use projections from the TIMES-Ireland model. This has been developed by the MaREI energy policy and modelling group at UCC and the model was used to inform Ireland’s 2022 carbon budgets. The projections assume that climate change mitigation targets are met in a “least-cost” approach. The analysis we present is based on the current tax system being largely maintained. One exception is increases in the carbon tax, which have already been outlined in legislation.

In our analysis, the main impact on Government revenue is due to the electrification of Ireland’s stock of vehicles. The reductions in Government revenue build steadily out to 2030, reaching 0.9% of GNI*, or €2.5 billion in today’s money. The fall in revenue eventually settles at 1.6% of national income in the 2040s. The fall in revenue is mainly driven by excise, VAT, motor tax and vehicle registration tax, and these reflect the move from using diesel and petrol to electricity, which is less heavily taxed in the current system. Both motor tax and VRT receipts would fall as electric vehicles are less heavily taxed than petrol or diesel vehicles. These falls in revenue could be offset by making changes to the tax system, changes which could further help achieve climate targets. For instance, the 2023 Tax Strategy Group papers discussed charging drivers for road use by distance, congestion charges and-or by weight. It is worth noting that this would not necessarily involve an increase in the average tax burden faced by households and businesses. It would merely replace one declining revenue stream with a new revenue stream, although there may be important distributional implications which would warrant further analysis.

Modelling the public expenditure implications of climate change is more challenging than the revenue side. The main judgment that needs to be made is what proportion of climate transition costs will be borne by the State. This is ultimately a policy choice. Given we do not know what future policy will be, this expenditure path is incredibly uncertain. In arriving at an expenditure scenario, significant modelling judgment was made on what was deemed to be a likely scenario. These modelling choices should not be taken as the council endorsing one set of expenditure policies over another. They merely reflect some potential scenarios.

Given some of the uncertainty involved, in the analysis, we present a high cost scenario and a low cost scenario. The highest level of outlays will be late in this decade from 2027 to 2030. Public spending of between 0.7% and 1.2% of national income, or €2.6 and €4.4 billion, would be required at that time. Thereafter, costs are expected to fall slightly, settling at 0.4% to 0.7% of national income per year. The main costs relate to retrofitting buildings and farming supports. These costs are ongoing. Transport costs, which aid the transition to electric vehicles, are more upfront in nature but are not significant beyond 2031. On the residential housing side, significant Government intervention will be required to retrofit homes. In our high cost scenario, we assume that two thirds, or 66%, of costs are borne by the State. This amounts to an average of €1.3 billion per annum from 2026 to 2030, rising to an average of €1.8 billion per annum from 2031 to 2050. In the low cost scenario, the State incurs 45% of the costs. We assume that farming supports will be maintained out to 2050. In the high cost scenario, we assume all losses of farm income from the reduction in livestock numbers are compensated by the Government; in the low cost scenario, only 70% of the income loss is compensated.

Additional spending will be required to help adaptation to climate change. An example would be building and reinforcing flood defences. The Climate Change Advisory Council has identified the need for better planning of adaptation spending. The Department of the Environment, Climate and Communications provided an indicative estimate of flood damages of €1.15 billion per year by 2050. If such spending on adaptation were not to occur, there would be a risk of significant costs from flooding. For Dublin city, in a mid-range scenario for sea level rises, a one in ten year event would be estimated to see damages rise to €333 million from €25 million today. A high-end risk scenario could see such costs rise to €2.9 billion.

Overall, we can see that there are several ways in which climate change will impact on the public finances. Transition costs to revenue and spending will be the largest impacts. Adaptation to climate change and potential penalties for non-compliance would have lower but still significant effects. While these impacts are large, they are manageable. The costs of inaction, particularly if mirrored by other countries, could be far larger if it means a greater likelihood of more catastrophic outcomes related to climate change. Setting out plans now will make the disruption less pronounced. Introducing changes in a more gradual and phased way, rather than waiting too long and having to take more drastic actions, is preferable.

Climate change is not the only fiscal challenge Ireland is facing as the costs relating to climate change increase. The cost relating to our ageing population are also going to mount. As the council has outlined previously, an ageing population will mean increases in spending on health and pensions. These future costs are also best addressed in a planned and gradual fashion.

We thank the committee for the time for this opening statement. We look forward to answering members' questions.