Climate policy will be less expensive than previously thought

Amid the doom and gloom, here is some good news – and achieved by civil servants at that.

On several occasions, I expressed concern about the high costs Ireland would face if it would try to comply with the greenhouse gas emission reduction targets for 2020. These targets were agreed in early 2008 – when we are expecting a soft landing for the economy and an Taoiseach had his eyes on the European presidency. We argued that the targets, agreed before impact assessment was done, were certainly very costly and probably infeasible.

Things have now changed. The targets are still the same, but policy instruments were added. Specifically, a second market for trade in emission permits was established. Previously, emissions by the power generation sector, the cement industry, and selected other energy-intensity sectors were covered by a permitting system, with the permits freely tradable within the European Union. Now, permits for the rest of emissions can also be traded. In Ireland, this will substantially reduce the marginal costs of abatement. In the original proposal, the required carbon tax would be some €60 per tonne of CO2 according to the European Commission. Cambridge Econometrics has €300/tCO2, while the ESRI models say it is much higher than that (we tried $500/tCO2 which was not nearly enough; the model does not solve for taxes beyond that). With the new proposal, the cost at the margin is cut in half to €30/tCO2 – and the total cost in four.

The reason that costs fall so much is that Eastern European Member States had negotiated rather lenient emission reduction targets. In fact, Bulgaria, Czechia, and Poland have emission allocations that are higher than they can hope to emit. With a market in place, Ireland can now buy these cheap permits instead of expensive emission reduction at home.

There are two further points to this. You will not read about this in the newspapers. All media attention was focussed on the antics of the Poles, who in the end achieved little except some transfer of wealth from Polish citizens to Polish companies. The Irish got what they wanted by quiet diplomacy and constructive engagement. Furthermore, the original bad-for-Ireland plan was agreed before the Lisbon referendum. The good-for-Ireland adjustments were made after the referendum.

Unrelated to the above, this message was posted while on the bus from Heathrow to Oxford.

7 thoughts on “Climate policy will be less expensive than previously thought”

  1. “The good-for-Ireland adjustments were made after the referendum.”

    Well that doesn’t conform to the “Ireland is on the outside looking in post-Lisbon” echo chamber view, does it?

  2. Does this mean that Ireland will not be rquired to achieve substantial reducitons in transport and agriculture by 2020? Is there a limit on the ability to purchase credits for domestic emissions?

  3. Indeed. There is a limit on the permits that can be bought from China, but no limit on permits from Poland.

    Mind you, the Poles will sell their permits so this is not costless but it is a lot cheaper than trying to do everything domestically.

  4. Thanks for answering my question. This is a big story that hasn’t got any media attention. What are the implications of the changes for the EU’s ability to achieve lower emissions?

  5. As I said, the diplomacy was quiet. These issues are probably too arcane for the mass media, but even specialist outlets seem to have missed this story.

    There have been two changes. First, non-ETS allocations are tradable within the EU. This means that hot air in Eastern Europe will be used. The EU target is thus more lenient but by only one percent.

    Second, CDM was expanded but again by one percent EU wide.

    So, as a result, the nominal EU target is still 80% of 2005 in 2020. The actual target was more like 90% and has gone up to 92%.

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