Climate action to hit public purse by €5.5bn a year by end of decade - IFAC

Irish Government efforts to reach its 2030 climate targets will result in a €5.5 billion financial hit to the public purse in the latter years of the decade, according to estimates from the Irish Fiscal Advisory Council (IFAC).

The estimates assume, however, the unlikely event that the Republic meets its end-of-decade climate goals – and include both a reduction in tax revenues from the likes of fuel and energy use, and an increase in spending on supports to push households and businesses down the decarbonisation path.

The Environmental Protection Agency (EPA) forecast earlier this year that Ireland will achieve a reduction of only 29 per cent in its greenhouse gas emissions by 2030, far short of a legally binding target of 51 per cent that is core to the Government’s climate policy. The cumulative cost of not hitting climate objectives could amount to €3.5 billion by 2030 – mainly on the purchase of credits from other EU member states, the IFAC report said.

“The climate is changing. Long-run data points to clear trends in Ireland of rising temperatures, increased rainfall and more frequent extreme weather events. A changing climate in Ireland and globally will impact the Irish economy and the public finances,” said the report, written by IFAC economists Eddie Casey and Killian Carroll.

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“There will be some costs associated with the transition to a less carbon-intensive economy, with the possibility of not hitting legal requirements, and from facing up to more regular extreme weather events. Of course, there will also be opportunities in moving towards a more sustainable growth model, including through lower imports of fossil fuels and less pollution.”

The IFAC report on what climate changes mean for Ireland’s public finances estimates that in the event the State hits its 2030 greenhouse gas emissions target, this would likely see tax revenues fall by 0.9 per cent of gross national income star (GNI*), a measure of the domestic economy, by 2030. That equates to €2.5 billion in today’s terms, it noted.

This would be driven by lower excise duties amid declining petrol and diesel sales, reduced VAT receipts on energy, and a drop in motor tax as people continue to switch at pace to electric vehicles. The estimates assume no change in current tax policy.

Lost revenues could rise to 1.6 per cent of GNI* – or €4.4 billion in current terms – annually in the long run, it added.

Forecasting Government expenditure on supports to push taxpayers down the green path was more difficult and involved “judgment calls” on how much of the climate change transition costs would be borne by the State, IFAC said.

IFAC said a low-cost approach by Government would amount to about €1.6 billion annually in the final five years of the decade, while a high-cost scenario could reach €3 billion a year.

The high-cost model, for example, assumes the introduction of car scrappage grants of up to €10,000 per vehicle aged over 10 years in the latter part of the decade, double what the authors of the report have pencilled in for a low-cost plan.

“It is important that the Government sets out its plans now so that the disruptions necessary will be less pronounced. That means introducing adjustments in a gradual and phased way rather than overnight,” the report concluded.

“While these aspects of Ireland’s climate transition will be costly, the changes will be necessary to achieve Ireland’s requirements. More broadly, the costs of inaction, particularly if mirrored by other countries, could be far greater if it means a greater likelihood of more catastrophic outcomes related to climate change.”