Committee on Budgetary Oversight debate -
Wednesday, 28 Feb 2024

Impact of Climate on Public Finances: Irish Fiscal Advisory Council

An Leas-Chathaoirleach

The purpose of the meeting is to discuss the report of the Irish Fiscal Advisory Council, IFAC: What Climate Change Means for Ireland's Public Finances. On behalf of the committee, I welcome the following representatives from IFAC: Professor Michael McMahon, who is appearing remotely, Mr. Niall Conroy and Mr. Killian Carroll.

Before we start, I wish to explain some limitations to parliamentary privilege, and the practices of the Houses with regard to references witnesses may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, one of today's witnesses is giving their evidence remotely from a place outside the parliamentary precincts, and as such may not benefit from the same level of immunity from legal proceedings as a witness who is physically present. Such witnesses may think it appropriate to take legal advice on the matter.

Witnesses are again reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity.

Therefore, if their statements are potentially defamatory in respect of an identifiable person, they will be directed to discontinue their remarks, and it is imperative that they comply with any such direction.

I remind Members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable. I remind Members of the constitutional requirement that they must be physically present within the confines of the place where the Parliament has chosen to sit, namely, Leinster House, in order to participate in these public meetings. I will not permit a Member to participate where they do not adhere to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.

I invite Professor McMahon to give his opening statement.

Professor Michael McMahon

The council is grateful to the Chair and members of the committee for inviting us to appear before it again. As members know, we value these engagements and see them as an integral part of our work. I apologise that I cannot attend in person but I am sure my two colleagues will represent us perfectly in the room and I will try to answer whenever I am needed.

This meeting is a welcome opportunity to discuss our recent work on what climate change means for Ireland’s public finances. The committee is interested in what the estimated effects are and how these were arrived at, and we are happy to shed light on this. First, I want to make a few general points about Ireland’s climate. Ireland’s climate is changing. Temperatures are increasing, rainfall is rising and extreme weather events are becoming more frequent. We have seen striking evidence of this, with significant flooding in Midleton this winter. Severe weather events also appear to now be more common, albeit this may be partially due to improved record keeping and weather instruments.

As the EPA recently highlighted, these events are exposing an adaptation deficit in Ireland. Keeping global temperatures below 2°C of warming relative to pre-industrial levels appears to be unlikely. There is uncertainty over the impact this could have. There is the possibility that the impacts of climate change could be more severe than current studies imply. This is because of what are called tipping points, which are the threshold beyond which more catastrophic outcomes can occur. We may now be close to, or at, these tipping points.

Ireland has two key climate targets. Ireland’s legally binding carbon budgets require a 51% reduction in greenhouse gas emissions relative to 2018 by 2030. Any emissions over the carbon budget limits will have to be made up through lower emissions in later periods. Ireland also has a legally binding target of climate neutrality by 2050. Projections from the EPA suggest that, based on plans to date, Ireland will only reduce greenhouse gas emissions by 29% in 2030, rather than 51% and, therefore, current plans and policies will be insufficient to meet Ireland’s climate objectives. If Ireland fails to meet its climate targets, there will be fiscal implications. Recent work by officials in the Department of Public Expenditure, NDP Delivery and Reform and the Department of the environment suggests that, based on current plans, the cost of non-compliance by 2030 could be up to €3.5 billion cumulatively.

Our own work, led by Killian Carroll, who is with the committee today, and Eddie Casey, has focused on trying to estimate the fiscal impact of the climate transition. Notwithstanding the aforementioned risks of Ireland not meeting its climate goals, our estimates assume Ireland achieves them. Not achieving climate targets today would likely result in much greater fiscal costs in later years. To model the impacts of the climate transition on the public finances, we use projections from the TIMES-Ireland model. This has been developed by the MaREI energy policy and modelling group at UCC and the model was used to inform Ireland’s 2022 carbon budgets. The projections assume that climate change mitigation targets are met in a “least-cost” approach. The analysis we present is based on the current tax system being largely maintained. One exception is increases in the carbon tax, which have already been outlined in legislation.

