I welcome the delegation from the Department of the Environment, Heritage and Local Government: Mr. Tom O'Mahony, assistant secretary of the environment division; Mr. Owen Ryan, principal officer dealing with climate change; Mr. Matthew Collins, principal officer; Ms Petra Woods, assistant principal officer; and Mr. George Hussey, assistant principal officer.
EU Emissions Trading Directive and EU Effort-Sharing Decision: Discussion.
Mr. Tom O’Mahony
I thank the Chairman and the committee for the invitation to come before it again. We were here prior to last summer when the committee began its scrutiny of these proposals. This led to the committee's report and, as we will see during the course of our presentation, we will be able to confirm that the objectives the committee hoped would be achieved through its report were reflected in the eventual package.
The purpose of our presentation today is to update the committee on the two climate change proposals contained within the recently agreed EU climate energy package. These are the revision of the EU's emissions trading system and the effort-sharing for gases not covered by the emissions trading system.
As committee members will recall from our previous discussions, the package put forward by the European Commission in January 2008 was based on the most up-to-date science available as set out in the IPCC 4th assessment report. The package included a number of proposals on energy and climate change which aimed to reduce the EU's dependence on fossil fuel, enhance the competitiveness of the European economy and reduce European greenhouse gas emissions. The agreed package includes energy and climate measures that mutually support the achievement of these goals.
The reason behind this is that in order to prevent the worst impacts of climate change, the EU wants to ensure that the global temperature does not rise by more than 2°C on average above pre-industrial levels by the next century. To stay on track to meet this goal, the EU's objective is to stabilise global emissions within the next decade or so and then reduce them to at least 50% below 1990 levels by 2050.
The EU has proposed that, as part of a new, post-Kyoto global climate agreement, developed countries should reduce their emissions by 30% by 2020 compared to 1990 and developing countries as a group should moderate their emissions through nationally appropriate actions by 15% to 30% below their business as usual trend over the same period. As part of this framework, the EU has proposed to reduce its emissions by up to 30% by 2020 compared to 1990. Notwithstanding this international negotiating position, the EU has made a unilateral commitment to reduce its emissions by 20% by 2020 compared to 1990 levels even in the absence of a new global climate agreement. The EU is determined to demonstrate that the scale of reductions necessary to meet the 2° Celsius target is achievable.
The revision of the emission trading scheme, ETS, and the effort-sharing proposal specifically set out how the EU will achieve its independent target of a 20% reduction. In order to reach this, the EU needs to cut its 2005 emissions by 14%. This reduction is achieved by two separate but linked measures. Under the revision of the ETS, the energy and industrial sectors have an EU-wide cap that reduces ETS emissions to 21% below 2005 levels by 2020. Under the effort-sharing proposal, member states will reduce the remaining non-ETS emissions to 10% below the 2005 levels by 2020. This overall non-ETS 10% reduction is further divided between member states in a range of +20% to -20% compared to 2005 emissions, primarily on the basis of GDP per capita.
Ireland has been fully supportive of the European Union's leadership role in the international climate change negotiations. The Government directed our negotiators to seek to ensure that the environmental ambitions and overall balance of the package were maintained. In doing so, we were also to seek to ensure that the achievement of the effort sharing and emissions trading targets would be fair, would not impact negatively on Ireland's competitiveness or impose disproportionate compliance costs in comparison to other member states and would give all sectors the opportunity to achieve the targets in the most cost-effective manner.
To those ends, Ireland pursued a number of specific point in the negotiations. In order to ensure that targets could be met in the most cost-effective way, a range of flexibilities were sought in the proposal for effort sharing, including: a provision, known as the Irish proposal because we tabled it, that member states could purchase ETS allowances to meet their effort-sharing targets; a Swedish-Hungarian proposal to allow member states to trade their effort-sharing emissions allocations; allowing the use of credits from clean development mechanism, CDM, projects to comply with effort-sharing targets and member states to trade their unused CDM access rights; the differentiation of CDM access within the overall proposal to reflect the differences in member states reduction efforts; flexibility on the binding linear annual targets in order to take account of annual fluctuations; and the inclusion of carbon sinks in the effort-sharing target under the international agreement but also in the EU's unilateral target should no international agreement be reached.
The original proposal published by the Commission did not provide for the inclusion of carbon sinks. The mandate sought a co-decision procedure that would require a full impact assessment for the step up to the 30% reduction target in the context of an international agreement to ensure that the revised targets would be fair and equitable for all member states. The original Commission proposal was that all countries' targets under the 20% limit would simply be grossed upwards to arrive at 30% but we felt that contained the risk of unfairness to individual member states and that a fresh impact assessment would need to be conducted in respect of a new 30% target. We were also mandated to seek recognition of Ireland's particular agricultural circumstances, including a provision that the risk of carbon leakage in agriculture would be taken into account in the step up and an enhanced role for Community level measures in effort sharing to assist member states in reaching their targets.
On the emissions trading proposal, the mandate sought to ensure the protection of Ireland's competitive position with respect to other member states, to ensure that firms have the scope to meet reduction targets in the most cost-effective way and to prevent earmarking or hypothecation of member states' proceeds from ETS auctioning.
