This chapter reviews Ireland’s progress in mainstreaming environmental considerations into economic policy and in promoting sustainable development and green growth. It looks at efforts to ensure a green and inclusive recovery from the COVID-19 crisis and to increase investment in environment-related infrastructure and services. The chapter reviews steps taken to green the tax system, including the use of energy and transport taxes to pursue environmental objectives, and to remove environmentally harmful subsidies. Finally, it discusses the country’s eco-innovation performance, as well as opportunities for expanding employment in green sectors as means to ensure a just transition to a green, low-carbon economy.
OECD Environmental Performance Reviews: Ireland 2021
OECD Environmental Performance Reviews
3. Towards green growth
Abstract
Recommendations on green growth
Greening the economic recovery
Maintain the stringency of environmental requirements, including to access financial aid, during the COVID-19 crisis; as the recovery gains ground, consider linking future support for businesses and households to meeting environment- and climate-related requirements.
Promoting low-carbon investment, eco-innovation and green jobs
Ensure the revised NDP continues to prioritise investment in low-carbon transport infrastructure and energy efficiency, and to promote eco-innovation and reduction of the carbon footprint of agriculture, in line with the goal of a climate-neutral and circular economy; identify evaluation mechanisms and indicators to assess the effectiveness and environmental outcomes of the plan.
Increase government spending on R&D related to environment, climate and low-carbon energy solutions; extend direct funding instruments to encourage eco-innovation in SMEs; establish a national database of environment- and climate-related research to improve co‑ordination and efficiency of public research funding.
Customise the just transition measures to the local needs by: i) offering targeted skill and entrepreneurship training programmes to affected workers; ii) promoting green business opportunities and supporting SMEs; iii) providing targeted social benefits schemes to vulnerable households (e.g. for switching to cleaner heating fuels); and iv) ensuring widespread access to adequate infrastructure and services.
Greening the tax and subsidy system
Maintain the commitment to progressively increase the carbon tax rate; continue to provide carefully designed compensation measures targeted at the most vulnerable parts of the population.
Increase the diesel tax rate gradually so that it at least reaches the petrol tax rate in the medium term; phase out the current price cap for diesel used by road hauliers as soon as possible; assess whether the tax rules on company cars encourage substantial unnecessary driving and, if so, consider correcting the system.
Consider if the NOx element in the motor vehicle tax appropriately reflects the social costs of NOx emissions, especially as regards high-emitting vehicles.
Prepare to shift the focus of road transport taxation from fuel use to road use over the medium term through road use pricing based on geographic information systems, which consider where and when the driving takes place and the type of vehicle driven.
Establish a process to systematically screen actual or proposed subsidies and tax provisions to identify those that are not justified on economic, social and environmental grounds; develop a plan to phase out fossil fuel and other environmentally harmful subsidies.
Remove the VAT exemptions on fertilisers and animal feeds and the tax concession on fuel used for farm operations, while recycling the revenue to support general agricultural services or to individual farmers (on the basis of farm size and type); consider introducing a tax on pesticide based on toxicity of the active ingredient.
Consider rebranding the fuel allowance and providing it to eligible households during the whole year with a view to fully delinking it from heating fuels.
3.1. Introduction
Ireland is a dynamic and open economy. The COVID-19 pandemic was the second economic and social disruption the country faced in little over a decade. A severe banking and fiscal crisis plunged the economy into a deep recession in 2008. Determined structural reforms and fiscal consolidation helped Ireland start to recover in 2012/13,1 and subsequently grow faster than on average in the OECD. This helped Ireland make considerable progress towards the Sustainable Development Goals (SDGs) linked to poverty and inequality reduction, economic growth and jobs, education, industry and innovation. However, regional disparities widened, and the speed and scale of recovery came at an environmental cost. Additional effort is required to pursue the SDGs related to climate, energy, water and biodiversity (Chapter 1).
There are concerns over the country’s effective capacity to deliver on its ambitious plans for the transition to a climate-neutral, circular and green economy. While Ireland has an extensive suite of policies addressing the SDGs, it needs to strengthen the linkages among these policies to achieve the goals cost-effectively by 2030 (Box 3.1). The scale of the investment needed to catch up and prepare for future demographic pressures on infrastructure and the environment is remarkable. At the same time, additional sizeable fiscal spending is needed to support recovery from the COVID-19 pandemic. Ireland’s own history shows that early action is needed to steer the economic recovery towards sustainable consumption and production patterns and avoid a rebound of environmental pressures. This would also make the economy and environment more resilient to future shocks.
3.2. Ensuring a green and inclusive economic recovery from the COVID-19 crisis
Measures to contain the spread of the COVID-19 pandemic resulted in a dramatic drop in domestic demand and economic activity, as well as a rapid rise in unemployment in the first half of 2020.2 Strong exports mitigated the impact on the economy. As of September 2020, the Central Bank of Ireland forecasted gross domestic product (GDP) to decline by 1.1% in 2020 and by 0.3% in 2021, followed by a recovery in 2022 (+3.4%). This assumed a strong resurgence of the pandemic and the restoration of widespread and stringent containment measures. Unemployment would jump to 12.5% in 2021 from less than 5% in 2019 (CBI, 2020). The increasing public debt and the change in trading arrangements between the European Union (EU) and the United Kingdom as from 2021 also pose risks to the Irish economy (OECD, 2020a).
In the first two months from the onset of the pandemic, the government increased health spending and took measures to cushion households and businesses from the full impact of the shock and reduce the GDP slump. These pre-recovery or damage limitation measures amounted to more than EUR 14 billion (or 4% of 2019 GDP).3 In addition, the authorities introduced measures to protect households with difficulties paying their mortgage, rents or bills.4
3.2.1. Green elements in Ireland’s 2020 recovery package
In mid-2020, the government launched the July Stimulus Package as part of its response to the COVID‑19 crisis. In addition to supporting employment, the package aimed to prepare for a greener, more sustainable economy, as well as for an economy with more remote working, online trading and digital services (Government of Ireland, 2020a). The package amounted to about EUR 7.4 billion in 2020-21 (or 2.1% of 2019 GDP), including tax measures, direct expenditure, credit guarantees and accelerated capital expenditure.5
The July stimulus brought the overall funding available to support business and employment since the outbreak of the pandemic to an unprecedented EUR 24.5 billion in 2020 (7% of 2019 GDP), or nearly eight times the state budget for that year. In line with advice (OECD, 2020b), the stimulus measures were timely, targeted and temporary.
Box 3.1. A coherent framework for achieving the Sustainable Development Goals
Ireland played a significant role in the development and adoption of the 2030 Agenda and the SDGs. It acted as co-facilitator, together with Kenya, for the final phase of intergovernmental negotiations. It has a wide range of policies addressing the 17 SDGs and their associated targets; many of these policies have been developed within the EU context.
Ireland has adopted a whole-of-government approach to implementing the SDGs. The Department of Environment, Climate and Communications has responsibility for ensuring coherent mainstreaming of the SDGs across the government’s actions, while each department leads implementation in relation to one or more SDGs. Ireland established an SDG Interdepartmental Working Group, a national SDG Stakeholder Forum and an SDG implementation and reporting framework.
The SDGs National Implementation Plan 2018-20 is the first in a series of plans to integrate the SDGs into national policy. Its strategic priorities are increasing public awareness of the SDGs, providing stakeholders with opportunities to engage with and participate in national implementation, supporting communities to help achieve the SDGs and aligning national policy with the SDGs. The plan includes an “SDG policy map” that identifies the correspondences between national policies, SDGs and associated targets, as well as the interlinkages between national policies that can contribute to achieving more than one SDG at a time. The plan builds on the 2012 National Sustainable Development Strategy “Our Sustainable Future” and announces the preparation of a new sustainable development strategy that more closely encompasses the SDGs.
In 2018, Ireland presented the voluntary review of the implementation of the SDGs to the UN High-level Political Forum on Sustainable Development. The process helped increase the level of engagement with the SDGs across government. It revealed the potential for further breaking policy silos across departments and enhancing policy coherence.
Source: Government of Ireland (2018), Ireland: Voluntary National Review 2018, Report on the Implementation of the 2030 Agenda to the
UN High-level Political Forum on Sustainable Development, Government of Ireland, Dublin, https://sustainabledevelopment.un.org/content/documents/19382Ireland_Voluntary_National_Review_2018.pdf.
Some measures of the stimulus package can be considered green (Table 3.1), although it is difficult to quantify the balance between green and non-green spending. The July stimulus foresaw accelerated capital investment of EUR 500 million, about half of which was environment- and climate-related or 3.5% of the recovery package. The recovery package provided funding to advance existing sustainable transport and energy efficiency investment plans that could be delivered quickly, thereby providing job opportunities in the construction sector. This is common to the recovery packages launched by many other OECD member countries (OECD, 2020c). The experience of previous green stimulus packages in the OECD shows that investment in energy-efficient building can help maintain jobs, while contributing to reducing greenhouse gas (GHG) emissions (OECD, 2020b). A multi-year peatland rehabilitation programme also received funding. This aimed to create environment-related jobs in the Midlands, where job losses are expected from the progressive phase-out of peat power generation (Section 3.7).