In our analysis, the main impact on Government revenue is due to the electrification of Ireland’s stock of vehicles. The reductions in Government revenue build steadily out to 2030, reaching 0.9% of GNI*, or €2.5 billion in today’s money. The fall in revenue eventually settles at 1.6% of national income in the 2040s. The fall in revenue is mainly driven by excise, VAT, motor tax and vehicle registration tax, and these reflect the move from using diesel and petrol to electricity, which is less heavily taxed in the current system. Both motor tax and VRT receipts would fall as electric vehicles are less heavily taxed than petrol or diesel vehicles. These falls in revenue could be offset by making changes to the tax system, changes which could further help achieve climate targets. For instance, the 2023 Tax Strategy Group papers discussed charging drivers for road use by distance, congestion charges and-or by weight. It is worth noting that this would not necessarily involve an increase in the average tax burden faced by households and businesses. It would merely replace one declining revenue stream with a new revenue stream, although there may be important distributional implications which would warrant further analysis.

Modelling the public expenditure implications of climate change is more challenging than the revenue side. The main judgment that needs to be made is what proportion of climate transition costs will be borne by the State. This is ultimately a policy choice. Given we do not know what future policy will be, this expenditure path is incredibly uncertain. In arriving at an expenditure scenario, significant modelling judgment was made on what was deemed to be a likely scenario. These modelling choices should not be taken as the council endorsing one set of expenditure policies over another. They merely reflect some potential scenarios.

Given some of the uncertainty involved, in the analysis, we present a high cost scenario and a low cost scenario. The highest level of outlays will be late in this decade from 2027 to 2030. Public spending of between 0.7% and 1.2% of national income, or €2.6 and €4.4 billion, would be required at that time. Thereafter, costs are expected to fall slightly, settling at 0.4% to 0.7% of national income per year. The main costs relate to retrofitting buildings and farming supports. These costs are ongoing. Transport costs, which aid the transition to electric vehicles, are more upfront in nature but are not significant beyond 2031. On the residential housing side, significant Government intervention will be required to retrofit homes. In our high cost scenario, we assume that two thirds, or 66%, of costs are borne by the State. This amounts to an average of €1.3 billion per annum from 2026 to 2030, rising to an average of €1.8 billion per annum from 2031 to 2050. In the low cost scenario, the State incurs 45% of the costs. We assume that farming supports will be maintained out to 2050. In the high cost scenario, we assume all losses of farm income from the reduction in livestock numbers are compensated by the Government; in the low cost scenario, only 70% of the income loss is compensated.

Additional spending will be required to help adaptation to climate change. An example would be building and reinforcing flood defences. The Climate Change Advisory Council has identified the need for better planning of adaptation spending. The Department of the Environment, Climate and Communications provided an indicative estimate of flood damages of €1.15 billion per year by 2050. If such spending on adaptation were not to occur, there would be a risk of significant costs from flooding. For Dublin city, in a mid-range scenario for sea level rises, a one in ten year event would be estimated to see damages rise to €333 million from €25 million today. A high-end risk scenario could see such costs rise to €2.9 billion.

Overall, we can see that there are several ways in which climate change will impact on the public finances. Transition costs to revenue and spending will be the largest impacts. Adaptation to climate change and potential penalties for non-compliance would have lower but still significant effects. While these impacts are large, they are manageable. The costs of inaction, particularly if mirrored by other countries, could be far larger if it means a greater likelihood of more catastrophic outcomes related to climate change. Setting out plans now will make the disruption less pronounced. Introducing changes in a more gradual and phased way, rather than waiting too long and having to take more drastic actions, is preferable.

Climate change is not the only fiscal challenge Ireland is facing as the costs relating to climate change increase. The cost relating to our ageing population are also going to mount. As the council has outlined previously, an ageing population will mean increases in spending on health and pensions. These future costs are also best addressed in a planned and gradual fashion.

We thank the committee for the time for this opening statement. We look forward to answering members' questions.

An Leas-Chathaoirleach

I thank Professor McMahon.

Deputy Rose Conway-Walsh

I thank Professor McMahon for his opening statement. Many of the costs look set to merge towards the end of the current decade. That is something which is not covered by budgetary forecasts. Ideally, how long would budgetary forecasts extend in the context of covering these costs? Is the forecasting horizon as it stands realistic in light of the backloading as opposed to front-loading of things instead? The professor is suggesting that we should be front-loading, particularly in the context of flood defences and so on for prevention, but it seems as though we are backloading everything.

Professor Michael McMahon

We have spoken not just in the context of the climate and our ageing population but also with regard to good prudent planning in general. We would like to see more realistic forecasts on the budgetary side, given where we are in 2024, extending out to at least 2030. As the Deputy noted, that should not stop just before some of the biggest costs. There is definitely a role for trying to extend the forecast to a more medium-term scenario, as we have done occasionally in the past - although probably not every time. Longer term forecasting is also of quite a bit of value in the context of planning.