The package as published by the Commission was also the subject of Oireachtas scrutiny and this committee published a report on its consideration of the proposals. The committee's report was generally positive in respect of the overall package. It welcomed the overall cap on emissions and supported auctioning as the optimal mechanism for the efficient allocation of permits. The linking of the EU's ETS with similar trading schemes worldwide was likewise supported. The committee also welcomed the proposals to provide free allocation of permits to industrial sectors exposed to risks of carbon leakage and to allow small installations to be opted out of the trading sector.
The committee made a number of recommendations, including that the step to a 30% reduction target be done on the basis of a full impact assessment that took account of the international agreement and the cost-effectiveness of meeting any new targets. This position was shared by the Government and reflected in the negotiating mandate. Within the effort-sharing decision, the committee recommended the trading of non-ETS entitlements and suggested indicative average annual limits for emissions for each member state, calculated linearly, to ensure that emissions do not exceed the maximum level in 2020. The Government position on the latter point was to seek flexibility in the annual targets to take account of fluctuations in emissions given the difficulties in timing emission reductions in sectors such as transport.
Following extensive negotiations throughout 2008, the climate energy package was finalised and agreed by the European Council on 12 and 13 December and approved by the European Parliament on 17 December. It is a product of substantial engagement by all member states and a range of other stakeholders and represents a significant step forward for the EU in its preparations for conference of parties, COP 15, due to take place in Copenhagen in December 2009. While certain compromises were made in order to secure agreement, it is important to stress that the targets set out by the Commission have been maintained and the overall architecture, which was supported by the Government and by this committee in its report, remains intact. In some cases, proposals recommended or pursued by Ireland were not included in the final package but the same effect was achieved in a different way. For example, the Irish proposal to allow member states to purchase allowances from the ETS to meet effort-sharing targets was considered at length but, as negotiations progressed, it became clear that a consensus was building around the Swedish-Hungarian proposal to keep the ETS and effort-sharing sectors separate while allowing member states to trade their effort-sharing allowances. Our analysis indicates this option is equally satisfactory in providing Ireland with the flexibility we need.
The focus of the negotiating team was to ensure, as far as possible, that trading takes place in a non-discriminatory and transparent manner. In plain language, we wanted to ensure that small countries such as Ireland would not be squeezed out of the opportunity to trade with larger member states for allowances they do not need. As a result of this pressure exerted by Ireland and other member states, the Commission will be required to put in place modalities to facilitate these transfers and increase their transparency. It has suggested that by 2020, member states will be seeking to purchase approximately 55 million tonnes of effort-sharing allocations and CDM access rights. It believes other member states will offer substantially more than this. Based on discussions with the ESRI, in a trading scenario, we would expect effort-sharing transactions to be in the region of 100 million tonnes or more within the European Union in 2020. Based on current projections, Ireland is likely to need to purchase approximately 4 million tonnes of this. We are satisfied that the arrangement that will be in place will enable Ireland to have access to the level of purchases it needs to cover the gap when all cost-effective emission reduction measures have been put in place and that we will have access to these purchases on similar terms to other member states and at a price broadly similar to the carbon price in the ETS.
For the package to be effective, the price of carbon needs to be the same for all sectors and in all member states. Without this flexibility, the marginal abatement cost, MAC, in Ireland could have been much higher than in other member states. We could have found ourselves in a situation where although carbon credits might have been available at, say, €30 per tonne throughout Europe, if we had no access to this, the measures we would have had to implement in certain sectors to achieve emission reductions might have had a marginal cost of €100 or €200 per tonne. Clearly, the economy would have been penalised in not having access to the most cost-effective means of meeting our commitments. That is sorted through the flexibility arrangements in place.
In the effort-sharing proposal we have flexibilities that will reduce the cost of meeting our target but which are still consistent with the European Union's overall emissions reduction commitment because the overall cap within Europe stays. The overall emissions in Europe are fixed. The question is how member states can distribute between themselves the effort within this. They may trade effort-sharing allocations. There is a small increase in the level of CDM credits that can be used to meet the effort-sharing target, including an additional 1% for member states such as Ireland which have significant reduction targets. Member states may trade their unused CDM access rights and there is some flexibility on interim annual targets. This is the solution to the need to have, as the committee identified, a linear trajectory in order that we can be sure member states are not leaving themselves in a position where by 2020 the challenge will be so great it cannot be achieved. It also supplies the need to have flexibility from year to year to recognise the impact of something such as a particularly cold winter. The solution is to allow up to 5% borrowing from the following year. It is a linear trajectory with a slight degree of flexibility.
The package includes a provision that the carbon sink effect of forestry activities will be allowable in an international climate change agreement or will be provided for if there is no such agreement. The adjustment of Ireland's effort-sharing target on foot of a future international agreement will be based on a new legislative proposal from the Commission with a full economic impact assessment that will ensure a fair and cost-effective new national target. The impact on EU agriculture, particularly the risks of carbon leakage, will be assessed as part of the adjustment. There is scope for enhanced Community measures to assist member states to meet their effort-sharing targets. Other new elements in the effort-sharing decision include a compliance mechanism that will impose a corrective factor of 1.08 on member states which fail to meet their targets. This is the equivalent of an interest charge of 8% per annum on any excess emissions. If one exceeds one's targets by a certain amount, there will be an 8% premium on top of this for the gap one has to bridge the following year.
