Costs for climate transition in new action plan are enormous

The cash costs of the climate transition as set out in the new action plan are enormous – for the State, for households and for businesses. And so they stand to have a big economic impact in the years ahead. Of course, the economic costs of global inaction are much greater – and there are big advantages of the investments for lifestyles and for businesses. But while the document lays out the menu of actions, there is much work still to do on how to make the essential cuts in carbon emissions happen – and how to pay for it all.

The new plan includes an estimated €125 billion of investment due by 2030 to achieve the transition. This figure is taken from an analysis by McKinsey consultants and includes spending by the State and the private sector – businesses and households – in areas like electric vehicles, retrofitting homes and offices, and energy infrastructure.

Up to 60 per cent of this investment may not require a State subsidy, the report says – as it will yield a return. And the estimate is that €80 billion of the investment is money redirected from existing investments – an obvious example is replacing spending on traditional petrol and diesel cars with spending on electric vehicles.

But massive State spending will be needed and while money has been put aside in the National Development Plan for green projects, it is not clear how this relates to the targets in the new plan. More State cash will surely be needed, beyond that already committed – and this needs to be spelled out if the new plan is to happen. “Green” spending will be a huge issue for the exchequer in the years ahead, pushing up the base of State spending and, in time, requiring new taxes.

Carbon cuts will mean major changes to the way we live

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Fundamental economic changes needed to meet new carbon goals

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Climate conference to highlight challenge of turning pledges into action

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

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There are wider economic issues,. In a background paper for the recent report of the Climate Change Advisory Committee, economist Prof John FitzGerald underlined that there would be economic costs as spending was redirected by the State and consumers and tax levels rose. There will also, of course, be new activity generated by the need for additional investment.

There is no overall estimate of how this will balance out for the economy. And the document still leaves room for debate on the speed of transition in some sectors – there are hopes of improved technology in agriculture, transport and energy in the years ahead, but there are costs, too, of waiting too long.

Crunch areas

Agriculture is one of the crunch areas. The document sets out a target of a 22-30 per cent reduction in emissions from the sector by 2030, but emphasises less-controversial measures such as better fertiliser use and farm management. An earlier draft had set a target of diversifying about 8 per cent of grassland now used for cattle to other uses, but this does not appear in the final document. The action plan leaves many of the big issues of how to achieve the agricultural cuts as “to be decided”. And this has big implications not only for farm incomes but also for the beef and dairy sectors and the wider rural economy.

There are also big challenges for businesses – there is a commitment to review the issue of data centres, which will account for a quarter of electricity demand by 2030, but no hint of what might be decided. And the targets for electric vehicle use and home retrofitting involve significant cost and adjustments by households, as well as longer term benefits.

The clearest way to incentivise sectors to adjust is to ensure that the price of carbon use is reflected in decisions they make, with State subsidies and investment used where needed. Using the stick, as well as the carrot, in other words. Big businesses face these constraints under the carbon trading system. But pricing carbon to drive decisions by households, SMEs and farmers is a big issue and goes well beyond the planned rise in carbon taxes. Getting the economic signals right to get sectors and households to adjust is a big – and vital – challenge.