As a complement to this capital investment, the package provided funding for retrofitting skill training. It also increased the allowable expenditure under the “Cycle to Work” scheme to encourage employees to purchase bicycles.6 A new Green Enterprise Fund was launched to support green research, development and innovation, capital investment and capacity building in businesses. In line with long-term climate objectives, the July Stimulus Package made no commitment to a bailout of the aviation industry.
The stimulus did not attach green conditionality to the various forms of support. For example, the large Employment Wage Support Scheme provided subsidies to firms in all sectors, without any requirement for environmental improvements.7 Similarly, support to farmers has not been made conditional to improved farming practices. On the contrary, Ireland temporarily relaxed conditionality, cross-compliance or green measures and temporarily halted or delayed on-farm compliance inspections (OECD, 2020d). In addition to the July stimulus, the government announced a EUR 2 billion Pandemic Stabilisation and Recovery Fund within the Ireland Strategic Investment Fund (ISIF) to provide loans to medium and large enterprises on commercial terms. However, there will be no need for businesses to align with ISIF’s priority themes, including climate change. In accordance with OECD guidance, as the recovery gains ground, environment-related conditions should be introduced when loans and grants to businesses are rolled over (OECD, 2020b).
Table 3.1. Green elements in Ireland’s COVID-19 recovery package
Note: (a) The Additional 2020 COVID-19 Support announced on 13 October 2020, amounting to about EUR 500 million, allocated an additional EUR 44 million to investment in water infrastructure.
Source: OECD Secretariat based on Government of Ireland (2020), July Jobs Stimulus 2020, Department of the Taoiseach, Government of Ireland, Dublin, https://assets.gov.ie/81556/d4fa4cc4-7e9f-4431-8540-a9ecb7126505.pdf; Department of Finance (2020), “July Stimulus” Policy Initiative: Overview of economic support measures, Department of Finance, Dublin, https://assets.gov.ie/81748/0f52c867-06a1-4bb1-b059-7c571ac2a1ee.pdf.
3.2.2. Green elements in Ireland’s 2021 state budget
The state budget for 2021 continued to provide fiscal support to the economy. It was the largest state budget in the country’s history (more than EUR 17 billion). In line with OECD guidance (OECD, 2020e), the budget put a strong focus on investment for the green and low-carbon transition and increased the carbon tax (Section 3.4). About a third of the EUR 10 billion investment envelope was allocated to, among others, sustainable transport and water infrastructure, energy efficiency and renewables, landfill remediation and peatland rehabilitation. This represented a contribution to the National Development Plan (NDP) 2018-27 (Section 3.3.1). The budget allocated EUR 1.8 billion to investment in public transport and active mobility. While this is higher than the allocation to road investment (EUR 1.3 billion), it does not meet the government’s commitment of a two-to-one spending ratio of sustainable transport over roads (Chapter 4).
Fiscal support should remain available while the economy is still recovering. While the government’s measures have shielded families from the brunt of the shock, the pandemic could raise inequalities and make disparities between regions grow further (Chapter 1). The government should continue to support the most vulnerable; prepare the workforce for the green and digital transitions; and increase employment opportunities in poorer areas (Section 3.7). It is also essential that the government maintain its commitment to progressively increase the carbon tax rates (Section 3.4). If oil prices remain persistently low due to reduced economic activity, the planned tax hikes could be even accelerated to encourage low-carbon investment during and beyond the fiscal stimulus period (OECD, 2020c).
Work started in 2020 to develop a set of well-being indicators for policy design and evaluation, with a view to capturing all dimensions of the COVID-19 crisis and the recovery. This will enable Ireland to better assess the economic effectiveness and the environmental and social outcomes of the July Stimulus Package and of future recovery and development plans. This, in turn, will allow adjustments in response to changing circumstances or new evidence from data. The OECD selected 13 headline environmental indicators that can help in this respect (OECD, 2020c).
3.3. Investing in environmental and low-carbon infrastructure and services
Public investment has increased since 2014 and is expected to further increase until 2024.8 Ireland has made progress in facilitating investment related to climate change, energy transition, sustainable transport and water. However, the prolonged period of underinvestment in the aftermath of the global financial crisis affected the quality of infrastructure, especially in the transport and water sectors. It also slowed down progress towards climate, energy and environmental objectives (Chapter 1). Investment needs remain high in various areas to meet the needs of a growing population, while ensuring a transition to a climate-neutral, circular and green economy. This calls for the mobilisation of the private sector, including households and financial markets.
3.3.1. A sound investment framework
Ireland developed a sound multi-annual investment framework as part of the high-level development strategy known as Project Ireland 2040. This policy initiative is a pillar of Ireland’s strategy to achieve the SDGs by 2030 (Box 3.1). It aims to provide the country with the additional housing, infrastructure and services needed to accommodate projected demographic changes, with a larger and ageing population and smaller households. Project Ireland 2040 consists of a ten-year investment plan (NDP 2018-27), which is aligned with a spatial strategy (National Planning Framework) that promotes urban compact growth and regional development and accessibility (Chapters 2 and 4).
The NDP 2018-27 sets aside EUR 116 billion for public investment, thereby responding to the significant underinvestment during the economic recession. In line with Project Ireland 2040 priorities,9 more than a quarter of the NDP outlays target the climate and energy transition. This includes a substantial envelope for sustainable transport and energy efficiency, and investment in water infrastructure. To better align public investment decisions in all sectors with climate policy objectives, the 2019 Public Spending Code revised the shadow costs of GHG and other pollutant emissions to be used in public investment appraisal (Box 3.2).
However, Ireland has not managed to sufficiently mobilise private investment (Section 3.3.2). Public financial support should target investment that would not occur otherwise, with a view to enhancing cost-effectiveness of public spending and leveraging private investment. With this aim, the NDP allocated EUR 4 billion jointly to four funds for rural development, urban regeneration, climate action and innovation over 2018-27. The Climate Action Fund (EUR 0.5 billion) aims to finance projects that contribute to achieving the climate and energy targets.10 The first round of applications took place in 2018, but it is too early to assess its environmental outcomes.
Ireland would benefit from assessing the private and public investment needs related to the transition towards a green, climate-neutral economy (EC, 2020a). The announced in-depth review of the NDP, to be completed in 2021, provides an opportunity to further align investment priorities with the goal of a just transition to a climate-neutral economy by 2050. The revised NDP should continue to prioritise investment in low-carbon transport infrastructure and energy efficiency. It should also further promote eco-innovation and the circular economy, which would help improve the resilience of supply chains (OECD, 2020e). Ireland should use the EU Recovery and Resilience Facility in line with these objectives.11 In addition, the Rural Development Programme to be prepared for 2021-27 should aim at improving the productivity of Ireland’s agriculture while reducing its carbon footprint. This would also contribute to enhancing the resilience of the food system (Moore, 2020; OECD, 2020c).12
Box 3.2. The shadow price of carbon for the cost-benefit analysis of public investment
The reformed Public Spending Code of 2019 sets the values to monetise emissions of GHGs and other pollutants (particulate matter, nitrogen and sulphur oxides, non-methane volatile organic compounds) in economic appraisal of public investment. The shadow prices of carbon are based on Ireland’s estimated marginal abatement cost at the level required to reach the binding mitigation targets. For emissions from the sectors under the EU Emissions Trading System (ETS), the shadow price per tonne of carbon dioxide (CO2) emissions is based on market projections of the price of ETS allowances; it is EUR 23.6 in 2020, rising to EUR 33.5 in 2030 and EUR 88 in 2050 (at 2013 prices). For emissions from sectors outside the ETS, the shadow price of a tonne of CO2 is EUR 32 in 2020, rising to EUR 100 in 2030 and EUR 265 in 2050 (at 2014 prices).
Source: DPER (2019), Public Spending Code – Supplementary Guidance: Measuring & Valuing Changes in Greenhouse Gas Emissions in Economic Appraisal, December 2019, Department of Public Expenditure and Reform, Dublin, https://assets.gov.ie/45078/b7dbf515ad694c3e8b2c37f1094b7dca.pdf.
3.3.2. Investment for environmental protection and resource management
Investment in environmental protection services
The recession hit environmental protection investment harder than total investment in the economy.13 Investment to provide environmental protection services more than halved in 2008-13, from 2% of total investment (gross fixed capital formation) in 2008 to 1.2% in 2013. It subsequently grew, but less quickly than total investment. In 2017, environmental protection investment was nearly EUR 490 million, just above half the pre-crisis level and 0.6% of total investment (Figure 3.1).
The public sector is the main driver and funder of environmental protection investment in Ireland. The share of environmental protection investment in total investment of the public sector is the highest among the OECD countries that are also part of the European Union. It hovered around 8% in 2008‑17.14 The public sector (including the government and non-profit institutions serving households, or NPISHs) accounted for more than 85% of investment in environmental protection in 2017, a share that has remained broadly constant since 2013 (Figure 3.1). Corporations accounted for the remaining 15%.15 This is in stark contrast with the EU trend, where the public sector provides 40% of environmental protection investment.
Figure 3.1. Environmental protection investment slowly recovered from the 2008-13 austerity
The strong role of the public sector is linked to the governance of the water sector and the high investment needs to extend and upgrade wastewater treatment systems (Chapter 1). Wastewater management accounted for nearly three-quarters of public environmental protection investment in 2008‑17. The Treasury, through local authorities until 2014 and through the national utility Irish Water afterwards, provides most of the funding for this investment (Section 3.3.3).
