Tom McDonnell: Budget climate policy needs to focus on the carrot rather than the stick

Sun, 24 Sep, 2023 - 18:00

Climate change means rising temperatures and sea levels, increased water stress, more extreme events, threats to food security, climate migration, and of course biodiversity loss. We need climate action but climate action and a successful net zero transition will not happen by themselves.

US president Joe Biden’s Inflation Reduction Act is catalysing investment into domestic energy production and sparking a transformative shift towards green energy with significant cuts in greenhouse gas emissions. His attitude is that these are investments rather than costs.

On the other hand, British prime minister’s Rishi Sunak’s climate strategy is apparently to renege on Britain’s net-zero pledges and to adopt a head-in-the-sand attitude to global warming. He appears to think the cost is not worth paying and presumably that such a stance will help him politically.

It is true that the net-zero transition has employment implications, but there will also be new types of employment. The labour market will adapt but we need to manage that change.

There is no doubt that selling the need for climate action and convincing people and businesses to change is a tremendously difficult political challenge.

Stricter regulations and taxes on pollution are both effective policies. However, they also create losers and add to costs. They can also be regressive.

The up-front costs make policies inherently vulnerable to sectoral lobbying and to political reversal.

The correct sequencing of green measures is crucially important for political, economic, social consensus, and just-transition reasons. Green policies will need to focus on the carrot rather than the stick if they are to be politically sustainable during the transition to net zero.

Most economists will argue that increasing taxes on greenhouse gas emissions and abolishing fossil fuel subsidies will bring us to net zero emissions in the most economically efficient way. The evidence is pretty compelling that such measures are indeed pretty effective.

Yet such measures are inherently vulnerable to being rolled back and need to be accompanied by measures providing households and businesses with non-polluting alternatives.

Provision of affordable alternatives will require significant targeted interventions by governments in a range of areas. This includes directly retrofitting social housing and subsidising private retrofits; the roll-out and expansion of widely available and subsidised public transport; and ongoing supports for climate and biodiversity sustainable farming. Also required is significant government support and investment in green research and development in renewable energy infrastructure, and in the retraining and upskilling of workers in affected sectors.

All of these measures are costly and will add to the significant budgetary challenges we are set to face over the next 20 years. The ageing population will exert increasing fiscal pressure via less tax receipts from employment and higher spending on pensions and healthcare. There is a case for explicitly linking green revenue yields to some of the temporary transition investments needed such as retrofitting homes or building out renewable energy infrastructure. One way to do this would be through the establishment of dedicated green investment funds.

This brings us to Ireland’s windfall corporation tax receipts. The Government intends to invest much of these receipts into a fund to generate a new revenue stream. This makes sense.

However, it does make sense to use a portion of the windfall receipts to pay for once-off transition costs.

This would ‘socialise’ much of the transition costs, make the net-zero transition politically more likely to succeed, and would ultimately boost the productive capacity of the economy. The key is to change the narrative so that climate action is seen as an investment in a future that will benefit everyone in society rather than a cost for people to bear.

Hopefully, we will get the right type of leadership.