With regard to front-loading versus backloading, our main message would be around taking actions now in a planned way, not just because we can do smaller steps and build up to it, and, in doing so, potentially avoid some of the costs. For example, if we did more now and we were successful in achieving our climate goals, we would avoid the costs of non-compliance I alluded to earlier. There is an important role in the context of providing some form of policy certainty to households and businesses that are partners in this. I do not want to sit here and pretend that this is a purely a Government endeavour; it is a societal endeavour. Consider the household deciding whether to retrofit their property or companies thinking about whether to move more quickly to the electrification of any vehicle stock they have. It is about understanding the extent to which there will be infrastructure in place to facilitate that. It is about understanding that the household is not going to lose out in making the decision now by missing out on potential supports and subsidies that may be introduced by the Government further down the line. This is really a place whereby if there was a clear plan, ideally, cross-party and across government, to put in place some certainty, it would also help with the planning of the private sector. This is another reason that decisive action now would probably be helpful.

Deputy Rose Conway-Walsh

Leaving the heavy lifting for the next Government to deliver will obviously mean greater pressures on the finances at that point. How are we reconciling all of this? We have identified that there will be a €2.5 billion shortfall in the spending relating to national development plan or of up to €19 billion out to 2030. What are the dangers there in having that hole in the funding for the national development plan and meeting the targets that we need to meet when it comes to investment in infrastructure relating to rail, such as the western rail corridor, and other modes of transport?

Professor Michael McMahon

One advantage of the national development plan is that it sets out some goals and targets for where we should invest. Obviously, it would be ideal to hit all of those targets. One way to address the challenges, particularly those relating to supply constraints on the construction side, is to take actions that enable us to get the most bang for our buck in the context of climate. This is one way to address that along with thinking carefully about how we address whatever supply constraints we are facing. We are not doing this on our own. Every country will be looking for larger and more efficient battery storage. Every country will be looking for the materials needed to build up the infrastructure for charging points for electric vehicles. If we wait too long there is then the risk that we go diving in to try and buy these things at exactly the same time that other countries are suddenly trying to do it. That is exactly the type of supply constraint we would ideally avoid. The answer is that we have a plan, we have the national development plan, and we have guidance from the Climate Change Advisory Council and others. We need to start taking these plans seriously, work to hit the targets they contain and do these things now rather than waiting until the last possible minute.

Deputy Rose Conway-Walsh

Should we be planning for the budgetary implications of failing to meet the targets? Based on EPA projections, the State will be on the hook for a cumulative €3.5 billion. What would that mean in annual costs by 2030?

Professor Michael McMahon

The approach taken is based on milestones and failing to hit these milestones requires a member state to put this money aside into the EU funds. The more we do and the sooner we do it the less we face those costs. The direct bottom-line budgetary implication of not taking action is the cumulative €3.5 billion by 2030. I do not want to say that this is the maximum it could be as I have heard other people who are more pessimistic on what will be achieved by 2030. Then the numbers get bigger. The further we are from the targets the larger the amount we would have to put away. That is part of it and is the cost of non-compliance.

There is another cost involved. It is the clearest one for us to model, namely, that relating to electrification. There are also the costs relating to the loss of vehicle registration and excise taxes. I do not want to be pessimistic about that. If we are successful and we do a massive electrification of the vehicle stock, in some ways this is good because it helps avoid non-compliance costs. There is a sort of good news in there, but then there is the question of what will be the mechanism we use to fill the gap that will be left. I have sat in front of this committee over many years and pointed out a very obvious thing; if there is a gap in the budget that needs to be filled, then either spending on other things that we like spending on must be cut or taxes must be raised in other areas to fill the gap. This is the kind of obvious choice to do this in a sustainable way.

Mr. Niall Conroy

I will just come in here on the numbers side of things. In the paper we published, we took estimates compiled by the Department of Public Expenditure, National Development Plan Delivery and Reform and the Department of the Environment, Climate and Communications. As was said, it would seem to accumulate to approximately €3.5 billion by 2030, but the annual costs seem to be €700 million per year towards the end of that.

Deputy Rose Conway-Walsh

Is that current or constant prices?

Mr. Niall Conroy

I believe it is in current prices.

Deputy Rose Conway-Walsh

In light of the costs resulting from the physical risks, would it be advisable to have a dedicated fund for dealing with flood damage and so on?

Professor Michael McMahon

I do not believe we have to have a dedicated fund for flood damage. However, we must make sure that there are contingencies. While flood damage has been the most pertinent climate event we have had in Ireland recently, it is not just about flood damage.

