Ireland’s Vulnerability to the Rising Price of Carbon

In 2020, for the first time ever, Ireland’s dismal failure to control its climate-changing emissions will result in direct financial consequences for the state and for its taxpayers. We will overshoot our binding EU emissions target and will have to cover our excess emissions by buying carbon credits from other countries at an annual cost estimated at €455 million. This looming prospect of financial accountability has powerfully focused minds among Irish decision makers, as it was intended to do. Slowly but surely the country is waking up to one central and salient fact with deep implications for national finances, trade, the economy, and for the lives and livelihoods of many Irish people: carbon has a price, and that price is only going up.

Average global temperatures are increasing, ice sheets and glaciers are melting, the seas are rising and we are experiencing more of what have come to be called “significant weather events”. Climate scientists agree that the cause of these changes is carbon dioxide and its greenhouse gas equivalents (conflated here as ‘carbon’), and economists agree that the most effective and efficient way to reduce carbon is to make it more expensive, thus “internalising” the considerable costs of climate change into the actual price of the products and behaviours that cause it. There are many alternatives to carbon and more are being developed and brought to market every day. A price on carbon makes each one of these alternatives cheaper relative to their fossil fuel competition, biasing the entire market away from carbon and towards renewables and sustainability. It’s a fundamental part of any realistic solution to climate change.

Ireland currently prices carbon in two ways: by participation in the EU’s Emission Trading System (ETS) in which emission permits are bought and sold, and by directly taxing carbon not covered by the ETS at a flat rate of €20/ton. Growing scientific, economic and political pressures mean that both of these carbon prices will rise dramatically over the coming decade.

There is widespread recognition that the EU’s ETS carbon price is far too low and uncertain to meaningfully influence purchasing and investment decisions. As a market signal the current ETS trading price of €20/ton is essentially background noise against the fluctuating prices of oil and other fossil fuels, and far below the €40-€80/ton required to meet Paris Agreement commitments. In response to this failure the EU will reduce the number of emission permits available to the ETS from 2021, with the goal of increasing the market price of ETS carbon. The ETS is also scheduled for a full review and reform by 2028 and there is growing movement to put a minimum “floor price” on carbon, essentially going around the ETS market to directly tax carbon instead (the UK already has such a floor price, currently £18/ton). The point is that whatever way the ETS carbon market is reformed or circumvented in the coming decade, it’s clear that the price is only going one way.

Carbon pricing around world from the World Bank’s Carbon Pricing Dashboard.

Ireland’s existing direct carbon tax of €20/ton can also only rise. Ireland has the third highest per-capita emissions in the EU (after Luxembourg and Estonia) and is far behind most other member states in decarbonising its economy. Finland currently taxes non-ETS carbon at €62/ton, Norway at €52/ton and France at €45/ton, with plans to increase this to €84/ton by 2022. Professor John Fitzgerald, chairman of the Climate Change Advisory Council, has estimated that Irish carbon tax would have to be as high as €70/ton to be in line with our 2020 emissions target. Meanwhile Sweden, which currently taxes carbon at €120/ton, is moving beyond EU targets (source: World Bank’s Carbon Pricing Dashboard)

Not all EU states directly tax carbon, but most of them are better positioned than Ireland on emissions. If we are to have even the slightest chance of reducing our emissions to within acceptable EU levels, dramatic increases in carbon taxation will be necessary.

In two years the Irish taxpayer will begin to pay an annual carbon bill to others, outside of the country, who are better at reducing and eliminating carbon. This recurring bill will be our fiscal and legal responsibility under EU “burden sharing” in response to increasingly alarming climate change. The expected €455 million due in 2020 is only the beginning of an ongoing and growing liability.

The EPA estimates that on our current path Ireland’s annual emissions will be around 50 million tons beyond our agreed target by 2030 . At €100/ton – a very realistic carbon price for 2030 – that overshoot would cost us €5 billion, or about half of the current cost of servicing the entire national debt. Considering the quickening urgency surrounding climate change, the very real possibility that emissions targets may tighten further, and the growing upwards pressures on carbon prices, the actual cost of our excess emissions could easily be much higher.

There are other threats too. Significantly higher EU carbon prices would require “border adjustments” in order to maintain competitiveness against jurisdictions with lower carbon taxes. These ‘adjustments’, essentially tariffs on imported goods containing carbon, would likely be returned in kind, with significant effects for agricultural and other emission-intensive Irish exports. Tourism, a significant employer and foreign exchange earner, is also likely to be hit hard by higher travel costs. Throughout the country businesses and lifestyles will be seriously disrupted.

Ireland is starting from a bad place. Our late industrial development, our high agricultural emissions, decades of planning and building with little regard for carbon, the way EU emissions targets are calculated, our growing population and our late start on taking the environment seriously – all are standing against us now. But carbon dioxide, climate change, and the rising price of carbon are not going to go away because of our unique circumstances. This is a war on carbon and like it or not, Ireland is part of that war.

We will pay much more for carbon in the decade ahead – that much is certain. Ireland’s essential choice now is what will happen to that money. If we continue on our current path our taxes will flow outside the country to those who are better than we are at eliminating carbon from their lives, businesses and economies than we are. One way or another we will be paying a much higher price for the carbon we use in the years ahead. If we want to keep that money in Ireland, then the time to start paying that price is now.

Graham Caswell is the coordinator of Citizens’ Climate Lobby Ireland, an advocacy group campaigning on carbon pricing.

Author: Graham Caswell

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