Transition to a greener economy needs to accelerate – but how?

The potential economic cost of climate warming is by now undeniable. The lack of sufficiently rapid action internationally to deal with this may in part reflect the fact that the worst risks are some way off.

But part of the problem is that countries need to be convinced that everyone else will do their bit as well – and some may even be tempted to ease back on difficult decisions in the hope that international action takes up any slack.

The risk, of course, is that action is delayed until it is too late, or until the cost of coping becomes much higher and more disruptive. As European Central Bank chief economist Philip Lane told the Dublin Climate Dialogues conference this week, a managed transition should be doable economically, but a more sudden one could be disruptive to economies and financial markets. It is a cliché to say markets hate uncertainty, but nonetheless true.

The conclusions of the conference were designed to send a message to the major COP26 conference in Glasgow that commitments need to be turned into action. Part of the discussion at the conference was on how to try to push global action. For example, former World Trade Organisation director general Pascal Lamy outlined the case for what a carbon border adjustment mechanism, or tax, could achieve. By taxing goods at borders based on the carbon content of their production, it can cut any incentives for businesses to move production to countries with less strict environmental rules.

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The European Commission is due to put forward its plans for a carbon border tax later this year and while this is technically very complex, the commission is likely to try to push ahead. This will have significant implications for Ireland as a country with wide trading and supply chain links across the world.

Ireland has signalled its commitment to the climate agenda, a point underlined at the conference by Minister for the Environment Eamon Ryan and Minister for Finance Pascal Donohoe.

However, how the country proposes to reach its climate goals – via binding sectoral targets – has still to be spelled out. This is due to happen later this year as part of a carbon budgeting process, but will bring difficult trade-offs in areas like agriculture and transport.

A statement issued this week by all the main representative bodies in the Irish dairy sector committed to the sector making a positive contribution to the green agenda, but said that reducing dairy production in Ireland was not the answer. It warned against the “unintended consequences of actions that will undermine the cost competitiveness of the Irish dairy sector”. It is just the latest sign of the tensions to come.

Emissions

Meanwhile, the Government faces many other challenges such as phasing out supports for fossil fuels, increasing the uptake of electric vehicles and retrofitting and dealing with those whose livelihood is threatened by all of this.

For businesses, the pressure to cut emissions will now be relentless. Pressure from consumers and investors is building. The conference heard, in particular, of fears from investors of losses emerging from so-called stranded assets – those left behind by the move to a greener economy – and assets facing climate risks from tides, weather and so on.

The key pressure facing businesses and governments now is the pace of required action. The conference clearly outlined how the balance of risks could change sharply if progress is not made, starting at the COP26 conference.

For the Irish Government the challenge is how to accelerate the transition. There are opportunities, for sure, but also the need to adjust taxes and regulations across the economy to discourage activities that create emissions.