However, others could manifest that are not flood related, such as other kinds of storm damage from extreme weather events coming off the Atlantic Ocean or other such things. It is therefore useful to plan for funds. Setting them aside for that in particular is not necessary, but we do have to plan for these costs and be ready to face them.

I will return to the Senator's first question on thinking carefully about planning for this to try to avoid it. For example, in the note we mentioned the risks of costs from flooding in Dublin city and getting flood protections in place, which is technology that exists. Countries such as the Netherlands have been leading on this for 50 years at least. Getting on top of infrastructure investment to mitigate the potential costs is a sensible approach at this point in time.

Deputy Rose Conway-Walsh

I will leave it at that.

An Leas-Chathaoirleach

I thank Deputy Conway-Walsh. The next contribution will be from Fine Gael. I see Deputy Durkan is online. He might need to unmute himself.

Deputy Bernard J. Durkan

I listened to the discussion so far and I wish to correct a few points. It is not true to say the present Government has avoided the heavy lifting and done nothing. It has done everything that could and should be done and it has recognised the challenges in front of us. However, there is a problem, of which we saw some evidence today. Someone made a mistake in calculations somewhere and those calculations seem to indicate we have to do more and that what has been done to counter climate change so far is not enough. I am not sure about that. I have lived in this country as long as most other people and this is the point. If we exert ourselves to the extent that we try to do more than we can afford, there will be a backlash. That is already beginning to be seen in Germany, France and across Europe. If we want to go that route, that is fine, but I do not advise it. It is counter-productive. We will achieve much more by leading the people than pushing them in a particular direction.

I will go back to a point I mentioned at a meeting earlier today. Someone suggested that a mistake was made somewhere and as a result we are behind in our targets and we will have to do more. I have been an observer of economic and social events for a number of years and there comes a time when we have to ask whether we can do more and whether we are in a financial position to do more. Do we break the country by attempting to force it to do more? Do we divide the country and do we leave ourselves exposed? Do we damage the agrifood sector to such an extent that it will no longer be able to cater for the food requirements of the country? That sector currently contributes 40% of the food requirements all around us. I say this in the knowledge that I know what we have to do. We have to take steps to counter climate change and ensure we take the steps on time. However, we cannot take the steps to the extent that we break ourselves.

One example is hanging around while turloughs flood the houses adjacent to them and saying people should not have built their houses there and we must find an environmental way of dealing with it. There is an environmental way. We should use drainage. We have not used drainage in 50 or 60 years. That is a fact of life. It involves arterial drainage, cleaning rivers and allowing the water to flow away.

We have lost that art to a huge extent. I have noted recently the degree to which imported food is visible in our supermarkets because we are not able to supply it ourselves. There is a combination of reasons for that, including that we had a terribly wet season last year. There was water everywhere. You could drink it if you wanted to, but it would not be safe. We need to address this in a fundamental way that will achieve the targets necessary and that will not extend the strength of the people and the economy beyond their reach. If we do so, we will break the economy, ourselves and our resolve. It does not work that way.

It is no good saying "There is a fool who does not know what he is talking about". I have lived in this country as long as anyone else. I have seen all the trends over the years. I have seen the appalling weather conditions that prevailed in the past - I mentioned this earlier today - in the 1940s, 1950s and 1960s. The 1970s were good. We were all told in the 1970s that we would have a different climate, it would be much easier in the future and there would be more fine weather with more sunshine. That stopped at the end of the 1970s. We had a couple of years after that and we certainly did not have it last year. What did we get? We are told it was the hottest year on record. If we go into the supermarkets and look at the products produced during the hottest year on record, there is ample evidence that the products were produced on flooded lands. We are told that flood plains are important and it is important that the flood goes somewhere when it has nowhere else to go, but nothing is as important as arterial drainage to contain flooding as much as possible. The Netherlands was already mentioned. The Dutch have been living in a situation since the 1950s which they have controlled effectively.

We have to make changes to accommodate climatic issues that are taking place. We have to do the best we can. We should not, nor can we, break our economy in the process. It would be ludicrous to do so and we will pay a very high price for that. The kind of price we are talking about is the demonstrations by concerned agrifood producers we see across Europe at present.

I will finish with this. I used to make my living in the contracting business once upon a time. In the old days, farmers ploughed the fields. That meant using the conventional plough to turn over the soil and once that was done, there was a drainage system underneath, which helped to aerate the soil and improve its productivity. That does not happen to any great extent anymore because we are in the era of the one-pass sowing system. That means that the French drains that were plentiful once upon a time - for the past 200 years - do not work anymore, because heavy machinery has forced them downward and out of existence. That is fine. If we want to go on that way, we can do so. However, unless we ensure adequate drainage for the land to dry out, productive capacity will be dramatically reduced. You may say these are the meanderings of an old guy who does not know what he is talking about, but I lived with it and I did it.

