Failure to decarbonize the economy will reduce gross domestic product (GDP), investment and consumption spending, while labor market outcomes will worsen, according to a report by the Economic and Social Research Institute (ESRI).
The report, called The Impacts of High Energy and Carbon Prices on Irish Enterprises, aims to quantify the cost of decarbonisation inaction.
If international energy prices remain „extremely high,” real GDP would be 0.7 percent below the business-as-usual scenario in 2030, and at current energy prices at the end of 2021.
Costs stemming from higher carbon taxes and EU Emissions Trading System (EU ETS) prices have abstract economic effects, reducing real GDP by 0.7 and 1.1 percentage points, respectively, relative to the GDP impacts of higher energy prices.
The report found that higher energy prices would adversely affect all sectors, with transport, construction and services sectors most affected.
The power generation sector has been positively affected as the demand for electricity has increased due to the increase in the price of fossil fuels.
The implications of a high carbon tax are particularly strong for the mining, transport and power sectors as a whole.
For the total electricity sector, a higher EU ETS price induces a shift in electricity generation to renewable sources, which partially reverses the contraction of the sector.
The only macroeconomic aggregate affected positively is the balance of trade resulting from both economic contraction and a lower energy bill.
Reduced economic activity leads to reduced emissions. Also, with a shrinking economy, government revenues will fall and the government's debt burden will increase.
The brunt of the economic contraction will be borne by the mining and transport sectors, with significantly greater falls in real value addition and employment.
According to ESRI, the electricity sector will be positively affected in all scenarios due to increased production in wind and other renewable sectors.
The results show that transitioning to a low-carbon economy would not only help mitigate the adverse impacts of climate change, but also make the Irish economy more resilient against external energy price shocks.
The transition will also reduce Ireland's dependence on imported energy products and improve the country's energy self-sufficiency.
„The transition to a low-carbon economy is critical to reducing energy-related emissions to meet targets set by environmental legislation,” the report noted. „The transition requires all economic agents to switch from fossil fuels to renewable energy resources.
„This change can be accomplished by replacing all combustion systems currently in use, which requires a large amount of investment.
„However, failure to take the necessary measures will not only keep emissions levels high, but also incur costs, especially when carbon prices tend to increase with considerable volatility and unexpected spikes in energy prices.”