How much of a bill will Ireland face if it does not meet its climate goals in 2030? Up to recently the indications were that this could be expensive for the State, but not financially punitive.
But the latest assessment report from the Fiscal Advisory Council estimates that the total bill Ireland could face in the early 2030s from not meetings its target for the years 2021 to 2030 could be up to €20 billion.
In trying to assess this risk – a cost equivalent to nearly all the money spent by the State in one year on investment projects – we need to understand what is going on. And realise that this is now an issue for the next government.
1. Ireland’s carbon commitments
The State has a range of targets to reach the goal of carbon neutrality by 2050. The relevant one in this context is agreed with the EU as part of a sharing out of the burden of cutting emissions across member states (the Effort Sharing Regulation, or ESR in the jargon).
Big polluting sectors like power generation and heavy industry are already covered under a separate scheme, so the targets here cover the rest of the economy. Ireland is committed to cutting emissions by 42 per cent by 2030, compared to 2005 levels.
This involves individual targets for the different sectors – the biggest ones being transport, agriculture and households. As things stand, Ireland is not going to meet these targets – not by a long way. And this is where the financial penalties come in.
2. The price of failure
If targets are not met, member states are obliged to buy carbon credits from other states – the idea being that the laggards can buy from the over-achievers who in turn can invest the resulting cash to reduce emissions further.
There are complications in this and various flexibilities allowed to member states, but that is the basis on how the system is meant to work, acting as one of the key pillars of European Union (EU) climate policy.
3. Calculating the bill – part one:
We do not know by how much we will miss our 2030 target, which is one vital element of calculating the 2030 cost. Most of the calculations to date have been based on a scenario outlined by the Environmental Protection Agency (EPA), which assumes that Ireland implements a range of new policies in addition to those already in place.
In the jargon, this is known as the " with additional measures”, or WAM, scenario. On the EPA’s most recent estimate, this would lead to a 25 per cent cut in emissions by 2030, still well short of the 42 per cent target.
While the fiscal council does not spell out the full basis for its recent estimate that the costs could be as high as €20 billion, it would seem to assume – on the basis of policy implemented to date – that a lot of the assumed additional measures will not happen.
In this case, the outcome might be closer to another scenario outlined by the EPA which is based only on existing measures continuing. This is called the WEM, or the “with existing measures,” scenario.
The EPA says that this would mean emissions reducing in the sectors concerned by just 9 per cent by 2030 compared to 2005 levels. And so Ireland would have to buy more credits to cover the shortfall and the cost would be higher – potentially a lot higher.
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4. Calculating the bill – part two
The second key question is the cost of buying the credits. And here there is also great uncertainty. Most of the estimates are based on the current market price of carbon credits (already traded by big companies in areas like power generation).
But there is a risk of the price inflating as the deadline draws nearer and it becomes clear that a lot of countries are going to need to buy credits – quite likely more than will be available from countries over-achieving on their targets.
A report earlier this year from environmental advocacy group T & E (Transport and Environment) calculated that the EU as a whole is well off track in terms of the 2030 goal, with 12 of the 27 countries including Ireland – looking certain to miss the targets, many of the rest struggling to comply and enormous deficits in Germany and Italy in particular.
This could lead to a scarcity of credits, leading to a possible bidding war as countries scramble to buy them. Some countries could be left with no credits and at risk of lawsuits and fines, the report cautions.
It is reasonable to ask whether the EU countries – facing this potential chaos – could decide to change the rules, especially given the lower representation for Green parties in the new European Parliament and the poor state of many national budgets.
There is already kickback on some Green policies and the centre-right European People’s Party, the biggest group in parliament, is mounting a campaign to reverse the European Union’s 2035 ban on sales of new CO2-emitting cars in the light of pressure on the European car industry.
5. Adding up the numbers
To date, most of the estimates of the cost to Ireland have been significant, but within what might be seen as being affordable, albeit reducing room for manoeuvre elsewhere.
A 2023 paper by economists in the Irish Government’s economic service estimated – with a lot of health warnings – that the cumulative cost for the 2021- 2030 period could reach up to €3.5 billion, if new policies were progressed. If they were not, it said the bill could rise to over €8 billion.
The T & E report put the cumulative cost to Ireland by 2030 at between €1.7 billion and €9.6 billion, depending on the price of credits on the market.
However the latest Fiscal Council report warns that the potential costs could be a lot higher – up to €20 billion for the 2021 to 2030 period.
This seems to be based on an outcome closer to the EPA’s pessimistic one, estimating a nine per cent reduction in emissions by 2030, rather than the 25 per cent much of the earlier work was based on.
It also assumes an increase in the price of credits. It is expected that the full assumptions will be outlined in future work the fiscal council is undertaking with the Climate Change Advisory Council, the independent adviser to government on climate issues.
6. Counting the cost
A higher estimate – in the region of €20 billion – would be a significant burden on the State, representing, for example, four times the annual amount collected from the universal social charge (USC). Ongoing financial penalties would apply thereafter until Ireland got on track.
It would probably be early 2032 before the bill would be fully clear, based on final data for 2030 being signed off. So what can Ireland do?
The most obvious point is that a higher potential bill strongly increases the economic case for taking quicker action to reduce emissions – for example, providing greater incentives for people to scrap old cars and move to electric vehicles (EVs) and investing in the required infrastructure.
And of course speeding the provision of improved public transport. For the wider economy, the planned increase in wind power is central to powering the grid with clean energy and here planning reform seems to be the key.
Helping households to retrofit is another avenue, though the current shortage of construction workers is an issue here. Ireland needs to act, in other words, to get much closer to the target.
Tactically, the State may also have to consider buying up credits ahead of time to avoid the scramble after 2030. And ensuring substantial funds have been put aside if a big bill looks likely.
The alternative to acting to reduce emissions is to sit back in the belief that the EU will find some way to cut the financial burden of failure on member states.
The EU may end up doing so, but it looks risky to bet on it. And failure to meet the targets, of course, opens up much greater climate change risks in the longer term.
