Facing challenging and legally binding greenhouse gas emission reduction targets, it is imperative that the assessment of public investment projects includes an appropriate valuation of the cost that society will bear in dealing with these emissions.
Under the national mitigation plan, my Department 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”. This review concluded that the model used for pricing carbon in the public spending code is outdated. As such, in 2018 my Department published a consultation paper proposing significant reforms of how carbon is priced in the appraisal of capital projects.
The consultation paper proposed that future greenhouse gas emissions should be valued 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 emissions not covered by the emissions trading scheme of €32 per tonne in 2020, rising to €100 per tonne by 2030. Beyond 2030, it is proposed that the shadow price of carbon will rise by 5% a year, reaching €265 by 2050. For any elements of projects that will affect emissions in sectors of the economy covered by the EU emissions trading scheme, ETS, the shadow price of carbon will continue to be based on the estimated future value of allowances in the ETS.
To be clear, the shadow price of carbon applies only to the public spending code which covers the evaluation of direct Government investment. It is not a direct cost borne by consumers, it is not a carbon tax, nor does it imply any future direction for carbon taxes.