Yaku , Ayku Me ; McA dle, Samuel; De B uin, Kelly C.
Resea ch Repo
The implica ions o high ene gy and ca bon p ices on i ms
Resea ch Se ies, No. 179
P o ided in Coope a ion wi h:
The Economic and Social Resea ch Ins i u e (ESRI), Dublin
Sugges ed Ci a ion: Yaku , Ayku Me ; McA dle, Samuel; De B uin, Kelly C. (2024) : The implica ions
o high ene gy and ca bon p ices on i ms, Resea ch Se ies, No. 179, The Economic and Social
Resea ch Ins i u e (ESRI), Dublin,
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THE IMPLICATIONS OF HIGH ENERGY
AND CARBON PRICES ON IRISH FIRMS
AYKUT MERT YAKUT, SAMUEL MCARDLE AND KELLY DE BRUIN
RESEARCH
SERIES
NUMBER 179
APRIL 2024
E
V
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E
F
O
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P
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THE IMPLICATIONS OF HIGH ENERGY AND
CARBON PRICES ON IRISH FIRMS
Ayku Me Yaku
Samuel McA dle
Kelly de B uin
Ap il 2024
ESRI RESEARCH SERIES
NUMBER 179
A ailable o download om www.es i.ie
©The Economic and Social Resea ch Ins i u e
Whi ake Squa e, Si John Roge son’s Quay, Dublin 2
h ps://doi.o g/10.26504/ s179
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(h ps://c ea i ecommons.o g/licenses/by/4.0/), which pe mi s un es ic ed use, dis ibu ion, and
ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly c edi ed.
ABOUT THE ESRI
The Economic and Social Resea ch Ins i u e (ESRI) ad ances e idence-based policymaking ha
suppo s economic sus ainabili y and social p og ess in I eland. ESRI esea che s apply he
highes s anda ds o academic excellence o challenges acing policymake s, ocusing on en
a eas o c i ical impo ance o 21s Cen u y I eland.
The Ins i u e was ounded in 1960 by a g oup o senio ci il se an s led by D T.K. Whi ake , who
iden ified he need o independen and in-dep h esea ch analysis. Since hen, he Ins i u e has
emained commi ed o independen esea ch, and i s wo k is ee o any exp essed ideology
o poli ical posi ion. The Ins i u e publishes all esea ch eaching he app op ia e academic
s anda d, i espec i e o i s findings o who unds he esea ch.
The ESRI is a company limi ed by gua an ee, answe able o i s membe s and go e ned by a
Council comp ising up o 14 ep esen a i es d awn om a c oss-sec ion o ESRI membe s om
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Fu he in o ma ion is a ailable a www.es i.ie
THE AUTHORS
Ayku Me Yaku is a Resea ch Office a he Economic and Social Resea ch Ins i u e (ESRI) and
is an Adjunc Assis an P o esso a T ini y College Dublin (TCD), Samuel McA dle is a Resea ch
Assis an a he ESRI, and Kelly de B uin is a Senio Resea ch Office a he ESRI and is an Adjunc
Associa e P o esso a TCD.
ACKNOWLEDGEMENTS
The esea ch ca ied ou in his epo was unded by he Depa men o En e p ise, T ade and
Employmen (DETE) and is pa o an ongoing modelling p og amme unded by he Depa men
o En i onmen , Clima e and Communica ions (DECC).
This epo has been accep ed o publica ion by he Ins i u e, which does no i sel ake ins i u ional policy
posi ions. The epo has been pee - e iewed p io o publica ion. The au ho s a e solely esponsible o
he con en and he iews exp essed.
Table o Con en s | i
TABLE OF CONTENTS
LIST OF TABLES .......................................
LIST OF FIGURES .......................................