A number of new elements were introduced into the emissions trading proposal to take account of concerns relating to the impact of the proposal on the competitiveness of European industry in advance of a global deal on emissions. The criteria used to determine the sectors at risk of carbon leakage will be clearly set out in the directive and those sectors exposed to the risk of carbon leakage, in other words, where the likelihood is that on foot of the ETS system there is a danger that production in these industries would move out of Europe to other countries that do not operate similar emission constraints, will receive 100% free allowances to the extent that they use the most efficient technology. The free allocation is limited to the share of the industries' emissions in total emissions in the 2005-07 period and will decline annually. A review will be undertaken when an international agreement is reached.
Indirect carbon leakage is also provided for and allows member states to compensate certain installations for carbon costs passed on in electricity prices where this pass through may expose the installations to carbon leakage. The level of auctioning for non-exposed industries will increase in a linear manner to reach 70% by 2020, with a view to reaching 100% by 2027. The original Commission proposal was to reach 100% by 2020. The proceeds from the auctioning of 300 million allowances from the new entrant reserve will be used to support up to 12 carbon capture and storage demonstration projects and projects demonstrating innovative renewable energy technologies. The thresholds for small installations which opt out of the ETS have been amended, provided they are subject to equivalent measures.
As the Commission originally proposed, 10% of the auctioning allowances will be redistributed from member states with high GDP per capita such as Ireland to member states with lower per capita income, mostly in eastern Europe. However, an additional 2% of auctioning allocations will be redistributed to certain member states which had in 2005 already achieved a reduction of at least 20% compared to 1990. The share of auctioning revenues that member states are recommended to use for climate related issues has been increased from 20% to50%, but this commitment remains voluntary. Ireland was one of a number of member states which had a principled objection to hypothecation of revenue being decided at EU level and regarded this as a matter of national sovereignty.
The negotiations resulted in a good deal for Ireland. While we have the very ambitious target of a 20% reduction in emissions in the non-trading sector, we have, through the negotiations, achieved access to a range of flexibilities that will help us and the member states as a whole to meet that target in the most cost-effective way. We have also ensured that, in the context of an international agreement, the step-up to a -30% target for the Community will be done by co-decision and on the basis of a full impact assessment which will include a specific look at the impact on the European agriculture sector. This will ensure that following an international agreement, all the relevant factors will be taken into account and the new distribution of effort between member states will be fair and equitable.
We would like to update the committee on the work under way in relation to both elements of the package. If a new international treaty to succeed the Kyoto Protocol is agreed in Copenhagen in December, the European Commission will be required to submit a proposal on stepping up to a 30% target for 2020, a new effort-sharing proposal within the member states. That proposal must be submitted within three months of signing the new agreement, which points to the middle of 2010. Some preparatory work will be done in the interim but we expect no specific proposals from the Commission on how a 30% target should be shared until after the Copenhagen meeting.
The position on the revised EU emissions trading directive is different. A great deal of work has to be done at EU level to ensure timely and effective implementation in the context of a 20% or 30% target. Some 15 comitology decisions must be taken to enable the directive to come into operation and this work will be progressed through the climate change committee chaired by the Commission. An intensive programme of work is envisaged, particularly in the coming two years. The 2020 package agreed in December represents a major milestone for the EU in its acknowledged leadership of the international effort to combat climate change. Notwithstanding the significant amount of work that went into developing that package, much remains to be done both in terms of the logistical requirements to give operational effect to the revised ETS directive, which comes into effect in 2013, and in the build-up to the next meeting of the parties to the convention in Copenhagen in December. Beyond Copenhagen, we hope the climate change agenda at all levels — national, EU and international — will have a new focus in the form of a successor agreement to the Kyoto Protocol.
We would be happy to clarify any issues or answer any questions the committee might have. Mr. Matt Collins on my left was Ireland's lead negotiator in the EU negotiations. His role has been taken over by Mr. Owen Ryan. Ms Petra Woods and Mr. George Hussey work in the Department in the climate change area in support of all this work.
I compliment the delegation because this is a very technical area. It seems the witnesses have been able to fight the good fight on behalf of the country, which is probably making it more realistic for us to make the contribution required and which we are committed to. I find the matter technical so if some of my questions are simplistic I ask the delegation to allow for that.
With regard to afforestation and carbon sinks, I understood from the beginning of the presentation that this idea had been presented and had been shot down. Further into the paper it is indicated that afforestation will be allowed. Will the witnesses explain whether this is specific to Ireland? It seems there is now some recognition of our uniqueness with regard to agriculture. Will the witnesses comment on that?
I am not sure how the process works but with regard to the 30% target in Copenhagen, will there be meetings between now and Copenhagen? The witnesses have signalled there will be. What is the delegation's estimation as to the likelihood of having to bring in that 30% target and whether the economic climate has changed things for the better or worse with regard to climate change? Allowances provided for and which have been agreed with regard to trading show a figure of €4 million for Ireland. I presume that would change significantly if the figure was 30%. Will the witnesses comment on that?
