Facing challenging and legally binding greenhouse gas emission reduction targets, it is imperative that the assessment of public investment projects include an appropriate valuation of the cost that society will bear in dealing with the increased greenhouse gas emissions a project might give rise to.
Under the National Mitigation Plan, the Department of Public Expenditure and Reform committed to “undertake a review of guidance on public expenditure appraisal and evaluation to ensure their suitability to capturing key costs and benefits of climate measures”. In November 2018, my Department published a consultation paper on valuing greenhouse gas emissions in the Public Spending Code, along with a review of the other central technical appraisal parameters used in the Code.
The paper on valuing greenhouse gas emissions concluded that the model currently in use for pricing carbon in the Public Spending Code is outdated. It proposed a new methodology that values future greenhouse gas emissions according to a shadow price of carbon that is based on the estimated marginal cost that will be faced by society in achieving Ireland’s legally binding 2030 greenhouse gas emissions target.
In practical terms, this means a new shadow price of carbon for non-ETS emissions of €32 per tonne in 2020, rising by €6.80 a year to reach €100 per tonne by 2030. Beyond 2030, it is proposed that the shadow price of carbon will continue to rise by 5% a year. This means that the shadow price of carbon rises to €128 for 2035, €163 for 2040, €208 for 2045 and €265 for 2050.
The consultation period has now concluded and my Department has completed its evaluation of the responses received. It is my intention to publish a decision paper detailing my Department's response to the views received along with a circular revising the Public Spending Code to take account of the revised shadow price of carbon during the course of July. The circular will also update other technical parameters, including a downward revision of the test discount rate from 5% to 4%.
Collectively, these reforms will ensure that the Public Spending Code incorporates a more realistic appreciation of the climate consequences of all Government investment decisions. Once the circular is published the use of the revised values will be mandatory for all appraisals.