The share of environmental protection investment in total investment of corporations is low. In 2017, it was less than 0.1%, the lowest in the European Union (EU average was 1.7% in 2017 and 2019). The manufacturing sector has traditionally accounted for most of the business environmental protection investment, i.e. the investment to prevent and/or limit the negative environmental effects of the main production activity. In 2017, manufacturing made up 70% of such investment, compared to about 40% on average in the European Union. Irish businesses invested more in so-called integrated technology than in end-of-pipe technology. Integrated technology accounted for three-quarters of environmental protection investment in 2017. Irish small and medium-sized enterprises (SMEs) have also increasingly undertaken resource efficiency and circular economy measures (EC, 2019).
Public transfers for environmental protection and resource management
In addition to investing directly in environmental protection, the government provides various current and capital environment-related transfers to corporations, households, public bodies and international environmental organisations. As for public investment, government environmentally motivated transfers declined during the economic recession, but have grown again since 2013. In 2018, they were EUR 1.1 billion (2015 prices), a level comparable to that before the crisis (Figure 3.2). However, government climate-related expenditure was estimated to be nearly twice as much in 2020 (Box 3.3).
Box 3.3. Green budgeting in Ireland
Ireland joined the OECD Paris Collaborative on Green Budgeting. Ireland is one of the few EU countries to have started green budgeting practices. It introduced a green budgeting exercise for the 2019 budget, which implied identifying and tagging all climate-related expenditure. The Department of Public Expenditure and Reform (DPER) drew on the definition developed for the Irish sovereign green bonds to define a climate-related expenditure as any expenditure that promotes, in whole or in part and directly or indirectly, Ireland’s transition to a low-carbon, climate-resilient and environmentally sustainable economy.
For the first two years of the exercise, the DPER adopted a conservative approach and included only those expenditures that directly contributed to GHG emissions reduction, including funding for energy efficiency. In 2020, the central government climate-related expenditure (including capital and current expenditure) amounted to EUR 2 billion, or 3% of total budget expenditure – a 23% increase from the previous year. The bulk of this expenditure targeted the transport and agriculture sectors.
The DPER acknowledges that the current approach to green budgeting has its limitations and intends to continue developing it within the OECD and EU collaborative frameworks.
Source: Government of Ireland (2020), “The Use of Carbon Tax Funds 2020”, Department of Public Expenditure and Reform Staff Paper, Government of Ireland, Dublin, https://igees.gov.ie/wp-content/uploads/2020/01/The-Use-of-Carbon-Tax-Funds-2020.pdf.
After supporting investment to ensure compliance with EU directives, these transfers have moved to finance mainly operating and maintenance expenditure. In 2018, a third of transfers targeted capital investment. In line with a change in policy priority, there has been a marked shift in the allocation of environment-related transfers from the typical environmental protection activities (e.g. biodiversity conservation, waste management and wastewater treatment) to resource management activities. Transfers to resource management (i.e. to reduce over-consumption of natural resources and energy) increased to reach about half of the total transfers in 2018 (Figure 3.2).
Figure 3.2. Environmentally motivated transfers have increasingly targeted resource management
In 2018, 35% of environmental transfers went to renewable energy production, 22% to biodiversity protection, 21% to wastewater management, 9% to heat and energy-saving measures and 6% to air and climate. The amount of transfers to air and climate grew more than ten-fold in 2009‑18. Other environmental protection and resource management activities (including waste and water management, soil and water protection and forest management) accounted for the remaining 8% (Figure 3.2). The largest transfers include those to renewable energy generation funded through the Public Service Obligation (PSO) Levy on electricity consumers (which has increased since 2015; see Section 3.3.4); transfers to local authorities and the Sustainable Energy Authority of Ireland (SEAI) for energy efficiency programmes and to Irish Water for wastewater infrastructure investment; and subsidies under the Green, Low-carbon Agri-environment Scheme.
In the 2010s, three sectors received most of the funding: the energy sector for renewables support; the agriculture, forestry and fishing sector as a result of agri-environment schemes aimed at encouraging biodiversity- and climate-friendly farming; and the public service sector due to its investment in wastewater management infrastructures. Households received increasing subsidies through the energy efficiency retrofitting programmes (Section 3.3.4).
3.3.3. Investment in water supply and wastewater infrastructure and services
The Strategic Funding Plan 2019-24 of Irish Water (the national water utility) outlines a financing requirement in the water sector of EUR 11 billion to 2024, including EUR 6.1 billion for infrastructure investment and the remainder for operating costs.16 Government capital and current transfers (EUR 8.3 billion) will meet three-quarters of the funding requirement. The remainder is to be financed by a combination of revenue from water charges of non-domestic users, revenue from excess use charges of domestic users and state loans.17 The 2020 and 2021 state budgets committed about EUR 1.9 billion as a contribution to the Irish Water financial plan.
The NDP allocates about EUR 8.5 billion to investment in public water infrastructure in 2018-27. This commitment appears sufficient to ensure compliance with the EU drinking water and wastewater directives and reduce water losses (Chapter 1). However, meeting the water infrastructure needs of growing population, housing supply and economy will require much higher investment. OECD (2020f) estimates Ireland’s financing needs for water supply and sanitation at EUR 20-25 billion to 2030. There is a risk that the current funding model will be unable to keep up with the scale of required investment in the water sector.
The limited use of water charges implies the state budget covers most of the water sector financing needs (including nearly all the cost of services to domestic water users). Households do not pay charges for drinking water and wastewater services, which is uncommon in the OECD (OECD, 2020f). Domestic water charges were introduced in 2015 but were abolished a year later due to strong social opposition. An excessive use charge will be effective from 2022. It is expected to yield EUR 39 billion until 2024, less than 1% of the investment and operating costs of providing services to domestic customers.
The new excessive use charge will apply to households with annual water consumption exceeding a certain threshold.18 It is estimated that only about 7% of the households will be affected by this charge. These households account for almost 40% of domestic water consumption and their excessive use is supposed to be due to leaks. In 2020, Irish Water started to warn households that were using an amount of water above the threshold. It has provided them with information about how to save water and deal with leaks before households become liable to pay the charge in 2022.19
Irish Water plans to cover most of the costs of providing water services to non-domestic customers through charges and connection fees. A new charging framework for non-domestic customers was scheduled to come into effect in 2020 to replace the multitude of charges levied by local authorities.20 The new tariff structure is to combine two elements – a fixed charge and a volumetric element. Most customers will be placed in one of four consumption bands. The new charges will apply across the service, industrial and agricultural sectors, as well as to public bodies and social enterprises. National connections charges came into effect in 2019. Customers pay for their direct connection assets (based on pipe diameters), plus an element of downstream infrastructure.
3.3.4. Investment in the energy sector
Renewable energy
The share of renewable sources in the energy mix has more than doubled since 2010, thanks to a rapid expansion of wind power. However, as of 2018, Ireland was not on track to meet its 2020 renewable energy targets (Chapter 1). Three consecutive renewable energy feed-in tariff (REFIT) programmes provide minimum prices for each unit of electricity generated from onshore wind, hydro and biomass technology development for 15 years. The REFIT programmes are funded from a PSO levy charged to electricity users, whose real cost in 2018 was five times higher than in 2010. The REFIT programmes closed to new applications in 2019. A new auction-based renewable electricity support measure, launched in 2020, is expected to continue attracting investment in the sector while reducing the costs of support. In addition, a support system for renewable heat became operational in 2020. It provides an installation grant and operational support for renewable heat generated by non-domestic heat users excluded from the EU ETS (e.g. commercial, industrial, agricultural, district heating, public sector). The government plans to launch a micro-generation support scheme in 2021, based on the pilot scheme implemented for solar photovoltaics. The pilot provided a grant of about 30% of the installation costs for homes.
The 2019 Climate Action Plan aspires to reach 70% of electricity generated from renewables by 2030, nearly double the 2019 share (Chapter 1). Investing in electricity infrastructure (including international interconnectors) is a prerequisite to reaching this target, as is addressing administrative barriers in the consent, planning and grid connection processes (EC, 2020a). The 2014 Offshore Renewable Energy Development Plan aims to exploit the country’s vast potential for offshore wind. However, the lack of a planning and development consent framework for offshore facilities hampers development (IEA, 2019). Ireland should also further invest in energy storage facilities and related research and development (R&D) to meet the growing energy needs arising from the planned electrification of heat and transport.
Energy efficiency of buildings
Several grant schemes have supported energy efficiency improvements in buildings and contributed to reducing energy use and related carbon dioxide (CO2) emissions in the residential sector since 2010 (Chapter 1). The government allocated an average EUR 75 million per year in 2010-18 to building energy renovation. This included grants targeting households at risk of energy poverty and/or with poor health conditions, as well as the housing stock of local authorities (e.g. Greener Homes, Better Energy Homes and Warmer Homes Schemes, Better Energy Communities Programme). However, in 2017, energy consumption per dwelling in Ireland was still well above the EU average (Chapter 1).
Improving energy efficiency of the residential building stock is a pillar of the 2019 Climate Action Plan. The plan foresees to renovate half a million homes (about a third of the housing stock) and to install 400 000 renewable heating systems in existing homes by 2030. In line with this commitment, the 2021 government budget increased the funding for residential and community energy efficiency by over 80% compared to the previous year. This increase permits expansion of existing grant schemes and the launch of new ones. The carbon tax revenue is to be partly used for this purpose (Government of Ireland, 2020b).