Mr. Niall Conroy

I might pick up on one point. We held a conference last week on climate change, budgeting for climate change and how to best plan for it. Something that struck me was that people spoke about the need to plan for adverse outcomes. Everyone is planning to try to limit climate change and limit warming to below 1.5°C or 2°C. However, perhaps we need to start to think about how to plan for a greater degree of warming that will happen if these targets are not met. We might have to think very seriously about adapting to what could be a very different climate from the one we currently have.

Professor Michael McMahon

Can I also chip in a few things? I want to be very clear that in the report, the opening statement and at the conference Mr. Conroy mentioned, we were not the people standing up making statements about whether or not we have done enough. I have qualifications in economics, not in climate science, but we had people such as Marie Donnelly, chair of the Climate Change Advisory Council, Lisa Ryan, professor in energy economics at University College Dublin, Hannah E. Daly, professor in sustainable energy at University College Cork, and Laura Burke, director general of the Environmental Protection Agency, and they are the people who are giving us their assessment of how close or not we are to achieving targets. I agree and I tried to stress the fact that these changes do not have to break the economy but they have to be done in a planned and phased way in order to make it manageable. However, they are manageable. Part of the concern from sectors like agrifood or others is because they see change coming but they have a lot of uncertainty about how they will bare the costs versus someone else. There is a role there for Government to make clear what supports will be there. In fact, a bit part of the supports we mentioned in our note are related to supports for the farming sector and that is a policy decision that would be usefully made soon but in a sort of joined-up way. Globally warming is the title we often give it. For Ireland, global warming means warmer summers, colder winters and possibly more water because we will not have the same Gulf Stream protection. We have to plan for the drainage and the water aspects of that. We can do so if we invest in a manageable and phased way without breaking the economy but we also need to have policy take the lead by providing certainty.

An Leas-Chathaoirleach

I thank Professor McMahon. That was very useful indeed. I now call on Deputy Canney.

Deputy Seán Canney

There was a lot of interesting conversation going on there but as a former Minister with responsibility for the OPW dealing with flood relief, investing in it is one thing but to have a budget for the general maintenance of whatever we do is another issue. The fact is that the type of maintenance we do now is being hampered by our desire to protect the habitat in which the flood occurs. These are basic principles. I have learned that when you are talking about flood relief, you have to design and maintain channels so that the waters can flow. However, we now have a method of doing it which costs probably the same money, where we will take little bits of twigs out of a river and leave the problem there which is silt that has built up over the years. We cannot touch that now because of a fisheries issue or something else. We are compromising ourselves with all the rules and regulations we have. Sadly, it is costing us a lot of money to, effectively, not make a huge improvement in our flood defences because we are hampered all the time by environmental constraints we keep building into all of these projects.

We talk about preparing for the future, 2030. In 2017, I said that we need to do a drainage scheme for the Gort lowlands in my constituency. In 2024, we still have not got to a stage where we have what they call an exhibition stage of our project. We are going to spend at least ten years spending money on paperwork to try to justify whether this project will have a cost benefit for us at the end of the day. That is where the conflict really is in budgets. We have Departments that will not spend money unless they can see a cost benefit. The cost benefit is the here and now as opposed to what we would save into the future. We never build that into it.

We do not take the human cost into account. If people lost their homes, we do not take the additional stressful situations you have then, or livestock trapped in farmyards and that cannot get out or be fed. Over the past 20 years, we, in this country, have developed a great animal we are trying to feed. This animal is a bureaucratic way of trying to do things that we know we have to do but we have put ourselves in a position where we keep building barriers to getting the thing done at a cost. That is one thing.

When I look at transport in this country, we have to make a decision very fast. If we are going for the electric car as being the solution to our traffic and fossil fuels issue, we have to do a number of things. The first thing we need to do is invest in the infrastructure, so that people who buy a car will have the confidence they will be able to charge the car wherever they go in the same way as they can put fuel in at the moment. It is a big problem. It is not the witnesses' problem but if we are investing, we should be pre-planning and forward planning to put in that infrastructure so the guy or the family buying the electric car will get the nice experience of being able to use it rather than having a stressful issue about where to charge the car if travelling from Galway to Sligo and back again. That is the type of thing we come across.

