Why a failed climate transition will prove costly
Summary
This report assesses the long-term fiscal impacts of climate policy. It focuses on three distinct scenarios:
- coordinated action where Ireland and the rest of the world successfully transition to net zero.
- inaction where Ireland misses its targets, other countries stick to current policies, and temperatures rise more than they otherwise would; and
- uncoordinated action where Ireland takes action to meet its net-zero targets, but the rest of the world fails to act.
When comparing these scenarios, several key insights emerge.
First, the State faces a direct choice between investing in the domestic economy or risking paying substantial amounts for missing its targets. If Ireland takes action, the Exchequer will incur costs to electrify transport, upgrade buildings, and decarbonise. If Ireland chooses inaction, these upfront transition costs would be lower. But the State risks facing massive costs for missing legally binding EU targets.
Second, domestic climate action is an insurance policy with benefits, even if the rest of the world fails to act. In an uncoordinated scenario, where Ireland acts but global temperatures still rise, the State could face severe economic damages alongside high costs to fund its own transition. However, acting alone guarantees tangible local benefits and limits potential costs. It would shield the State from escalating, open-ended costs of missing EU targets. It would reduce healthcare costs associated with air pollution. It would lower the running costs of homes and vehicles for citizens whilst improving Ireland’s energy security.
Third, regardless of the path chosen, Ireland will eventually have to replace lost fossil fuel revenues. The ongoing shift towards electric vehicles and electrification means tax revenues tied to fossil fuels will fall significantly. Even if the State takes no further climate action, these revenues will still decline. The Government must devise a strategy to replace this lost revenue.
Finally, action remains fiscally prudent. A credible strategy would result in the least cost outcome, and would reduce the overall impact of climate action on Ireland’s annual budget balance substantially to just 1% of GNI*. Inaction would result in a more negative outcome, potentially rising double the cost, to as much as four times the cost by 2050. Even a situation in which Ireland takes action and other countries do not has similar costs to wider inaction. That is, the average budgetary impact would end up broadly similar at close to 2% of GNI* on average— almost double the costs of action.
This all suggests that, from a sustainability of the public finances perspective, action is the more sensible approach. If Ireland takes climate action, in a way that successfully contributes to more coordinated action, the Exchequer costs will be far lower.