Residential energy efficiency support programmes have mostly targeted low-hanging fruit and the simpler and cheaper upgrades, which have already been implemented. Their variety may confuse households and reduce uptake. Ireland should target the available funding to deep renovations of the social housing stock and of the most carbon-intensive residential buildings. A guiding principle for Ireland’s building renovation policy is “fabric first then fuel switching”. This ensures that the benefits of fuel switching are not compromised by insufficient building fabric standards (IEA, 2019). However, fuel switching and the roll out of renewable heating systems need to be accelerated. Residential heating is heavily based on fossil fuels, including peat, coal and oil, which makes Ireland’s dwellings particularly carbon-intensive (Chapter 1). The implementation of the near-zero energy building standard for all new buildings as from late 2019 is expected to help phase out the use of oil and gas boilers in new dwellings. The IEA (2019) recommended the introduction of minimum energy efficiency standards in the rental sector to encourage renovation.
3.4. Greening the tax system
Ireland made progress in following up on the recommendations from the 2010 OECD Environmental Performance Review on greening the fiscal system. The review recommended to replace some taxes with appropriate environmentally related fiscal measures in the framework of a comprehensive environmental tax reform and to introduce a carbon levy on sectors outside the EU ETS. It also recommended to phase out environmentally harmful subsidies (e.g. for electricity generation from peat and for domestic aviation) and tax concessions (e.g. on coal and on fuel oil used by households and farmers) (OECD, 2010).
3.4.1. Environmentally related taxes: An overview
Revenue from environmentally related taxes accounts for a relatively high share of tax revenue in Ireland in international comparison. In 2018, about 7% of Ireland’s tax revenue came from environmentally related taxes, which was in the top half of OECD member countries (Figure 3.3). This is due to Ireland’s low level of total taxation. Total tax revenue in Ireland was about 22% of GDP in 2018, the lowest in the OECD (the OECD average was 34%), mainly as a result of the country’s low corporate taxation policy.
Figure 3.3. Environmentally related taxes made up a relatively high share of tax revenue
Real revenues from environmentally related taxes (at 2015 prices) increased with the economic recovery in the second half of the 2010s. However, they did not keep pace with the growth of GDP and total tax revenue. Hence, when measured as a share of GDP and total tax revenue, revenue from environmentally related taxes decreased considerably (Figure 3.4).
As in most OECD member countries, revenues raised on energy products in Ireland represent the bulk of the revenues from environmentally related taxes. This was partly due to the introduction of a carbon tax in 2010 and its gradual increase in tax rates and coverage. A significant amount of revenues is also raised on motor vehicles’ purchase and use. Taxes on pollution and resource management are applied in the waste management sector but raised only modest amounts of revenue (Figure 3.4).
Figure 3.4. Environmental taxes accounted for a declining share of GDP and total tax revenue
3.4.2. Taxes on energy use and carbon pricing
Energy taxes in Ireland are levied within the framework of the 2003 EU Energy Tax Directive, which sets minimum rates for the taxation of energy products in EU member states. Box 3.4 lists the main taxes on energy use in Ireland as of October 2020. The tax rates applied are in almost all cases well above the minimum rates of the Energy Tax Directive (EC, 2020b). Taxes on energy products accounted for 60% of revenue from environmentally related taxes in 2019 (Figure 3.4).
The carbon tax
Ireland is one of the 11 European OECD countries that as of 1 July 2018 levied a carbon tax on some or all fossil fuel use (OECD, 2019). The tax was introduced in 2010 in the context of a deep economic recession, rising unemployment and declining wages. “The carbon tax was seen as just a little more noise in a cacophony of bad news” (Convery, Dunne and Joyce, 2013). Combined with a broad understanding that the government needed to raise more revenue, the “noise” contributed to limiting the public’s opposition to the carbon tax. The carbon tax initially applied to liquid and gaseous fuels at the rate of EUR 15 per tonne of CO2. It was extended to solid fuels in 2013 (although initially at a lower rate). There were phased increases of the tax to reach EUR 26 per tonne in 2020. The 2021 government budget further raised the tax to EUR 33.5 per tonne of CO2 on automotive fuels in October 2020 and on all fuels as of May 2021. As of 2020, the carbon tax applies to all fuels used in sectors not covered by the EU ETS.
The 2021 budget implemented the government commitment to raise the carbon tax by EUR 7.50 per tonne of CO2 per year over the decade. This would allow the tax rate to reach EUR 100 per tonne of CO2 by 2030 – a welcome development. A credible future trajectory of carbon prices will provide an incentive for low-carbon consumption, investment and innovation without immediately imposing the burden on households and firms recovering from the COVID-19 crisis (OECD, 2020b). The carbon tax increase is also in line with the recommendation of the Climate Change Advisory Council (CCAC, 2020).21 According to the government’s programme, the progressive carbon tax increases should help Ireland achieve an average decrease in GHG emissions of 7% per year from 2021 to 2030. However, as indicated by de Bruin, Monaghan and Yakut (2019), increasing the carbon tax alone along the lines announced may be insufficient to achieve Ireland ambitious GHG emission reduction targets.22 Removing fossil fuel support measures is also necessary, as well as implementing the measures outlined in the 2019 Climate Action Plan (e.g. investing in public transport, electric vehicle charging infrastructures, building retrofitting) (Chapters 1 and 4).
Box 3.4. Taxes on energy products
The mineral oil tax (MOT) applies to liquid and gaseous fuels, including biofuels and natural gas used for propellant purposes. The MOT is composed of two components:
a long-standing non-carbon tax component, which applies to all fuels subject to the MOT except for kerosene and liquified petroleum gas (LNG) used for non-propellant purposes, with varying tax rates across the fuels covered;
a carbon tax component, introduced in 2010, which applies to all fuels subject to the MOT, with the exception of bioethanol and biodiesel.
The natural gas carbon tax (NGCT), introduced in 2010, applies to natural gas when used for non-propellant purposes.
The solid fuel carbon tax (SFCT), introduced in 2013, applies to coal, coke and peat products.
The electricity tax, with a rate of EUR 1 per megawatt-hour, applies to electricity consumption.
EU ETS participants benefit from a partial refund on the SFCT paid on coal and coke products, as well as on the NGCT. EU ETS participants also benefit from a full refund on the SFCT paid on peat products and the carbon component of the MOT paid on fuels. The reason for these exemptions is to avoid “double-pricing” of the emissions of the firms affected via the carbon tax and the price of the EU ETS allowance.23
There remain large differences in the effective carbon taxes (including excise taxes applied to fossil fuels and the carbon tax) that are levied on different fuels and uses. As in all countries, the effective carbon tax rates outside the road transport sector were much lower than the rates applied on petrol and diesel (Figure 3.5). The higher rates for petrol and diesel can be justified by the fact that road fuel taxes also put a price on social costs other than those related to climate change (e.g. air pollution, accidents, congestion).
The increase of the nominal carbon tax rate between 2018 and 2020 resulted in a nearly 5% rise in the effective carbon tax rate in the transport sector and a 35% increase in the non-transport sector. This is because some fuels that are not used for transport (natural gas, coal, peat, kerosene, LNG) are subject only to the carbon tax and not to other energy duties. The nominal carbon tax increase brought Ireland’s effective carbon tax in the top half of European OECD countries (Figure 3.5). In 2018, prior to the tax hike, Ireland was among the ten OECD members that priced (via carbon and energy tax and the EU ETS) at least half of their energy-related CO2 emissions at EUR 60 per tonne of CO2. This is the mid-point estimate of carbon costs in 2020 and a low-end estimate for 2030 (OECD, 2020g). The carbon tax rate increase to EUR 33.5t/CO2 on all fuels in 2021 will possibly extend the share of emissions facing the EUR 60 benchmark and move Ireland higher among the top OECD performers.
Taxes on transport fuels
The tax rate applied to diesel in Ireland is much lower than the one applied to petrol due to the lower excise duty (non-carbon related part of the MOT).24 Together with the taxes on motor vehicles (Section 3.4.3), the tax preference given to diesel has contributed to a high share of diesel vehicles in the fleet stock (Chapter 4). This has potentially negative impacts on local air pollution and human health in the parts of the country with the highest population density (Ryan et al., 2019).
Ireland should gradually increase the non-carbon tax component of the MOT on diesel so it reaches the petrol tax rate. Cross-border fuel purchases do not represent a limiting factor for Ireland. Its only neighbour, the United Kingdom, applies a higher tax rate per litre for both petrol and diesel. The cross-border sales go in the opposite direction. It was estimated that in 2015, 2.4% of petrol and 17.1% of diesel sold in Ireland was used in vehicles (including trucks) registered in the United Kingdom and other countries (EPA, 2017). Changes in the exchange rate between EUR and GBP reduced cross-border sales, but an estimated 4.5% of automotive fuels purchased in Ireland were used in the United Kingdom in 2017 (EPA, 2019).
