Cliff Taylor: Who will pay the massive bill for climate transition?

An old friend used to have some advice for people when something dramatic happened to their employer, or the area they worked in. “Let’s look at this from the widest possible viewpoint,” he would say. “What does it means for you?”

And so while people generally display a commitment to the goal of cutting carbon emissions, the worthy words and big promises at Cop26 can seem a long way off. The Government’s Climate Action Plan starts to translate the commitment to reduce carbon emissions into what actually needs to happen. And Sinn Féin’s initial reaction was interesting, focusing straight away on the potential burden for households.

So who will pay the bills? The much-quoted €125 billion estimated cost of the plan breaks down into two bits – the estimate is that about one third of it is new investment and two thirds is investment redirected from other areas. The total annual investment when redirected cash is also counted in – about €14 billion per annum – amounts to 9 per cent of total annual investment by the public and private sectors. This, in other words, is a massive job. The Irish figures in terms of new investment – and the projection that the peak spending period will be 2026 to 2030 – are roughly in line with a similar UK plan.

Two of the biggest issues in the earlier years of transition concern households – and illustrate the crunch issues of where the burden will fall. From the household point of view, paying for an electric vehicle (EV) is a redirected investment – otherwise a petrol of diesel car would be purchased. The plan indicates that existing supports will be reduced as EVs fall in price and car buyers tot up the fuel savings.

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Perhaps the €5,000 grant will be phased out, but motor tax and VRT incentives will remain. The goal is to get the price signals for motorists right to convince them to make the transition. Increasing diesel taxes to the level of those on petrol will be examined to increase the “ nudge”.

The payback period for motorists buying an EV – taking into account fuel savings– is expected to fall to about seven years. The speed of the planned transition is likely to require some level of ongoing State support, especially as less well-off purchasers do not currently have much option apart from buying second-hand vehicles. But purchasers will pay most of the cost.

The other big spending issue for households is retrofitting, where a target of 500,000 homes is set by 2030. There are benefits for homeowners – in comfort and lower energy – but in cash terms the payback time on a full retrofit is very long.

Subsidies

The cost of the retrofitting programme, could, the document estimates, be as much as €28 billion. It seems exchequer cash is allocated to meet around one third of this cost, but given the high cost and lengthy payback time, more State support is likely to be needed. A loan scheme and tax breaks are mooted to help. Economist John FitzGerald has written that the State is likely to have to cover the bulk of the cost for households.

In general, the Climate Action Plan makes no specific commitment of additional State spending. This will allow the Departments of Finance and Public Spending to say no extra cash is written in, while at the same time the Government pledges full commitment to the targets. Sooner or later, this will have to be reconciled, because if money isn’t provided to do things, they don’t happen.

And make no mistake, more cash will be needed. As this is crystallised, the Green agenda will be the key driver – along with an ageing population and the post-Covid demand for greater social spending – in the move to a bigger State, requiring a higher level of taxes, which bring their own economic costs. Endlessly borrowing more to pay for “more” government is not an option.

It will also increasingly cross every economic decision the State makes and we make as individuals. Read the Climate Action Plan and you see a commitment to people living in smaller, more energy-efficient dwellings closer to where they work. As they say on the Leaving Cert paper: “Discuss.”

Compensation

There are other areas of potential cost – the transition in agriculture, for example, will require State investment and most likely compensation schemes as farmers adjust and methane emissions are cut. Supports for industry will be needed in some areas. FitzGerald argues that the transition would be a net cost to the economy and jobs – despite significant savings and new jobs in some areas – but not on a scale of recent shocks such as the financial crisis.

Those in charge of the national finances will now realise their hands are tied to an extent by the climate commitments. The precise impact of these being legally binding is debatable – as someone put it to me this week, who is going to sue the Government? But the legally binding nature of the targets will find their way into third-party legal proceedings – planning appeals, especially for industrial projects, for example. It will put pressure on Government departments and on annual budget allocations. And EU rules along with a rising price of carbon are likely to mean rising penalty costs for the exchequer if targets are missed.

In other words, the room for fudge on climate targets is slowly closing. The political difficulty is that while there is an unanswerable case to act – for the wider public good – the purely financial incentives for households are not compelling. Taxes, charges and State supports can swing the balance and ensure we reflect the price of pollution in our decisions. As well as the “local” advantages of, for example, cleaner air and healthier lifestyle, we will then be playing our part in the vital wider global effort.