With regard to carbon leakage on the ETS, how does a company prove it would suffer from carbon leakage? Would the EPA make a judgment on that? Any time the matter of carbon capture has been raised before it was felt it was irrelevant to Ireland. Has that changed as a result of these negotiations? An impact study is required by mid-2010 with regard to any new targets set, if one takes the 30% figure. I presume preliminary work is being done on that. A three-month window is quite narrow.
I do not know if the last point is a responsibility of the witnesses but it is an aspect of this area. It relates to the discussion we had on carbon tax. There is a need for public information as to where money is being transferred or charged to the public in some way. It would be immensely helpful if public awareness was such that it was clear that this money had this particular purpose so Ireland could live up to its responsibilities. There are intense negotiations and technical aspects but at the same time there is a population in each country that must be brought along with all this. Will the witnesses comment on that?
Mr. Tom O’Mahony
As there are many questions, would it be helpful if I dealt with those just asked? I will make some comments and ask Mr. Collins to deal with some of the more technical questions arising from the negotiations, as he specialised in the detailed discussions. I will also ask Mr. Ryan to speak about the work now going on which he is involved in.
Taking the questions in sequence, the original proposal put forward by the Commission at the start of the year on carbon sinks made no provision for them. We might have had some discussion on this in the summer. The question of accounting for carbon sinks must be subject to very carefully worked out rules and they must be in the international agreement. There are rules for the Kyoto period, which is why, for the Kyoto period, we can take account of the sequestration, and we do. That will cover 2008-12.
The Commission's position was that this was potentially extremely important throughout the world, not just with regard to forestry in Ireland, as there are all sorts of different types of sequestration. There can be a negative as well as a positive effect, depending on when trees have been planted and so on. Therefore, the rules under any new agreement would have to be negotiated. As we do not yet know what those rules are, the Commission accepts there will be provision for carbon sinks under any final international agreement. That will be the 30%.
In this paper we are speaking about our unilateral 20%, which only applies if there is no international agreement and we are not, therefore, providing for carbon sinks in it. We were very unhappy about that. We do not believe there will be no international agreement on the matter but we do not think it is appropriate that a country such as Ireland, which relies quite significantly on afforestation for our sequestration, would suddenly find itself after 2012 unable to count sequestration if there is no international agreement and it is part of the EU's unilateral reduction.
It would have been a waste of everybody's time to look for any detailed set of rules in the 20% agreement. All we looked for and achieved was language in the directive recognising that, regardless of whether there is an international agreement, this must be provided for. That is now included. I will come to the question of whether there will be a deal later. In what I think and hope is the unlikely event of there being no deal, if we end up with the EU unilaterally implementing its own set of reductions after 2013, we now have the language that forces the Commission to bring forward proposals to be negotiated on how carbon sinks will be dealt with. We feel we have boxed that off to Ireland's requirements.
I will pass over the agriculture issue for a moment as Mr. Collins will deal with it. The Deputy asked about the likelihood of a deal. One can never know with certainty and all negotiations in any sphere tend to reflect deep pessimism about the possibility of agreement, if the negotiators are any good, until five minutes before an agreement. That is the nature of the business.
Unless it is the social partners.
Unless they pull out at the last minute.
Mr. Tom O’Mahony
With Mr. Collins and Mr. Ryan, I have been attending the international negotiations for four or five years in a row. One must try to judge the mood and the way countries which initially were quite reluctant to get involved in a global agreement are gradually coming on board. In many cases it is because they now recognise the potentially devastating implications for their own people and economies in the event that this is not sorted out. I am thinking in particular of countries like China and India.
The major issue has been the attitude of the United States. There is expectation that the change of Administration in the United States will mean a major change in approach. We all hope this will be correct but we must wait and see.
An interesting question was raised about the economic downturn and consequent implications. There is a very significant implication for the Kyoto period. Comments were made in the earlier session about the carbon price which has fallen significantly. There is a major economic downturn. In a country such as Ireland where a substantial amount of emissions come from the production of cement, for example, suddenly there is very much less need for cement and emissions are significantly reduced. That lies within the emissions trading sector. It does not help the Government achieve its target but makes it easier for the emissions trading sector to achieve its target without having to buy emissions. Similarly, in the non-trading sector, especially in transport but possibly also in some other sectors, we are likely to have fewer emissions than would have been expected previously. I cannot put figures on this at present because the modelling that must be done is quite complicated. It incorporates the ESRI's economic modelling and the work of the Environmental Protection Agency on climate change projections. A new assessment is being done currently which will be published at some time over the next couple of months.
When one looks ahead to 2020 one must assume that, at this point, the world economy is going through a seismic shift but that this, ultimately, is something that will correct itself. If it does, one would expect that eventually, certainly well before 2020, economic activity will have returned to its former path. Considering that what we are now talking about is the 2013-20 period, it does not necessarily follow that the economic downturn will have a significant effect.