Figure 3.5. Ireland’s effective tax rates on CO2 emissions are in the top half OECD Europe countries
In 2013, Ireland set a ceiling, or refund system, on the diesel prices that qualified road hauliers risked paying (Diesel Rebate Scheme). This ceiling reduces the incentives for the road hauliers to buy fuel-efficient vehicles, to train the drivers in fuel-efficient driving styles and to develop fuel-efficient logistics systems. The scheme encouraged increased diesel use in 2013‑15, which had negative environmental consequences, such as an additional 100 000 tonnes of CO2 emitted (Morgenroth, Murphy and Moore, 2018). There are no repayments when the price, including value added tax (VAT), is at or below EUR 1.23 per litre. As of September 2020, diesel prices were lower than this ceiling. Therefore, the mechanism was not in operation at the time of writing.25 Ireland should take advantage of the low oil prices to eliminate this ceiling immediately.
Mitigating the distributional impact of the carbon tax
Ireland’s tax and benefit system has been effective in reducing income inequality and mitigating the risk of people falling into poverty (OECD, 2020a). After social transfers, 15% of the population remained at risk of poverty and social exclusion in 2018 compared to 17% in the European Union. The welfare system, including the fuel allowance, has helped reduce fuel poverty. Fewer than 5% of the population were unable to keep their homes adequately warm in 2018, compared to 7.6% in the European Union.
Vulnerable households benefit from a fuel allowance during winter to help with heating expenses. More than 370 000 households are eligible for the allowance because they are considered most at risk of fuel poverty. The fuel allowance is a means-tested lump sum that is not required to be spent on heating. Hence, the allowance does not distort prices and does not encourage excessive energy consumption. In 2020, the fuel allowance was EUR 24.5 per week (increased to EUR 28 from 2021), payable for 28 weeks together with the applicant’s primary social welfare payment. However, the allowance tends to support use of fossil fuels, which are the main source of residential heating (Chapter 1). The name of the allowance is unfortunate and may have some undesirable behavioural effects. For example, recipients may be more inclined to spend it on polluting fuels and not encouraged to invest in energy efficiency. Ireland should consider rebranding the fuel allowance and providing it to eligible households during the whole year with a view to fully delinking it from heating fuels.
The government committed to use the revenue from the carbon tax increase until 2030 (EUR 9.5 billion over ten years) to prevent fuel poverty, ensure a just transition for displaced workers and finance climate-related investment. In line with this commitment, the government allocated part of the carbon tax revenue to enhance some social welfare schemes in 2021. This included an increase in the fuel allowance and in benefits for children and people living alone (Government of Ireland, 2020b). This increase is expected to mitigate the impact of the carbon tax on vulnerable households. It may even contribute to reducing poverty, as average weekly disposable income of households would increase as a result of the budget package (O’Malley, Roantree and Curtis, 2020). In addition, EUR 6 million of carbon tax revenue was allocated in both 2020 and 2021 to finance the newly established national Just Transition Fund for the Midlands (Section 3.7). Such earmarking of revenues can help create and maintain political support for the carbon tax increases and climate action more generally. However, it may limit the flexibility of public authorities to adapt public spending to changing needs.
3.4.3. Transport-related taxes
Taxes on motor vehicles accounted for nearly 40% of revenue from environmentally related taxes in 2019, one of the highest shares among European OECD countries. Ireland applies taxes on purchase and use of motor vehicles, and provides tax incentives to encourage the purchase of electric vehicles (EVs).
Vehicle taxes
Ireland applies a vehicle registration tax (VRT), which is calculated as a percentage of the open market selling price and collected as a one-time tax when the car is purchased. There is also an annual motor tax (AMT). Both taxes are linked to the CO2 emissions of the vehicles. Ireland implemented a stepped transition to CO2 emissions-based vehicle taxation starting in 2008 (Table 3.2).
Table 3.2. Implementation of the emissions-based vehicle taxation reforms
Source: Based on Ryan et al. (2019), An assessment of the social costs and benefits of vehicle tax reform in Ireland, OECD Publishing, Paris, https://dx.doi.org/10.1787/952e7bff-en.
Ryan et al. (2019) suggest that the initial policy change in 2008 reduced the fleet average CO2 emissions rating of newly registered passenger cars in Ireland by between 8 and 11 grammes of CO2 per kilometre (gCO2/km). Some subsequent policy changes (such as the introduction of a motor vehicle scrappage scheme in 2010) have also stimulated the purchase of vehicles with lower CO2 emissions (Chapter 4). The decline of the average CO2 emission ratings of newly registered vehicles in Ireland was also influenced by other factors, such as the EU CO2 emissions regulation for motor vehicles. The decrease in rated CO2 emissions was driven by a significant shift towards diesel-powered vehicles, which have higher emissions of nitrogen oxide (NOx) and fine particulate matter (PM2.5) per kilometre driven. Ryan et al. (2019) found that the net social costs exceeded the benefits of the vehicle tax reform by more than EUR 750 million in 2009-17. This was mainly due to the potential negative effects of the dieselisation of the fleets on human health in densely populated areas.
To address the unintended shift towards high-polluting diesel vehicles, a NOx component was added to the VRT in 2020. The NOx component applies to all first registrations of motor vehicles in Ireland, including second-hand vehicles, imported most often from the United Kingdom. The emission rates and bands of this NOx component were tightened as of 2021. The rates vary between EUR 5 and EUR 25 per milligramme of NOx emitted, depending on the vehicle’s NOx emission levels.26
Preliminary indications suggest the addition of the NOx component to the VRT reduced the share of diesel vehicles in new registrations in 2020, although the COVID‑19 pandemic strongly affected vehicle sales in 2020. The share of diesel vehicles decreased from 46.3% to 43.6%; the share of petrol vehicles decreased from 41.2% to 37.5%; and the share of petrol-electric hybrids and EVs increased from 12.5% to 18.5% (Motorstats, 2020). It seems likely that the NOx component will continue to limit the share of old diesel vehicles in all first registrations. This, in turn, can provide important environmental and human health benefits.
The abatement incentives provided by the NOx component in the VRT are strong, especially for high‑emission vehicles, compared both to abatement incentives in other sectors of the Irish economy and to estimated damage costs of NOx emissions. The 2019 Public Spending Code presents parameter values for use in financial and economic appraisal in Ireland, including estimated damage costs of air pollutants (Box 3.2). The value set for NOx is about EUR 5.7 per kg of NOx emitted. Van Essen et al. (2019) estimate the damage costs of air pollutants (health effects, crop loss, biodiversity loss, material damage) in European countries. The study estimated the costs of NOx emissions from transport in urban areas in Ireland on average at EUR 17.6 per kg of NOx in 2016. In rural areas, van Essen at al. (2019) estimated these costs to be EUR 10.1 per kg of NOx emitted.
Ireland applies a high tax rate to NOx emissions from motor vehicles compared to the other countries (Chile, Israel and Norway) with a NOx element in their motor vehicle taxes. Figure 3.6 shows the estimated tax rate per kg of NOx emitted over the lifetime of the vehicles, assuming they are driven either 200 000 or 100 000 km on the roads of Ireland, Chile and Norway. In Ireland, the tax rate per kilogramme of NOx emitted increases with the emissions per kilometre driven. This holds true even if the damage caused by a kilogramme of NOx is the same, regardless of whether it stems from a high-emission or low-emission vehicle.
Figure 3.6. The NOx element in Ireland’s motor vehicle taxes is higher than in other countries
The 2019 Climate Action Plan set a target of 840 000 passenger EVs on the road by 2030.27 As discussed further in Chapter 4, Ireland has provided significant incentives for the purchase of such vehicles, including a purchase grant, a relief from the VRT, reduced rates of the annual motor vehicle tax, reduced road tolls and a grant supporting the installation of chargers for EVs in homes. Kevany (2019) documents that these incentives have come at a major financial cost to the Treasury. However, the number of EVs on Irish roads remains relatively modest compared to the ambitious target. Around 0.7% of the fleet was made up of EVs and plug-in hybrid EVs in 2019 (Table 4.1).
As Kevany (2019) indicates, the progressive EV take-up is expected to significantly reduce revenues from motor and fuel taxation, which could threaten the stability of the state’s finances. Van Dender (2019) suggests a gradual shift from an energy-based approach towards distance-based transport taxes could establish a stable tax base in the road transport sector in the long run. A distance-based tax system could apply different tax rates depending on the location and time of the driving and the type of vehicle. This would allow to take into account the different externalities (air pollution, road wear and tear, accidents, etc.) of driving. Ireland does not have a comprehensive road pricing system in place, but road tolls are levied on 11 selected main roads. These tolls are mostly used as a financing mechanism for major new road developments funded through public-private partnerships (Chapter 4).
Ireland could take short-term action while preparing a comprehensive distance-based charging system. If the introduction of the NOx component in the registration tax should not sufficiently stimulate the take-up of EVs, Ireland should increase the tax rate on motor vehicle fuels, particularly on diesel. The country could also consider adding a weight element in the annual motor vehicle tax. This could address, albeit imperfectly, some externalities of road transport other than those linked to fossil fuel use. As one advantage, adding this element to the annual vehicle tax (rather than to the VRT) would also affect vehicles currently in the fleet. Based on the experience of countries that are most successful at boosting EV adoption rates, increasing taxation of internal combustion engine vehicles provides an incentive to shift to EVs (Chapter 4). EVs could be exempted from the weight element (to stimulate their uptake). Such an exemption should be temporary, as EVs also contribute to congestion, accidents, road wear and associated particulate pollution. If deemed necessary, such a tax increase could be combined with temporary targeted compensation measures for low-income households living in remote areas. Such households depend strongly on the use of cars for satisfying their mobility needs.
