Failure to decarbonise the economy would lead to declines in gross domestic product (GDP), investment and consumption expenditures, while labour market outcomes would also deteriorate, according to a report by the Economic and Social Research Institute (ESRI).
The report, called The Implications of High Energy and Carbon Prices on Irish Firms, aims to quantify the cost of decarbonisation inaction.
It found that if international energy prices stay at “extremely high levels”, the level of real GDP in 2030 would be about 0.7 per cent lower than the business-as-usual scenario, along with energy prices staying at end of 2021 levels.
The costs stemming from the higher carbon tax and the European Union Emissions Trading System (EU ETS) price have contractionary economic effects, further reducing real GDP by 0.7 and 1.1 percentage points respectively compared with the GDP impacts of higher energy prices.
The report finds that higher energy prices would affect all sectors adversely, with the impacts higher for the transportation, construction and services sectors.
The electricity production sector is affected positively as demand for electricity increases due to the higher fossil fuel prices.
The impacts of the higher carbon tax are especially strong for the aggregate mining, transportation and electricity sectors.
For the aggregate electricity sector, the higher EU ETS price triggers a shift of electricity production to renewable sources, which in turn partially reverses the contraction in the sector.
The only positively affected macroeconomic aggregate is the trade balance, which results from both the economic contraction and the lower energy bill.
Reduced economic activity would lead to reduced emissions. Also, with a shrinking economy, government revenues would decrease and the government debt burden would increase.
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The brunt of the economic contraction would be borne by the mining and transportation sectors, with substantially higher falls in real value added and employment.
According to the ESRI, the electricity sector would be positively affected in all scenarios due to the increased production in the wind and other renewable sectors.
The results show that becoming a low-carbon economy would not only help mitigate the adverse impacts of climate change but also make the Irish economy more resilient against an external energy price shock.
The transition would also lower Ireland’s dependency on imported energy commodities and improve the country’s energy self-sufficiency.
“The transition to a low-carbon economy is crucial in lowering energy-related emissions to reach the targets set by environmental legislation,” the report noted. “The transition requires all economic agents to switch from fossil fuels to renewable energy resources.
“This switching can be accomplished by replacing all combustion systems currently in use, which requires a huge amount of investment.
“However, avoiding undertaking the necessary actions would result in not only keeping the level of emissions higher but also having a cost, especially when carbon prices have increasing trends with substantial volatility with unexpected spikes in energy prices.”