There is a forecast of a 9% reduction in GDP and the targets for 2012-20 are based on our GDP. This must in some way impact on the targets that will be set for us if that situation continues.
Mr. Tom O’Mahony
It might do so but it depends on the long-term growth trend in the economy. The Chairman is correct in that the base falls and, in consequence, percentage increases on that base will be smaller, in absolute terms. If the correction is such that we end up getting back to the path we would have been on we will end up with the same level of emissions.
Are the targets not set based on plus 20 to minus 20?
Is 2005 the base year?
Mr. Tom O’Mahony
Yes, 2005 is the base year.
Again, we will be crippled.
Mr. Tom O’Mahony
The base year is 2005. The target for Ireland for 2020 in terms of millions of tonnes has already been set, in effect on the year's 20% baggage.
Surely those figures have changed so dramatically that one would have to revisit that means of targeting.
Mr. Tom O’Mahony
The target for the EU is a specific reduction on the level of emissions in 2005. Those are now verified and do not change, and, therefore, the target does not change. The issue now is whether it will be easier to meet the target if our level of economic activity is to be lower than it would have been otherwise. Will that make it easier to meet the target? It will, if we do not get back up to the level of economic activity at which we would have been.
If one were setting those targets today, our targets would have been much lower than those we now face.
We had the 1990 base line and now we will be crippled again because activity will not be anything like it used to be. That is only in the short term, one hopes.
Mr. Tom O’Mahony
The target would still be the same. One must remember how the targets have been derived. Overall, they are derived from the level of reduction of emissions we need to stabilise the concentration of greenhouse gases in the atmosphere. That figure was worked out on the basis of the level of emissions in 2005, which is known and verified. The actual level of emissions we need to have in 2020 is fixed under these targets. What changes,or what may change, as a result of the economic downturn, if there is not a total recovery, is the ease or the difficulty member states have in meeting them. One might say now that although it is quite plausible that economic growth will resume in Ireland and elsewhere we will be permanently at a level below where we would have been because of the present shift. It has ratcheted us down and now we must start growing again. If that is the case, over the 2013-20 period our economic activity will be less than it would have been which reduces slightly the effort we must make to meet the target. However, the target itself will not change because that is based——
It does not change the science.
Mr. Tom O’Mahony
It does not change the science, as the Deputy said.
It might change the penalties we might have to pay.
Mr. Tom O’Mahony
Yes. If it makes it easier to meet the target, clearly we would have to make less use of the flexibility mechanisms which essentially involve buying other countries' emission reductions. The Chairman is correct.
The Deputy asked if the figure of 4 million tonnes will change under the 30% target. What comes into play under that percentage is the carbon sinks issue, which is probably worth about 4 million tonnes to Ireland. We cannot say for sure because there will have to be a new impact assessment. The EU has a target of 20% and Ireland has the same target but this does not mean necessarily that if the EU goes to 30% we will go to 30%. A new assessment would be required.
However, what we will have to play with under the higher target is the 4 million tonnes in carbon sinks. A new estimate of the extent to which we might have to use the flexibility mechanisms will emerge from our new target, from the unknown impact of the economic downturn and from our carbon sinks. I stress one point. This is early 2009. In talking about 4 million tonnes by 2020, we are trying to project how successful we will be in terms of emission reduction measures in the economy and the gap that will be left. There is a major focus on this now, as members will know. There is a Cabinet committee on climate change and energy security and there is much greater awareness across all sectors of the need to find new emission reduction measures. Members will be aware, from previous presentations, of potential developments such as electric cars and changes in agriculture technology and so on. One cannot look with certainty 11 or 12 years ahead and know how successful these developments will be. There may be potential scientific developments which will help in these matters, of which we are ignorant. I stress that when we talk about a specific amount of use we might need to make of the flexibility in 2020 the figure is based only on the best estimate from the best information we now have. We know it will change but, obviously, we hope it will change for the better.
I shall return presently to the issue of carbon leakage. I shall skip over carbon capture and storage, if the Deputy does not mind, because this area of expertise belongs to the Department of Communications, Energy and Natural Resources, which reports to the committee from time to time. I shall address the point made about the need for public information and public understanding of carbon taxes. We were present for the last 15 or 20 minutes of the previous discussion concerning the major issue referred to by all members. We would say two things. First, our Department believes that one of the reasons for the success of the plastic bag levy was that, apart from the fact that people saw the basic common sense of what was proposed, from the start the levy was sold on the basis that the money raised would go into a fund which would be used for related measures such as waste prevention, environmental awareness and so on. Much of the advocacy for a carbon tax from organisations such as the ESRI and others makes the point that the use to which the revenue would be put is just as important as the actual revenue raised by such a tax. It is possible to have a carbon tax that is revenue-neutral. In its medium-term review last year, the ESRI suggested the revenue from the carbon tax could be used to reduce employer PRSI and the tax on labour. The net effect might be to increase economic growth. The point was also made by many people who have advocated the carbon levy, and it arose in the committee discussions, that some of the revenue should be directly used to tackle fuel poverty. Professor Convery spoke of devoting a good deal of it to insulation.
That is a matter for the Department of Finance.
