TECHNICAL DOCUMENTATION OF I3E MODEL VERSION 2. ESRI SURVEY AND STATISTICAL REPORT SERIES NUMBER 77 September 2019

This paper provides a technical description of the Ireland Environment, Energy and Economy (I3E) model. The I3E model is an intertemporal computable general equilibrium model with multiple firms, one representative household group, multiple commodities, government, enterprises, and rest of the world accounts. It describes the Irish economy in sectoral detail. This model includes a detailed description of energy inputs and concomitant greenhouse gas emissions and has been developed with the purpose of investigating the economic and environmental impacts of climate policies for Ireland

THE ECONOMIC AND ENVIRONMENTAL IMPACTS OF INCREASING THE IRISH CARBON TAX. ESRI RESEARCH SERIES NUMBER 79 OCTOBER 2018

This study investigates the economic and environmental impacts of increasing the current carbon tax in Ireland from C20 per tonne of CO2 to C25, C30, C35 and C40. For this purpose, an Energy Social Accounting Matrix (ESAM) is developed for Ireland with 33 activities, 39 commodities, and ten household groups based on disposable income. The ESAM reproduces the structure of the Irish economy including production sectors, households and the government and quantifies the nature of all existing economic transactions among the diverse economic agents. Furthermore, the ESAM includes the flows of energy and emissions, creating a framework that can examine how money as well as energy and emissions flows between production sectors, households and the government. In this way the carbon content of different products and different households’ consumption is estimated. The current carbon tax in Ireland stands at C20 per tonne of carbon and is levied to incentivise households and producers to reduce their use of carbon-intensive goods. The carbon tax is relatively low, however, and constitutes just 1.9 per cent of total taxes levied on commodities in Ireland. Carbon tax accounts for only 7.6 per cent of total excise duties levied on petrol and 14 per cent of all excise duties on diesel. Our results reveal that increases in the carbon tax affect the prices of diesel and petrol the most. A C5 increase will increase the prices of carbon commodities by on average 0.8 per cent, and a doubling of the carbon tax to C40 per tonne of CO2 will increase the prices of carbon commodities by on average 3.4 per cent. The diesel price is expected to increase the most due to an increase in the carbon tax, whereby a C25 tax would result in a 1.7 per cent increase in diesel prices. A C40 tax would result in a 7 per cent increase in diesel prices. Putting this into context, it can be noted that in 2018 alone consumers have faced much greater fluctuations in diesel prices. Consumers are accustomed to relatively large fluctuations in fuel prices and may not react to increases in prices, assuming prices will fall again. This makes it extremely important to communicate a clear commitment to an increasing carbon tax by the government

THE IMPACTS OF REMOVING FOSSIL FUEL SUBSIDIES AND INCREASING CARBON TAX IN IRELAND. RESEARCH SERIES NUMBER 98 December 2019

A subsidy is classified as potentially environmentally damaging if it is likely to incentivise behaviour that could be damaging to the environment irrespective of its importance for other policy purposes. Examples of such subsidies include providing fossil fuels (including diesel, kerosene, fuel oil, and peat) at lower prices to certain industries and providing fuel allowances to households to alleviate fuel poverty. While some publicly-funded supports can have important social and economic purposes, they can have a negative impact on the environment. While the main approach in Ireland to address this has been to use different excise duties, Ireland also introduced a carbon tax in 2010. The carbon tax is one of the primary fiscal policy tools used in several countries to reduce human-induced greenhouse gas (GHG) emissions. For the first time after the equalisation of its level on all fossil fuels in 2014, the Irish government increased the carbon tax from C20 per tonne of CO2 to C26 in 2020. It is expected that the total carbon tax revenues will increase by C100 million in 2020, compared to 2019. Notwithstanding this, the total budgetary cost of these fossil fuel subsidies, excluding the agriculturerelated ones, was around C2.44 billion in 2014, whereas the government’s total carbon tax collection was C390.9 million. In other words, the monetary value of environmentally damaging subsidies was over six times higher than carbon tax revenues. In 2017, the same ratio was slightly higher, since the total value of subsidies increased by 11.85%, whereas the growth rate of total carbon tax revenues was only 7.7%. This report analyses the economic and environmental impacts of the removal of eight different fossil fuel subsidies in Ireland by using the Ireland Economy-Energy-Environment (I3E) model. In addition, a separate set of scenarios in which the removal of each subsidy is accompanied by a gradual increase in the level of the carbon tax are run to quantify the combined effects of these policy instruments

