The Public Spending Code is the Government’s set of rules, procedures, and guidelines that are designed to ensure Value for Money in public expenditure across the Irish Public Service. This blog looks at the Code’s rules for capturing greenhouse gas emissions in economic appraisals that are undertaken by public authorities.
Under the Code, public authorities are required to put monetary values on the greenhouse gas emissions that are likely to arise from their projects, using a shadow price of carbon. The Code sets out what the shadow prices should actually be. It is paramount that the appraisal of public investment projects would include estimates of the cost that the people of Ireland will have to bear in dealing with increased greenhouse gas emissions that projects are likely to generate.
The shadow prices for carbon were last updated in December 2019 by the Department of Public Expenditure and Reform. The values will now have to be further updated in the light of the Climate Action and Low Carbon Development (Amendment) Act 2021, which has the extremely ambitious target of achieving a climate neutral economy by the end of the year 2050.
Valuing Greenhouse Gas Emissions
The shadow prices for carbon are required for all economic appraisals and evaluations undertaken in compliance with the Public Spending Code and should be used by Government Departments and State agencies undertaking economic appraisals. When calculating the greenhouse gas emissions associated with economic appraisals it is important to only include those that are considered “additional”. If it is likely some of the change in greenhouse gas emissions would have happened anyway, these should not be included in the economic appraisal.
Fuel use is the largest source of greenhouse gas emissions. Most combustion of fuel releases CO2 and other greenhouse gases. However, different fuels emit different quantities of these gases. Therefore, changing the amount of fuel that is used changes greenhouse gas emission levels. Economic appraisals are required to estimate the emissions from a “basket of seven” greenhouse gas emissions a project or proposal may give rise to. Table A sets out the ingredients of the calculations.
Once the changes in emissions, resulting from a proposed policy have been estimated in tonnes of CO2e, it is necessary to monetise these values. This should be done using the guidance contained in Public Spending Code Central Technical References and Economic Appraisal Parameters (July 2019).
Table B shows the values for the shadow price of carbon for a selection of years, namely 2022, 2030, 2040 and 2050. The Code itself has values for each individual year up to 2050, for both the traded sector (those emissions covered by the EU Emission Trading System) and the non-traded sector (those emissions are not covered by the EU Emission Trading System) sectors.
Revision of shadow prices for carbon
The advent of the Climate Action and Low Carbon Development (Amendment) Act 2021 necessitates a revision of shadow prices for carbon. This revision was not unexpected. The Minister for Public Expenditure and Reform, Michael McGrath, T.D. in response to a Dail Question on 21 April 2021, said that he anticipated altering the shadow cost of carbon once the Climate Action Bill was adopted, as – “…this will ensure that the amount of emissions may give rise to is quantified and a value placed on those emissions that reflects the cost that society will have to bear to eliminate these emissions in the future. This in turn allows the appraisal to determine if this future burden outweighs any benefits the project may bring”.
In an address to the Dublin Economic Workshop on Wednesday, 15 September 2021, Ms. Laura Kevany of the Department of Public Expenditure and Reform pointed out that now that – “… Ireland intends to cut greenhouse gas emissions by 51% by 2030 and to reach a climate neutral economy by 2050, with any remaining emissions balanced by the removal of greenhouse gas emissions from the atmosphere”. She went on to point out that the Department of Public Expenditure and Reform – “…have a programme of works in pipeline to ensure the PSC reflects the increased ambition…Priority will be on significantly increasing the cost associated with any release of additional greenhouse gases into the atmosphere…”.
The next stage in the process will occur when the Department of Public Expenditure and Reform issues a circular setting out the revised shadow prices for carbon. This will, in turn, result in a revision of the Public Spending Code, which was last revised in December 2019. It is important that the Code is clearly compatible with the Government’s target of reaching a climate neutral economy by 2050.
Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and blogs regularly for PAI. He was formerly the Senior Economist at the Department of Transport.