Mr. Tom O’Mahony
It is absolutely the prerogative of the Minister for Finance. It is not appropriate for us to recommend or make any comment one way or another. In the debate taking place in this area and the associated literature, how the money is used and the public understanding of that arrangement and the whole reason for that arrangement is a major issue.
I invite my colleague, Mr. Matt Collins, to deal with the issues associated with agriculture and carbon leakage and I will then ask Mr. Owen Ryan to discuss the current position.
Mr. Matt Collins
The question related to the recognition of the agricultural issue in Ireland. There are several ways it was addressed. It is important to remember that Ireland has a completely different profile to most other European countries in the non-trading sector and the effort-sharing side, because of the size of the agricultural sector relative to EU norms, or that of most other member states. The issue was addressed in three key ways. One was already in the Commission's proposal and the other two were new proposals which we supported in the negotiation process.
The underlying key is flexibility and the aim to achieve member states' targets at a low cost and in the most cost effective way. Our objective was always to ensure Ireland could achieve its target at a cost approximate to that of other member states. This would ensure essential fairness in the package and it underpinned our strategy in terms of negotiations on this point. Flexibility was the key for us without causing any impact on the overall reduction targets agreed by the Heads of State. The EU objective of 20% was always safe.
The first Commission proposal, which we did not necessarily endorse or advance, was the use of a clean development mechanism whereby credits could be purchased from outside the EU. Our problem with this was that it undermined some of the rationale for achieving a 20% reduction in the first place. That was the initial flexibility proposed by the Commission.
There were two other proposals. One was the notion of tradeability of effort-sharing allowances between member states. Our agriculture sector is concerned that the mitigation potential in the agriculture sector is very limited and that the necessary measures could be very costly. Rather than impose those measures on Irish agriculture, there are potentially much cheaper and much more affordable options elsewhere in the European Union. The aim was to allow those reductions to be achieved where it makes most sense and in the most economically efficient way. That is the essence of the effort-sharing trading proposal put by Sweden and Hungary, which we supported with certain conditions.
Our conditional support was in order to reinforce an efficient market. For years people discussed the possibility of a carbon market between companies. We wanted to see a carbon market develop between member states on the effort-sharing side. It is important to ensure there is an open market and that many small countries, including Ireland, could engage in trade with other countries. However, we must be careful because there are only 27 member states and, therefore, a market of 27 players. That is why we insisted that the legislation would contain clear modalities developed by the Commission, which will not be one of the bidders or sellers. Modalities must be developed to ensure the transparency of the market. Achieving that trading option was essential in reducing the cost for Irish agriculture. The EU Presidency recognised that it was necessary to amend the Commission proposal to take account of the cost concerns for countries such as Ireland and its agriculture sector. The first priority was to address that point on the agriculture side.
The second point concerned another element, namely, the forestry inclusion. We tried to explain that it made no sense to have one activity on a farm, such as dairying, included in a target, but other elements such as the use of land for forestry, or changing the use of the land in such a way as to reduce emissions from the atmosphere, not included. It made no sense to us to have a portion of land depending on its use on a given day included in a target, but if a farmer does something to that land to try to reduce emissions, there is no resulting benefit. There is a complete inconsistency in this regard. The rationale for the proposal was to ensure that whatever the ultimate outcome, if there is an international agreement, land use would be included and if there was no international agreement, then within the European Union land use would be included. This provides a more rational approach for the farming community to address.
Does that mean the cattle are safe?
Mr. Matt Collins
It is up to the farmers to decide on the best way to use their land, whether with cattle or otherwise.
The positive became more important than the negative. It was a good day's work.
Mr. Matt Collins
That was the approach in that case. Let us consider the step-up in terms of the international agreement. We wished to ensure the needs and difficulties of agriculture were recognised. We got agreement to include this, in law, as part of the next step-up assessment. It is explicitly in the text that agriculture must be assessed as a sector in its own right. The risks of carbon leakage must also be assessed. This stems from the concerns of the farming community of the possibility of producing emissions reductions in Ireland but the reductions then transferring to other countries.
We made that point very strongly in our report.
Mr. Matt Collins
We were able to negotiate that point. There is now an explicit reference to the impact on the EU agriculture sector and this includes carbon leakage risks. This was a very important safeguard for future negotiations. The position is now much clearer for agriculture. It is not that there is a get out of jail card; rather we sought a fair assessment for agriculture and a recognition of the particular challenge in that area. That is a summary of our work on the agriculture side.
I refer to the carbon leakage area. This is a complicated area and measures will not be implemented on a company-by-company basis. Each sector or sub-sector will be assessed. There are two basic criteria we will assess. If production costs increase by a certain amount and if a sector is heavily exposed to international trade, then it will be eligible for a free allocation. The two risks were that production costs, both indirect and direct costs of carbon, would increase overall costs and make production uncompetitive. In a sense, it could push costs in excess of revenue, so sectors would be non-profit making. That was one concern. If a sector was heavily exposed to external trade it might also be at a competitive risk.
