I am chairman of the climate change working group of the Institute of International and European Affairs. I am accompanied by Mr. Donal Buckley, a member of the group, Mr. Joseph Curtin, a senior researcher in the institute, and Mr. Owen Wilson, another member of the climate change working group. As agreed with the committee's secretariat, we have prepared a PowerPoint presentation which I will go through for the committee. If members wish to interrupt during the course of the presentation to seek clarification on any points, they are welcome to do so.
We are primarily discussing the EU's climate change and renewables package, which was presented by the European Commission on 23 January. These are proposals, and we are considering them as such. They are fundamental but they are still being negotiated. In fact, it is expected that the package will not be finalised for another 12 months. The key message, however, is that the ground rules have changed fundamentally. Currently, the national climate change strategy has a single national climate change target but if these proposals are adopted, there will, effectively, be two targets - one set at EU level for the emissions trading scheme and one set for the domestic economy, what we call the non-traded economy. It is becoming apparent that the targets for the domestic economy, that is, other than for the powergen and heavy industry energy users, will be very difficult to achieve. These proposals are as fundamental, in terms of the strategic implications for Ireland and Europe, as perhaps the EMU package. Their implications are only beginning to be fully understood by the different constituencies as the detail is being examined.
The first slide is complicated but it shows what might happen in 2020 on a business as usual basis. On the left hand side members will see the ETS sector, that is, the emissions trading sector. Approximately 100 Irish companies are covered by that sector, such as all the powergen companies, aluminium, cement, paper and glass. They will have their rules set down at EU level and the compliance of the ETS sector will become an EU issue. It will be taken out of the competence of the Irish authorities. Compliance with these targets will be set at EU level. The bottom line is that this sector must reduce its emissions by 5.7 million tonnes by 2020, on the assumption that there is a 30% cut as part of the EU energy package.
The emissions trading sector accounts for approximately one third of Ireland's over 70 million tonnes of emissions. In other European countries the figure is significantly higher, so the burden of the domestic sector is lower. A critical issue is shown by the right side of the slide, which shows where domestic policy-making must focus. Where in the domestic sector, which includes agriculture, transport, residential, industry and services, can we realistically achieve a 30% cut as prescribed by the European Union? It amounts to approximately 10.8 million tonnes. Taking that amount out of a pot, if one can call it that, of approximately 48 million tonnes is very significant, given the possibilities for agriculture and transport, in particular.
The next slide shows the figures relating to the non-emissions trading scheme. They comprise agriculture, transport and residential. The forecast is that in 2005, in terms of millions of tonnes of carbon equivalent, the national emissions will total 70.4 million tonnes. For the non-ETS sector, it is 48.4 million tonnes. We are expecting that the 30% cut, and the consensus is that it will be a 30% cut, will involve a shortfall of approximately 10.8 million tonnes, which is 80% of the current output of the transport sector. The challenge, frankly, is utterly enormous. For the sectors in this area, it is beginning to dawn on the major players that there is a significant challenge involved. Another way of looking at it is how the different sectors might respond if we must go from approximately 47 million tonnes to 33 million tonnes. Where, how and on whom does the burden fall? I will deal with some of the sector specifics.
I draw the committee's attention to the purchasing graph. That is a reference to the flexible mechanisms that currently exist. The Commission is proposing that these mechanisms be very limited at EU level. However, there is another view, which is that given the high targets that have been set, there should be far more flexibility in using clean development mechanisms to help us achieve our national targets. There is a big debate about how these clean development mechanisms should be used. There is also an overseas development assistance dimension in the sense that if we manage to secure emissions abatement in countries where we have bilateral overseas development assistance mechanisms, they might in certain circumstances help us achieve our domestic emissions targets. As everybody knows, a carbon emitted in Tanzania is the same as a carbon emitted in Ireland, so we should consider all these issues. However, there is a big debate within our group as to where the burden should fall.