On transport also, I am involved in a campaign to reopen our western rail corridor. It was mentioned by Deputy Conway-Walsh as well. That campaign has being going on for 20 years. Not all of them, but many of the global companies along the west coast and those that are exporting product want to have their product carbon neutral so they need to use rail freight, for instance. It will cost maybe €150 million to join the line up from Claremorris to Ennis and to create a corridor along the west coast to get us to Shannon Foynes Port, Galway Port, Dublin, Wexford or wherever. That has been talked about. It has now been decided that it could be a runner.

We talk about the electrification of our railway network, how much it will cost and how long it will take to do it. Then we have to couple that with the fact that as we reduce our consumption of fossil fuels, we are also reducing our tax take from excise duty and tax on that. What is going to replace that? They are the competing factors we have when we are trying to solve a problem which we are not so sure where it is going to level out at. If a flood defence is put in with an expectation that water levels are going to rise by so much over the next ten to 20 years but if the measurement is out, the flood defence will not be built to meet whatever the expectation is. The other risk is that all that money would not have needed to have been spent if water levels did not rise as much as we thought they would. There are many contradictory things in my mind. It will take something a little more than thinking about what to do.

To deal with the budget for climate action, we have to recoil it back and view it as a budget to prepare ourselves but also to bring ourselves back from the brink. There are two different things going on. I would like the witnesses' thoughts on that. What do they think of what I am saying or do they agree with me?

Mr. Niall Conroy

I will start and Professor McMahon may pick up on whatever he chooses. On the point around reduced use of fossil fuels and the decrease in revenue we will see there, the Deputy is absolutely right. We have been outlining how reduced use of fossil fuels will reduce our VAT, excise or VRT and all those sorts of things. However, that is assuming the tax system remains as it is at present. At the moment, electric vehicles or electricity is taxed at a much lower rate than fossils fuels. That is open to change. There could be changes. There is a whole menu of options that could be pursued to bring back some of the revenue from car use that would otherwise be falling away. Things like congestion charges have been suggested, as has charging by road use or by weight. There are many different options that could be chosen there.

The other thing I will outline is that sometimes the frame around this can be a bit tricky.

We talk about some of the costs of transitioning away from fossil fuels, but there are also many benefits, such as environmental and health benefits, and improved air quality. We can even see fiscal benefits in that there might be reduced need for health services and things like that. In addition, things like energy security could be improved. Obviously, we are spending a lot of money importing energy from abroad. There is an obvious saving if we are generating that domestically, by wind, solar or whatever else. Professor McMahon may wish to pick up on some of the other topics.

Professor Michael McMahon

I agree fully with Deputy Canney. In a sense our role here is simply to put some numbers on the table related to some of these costs and these trade-offs. How do we make this transition at the right speed if we have a planning and regulatory system that prevents us from doing changes that we could do quickly, easily or whatever? This is exactly where policy comes in. I fully agree that a number of people choose not to buy an electric car because once or twice a year they drive from Cork to Belfast to see family or something and they are rightly nervous that they might get halfway and cannot find a high-speed charger. Will they need to park up at someone's house or at a pub and leave the car for 12 hours? When I mentioned earlier that policy can help to provide certainty, part of that is by making these investments.

The Deputy mentioned the distinction between transition costs and other costs. I might ask Mr. Carroll to outline some of those again.

We are always very strong on maintenance budgeting. When doing investments, we always need to think about the maintenance side of that. I agree that decisions need to be made, including on this question of what engineers would call robustness of the infrastructure. We might build defences which are perfectly good up to 1 m sea rise, but if it goes to 2 m, they are not so useful. Decisions need to be made and the sooner we start thinking about those decisions, making them and providing some certainty, the better it will be for others. These are Government decisions. These are decisions for the elected Members of the Dáil to ponder. I stress that we do not have much time to ponder them.

I ask Mr. Carroll to speak about the split between the transition compliance and the ongoing costs that we estimate.

Mr. Killian Carroll

In the paper, we looked at three distinct costs - the compliance cost, the transition cost and the physical cost. If we do not meet our targets those are the compliance costs. We could end up with that €3.5 billion cumulative figure out to 2030 Professor McMahon mentioned in his opening statement. I hope we will meet our targets which means we will not have those compliance costs and instead we will have transition costs. On the revenue side out to 2030, we would see a fall in revenue of about €2.5 billion. That is mostly through the switch from petrol and diesel vehicles to battery electrical cars. That is only a fall in revenue on the public purse. It would not replace the net revenue. It would not necessarily mean an increase in the tax burden for households. As Mr. Conroy mentioned, there are many areas in which we could raise revenue which might also help meet the targets, such as the congestion charges or taxing by road use.