These are the criteria that the Commission will use to determine which sectors, or sub-sectors if they are more narrowly defined, are at risk of carbon leakage. There has not yet been a decision on the sectors, but that is part of the follow-up process to which Mr. O'Mahony referred in his presentation.
Several comitology processes will now take place. I will provide some figures. A figure of approximately 5% of gross value added production costs has been agreed. There are specific figures in the text to provide a guideline and certainty to industry and its sectors. There was much dialogue with IBEC and industrial sectors in Ireland and within the European Union to ascertain what they believed were the significant benchmarks which needed to be addressed, and to take account of their concerns. The free allocation will be based on best available technology. They will be looking at it on the basis that industries are using the best available technology, which, in most cases, is very beneficial for Ireland because our industries are much newer and have made investments over recent decades. It applied more to industries in other countries such as those in Eastern Europe which have older industries. That is how the issue of carbon leakage will be addressed.
Mr. Tom O’Mahony
The final issue is what is happening now. Mr. Ryan is heavily involved.
Mr. Owen Ryan
There will be an intensive programme of work this year at various levels. At UN level there will be preparation for the Copenhagen meeting. I do not know the scale of the programme. There is plenty of room left for extra meetings but it has already ramped up to at least double the number of meetings at international level this year in preparation for Copenhagen.
Naturally, within the EU there is an equally intensive programme of work to prepare for it and the scene has been very much set for that programme of work by the communication published by the Commission last Wednesday on towards Copenhagen. It sets out the Commission's proposal on what topics should be discussed and issues need to be addressed in preparation for Copenhagen, as well as what should ultimately come out of it.
That is what is happening on the international side. We are also looking back at what has been agreed, as Mr. O'Mahony and Mr. Collins have said. There will be an equally intensive programme of work internally within the EU on carrying through the revision to emissions trading directive and the decisions that need to be made. Much of that work will have to be done very quickly, notwithstanding the fact that the amended directive will not come into force until 2013. A large amount of the work on it will need to be kick-started and well developed this year and next year.
When does the delegation anticipate the revised national strategy being reviewed or updated?
Mr. Tom O’Mahony
We would say it is under a process of continual review because the main responsibility the Cabinet committee has taken is to ensure that Departments and sectors develop new measures. I understand the reporting process for that is through the carbon budget, which is presented to the Dáil by theMinister for the Environment, Heritage and Local Government, Deputy John Gormley, after the financial budget.
At a particular point we need to publish a new national climate change strategy. Ultimately it will be a political decision as to when it should be done. One consideration is that as the current strategy, published in 2007, is focused on 2008 and 2012 and is focussing on the Kyoto period, the next strategy clearly needs to be focussed on the achievement of targets for 2013 to 2020.
We will not know, with certainty, what our 2013 to 2020 target will be until the middle of next year, assuming that the global agreement is reached in December and the Commission enters a process of internal negotiation in Europe on individual targets for member states. If we were to publish a definitive new national climate change strategy before that, it would be out of date very quickly because we would not know the targets upon which it was to be based.
It does not mean that we are not constantly effectively updating and putting the changes to the climate change strategy into the public domain. Each time the Minister delivers a carbon budget he is updating the projections, setting out the new measures which have been implemented, giving a review of what has happened and identifying new measures. Ultimately the Minister will have to decide, as there will have to be a new strategy when our 2020 target is finalised and questions must be asked on whether there would be value added in doing one in the interim.
Is it true that we are not meeting our existing targets?
Mr. Tom O’Mahony
No, that is not true. The carbon budget sets out how the Kyoto target will be met. It is correct to say that when the Minister delivered the carbon budget in October, he indicated that the element which would have to be met through the use of carbon credits was now greater than the Government had previously estimated. What has changed significantly since October are the economic forecasts.
This goes back to a point earlier in response to Deputy McManus that the projections are currently being revised. I cannot be definitive on this matter until we have the projections but indications are that the change in the current economic situation in comparison to what was known in October is such that it is probably now the case that we will be able to meet our Kyoto commitments with fewer purchases of carbon credits than the Government had previously provided for.
I hasten to stress that those are the indications and we cannot be definitive until we have firm projections from the EPA.
That may be the economic situation but it is not any great credit to us as a nation that we have to purchase credits at all. We should be working towards a target where there would be a neutral situation. According to the EPA we are significantly out of line in many areas and have made no impact at all in terms of transport.
Sadly, we might improve our situation due to economic circumstances but it is no comfort. One must hope that as a nation the economy will recover very quickly, but the ills are still there. In other words, the illness is still in the system insofar as we are not making changes that will achieve these targets. Therefore, it is only wise and reasonable that we should constantly revisit the current strategy and make the appropriate changes, otherwise things drift on.
A great example of this is the lack of direction in the whole area of transport and the failure on the part of those providing a service to realise there are obligations for Ireland to meet its commitments and targets and that if they do not "get the finger out" it will cost the taxpayer a lot of money. I hope a committee such as this can act as a sort of watchdog, prodding and reminding people that they have responsibilities.