THE ECONOMIC AND DISTRIBUTIONAL IMPACTS OF AN INCREASED CARBON TAX WITH DIFFERENT REVENUE RECYCLING SCHEMES. ESRI RESEARCH SERIES NUMBER 95 OCTOBER 2019

The recent all Government Climate Action Plan proposes an increase in the Irish carbon tax along a trajectory which reaches C80 by 2030. In line with this, this study investigates the economic, household level and environmental impacts of increasing the current carbon tax in Ireland from C20 per tonne of CO2 to C30 in 2020, further increasing it by C5 annually, thus reaching C80 (in nominal terms) by 2030. In our analysis, we examine not only the impacts of the increase in carbon tax alone, but also the impacts of how the carbon tax revenue is used, i.e. recycled. Our analysis shows that increasing the carbon tax will help Ireland reduce its emissions somewhat, but more initiatives are needed to reach the EU targets. Furthermore, an increase in the carbon tax will have limited impacts on GDP. The choice of how to use the revenues from the increased carbon tax will have significant implications for both macroeconomic impacts and household distributional impacts. Depending on the policy goal, the appropriate recycling scheme can reduce GDP impacts, decrease government debt, limit inflation or decrease inequality across households types

How Harmful are Adaptation Restrictions

The dominant assumption in economic models of climate policy remains that adaptation will be implemented in an optimal manner. There are, however, several reasons why optimal levels of adaptation may not be attainable. This paper investigates the effects of suboptimal levels of adaptation, i.e. adaptation restrictions, on the composition and level of climate change costs and on welfare. Several adaptation restrictions are identified and then simulated in a revised DICE model, extended with adaptation (AD-DICE). We find that especially substantial over-investment in adaptation can be very harmful due to sharply increasing marginal adaptation costs. Furthermore the potential of mitigation to offset suboptimal adaptation is investigated. When adaptation is not possible at extreme levels of climate change, it is cost-effective to use more stringent mitigation policies in order to keep climate change limited, thereby making adaptation possible. Furthermore not adjusting the optimal level of mitigation to these adaptation restrictions may double the costs of adaptation restrictions, and thus in general it is very harmful to ignore existing restrictions on adaptation when devising (efficient) climate policies.Integrated Assessment Modelling, Adaptation, Climate Change

TRANSITIONING TO A LOW-CARBON IRISH ECONOMY: AN ANALYSIS OF REGIONAL LABOUR IMPACTS. RESEARCH SERIES NUMBER 100 December 2019

Ireland has legally binding emissions reduction targets for 2020 and 2030. To achieve these targets and to become a low-carbon economy, the government uses carbon taxation as one of the primary policy tools. In addition, ceasing of peat and coal, which are the most polluting energy commodities from electricity production, is planned. However, given the concentration of specific production sectors in specific regions, there is a concern that the labour impacts for certain regions/counties will be high, compared to others. This report explores the projected county-level variation in labour demand impacts for 2030, following an increase in the carbon tax and removal of coal and peat in electricity production. More specifically, the electricity production sector will gradually phase out coal and peat from the production process, their usages will be terminated in 2026 and 2029, respectively, and the carbon tax will increase C6 annually starting from 2020 and reach C80 in 2029 per tonne CO2-eq. We combine the labour demand output from the Ireland Environment, Energy and Economy (I3E) computable general equilibrium (CGE) model, with regional employment statistics to highlight sectoral and county-level variation. Firstly, we assess the sectoral labour demand impacts, and these sectoral results are then “shared out” to evaluate labour demand impacts for each county