On the expenditure side, we found that the largest cost on the public purse would be on retrofitting residential buildings. That would account for the majority of the cost. It would be about 50% of the cost to the State. Cumulatively by 2030 if we are to meet our targets, it would be about €11 billion for the State.

Regarding physical costs, in the past we have seen costs of around €200 million per year for these once-in-ten-year events. Over time what had been regarded as once-in-100-year events might occur annually. The frequency of these events will increase and not only that, but the costs will also increase. Earlier Professor McMahon mentioned the cost of flooding in Dublin city. For a medium-range scenario, if the sea level rose by about 0.5 m, costs would rise from €25 million today to €330 million. If it rose by 1 m, costs in Dublin city alone could rise to about €3 billion. These physical costs could potentially get really large if we do not transition towards net zero fairly quickly.

Professor Michael McMahon

I know we have discussed this with Deputy Canney a few times in the past. Regarding that €11 billion estimate on retrofitting, if we can get the tradespeople and everyone in the construction industry ready with capacity to deliver on this, between the private and public sectors we can not only go about achieving our climate goals, but we also help in building up the capacity in the construction sector which we know has been subject to these constraints in recent years as we have also tried to address the housing shortage. Policy can play a vital role in this joined-up thinking and strategy.

An Leas-Chathaoirleach

I thank all three witnesses for their contributions and their responses to Deputy Canney. I have some questions and observations.

One of the threads running through the report and all the expert commentary on what we are required to do between now and 2030 on the climate agenda and the transition is that we need to be more decisive now, sooner rather than later, because there are a range of additional costs if we move beyond that tipping point. There is obvious environmental damage and the costs associated with that. There are also fiscal costs as well as economic and social implications.

The announcement in the last budget of the €14 billion infrastructure and nature climate fund was very welcome. A not insignificant component of that is just over €3 billion ring-fenced for climate and nature. Remarkably and given the obvious deficiencies we have with planning out to 2030 and what is an under resourced national development plan, is it not quite extraordinary that as far as Government is concerned this fund is not capable of being tapped into until 2026? Nobody has given me a sufficient explanation as to why that is the case given that the emergency is now. We have had these discussions routinely with representatives of the Irish Fiscal Advisory Council and others outlining that the last thing anybody wants to do is to inflate the economy beyond where it is at the moment; we have capacity constraints. Based on the council's report and the conversation today, it is clear that we need to act more quickly. Would it not make more sense to tap into that fund now, if we are prepared to do that, in addition to what is already committed in the national development plan around adaptation and mitigation?

Related to that I wish to ask about something that is more current and topical. Yesterday, the European Parliament finally voted for the nature restoration legislation. There is an enormous job that this State and other EU states need to do to assist farmers in that transition. In IFAC's consideration of all these matters and in talking about the kinds of investments the State needs to make in that transition to support the agriculture sector, has it factored in what is required under the new nature laws in moving to that point?

Has IFAC factored in what is required under the nature laws in moving to that point over the next period? I am looking at something I pulled from an IFAC report in September or October earlier. I used these figures in a press statement I made around then. It referred to extra spending of between €1.6 billion and €3 billion a year to assist farmers with the transition, retrofitting and so on. There is a very real debate - it is not abstract - about how we support farmers through this. We know the agricultural sector is the biggest sector, next to transport, in emissions. We know the challenges. There will have to be changes. Everybody has to confront that and be realistic about it. The agricultural sector needs to be resourced and paid, quite frankly. That is part of what will happen. It needs a plan, as Professor McMahon said. It needs that certainty. What does that certainty look like in IFAC's opinion? How do we practically support the agricultural sector in moving from where we are now to the point where we need to be, given what we know will be the obligations on the sector? That includes existing obligations to allow us to meet climate targets and additional obligations that will be placed on it in the context of the nature restoration laws passed yesterday.

Professor Michael McMahon

I will start and let the others join in a moment.

An Leas-Chathaoirleach

I accept Professor McMahon is not a climate expert or, indeed, an agricultural scientist, as far as I am aware.