There is no point in setting targets and saying, "If we do not meet them, we will divvy up and pay out the money". It does not achieve the object of the exercise, which is to try and improve the environment, nor does it do anything for the State's coffers. I strongly recommend that the delegation take a message back to the Cabinet committee and Minister that this committee is very anxious that it would at least revisit the current strategy and see what progress, if any, we are making and what changes are needed. We must keep updating and reviewing it like any plan.
In the meantime I heartily congratulate all concerned on the negotiations carried out and I am very proud of the fact——
Could I ask some questions?
Of course. This committee has contributed to reviewing and scrutinising the Commission's proposals. It identified problems from Ireland's point of view and thanks to the good skills of the delegation, many of them seem to have been dealt with. It augurs well for the role of a committee such as this into the future and the use of committees in such a way. It is another boost for the Lisbon treaty. If the Lisbon treaty is passed, we will have more say in Commission proposals.
While there has been some progress in areas in which we had concerns, the European Union will be on its own. Given the economic circumstances that the world faces and notwithstanding the enthusiasm that climate change policies might have moved up the political agenda in the United States, a country's competitiveness also matters to its leaders. One hopes climate change issues will be addressed correctly but I am increasingly sceptical about whether the measures proposed by the European Commission, and generally, will work because there is no international agreement. The collapsing price of carbon does not help. There are many imponderables. Targets for emissions will be set next year for 2030 but that is a long way off and much can change in the meantime. We are putting ourselves in a straightjacket. Furthermore, the European Union will do it alone. I do not mean to sound harsh but are the representatives of the Department of the Environment, Heritage and Local Government concerned about this? What is the point of this? It is like negotiating one's way through a bog in a fog. We do not know where we are going and whether we will be alone when we get there.
I do not completely agree with Mr. O'Mahony on the plastic bag tax. The public does not know where the money goes or that it is ring-fenced. People took to it because it was a good idea and they did not want to pay more. Cost, not the prospect of a cleaner environment, changes behaviour. I am sure that if he were to ask the person sitting beside him on the bus this evening whether he or she knew where the tax was going he would be told no.
Mr. Tom O’Mahony
The Senator is correct in saying people do not know where the plastic bag tax goes. That no longer matters because it is embedded and is seen as good. The Government tried on many other occasions to bring forward something new but the level of opposition was such that it abandoned the plan or was unable to implement it. The significant aspect of the plastic bag tax is the level of public understanding of it at the time. While I did not work in the area at the time, I understand its public presentation as part of a suite of environmental measures with the money going to fund similar objectives helped to defuse any opposition there might have been. This was borne out by research. It is subjective but once a policy is embedded, it does not matter because people will not suddenly protest about it.
We all fervently hope the European Union will not be alone. The Heads of State agreed almost unanimously two years ago to take on this leadership role and were unanimous in December on the details of the package. Their judgment is that they can bring the rest of the world along with them.
The measures taken to reduce emissions not only help the environment by having less carbon in the atmosphere, they also involve energy efficiency and security, competitiveness and leading the way in green technology that can be sold to the rest of the world. The underpinning economic analysis suggests there are major benefits to those who move in this area first. Even if it were the case — I do not believe it will be — that the European Union implemented all these measures and little was done elsewhere, there would be an economic benefit, despite the costs, through reduced reliance on fossil fuels, greater energy efficiency and security and the development of green technology that could create millions of jobs and exports. The reasons for doing this involve several spheres but all move in the same direction. The Heads of State have been alive to this, not only because of the scientific evidence about the atmosphere. There are many other benefits.
The fluctuation in carbon costs is a major barrier. It underpins the market and its responses.
Mr. Tom O’Mahony
That is correct but the market is in the emissions trading system and there are large carbon emitting firms throughout Europe, including cement producers, Powergen, aluminium and steel plants seeking credits to meet their requirements for 2008-12. Many are subject to a downturn and do not have to buy the extra credits they thought they would in the short term or have credits allocated that they will not need and can sell. This may be true of many firms in Ireland. The price in any market is a function of demand and supply at a given time. The effect of the economic downturn and the reduction in oil prices has been to bring down the carbon price. That may not help our effort because it is a function of there being lower emissions than expected. While I agree with the Chairman that we cannot pat ourselves on the back and say we have done well to cut our emissions by destroying the economy, the low price of carbon reflects lower emissions. At least that objective is being achieved. As the economy recovers, we expect the carbon price to rise and the long-term price to be substantially higher.
Wherever there is a negative, there is always a positive. This is the time for Ireland to grasp the opportunity to develop renewable energy sources such as wind and wave energy. If we can develop them through the concept of feeding into a supergrid, we could become a net exporter of power supplies. If people are seeking investment opportunities, now is the time to plough money into research and development and encourage outward investment. It is the one example where the downturn can be turned into a positive. It is waiting to be developed. On research and development, I have suggested the National University of Ireland, Galway, located beside the Marine Institute on the west coast, would be the ideal place to commence this research and development. It is an opportunity that should not be wasted.
I thank the delegates most sincerely for their work to date, appearing before the committee, providing a comprehensive report and answering our questions. I have no doubt we will be in the touch with the delegation again in the not too distant future.
The joint committee adjourned at 5.15 p.m. until 2.30 p.m. on Wednesday, 18 February 2009.