The Role of Proactive Adaptation in International Climate Change Mitigation Agreements

This paper investigates the role of proactive adaptation in international mitigation coalition formation. Adaptation is introduced into a three stage cartel game of coalition formation. We analytically derive the optimal level of mitigation and proactive adaptation for the singletons and coalition members. We introduce the AD-STACO model which is constructed based on the STACO model, which is an applied three-stage cartel formation model with 12 heterogenous regions. Simulating all possible coalitions (4084) and checking for internal and external stability, we investigate how different levels of proactive adaptation will affect the payoffs in Grand coalition and the incentives to freeride. We examine which stable coalitions are found with different levels of proactive adaptation and whether regions can gain from overadaptation in the best performing stable coalition. We find that though payoffs increase in the Grand coalition with lower adaptation, incentives to leave increase. Coalition members can increase their payoffs through overadaptation.N/A

AD-DICE: an implementation of adaptation in the DICE model

Integrated Assessment Models (IAMS) have helped us over the past decade to understand the interactions between the environment and the economy in the context of climate change. Although it has also long been recognized that adaptation is a powerful and necessary tool to combat the adverse effects of climate change, most IAMs have not explicitly included the option of adaptation in combating climate change. This paper adds to the IAM and climate change literature by explicitly including adaptation in an IAM, thereby making the trade-offs between adaptation and mitigation visible. Specifically, a theoretical framework is created and used to implement adaptation as a decision variable into the DICE model. We use our new AD-DICE model to derive the adaptation cost functions implicit in the DICE model. In our set-up, adaptation and mitigation decisions are separable and AD-DICE can mimic DICE when adaptation is optimal. We find that our specification of the adaptation costs is robust with respect to the mitigation policy scenarios. Our numerical results show that adaptation is a powerful option to combat climate change, as it reduces most of the potential costs of climate change in earlier periods, while mitigation does so in later periods.integrated assessment modelling, adaptation, climate change

The effects of an incremental increase in the Irish carbon tax towards 2030. ESRI WP619, March 2019

This paper investigates the economic and environmental impacts of an incremental increase in the rate of Irish carbon tax. For this analysis an intertemporal computable general equilibrium (CGE) model, namely Ireland Environment- Energy-Economy (I3E), is developed. This model allows for the investigation of industry level impacts as well as economy wide impacts by explicitly modelling sectoral interlinkages. We examine two potential future paths of carbon tax increases and the impacts of recycling carbon tax revenues through a lump sum transfer to households. Our results show that LPG, diesel and gasoline prices will be impacted most with increases of up to 10% in 2020 compared to a baseline scenario. The energy and transport sectors will be hit the hardest with losses of up to 4% of value added in 2020. Households face higher overall prices, with an up to 2.4% increase in the CPI in 2020 which lowers household real disposable income by 0.24% in 2020. Though income increases as prices rise, households consume less and save more in the medium-run. Driven by this decline in real private consumption, real gross domestic product declines, though at a negligible rate of 0.4% in 2020. Overall emissions in 2020 fall by 18% compared to the baseline. However, this is still far short of EU targets

International Cooperation on Climate Change Adaptation from an Economic Perspective

This paper investigates the economic incentives of countries to cooperate on international adaptation financing. Adaptation is generally implicitly incorporated in the climate change damage functions as used in Integrated Assessment Models. We replace the implicit decision on adaptation with explicit adaptation in a multi-regional setting by using an adjusted RICE model. We show that making adaptation explicit will not affect the optimal mitigation path when adaptation is set at its optimal level. Sub-optimal adaptation will, however, change the optimal mitigation path. Furthermore this paper studies for different forms of cooperation what effects international adaptation transfers will have on (i) domestic adaptation and (ii) the optimal mitigation path. Adaptation transfers will fully crowd out domestic adaptation in a first best setting. Transfers will decrease overall mitigation in our numerical simulations. An analytical framework is used to analyse the most important mechanisms and a numerical model is used to assess the magnitude of effects.Climate Change, Adaptation Funding, Integrated Assessment Modeling