Year: 2010

Energy and Environment Review 2010

Out now

The Energy and Environment Review 2010 is the third in a series of annual reports published by the Economic and Social Research Institute, discussing trends in resource use and emissions to the environment as well as policies to change those trends. The key findings are as follows:

  • While emissions of most persistent organic pollutants are expected to fall between 2010 and 2025, emissions from households of PCBs to air and of dioxins to land and air, and particularly emissions of hexachlorocarbons to air from agriculture are projected to increase. To avoid this, additional policy interventions would be required.
  • Our estimates of the amount of methane from landfill differ from the official estimates, suggesting that international emission reduction obligations are less severe than they seem to be.
  • On average, firms spend 0.3% of their turnover on environmental protection and 0.7% of their investment is directed towards environmental care. More than three-quarters of firms spend no money at all on environmental care, but some firms spend up to 1.5% of turnover or 7% of investment.
  • It is expected that wind power will account for two-fifths of power generation by 2020, replacing coal and peat. After 2020, coal may well return to the fuel mix, with or without technically risky and expensive carbon capture and storage. Carbon dioxide emissions in 2025 would be 2.6 million tonnes higher without carbon capture and storage.
  • A large share of electricity is expected to come from renewable energy. The use of biofuels in transport can be expanded but this may face economic and environmental objections. In other sectors, the use of renewable energy seems to have stalled. It is therefore likely that Ireland will have to import renewable obligations in order to meet its targets.
  • Recent tax reforms have shifted the balance in favour of diesel cars, so that carbon dioxide emissions and tax revenue are lower than what they would have been without tax reform. In the unlikely event that the government meets the target that 10% of all cars be all-electric vehicles, carbon dioxide emissions from transport and power generation would fall by only 1% as all-electric cars primarily displace small cars driven over short distances.
  • Over the last two decades, energy efficiency has rapidly improved in Ireland and the government hopes to accelerate this trend. However, even if current policies are maintained, which seems unlikely given the current fiscal situation, a deceleration is more likely due to sectoral shifts in the economy, less efficient power generation, and export of electricity to Great Britain.
  • Ireland will probably meet its emission reduction obligations under the Kyoto Protocol because of the severe recession. However, at this point the EU target for 2020 seems to be out of Ireland’s reach. Subsidies are more likely to fall than rise, and the announced carbon tax is insufficient for the emission reductions required. Ireland will therefore have to import emission permits from other EU Member States.
  • Incineration will help Ireland to meet its landfill targets in the medium-term, but in the long-term more reform of waste policy is needed. Weight-based charging and three-bin waste collection would be needed (in urban areas) to make the planned increase in the landfill levy effective.

The Energy and Environment Review presents scenarios that consider actual and probable policies but disregard targets that are not supported by such policies.

The energy part of the review should be compared to the SEAI Energy Forecasts.

IMF/EU Deal Interest Rate

In an article in the Sunday Business Post I explain how the deal will allow Ireland to finance its deficit over the next three years at somewhat lower cost than the headline interest rate would suggest. The article is here.

Sargent: Ask Olli Rehn About the Minimum Wage

Anyone left in any doubt as to which of the outside parties was calling the shots in setting the terms of the EU-IMF agreement should consider checking out the clip from last night’s Week in Politics show. About two minutes in, there is a clip of Green Party TD Trevor Sargent discussing the decision to cut the minimum wage with a protestor. Sargent tells the protestor to take it up with Olli Rehn and that it was the EU, and not the IMF, that insisted on the cut in the minimum wage.

IMF deal can change Irish legal system for the better

An article by Eoin O’Dell, Trinity School of Law explains how. You can read it here.

The EU Commission’s View of Ireland

Despite the constant references to the IMF in the media, on placards and on posters, the truth is that the Irish bailout deal is largely funded by the European Union and most of the reliable reports about the negotiations have suggested that the terms and conditions of the deal largely represent the preferences of the European Union.

Given that, I’ve been surprised at how little attention has been paid to the European Commission’s Autumn forecasts, released on November 29, the day after the EU-IMF deal was agreed. This post examines these forecasts and what they suggest the Europeans think will happen in Ireland.

Growth

The growth assumptions (see page 9 of this document) underlying this year’s budget come from the government’s four-year plan, published on November 24. They assume real GDP growth of 1.7% in 2011 and 3.2% in 2012 and, more importantly for budgetary projections, nominal GDP growth of 2.5% in 2011 and 4.3% in 2012.