We examine the marginal costs, in other words, where the cost should best fall, and there is a graph later which will explain this in more detail. Essentially, at EU level, the costs of the Irish ETS sector are capped at whatever the EU marginal cost is - that decision is taken out of our hands. The Government here, as a matter of extreme urgency, must carry out an exercise to produce what is called a marginal abatement cost curve for the economy. This will show, when making decisions, where the decisions should best be applied and at what cost. In other words, instead of inventing a figure with regard to transport, there will be an empirical basis upon which one can say that if a carbon tax is imposed on X, Y and Z, for example, it will have a demonstrable impact. If one wishes to achieve energy efficiency in transport, it can show the costs. It will then be possible to weigh up the different costs for each sector. That work should be carried out; we believe it is one of the most essential tasks to be done in the immediate future.
We are in the second phase of the emissions trading scheme. The Commission's proposals will take us into the post-Kyoto period. The proposals reflect the large consensus that has been achieved. The Commission conducted an EU-wide review among all the operators so the design of its proposals reflects what the current operators have found. There are some good elements in the proposals but also some negative elements. The issue for many people is whether the proposals about auctioning, which are good in principle, will work and how they will work. There are no rules about how auctioning will work. Will every single powergen company in Europe go into the marketplace on the same day, 1 January 2013, trying to buy allowances? Will it be done by country or by sector? All these rules must be organised. The actual mechanisms of running the auction have not even been presented other than the principle that auctioning should take place. While there is general support for the principle of auctioning, there is a great deal of uncertainty. Many of the powergen or heavy industry users who may be caught by auctioning are concerned that these rules have not been clarified. One of the key issues in terms of the Council's and Parliament's considerations of the emissions trading scheme is how auctioning will work.
If one assumes that the powergen sector will be covered anyway, which seems to be the case, one is looking at 16 million tonnes having to be found by auctioning every year. If the price is €20 a tonne, €320 million will accrue to the Exchequer every year. If the price is double that, one is talking about €640 million per year. That is an annual cost to take account of the EU's emissions trading arrangements. That is a heavy financial burden for companies to pay to be part of the EU emissions trading scheme.
The competitiveness impact of the proposals is another issue that arises. The Commission has indicated that where there is carbon leakage it will take cognisance of the fact that the emissions trading scheme could give rise to some competitiveness effects. It is not clear what exactly the Commission has in mind, however. We hope the negotiators will bring greater clarity to the debate about carbon leakage and will bring forward the timescale to give certainty to the non-powergen companies covered.
There are also major issues concerning the need for regulatory certainty. One of the positive aspects of the ETS is that it gives pretty good regulatory certainty to the powergen sector, which is very important. Tomorrow, we are meeting Avril Doyle, MEP, who is the European Parliament's rapporteur dealing with the emissions trading scheme. She will have a key influential role in emissions trading. Emissions trading accounts for one third of Ireland's 70 million tonnes of emissions.
There is a large ESB investment plan which, in terms of its scope and scale, is one of the most strategic plans ever announced by an Irish State company. It represents a paradigm shift in the way a State company operates. It will reduce the ESB's emissions significantly by 50%, so one is talking about perhaps 8 million tonnes being reduced by 2020. That is of benefit to the EU, but it does not benefit Ireland's national target because, as we understand the Commission's current proposals, emissions trading and non-emissions trading are effectively ring-fenced. If we over-perform concerning the emissions trading scheme we get compensation or account is not taken concerning the domestic side. That is a huge issue which we call permeability. We were hoping that during the negotiations more flexibility would be allowed for a small, open economy such as Ireland's. If, largely through the ESB's investment package, we achieve an introduction of renewables on the scale envisaged, with interconnection and increased energy storage, that would help to balance out the burden that is going to fall on the domestic economy.