Tax treatment of company cars and commuting allowances
Taxation rules for valuing the benefit-in-kind (BIK) employees receive from the personal use of company cars have implications for tax revenue and for environmental and other social costs, such as congestion. Ireland’s tax system captures a larger share of the BIK than in all other EU countries (Princen, 2017). However, it can encourage unnecessary driving.
The income tax treatment of company car BIK in Ireland depends on the distance driven for business purposes per year and on the original market value (OMV) of the vehicle. A share of the OMV of the vehicle is added to the employee’s taxable income that year; this share declines with distance driven for business purposes.28 Exemptions apply to EVs. Electric cars with an OMV of EUR 50 000 or lower are fully exempted; employees are not being taxed for the BIK they receive by having the car at their disposal. For cars with higher OMV, the BIK is taxable only for the part exceeding EUR 50 000 of the OMV.
A reform of the regime for company car BIK taxation will enter into force in 2023. The new system will consider both the distance driven for business purposes and the CO2 emissions of the vehicle. The percentage of the vehicle’s OMV added to the employee’s income increases with the CO2 emission level of the car, but it declines with distance driven for business purposes.29
Both the current and new systems can encourage unnecessary driving “for business purposes”, with the aim of reducing the BIK tax rate that will be applied. This driving causes more emissions of CO2 and local air pollutants, as well as other negative transport-related externalities. In addition, the income taxation of the employees does not increase if the employer covers the operating costs (fuel, insurance, maintenance, etc.) of the vehicles. If the employer covers these costs, the employees will hardly have any economic incentive to limit their private use of the vehicles. The employer can require employees to cover some operating costs, but employees can deduct these amounts from the BIK that gets added to their income for taxation purposes.
The new BIK taxation system will provide an incentive to buy company cars with low CO2 emissions. Other elements in the Irish tax system encourage the purchase of company cars with low CO2 emissions. The capital allowance on cars declines with the CO2 emission levels of the vehicles.30 In addition, a 20% VAT rebate is possible on the purchase of company cars if they emit fewer than 141 gCO2/km.
The focus on CO2 emissions in these tax provisions entails the risk of stimulating the purchase of diesel vehicles, with related negative impacts on air pollution and human health. The introduction of the NOx component in the VRT will help counteract these incentives. However, Ireland should consider additional measures to avoid the purchase of diesel vehicles for business uses, such as an additional tax on such vehicles. A tax on diesel vehicles for company uses would also stimulate the penetration of EVs in this market segment.
3.4.4. Taxes on pollution and resource use
Taxes on pollution and resources accounted for 0.5% of revenue from environmentally related taxes in 2019. Such taxes apply in the waste management sector. Their revenue declined in 2010-19, due to the decrease in the tax base.
Landfill tax
Ireland introduced a landfill levy in 2002 whose revenues go to the Environment Fund. The tax rate increased from EUR 30 per tonne of landfilled waste in 2010 to EUR 75 per tonne in 2013, but has remained unchanged since. The Environment Fund finances, among others, schemes to prevent or reduce waste amounts; waste recovery activities; and R&D regarding waste management. At the same time, it funds production, distribution or sale of products deemed to be less harmful to the environment than other similar products. The landfill tax revenue fluctuated between EUR 30 million and EUR 50 million in 2010‑17. It decreased to less than EUR 20 million in 2018, due to the effectiveness of the tax in reducing the amount of municipal waste being landfilled. In 2018, landfilling accounted for 14% of treated municipal waste (Chapter 1). Ireland could increase the landfill tax rate. At the same time, it could introduce a levy on the incineration and exports of reusable and recyclable waste, as foreseen by the Waste and Circular Economy Action Plan 2020-25. This would help further reduce the recourse to landfills, while avoiding the problem that increased waste incineration and exports discourage recycling (EC, 2019).
Plastic bag levy
Ireland introduced a levy on plastic bags in 2002, one of the first countries to do so (Convery, McDonnell and Ferreira, 2007). The tax, originally set at EUR 0.15 per bag, triggered a decrease in plastic bag usage from an estimated 328 bags per capita to an estimated 14 bags per capita in 2014. This, in turn, resulted in a strong reduction of littering. The tax rate was increased to EUR 0.22 per bag in 2007 but has not been changed since. Similar to the landfill tax, revenues from the tax collected go to the Environment Fund. The amount collected decreased from more than EUR 17 million in 2010 to EUR 5 million in 2019, due to less use of single-use plastic bags.
3.5. Removing potentially harmful subsidies
CSO (2019) estimated the amount of potentially environmentally damaging support measures in Ireland in 2012-16; CSO (2020) estimated the amount of fossil fuel subsidies in 2000-18. While fossil fuel support increased over the period, total potentially damaging support was relatively stable. Agriculture and food support declined, but transport support increased significantly, although it is a minor share of overall support. Ireland should build on this exercise to regularly produce statistics on potentially environmentally damaging subsidies. It should also establish a process to systematically screen actual or proposed subsidies and tax provisions to identify and remove those that are not justified on economic, social and environmental grounds.
3.5.1. Fossil fuel support
Ireland made progress in phasing out fossil fuel subsidies and tax concessions that create economic distortions and social inequity, as recommended by the 2010 OECD Environmental Performance Review (OECD, 2010). There was a strong increase in the support levels to fossil fuels up to 2016, including an important increase until 2017 in direct transfers under the peat-related part of the PSO Levy scheme (Figure 3.7). The PSO is a levy charged on final electricity consumers to finance purchases of power generated from renewable sources and peat. Revenue from the levy is distributed to energy producers to subsidise any shortfall in the price that is charged to consumers and the international market price of energy. About half of the revenue from the PSO Levy has been used to subsidise peat-fired power production.31 Support to peat-fired power plants decreased significantly in 2018‑19. It was discontinued as from 2020 in line with Ireland’s commitment to phase out peat electricity generation by 2028.
Figure 3.7. Support to fossil fuels started to decline after a peak in 2016
Ireland extended the carbon tax to coal and peat in 2013, but tax exemptions and rebates continue to apply to fuels used in agriculture, fishery, freight transport and power generation. These include the Diesel Rebate Scheme for road hauliers (Section 3.4.2). Coal and coke products, and natural gas and used in chemical reduction, electrolytic and metallurgical processes also benefit from a full carbon tax relief. The same is true for the portion of fuel used to generate electricity in high-efficiency combined heat and power cogeneration plants (OECD, 2019).
De Bruin, Monaghan and Yakut (2019) estimate the removal of fossil fuel support measures would reduce economy-wide CO2 emissions by 20% by 2030 and non-ETS emission by 11.7%, compared to a business-as-usual scenario. The removal of these subsidies would adversely affect the output of air and land transport, electricity and peat production sectors, agriculture and construction sectors. It would also affect low-income households. Target welfare payments, including an increase in the fuel allowance, would offset the impact on vulnerable households of both the subsidy removal and the increase of the carbon tax (de Bruin, Monaghan and Yakut, 2019; O’Malley, Roantree and Curtis, 2020).
In designing fossil fuel subsidy reforms, Ireland would benefit from a sequential approach. This approach implies: first, identifying the fossil fuel support measures and their policy objectives; second, evaluating the economic, social and environmental effects of the identified measures; third, on the basis of this evaluation, prioritising the support measures that need reform; fourth, assessing the distributional implications of the reform and identifying the winners and losers of the policy change; finally, designing alternative policies to achieve the same objectives more cost-effectively and with better environmental or social outcomes. Such an approach would help minimise adverse impacts of fossil fuel subsidy reform and, in turn, reduce the risk of political backlash and backtracking (Elgouacem, 2020).
3.5.2. Potentially harmful support to farming
Ireland’s support to agriculture follows the EU framework. As in all EU countries, agricultural support is largely decoupled from production or input use. Several agri-environmental schemes are in place to encourage agricultural practices that are beneficial in terms of climate change and the environment. However, some agricultural inputs benefit from favourable tax treatment, which can encourage their inefficient use. A tax relief has been available to farmers for the increase in carbon tax on farm diesel since May 2012. This is in addition to the income tax deductibility of costs of agricultural diesel as business expenses, and results in a double tax deduction (OECD, 2020h).
A reduced VAT of 4.8% applies to livestock (excluding chickens). Fertilisers and animal feeds are exempt from the VAT. Removing the VAT exemptions on animal feeds could encourage a decrease in ruminant numbers, which would reduce methane emissions. Removing the VAT exemption on fertilisers would help reduce fertiliser use, with benefits in terms of reduced GHG and ammonia emissions, as well as better water quality (Chapter 1). However, the tax would disproportionately affect small farmers, who are probably low-intensity users of fertilisers. To mitigate this impact, the VAT revenue could be refunded to farmers on the basis of farm size and type (Morgenroth, Murphy and Moore, 2018). Alternatively, revenue could be used to support general agricultural services, including R&D, to benefit the whole sector.
3.6. Fostering eco-innovation and expanding green markets
Ireland is a highly competitive economy, a strong innovator and one of the most attractive European destinations for foreign direct investment. It has a sound innovation system and highly educated human resources. In 2019, Ireland had the highest proportion of high-tech goods exports of any European economy (OECD, 2020a). However, some weaknesses persist, including low R&D funding, unbalanced public support for business R&D and insufficient co‑operation between firms and research bodies (EC, 2020a).