The EU Commission forecast published five days later projects real GDP growth of 0.9% in 2011 and 1.9% in 2012. They project growth in the GDP deflator of 0.4% in 2011 and 0.8% in 2012, so their forecasts for nominal GDP growth are 1.3% in 2011 and 2.7% in 2012, putting them 1.2 percentage points behind the government in 2011 and 1.6 points behind them in 2012.

Budget Deficit

Even if the government’s projected budget deficits came about, the lower level of nominal GDP projected by the Commission would produce a higher deficit as a fraction of GDP but this effect is small. Here’s a spreadsheet I’ve put together with various calculations. It’s not too easy to read but it reports that, on its own (i.e. keeping the government’s deficit forecasts), the lower projected level of nominal GDP in the Commission’s forecast would raise the deficit ratio from the government’s projected 9.4% of GDP for 2011 to 9.5% and from 7.3% in 2012 to 7.5%.

The Commission’s actual forecasts for the deficit ratios for the next two years, however, are 10.3% in 2011 and 9.1% in 2012. Based on my calculations of the Commission’s forecasts for nominal GDP, this implies deficit levels of €16.2 billion in 2011 and €14.9 billion in 2012. These figures are €1.3 billion higher than the government’s assumption in 2011 and €2.6 billion higher in 2012.

The discussion of the Irish forecast on pages 85 to 86 makes it clear that the Commission fully expects the implementation of the adjustment packages of €6 billion in 2011 (though €700 million of this is once-off measures) and €3.6 billion in 2012. This means that the Commission’s higher deficit forecasts are due to their estimates that the weaker economy will mean lower tax revenues and higher welfare spending.

The government projects revenue shares of 35.4% in 2010 and 2011 and 35.8% in 2012. The Commission project revenues shares of 35.1% in 2010, falling to 34.9% in 2011 and 34.7% in 2012.

The government projects an expenditure share of 67.3% this year, with 20.3% of this due to banking costs. The government then project expenditure share of 44.8% in 2011 and 43.1% in 2012. The Commission project expenditure shares of 67.5% in 2010, 45.2% in 2011 and 43.8% in 2012.

It seems clear from these calculations that the Commission do not view the 3% deficit target in 2014 as attainable. If a cumulative adjustment of €8.9 billion over 2011-2012 only succeeds in reducing the underlying deficit from 12.0% to 9.1%, it’s hard to credit how a further €6.2 billion in adjustments will succeed in reducing the deficit to below 3% in the following two years, even if economic growth did turn out to be strong. Indeed, a six percentage point reduction in the deficit over the three years after 2012, thus reaching the 3% deficit in 2015, seems ambitious.

Debt and the Cost of the Banks

One would expect the Commission’s projections for Irish public debt levels to be higher than those of the government over the next two years because of their higher deficit forecasts. However, the higher debt levels in the Commission’s forecasts also appear to reflect the EU’s view on the likely costs related to the banking system.

The Commission are forecasting Debt/GDP ratios of 107% in 2011 and 114.3% in 2012. Based on their nominal GDP forecasts, I calculate that this means debt levels that are higher than those projected in the budget documents by €11.6 billion in 2011 and by €15.5 billion in 2012.

The higher deficit projections will have implied an additional €1.3 billion of debt in 2011 and an additional €3.9 billion in 2012. The remaining €10.3 billion in 2011 and €11.6 billion in 2012, likely reflect the cost of the banking bailout.

The EU-IMF program involved the Irish government committing €17.5 billion in resources from the Pension Reserve Fund and cash balances towards the bank plan. These commitments do not add to the gross government debt. If the Commission are adding an additional €10.3 billion to their forecast for gross government debt in 2011, then this suggests that their estimate of the total cost of the banking package is €27.8 billion. This is already pretty close to the total of €35 billion that has been provided for these purposes. And this is prior to any unveiling of new information on loan losses from the upcoming PCAR stress tests.

Ruling out further costs of bank recapitalisations after 2012, if indeed the deficit is still 9.1% in 2012 and the debt ratio ends that year at 114.3%, it will take a very strong combination of GDP growth and fiscal adjustment to see the debt ratio stabilise at less than 120% in the following years.