There are some important elements in the ESB's announcement, which we certainly find helpful, including among other things the €1 billion it hopes to spend on smart meters between now and 2012. However, the benefit largely will not fall to the Irish economy because we still have a non-ETS target to meet. Obviously, therefore, the savings will be large but will not accrue to the Irish economy. There is a major element in the negotiations to see to what effect there could be with some change in the permeability issue. This is probably one of the biggest issues concerning emissions trading. I suspect there is an unintended side-effect in that the Commission may not really have intended for the two sectors to be ring-fenced in the way they have been. For a small economy such as Ireland, however, it is critical that our national effort, regardless of where it is sourced, should be counted as a whole rather than two separate parts.
As for non-emissions trading, there are effectively five sectors: agriculture, transport, the built environment, industry and services as the non-energy intensive sector, and commercial and residential. The Government is responsible for all these sectors and the new national climate change strategy will focus primarily on how it will take 10.5 million tonnes of carbon out of these sectors. That will be a very difficult task. We would argue that there should not be any national derogations. There is an issue of what we have described as inter-sectoral equity - that every single part of the Irish economy which generates emissions effectively should play its own part. There is an issue therefore concerning the quantification of the challenge and the distance to target for each of these sectors. The current national climate change strategy has indicated targets but in light of the January proposals, that strategy needs to be revised on a timescale far sooner than is currently envisaged. It is essential for every sector, including agriculture, transport, construction, industry and services, that a revised strategy be put in place at the earliest possible opportunity, even to anticipate the outcome of the EU negotiations, so that the correct signals are given to these sectors that their challenge is X. The last thing we want to know is that in 2012 the transport sector must cut 5 million tonnes in the space of ten years. That will not be physically possible if it is announced within a ten-year horizon. The current national climate change strategy certainly needs to be revised in partnership with all the stakeholders. A large stakeholder group is available to work with the Department, including our good selves.
A critical issue is where the burden should fall. This is where the marginal cost of abatement measures arises. I will ask Mr. Owen Wilson to go into this in the question and answer session. In other words, where are the most cost-effective solutions? Bearing in mind that the emissions trading scheme is outside the control of Government policy, are such solutions technically employable and, if so, over what time and at what cost? Many countries have prepared what is called a marginal abatement cost curve. IBEC has produced a graph which we will show to members of the committee. It is based on consultancy work carried out for one of the Swedish utility companies. On the left side it shows the quick wins - the cheap or obvious solutions. In other words, if one insulates a house, it reduces energy costs and the payback is instant. The further one goes to the right the more expensive the abatement measures are. This applies for an economy, but it differs per economy. We cannot use the UK's marginal abatement cost curve to inform Irish policy makers. An Irish model using the McKinsey formula is urgently required. Otherwise we cannot take an informed decision about what is required and where.
I will cite an example. We currently apply refit tariffs to support renewables. Every other country in Europe does it, but when one does an Irish abatement cost curve, the costs could be quite different from those in Scotland, Spain or France. This work needs to be done. In talking to the Government's senior officials group dealing with climate change, we know they also recognise this is a critical area.
Within our own power there is also the option of introducing a carbon tax. The report of the institute's working group has examined the issue of carbon tax in detail. There is broad support for the introduction of a carbon tax and it is being considered as a priority by the commission on taxation. It will apply to all business companies, households and individuals outside the emissions trading scheme. The view is that the emissions trading scheme is paying its own price, so if the carbon tax is introduced, it will apply to the domestic economy only, that is, the non-emissions trading scheme. It will be revenue neutral, the idea being that if it generates €1 billion per year, it will be ploughed back into energy efficiency within the sectors, presumably pro rata to whatever contribution they make. For example, therefore, if the tourism sector is forced to pay €100 million in carbon tax, that sum will be hypothecated and given back to the tourism sector to help it become carbon neutral and introduce energy efficiency in buildings. That is a big question for Government because typically the Government does not like to hypothecate new revenue streams. It is a bit like the road fund, but we will not get into that.
If the auctioning and carbon tax revenues are available, one is probably talking about between €500 million to €1 billion from 2013. How will this money be spent to best effect? If a significant burden falls on companies and individuals to comply with EU targets, there is a big argument that it should be ploughed back into well-targeted and highly focused subsidy schemes and other measures, including household behaviour.