Both the government and businesses spend relatively little on R&D. Although it increased, gross domestic expenditure on R&D was 1.1% of GDP in 2018, or half the EU average. However, this indicator is affected by the disproportionate weight of multinational capital stock on Ireland GDP (Chapter 1). Public R&D expenditure, while increasing, has not yet reached the pre-crisis level.
There is a sizeable disparity in innovation capacity and activity between multinational enterprises and domestic SMEs, and between regions. In 2017, foreign-owned companies accounted for nearly 70% of all R&D expenditure. Large enterprises manage to claim most of the public R&D support, which is primarily channelled through tax credit. The areas around Cork and Dublin, the location of highly competitive multinational companies, offer favourable business and innovation environments. Predominantly rural and remote areas in the Northern and Western regions increasingly lag behind, with lower quality infrastructure (Figure 1.2). All this calls for more diffusion of innovation from foreign multinational companies to local ones. More priority for direct funding instruments could help stimulate research and innovation and improve productivity of Irish firms, especially SMEs (EC, 2020a). This is especially true for investment in environmental and low-carbon technology and innovation, which can pose a higher financial burden on SMEs.
Higher investment is needed to spur climate- and environment-related innovation. The share of government R&D budget for environmental and energy research declined in the 2010s. Less than 2% of government R&D outlays targeted environmental and energy research in 2019, among the lowest shares in the OECD (Figure 3.8). By comparison, the share of government R&D outlays focusing on agriculture increased to reach 13% in 2019, which may include research projects to improve the environmental performance of the sector. This R&D effort should be further channelled towards the decarbonisation of agriculture.
Ireland has prioritised research on renewables and energy efficiency. On average, half of the energy public R&D budget focused on renewable sources in the second half of the 2010s, with a strong focus on ocean technology. The SEAI, which is the main organisation disbursing public energy R&D funds, has been actively engaged in the development of Ireland’s offshore renewable energy potential. In 2019, renewables and energy efficiency absorbed about two-thirds of the energy public R&D allocations in Ireland. This compares to 45% in the European Union and 36% in the member countries of the International Energy Agency (Figure 3.8).
Figure 3.8. The limited public R&D budget for environment and energy focused on clean energy
Several organisations provide funding for climate-related research in Ireland, including the SEAI, the Environmental Protection Agency (EPA), the government departments in charge of environment, climate or agriculture, and the European Union. A multitude of climate-related projects has been conducted in the last decade. The Climate Research Coordination Group aims to improve co-ordination between relevant funding organisations and to offer a platform to exchange knowledge and disseminate research findings. As recommended by Curtin (2017), the establishment of a national database of environment- and climate-related research could help further improve co-ordination and efficiency of public research funding. The SEAI maintains a national database of energy research, which includes many climate-related projects.
Low environment-related R&D spending has translated into a relatively low number of patents in environment-related technologies. After a growth over 2005‑08, patent applications dropped sharply with the global financial crisis. The share of environment-related patent applications in all technologies followed the world and OECD trend, growing at the beginning of the decade and declining afterwards. However, the decline in Ireland was more rapid than in the OECD; the country’s share of environment-related patent applications in all technologies remained steadily below the OECD average (Figure 3.9). Nevertheless, Ireland has specialised in some environmental management and climate-related technologies. In particular, in 2010-16, the country maintained a relative advantage in technologies related to waste management, soil remediation and climate change mitigation for buildings (Figure 3.9).32
The government acknowledged there is scope to enhance co‑operation between firms (especially SMEs) and research organisations to develop and deploy environment-related technologies and applications on a commercial basis. The national strategy for science and technology, Innovation 2020, and the 2019 Future Jobs Ireland strategy aim to support innovation and technological change, improve SME productivity, enhance skills and smooth the transition to a low-carbon economy. Science Foundation Ireland provides funding to 16 thematic research centres, including the MaREI Centre for Energy, Climate and Marine Research and Innovation, and the BEACON Bioeconomy Research Centre.
Figure 3.9. Ireland developed a specialisation in some environment-related technologies
The Disruptive Technology Innovation Fund (EUR 500 million in 2018-27) is one of the four headline funds in the NDP (Section 3.3.1). It aims to support development of innovative technologies and applications with strong commercialisation potential. The fund is aligned with the Research Priority Areas 2018-23, which include “energy, climate action and sustainability” and “smart and sustainable food production and processing”. Three calls for projects were launched in 2018-20. The government expects that projects approved under the fund will be well-placed to leverage EU research funding. The EPA manages a Green Enterprise Fund to support SMEs undertaking innovative initiatives related to circular economy and resource efficiency.
3.7. Expanding job opportunities from the green transition
Ireland’s environmental goods and services (EGS) sector grew faster than on average in the European Union in 2013-17 (Figure 3.10). In 2017, the EGS sector grew faster than the economy; its contribution to GDP increased by 16% from the previous year. However, it still contributed less than 1% to GDP and exports – among the lowest shares in the European Union. EGS employment more than doubled, to reach nearly 40 000 full-time equivalent (or some 2% of total employment).
Resource management activities accounted for a larger share of the EGS value added and employment than on average in the European Union (Figure 3.10). As in the European Union, waste management, renewable energy and energy efficiency dominate the EGS sector in Ireland. This reflects the policy emphasis of these sectors at both domestic and EU levels. These are also the EGS activities with the highest employment.
Figure 3.10. Ireland’s green industry grew, driven by waste and energy resources management
The development of the bioeconomy33 and the circular economy provides considerable opportunities for Ireland’s businesses. Ireland has some comparative advantages in relation to the bioeconomy, including the large domestic agro-food sector, one of the largest seabed territories in Europe (with a reservoir of biomass) and an established bio-pharmaceutical sector. With 80% of the agri-food sector based in rural Ireland, there is also potential for the bioeconomy and circular economy to boost employment in peripheral regions (DBEI, 2019). Some estimates indicate that 5 000 new jobs could emerge in Ireland through recycling materials (from sorting recyclables to eco-design), with a potential added GDP value of EUR 1.65 billion (O’Rafferty, 2017). Energy efficiency can also greatly contribute to job creation. The SEAI estimates that energy efficiency schemes support 17 direct and indirect jobs in Ireland per every EUR 1 million invested (Government of Ireland, 2020b). The additional funding for building retrofitting in the July Stimulus Package was estimated to create 3 200 direct and indirect jobs.
The transition to a low-carbon economy over the next decade is expected to have a modest negative impact on employment in Ireland. However, the impact will be concentrated in small areas and communities. There is also uncertainty about the combined effect of the low-carbon and digital transitions on some sectors (NESC, 2020). This will likely exacerbate regional disparities and affordability issues. Where appropriate, compensatory measures can contribute to a socially fair transition. Benefits for low-income households could incite a switch to cleaner heating fuels.
The most immediate impact arises from the commitment to phase out peat harvesting and peat-generated electricity in the Midlands by 2028 (NESC, 2020). As of end of 2020, about a third of active peat bogs had been closed to extraction. According to 2019 estimates, moving away from peat will potentially affect around 4 000 jobs of a total of 110 000 people employed in the region. In addition, the scheduled closure of the Moneypoint coal-fired power plant by end-2025 will affect around 750 jobs in the area (EC, 2020a).
While job opportunities can emerge in green sectors, the challenge is to ensure these new jobs are created in the same regions facing the risk of job losses. This would help avoid a relocation of workers with potentially negative consequences on family life and communities (OECD, 2020i). In 2020, the government launched a building retrofitting scheme in the Midlands, which will potentially benefit 750 homes and create 400 new direct and indirect jobs. The July Stimulus Package and the 2021 government budget re-financed a multi-year peatland rehabilitation programme. This could generate jobs and attract tourists, while delivering benefits for climate mitigation, adaptation and biodiversity (Section 3.2). For example, the Bord na Mona Rehabilitation Scheme (announced in November 2020) aims to restore 33 000 hectares of Bord na Mona lands previously harvested for peat used for power generation; it is expected to create 310 jobs.
The Just Transition Fund for the Midlands (EUR 11 million in 2020, with projects funded until 2023) provides financial support for retraining workers and for business projects that can generate sustainable jobs in the region (e.g. building retrofitting, peatland rehabilitation, tourism projects and development).34 The fund is partially fed by carbon tax receipts. Ireland is expected to prepare a territorial Just Transition plan consistent with its National Energy and Climate Plan to benefit from EUR 176 million under the EU Just Transition Fund.
Workers in affected areas will need re-skilling and up-skilling, and new green jobs may require skills not yet fully available. This would require investing more in education and training, as well as better guiding job seekers through available training programmes. Entrepreneurship training programmes could help affected workers start their own businesses. More generally, well-targeted support measures for SMEs can help them improve their productivity, innovate and provide job opportunities in cleaner sectors (OECD, 2020i; see Section 3.6). It is essential that Ireland continues to assess and anticipate future skill needs, including those associated with the green transition.
Systematic dialogue with affected communities and active engagement of local governments would help customise the just transition measures to local needs and build consensus. This is even more important in the context of a post COVID-19 recovery (Moore, 2020). The 2019 appointment of a Just Transition Commissioner is, therefore, welcome. The Commissioner has the mandate to engage with relevant stakeholders in the Midlands region and advise the government on possible policy measures.
