The cost of structural inaction towards a low-carbon economy under high energy and carbon prices

Highlights

• We developed a multi-sectoral, multi-household intertemporal CGE model.

• We analysed the cost of structural inaction towards a low-carbon economy in Ireland.

• High energy and carbon prices will negatively affect macroeconomic aggregates.

• Different energy intensities and carbon pricing regimes lead to heterogeneous sectoral impacts.

• Revenue recycling schemes targeting more vulnerable groups lead to a triple dividend.

Abstract

Transitioning to a low-carbon energy system is crucial for reducing energy-related emissions but requires substantial investment. However, the cost of failing to transition can also be considerable under the pressure of high energy prices arising from international conflicts and rising carbon prices resulting from increasingly stringent climate policies. Using a computable general equilibrium (CGE) model for Ireland, we quantify the impacts of energy prices remaining at their elevated 2022 levels and of gradually increasing carbon prices. Our findings show that these shocks adversely affect the Irish macroeconomic outlook and labour market outcomes, with the mining and transportation sectors bearing the brunt of the economic contraction. Additional scenarios examining several targeted and untargeted carbon tax revenue recycling (RR) schemes indicate that all considered options generate efficiency gains, while targeted lump-sum transfers and reductions in wage-income tax rates improve equity outcomes. Overall, a low-carbon transition supported by an RR scheme is required not only to mitigate the adverse impacts of climate change but also to strengthen the resilience of the Irish economy. This conclusion can be generalised to energy-importing, fossil-fuel-dependent countries, as failure to pursue a low-carbon transition increases vulnerability to external price shocks.