Professor Michael McMahon

No. That is a good guess. I definitely will not claim any expertise in the world of agriculture. An umbrella answer to what the Leas-Chathaoirleach said at the end about the role of planning, which I will continue to stress, is that it is not just planning in one area; it is joined-up thinking. As the Leas-Chathaoirleach noted, regarding the national development plan or extra investments in climate, it may be absolutely fine to wait until 2026 to tap into those funds as long as we keep going with other planned investments in this area. As I said earlier in response to Deputy Conway-Walsh, perhaps prioritising those that will have the biggest climate impact. As the Leas-Chathaoirleach pointed out, there are many other things that are not necessarily financial that can help us along the way. That would be - and I referred to this in my response to Deputy Durkan - providing some certainty to the agrifood sector about what the world will look like as we engage in this transition that is coming, how we expect it versus the State to bear some of the costs and what incentives there will be for it to move faster and to put in drainage or to make assessments, together with the Department for the environment, about the necessary steps. I will not claim any expertise on one system versus another but there are experts who can provide this guidance.

I like the way the Leas Chathaoirleach put it. Planning is necessary but I stress it is not just piecemeal planning, one dimension at a time, it is planning together in a joined up way and potentially having to be flexible. If it turns out that there is more capacity for retrofitting, perhaps we need to unleash more funds from even the normal capital spending budget to do that, or, if we find ourselves in a position in which the construction sector is much more constrained, are there other types of investment we can engage in now? For instance, if we want to move down the road of full electrification of rail networks or other transport industry, is now a better time to make those investments? A lot of those investments, at least the major capital parts, are not made in Ireland. In theory, you can invest from abroad, beyond the installation and maintenance, without adding to pressures in the domestic construction sector. Perhaps now is a better time to do that because in five years, everybody will be scrambling to do this. At that point, those industries may have capacity constraints. It points to a plan being a key part but it must be a joined-up plan that includes all of these things and provides some level of certainty in a very uncertain world. You cannot provide full certainty but you can at least provide some sense that investing in retrofitting your house now will not disadvantage you financially compared with waiting until 2028 because that is when we know the government of the day will be desperately trying to get more of this done and provide better incentives. Planning now can help in that respect. Mr. Carroll or Mr. Conroy may wish to add something.

Mr. Killian Carroll

I can come in on the agricultural emissions we spoke about. The Leas-Chathaoirleach is right - the agricultural sector will face challenges in meeting its targets. Teagasc did modelling work to see what would likely be required for the sector to meet its targets. Its modelling work suggested that there would have to be a reduction in livestock numbers, particularly in the cattle herd - beef and dairy. In our modelling work, we assumed, because there would be a reduction in livestock numbers, that there would be a corresponding reduction in farm incomes. We assumed that these farmers would ultimately need to be supported. The figure we had was about €500 million per year between 2026 and 2030 in supports. Some farms may operate at a net loss in existing circumstances. Some beef and sheep herds operate at a net loss. One could support those farms in particular to transition away from using the land for their beef and sheep herds towards other land use like afforestation. They could end up better off as a result.

Mr. Niall Conroy

On the use of funds, we really welcomed this after the last budget, particularly the future Ireland fund. We have talked a lot about the cost of the climate transition and the reduction in revenue and increase in spending as a result. That is not the only medium-term fiscal challenge we face. At a similar time, the population is ageing rapidly. There will be a lot of additional health spending and spending on pensions, both State and public sector. Putting money aside today when the economy is doing pretty well and demographics are pretty favourable is a good time to try to defray some of those costs in later years, which we know are coming down the track.

An Leas-Chathaoirleach

We obsess about the cost of climate change and the transition but we rarely speak about the economic opportunities and benefits that could accrue with the kind of planning, about which I think there is consent in this room, at least, we need to do and may not necessarily be evident from some quarters. Deputy Durkan said earlier he was astounded shopping in the summer at the amount of imported products on the shelves. I was astounded to read just before I presented a paper of sorts at a conference a few months ago on climate action on food about the very small number of large-scale Irish horticultural producers currently in the market. There are opportunities to support, for example, the Irish horticultural sector to produce more food sustainably and locally, cutting out unnecessary supply chains and all that goes with that and providing certainty in food production in the future. That means a change in mindsets. In this country, there are families who may and are right to consider themselves expert producers of dairy or beef, which they have done for generations, but because you do something for generations does not necessarily mean that will always be the case. People, of course, need to be supported through this difficult process. It needs to be handled sensitively - I think we all agree with that - because of the social implications. I will bring the meeting to a conclusion at this point.

As always, I thank the witnesses for their contributions. We have an open door for the IFAC. I thank the witnesses for attending. We enjoyed and valued their contributions. I hope they enjoy the rest of their evening.

The select committee adjourned at 7.20 p.m. until 5.30 p.m. on Wednesday, 6 March 2024.