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Notes
← 1. Ireland successfully exited the European Union-International Monetary Fund financial assistance programme in December 2013. The programme was largely based on the 2010 Irish government’s National Recovery Plan 2011-14.
← 2. Ireland endured a strict lockdown for more than seven weeks between March and May 2020. Another one was enforced in October the same year.
← 3. Various forms of income support were provided to workers whose employment had been affected. These included the Temporary Wage Subsidy to employers to pay part of the salary of their employees, the Enhanced Illness Benefit to support quarantined workers who cannot work from home and the Pandemic Unemployment Payment for workers who lost their jobs due to the crisis. Measures to support businesses included a wide range of loan schemes and deferrals of tax payments to allow viable businesses to maintain liquidity and retain employment.
← 4. The Commission for Regulation of Utilities issued a moratorium on disconnections of domestic customers for non-payment to gas and electricity suppliers. The Fuel Allowance season, due to finish on 10 April, was extended for four weeks to allow disadvantaged households to cover additional heating needs as people were asked to stay home.
← 5. The July Stimulus Package included EUR 1 billion of tax measures, EUR 4 billion of direct expenditure, EUR 2 billion of credit guarantees and EUR 0.5 billion in accelerated capital expenditure.
← 6. The Cycle to Work Scheme allows employers to pay for bicycles and related equipment for their employees (up to a certain amount). Employees pay back this amount through a gross salary sacrifice arrangement of up to 12 months. The scheme provides income tax and social contributions savings for employees. The Recovery Package increased the allowable expenditure under the “Cycle to Work Scheme” from EUR 1 000 to EUR 1 500 for electric bikes and to EUR 1 250 for other bicycles.
← 7. The Employment Wage Support Scheme was allocated EUR 1.9 billion. Under the scheme, employers whose turnover had fallen by 30% due to COVID-19 were eligible to receive a flat-rate subsidy of up to EUR 203 per week per employee to pay their employees until April 2021.
← 8. Capital expenditure is expected to increase at an average annual rate of 5.8% until 2024, and a ratio of 4.3% of modified gross national income to be maintained in the medium term (EC, 2020a).
← 9. Among the ten priorities of Project Ireland 2040 are the transition to a low-carbon and climate-resilient society and the sustainable management of water and other environmental resources.
← 10. The fund is to be financed from part of the petroleum products’ levy revenue (previously fully used to finance the National Oil Reserves Agency). The first call for applications, in 2018, led to award EUR 77 million to seven projects leveraging a total investment of EUR 300 million.
← 11. Ireland will benefit from nearly EUR 1.3 billion grants in 2021-23 from the EU Recovery and Resilience Facility and EUR 176 million under the Just Transition Fund, in addition to more than EUR 1 billion for cohesion policy in 2021-27. The Recovery and Resilience Plan needs to be submitted to the European Commission by the end of April 2021.
← 12. In 2021-27, Ireland will receive EUR 2.2 billion from the European Agricultural Fund for Rural Development, in addition to over EUR 8 billion of direct payments to farmers as part of the Common Agricultural Policy.
← 13. Environmental protection investment includes investment devoted to activities to prevent, reduce and eliminate pollution and degradation of the environment, e.g. pollution abatement (air, water, soil and noise), waste and wastewater management, protection of biodiversity, as well as R&D, education and training.
← 14. As a comparison, the share of environmental protection investment in total investment of the public sector declined in the European Union as a whole and was 4.9% in 2019.
← 15. Corporations include the specialist providers of environmental protection services (e.g. waste collection operators and water utilities), as well as other businesses that purchase technologies and equipment to manage the environmental impact arising from their (non-environment related) activity.
← 16. The investment plan aims to support the operation, maintenance and upgrade of the water and wastewater infrastructure to meet the needs of a growing population and housing supply, as well as to protect water bodies and adapt to climate change.
← 17. The water sector funding model is based on the 2017 recommendations of Joint Oireachtas (Parliamentary) Committee on the Future Funding of Domestic Water Services and the Water Services Act.
← 18. The excess usage charge is set at EUR 3.70 for each cubic metre (m3) above the threshold, to cover combined water and wastewater services. Households in receipt of only one of these services will pay half of this amount. Annual water bills will be capped at EUR 500. The free water allowance is 213 000 litre per year per household or 1.7 times the current average annual household water consumption. Households with more than four occupants will be entitled to an additional free allowance of 25 000 per person.
← 19. Under the so-called First Fix Free Scheme, Irish Water offer customers with a suspected leak on their external supply pipe a free investigation on the pipe and a free repair of identified leaks.
← 20. There used to be 500 charging rates billed in 44 separate areas.
← 21. The Climate Change Advisory Council is an independent advisory body tasked with reviewing national climate policy, progress on the achievement of the national transition objective and progress towards international targets.
← 22. De Bruin, Monaghan and Yakut (2019) simulated an annual carbon tax increase of EUR 6 per tonne of CO2 starting from 2020, with the tax rate reaching a level of EUR 80 in 2029. This tax increase scenario was added to another scenario, where all existing fossil fuel support measures were eliminated. The analysis indicated that the removal of fossil fuel support measures would reduce economy-wide CO2 emissions by 20% by 2030 and non-ETS emission by 11.7%, compared to a business-as-usual scenario. The carbon tax increase would make total CO2 emissions decrease further by 31% by 2013 (and non-ETS emissions by 18.4%). However, the level of non-ETS emissions would be higher than Ireland’s binding target of reducing non-ETS emissions targets by 30% by 2030 from the 2005 level.
← 23. Applying carbon taxes to the emissions of the sources covered by the EU ETS would tend to free up emission allowances and hence reduce the allowance prices. The reduced allowance prices would tend to reduce the abatement efforts by someone else covered by the ETS. Thus, taxing such sources would have a limited impact on Europe-wide CO2 emissions.
← 24. As of October 2020, the excise tax rate on diesel was EUR 0.426 per litre and the carbon tax rate was EUR 0.09 per litre; in total EUR 0.515 per litre. For petrol, the excise tax rate was EUR 0.542 per litre and the carbon tax rate was EUR 0.077 per litre (a total of EUR 0.619 per litre).
← 25. The Diesel Rebate Scheme for qualifying hauliers came into effect on 1 July 2013. Under the scheme, the tax authority repays some of the mineral oil tax paid by a qualifying road transport operator under three conditions: the diesel must be purchased by a business within the state, used in the course of business transport activities and used in qualifying vehicles. The quarterly diesel repayment rate is calculated using the national average purchase price. The repayment rate is calculated on a sliding scale basis: i) there is no repayment when the price, including VAT, is at or below EUR 1.23 per litre; ii) the maximum amount repayable was 7.5 cents per litre when the price, including VAT, was EUR 1.54 per litre or over until 31 December 2019; iii) from 1 January 2020, the maximum amount repayable is 7.5 cents per litre when the price, including VAT, is EUR 1.43 per litre or over.
← 26. For vehicles that emit up to 40 mg of NOx/km driven, the tax rate is EUR 5 per mg emitted. For any emissions between 40 and 80 mg/km, the tax rate is EUR 15 per mg emitted, and for any emissions above 80 mg/km, the tax rate is EUR 25 per mg of NOx emitted. If satisfactory evidence of organis emissions of the vehicle cannot be provided, a maximum tax rate of EUR 4 850 applies to diesel vehicles, and one of EUR 600 applies to other vehicles.
← 27. The plan also set a target of 95 000 electric vans and 1 200 electric buses on Irish roads by 2030.
← 28. If the vehicle is driven for business purposes fewer than 24 000 km in the year, 30% of the OMV of the vehicles is added to the employee’s taxable income. If the vehicle is driven more than 48 000 km, 6% of the OMV is added to the employee’s taxable income.
← 29. For example, if the vehicle is driven fewer than 26 000 km for business purposes in a given year, and if the vehicle emits between 100 and 139 g of CO2 per km, 30% of the vehicle’s OMV will be added to the employee’s income. If the vehicle instead emits 180 gCO2/km or more, 37.5% of the vehicle’s OMV will be added to the employee’s income. However, if the high-emitting vehicle is driven more than 52 000 km per year, 15% of the vehicle’s OMV will be added to the employee’s income.
← 30. Companies may claim up to EUR 24 000 in capital allowances on their cars if the cars fall into the lower CO2 threshold (140 gCO2/km from 2021), up to EUR 12 000 if they fall into the mid-CO2 threshold, and zero if they fall into the upper-CO2 threshold (155 gCO2/km from 2021).
← 31. The amount of revenue raised by this levy increased steadily from EUR 242 million in 2014 to EUR 406 million in 2018. Small funding disbursements are anticipated to be made for 2020 (at EUR 25.5 million compared to EUR 65.5 million in 2019).
← 32. The relative advantage in environment-related technologies is an index of the specialisation in environmental innovation of a given country relative to the world average. An index equal to one means that a country innovates as much in green technologies as the world average; an index above one indicates a relative technological advantage or specialisation in environment-related technologies compared to the world average.
← 33. The European Commission describes a bioeconomy as involving “the production of renewable biological resources and the conversion of these resources and waste streams into value added products, such as food, feed, bio-based products and bioenergy”.
← 34. Eight counties are eligible for support: East Galway, Kildare, Laois, Longford, North Tipperary, Offaly, Roscommon and Westmeath.