ABBREVIATIONS ....................................... i
EXECUTIVE SUMMARY ................................... ii
In oduc ion....................................... ii
MainFindings...................................... iii
CHAPTER 1 INTRODUCTION ................................ 1
CHAPTER 2 METHODOLOGY AND SCENARIOS ....................... 5
2.1 TheI3EModel................................... 5
2.1.1 Households................................ 6
2.1.2 P oduc ion and In es men . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1.3 Go e nmen ............................... 12
2.1.4 Labou Ma ke .............................. 14
2.2 Scena ios ..................................... 16
CHAPTER 3 RESULTS .................................... 18
3.1 Mac oeconomic Agg ega es . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.2 Sec o alImpac s.................................. 22
CHAPTER 4 CONCLUSION .................................. 29
REFERENCES ......................................... 32
APPENDIX .......................................... 37
A Addi ionalTables ................................. 37
|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
LIST OF TABLES
Table 2.1: Scena io Defini ions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table 3.1: Mac oeconomic Resul s o Main Scena ios, % change w. . . BaU . . . . . 18
Table 3.2: Agg ega ed Sec o al Resul s . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 3.3: Manu ac u ing Sec o s Resul s, % change w. . . BaU . . . . . . . . . . . 27
Table A.1: Lis o Commodi ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Table A.2: Lis o Ac i i ies and Agg ega ion Key . . . . . . . . . . . . . . . . . . . 38
LIST OF FIGURES
Figu e 2.1: In e linkages wi hin he I3E Model . . . . . . . . . . . . . . . . . . . . 5
Figu e 2.2: Nes ed S uc u e o Consump ion . . . . . . . . . . . . . . . . . . . . . 7
Figu e 2.3: Nes ed S uc u e o Elec ici y P oduc ion . . . . . . . . . . . . . . . . 10
Figu e 2.4: Nes ed S uc u e o P oduc ion, Excep Elec ici y P oduc ion . . . . . . 11
Abb e ia ions | i
ABBREVIATIONS
CGE Compu able Gene al Equilib ium
CPI Consume P ice Index
CRRA Cons an Rela i e Risk A e sion
DECC Depa men o En i onmen , Clima e and Communica ions
DETE Depa men o En e p ise, T ade and Employmen
ETS Emissions T ading Sys em
EU ETS Eu opean Union Emissions T ading Sys em
FOC Fi s -o de Condi ion
GDP G oss Domes ic P oduc
GHG G eenhouse Gases
I3E I eland En i onmen -Ene gy-Economy
LFS Labou Fo ce Su ey
PP Pe cen age Poin s
RHGs Rep esen a i e Household G oups
SILC Su ey on Income and Li ing Condi ions
ii | The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
Execu i e Summa y
INTRODUCTION
T ansi ioning o a low-ca bon economy equi es unde aking massi e
in es men expendi u es, and how o finance hese expendi u es emains a
he co e o economic deba es. Howe e , he cos o no ansi ioning o a
low-ca bon economy is o en o go en in hese deba es. These cos s ha e
inc eased unde cu en global geopoli ical ensions, especially o impo ed
ossil uel-dependen coun ies, such as I eland. This epo aims o quan i y
he cos o deca bonisa ion inac ion. Wha cos s will I ish fi ms ace i hey
con inue wi h hei cu en ene gy use pa e ns when he ca bon ax (se by
he I ish go e nmen ) and he Eu opean Union Emissions T ading Sys em (EU
ETS) p ice (de e mined by he ma ke condi ions a he EU le el) a e
inc easing while a he same ime, in e na ional ene gy p ices a e a hei
ex emely high le els?
The epo u ilises he I eland En i onmen -Ene gy-Economy (I3E) model, an
in e empo al compu able gene al equilib ium (CGE) model o I eland, by
conside ing h ee scena ios desc ibing u u e ene gy p ice de elopmen s.
Fi s ly, he impac s o a hypo he ical con inua ion o sky ocke ed
in e na ional ene gy p ices a e in es iga ed in he HEP scena io. In his
scena io, he p ice o emissions allowances in he EU, i.e., he EU ETS p ice
and he ca bon ax, a e fixed a hei 2022 le el. Secondly, in addi ion o high
in e na ional ene gy p ices, he impac s o a g adually inc easing I ish
ca bon ax un il 2030 as commi ed by he go e nmen a e in es iga ed (CT
scena io). Finally, he CT_ETS scena io quan ifies he impac s o g adually
inc easing he EU ETS p ice along wi h he ca bon ax un il 2030 while
in e na ional ene gy p ices a e high and he ca bon ax inc eases ollowing
he go e nmen -commi ed ajec o y. Since he ocus o he epo is he
implica ions o he ene gy and ca bon p ice shocks on he mac oeconomic
en i onmen and p oduc ion sec o s in I eland, he esul s o basic
mac oeconomic agg ega es, he agg ega e p oduc ion sec o s, and
manu ac u ing sub-sec o s a e discussed. Howe e , he de ails o he
dis ibu ional implica ions o he shocks ac oss households, which a e
a ailable upon eques , a e only b iefly discussed.
Me hodology and Scena ios | 5
CHAPTER 2
Me hodology and Scena ios
2.1 The I3E Model
This analysis applies he I eland En i onmen -Ene gy-Economy (I3E) model.
The I3E model is an in e empo al compu able gene al equilib ium (CGE)
model, which ep oduces he s uc u e o he economy in i s en i e y. I
includes p oduc ion sec o s, households, and he go e nmen , among
o he s. The model quan ifies he na u e o all exis ing economic ansac ions
among di e se economic agen s. Acco ding o mic oeconomic beha iou ,
p oduce s/consume s maximise hei p ofi s/u ili y gi en hei budge
cons ain s. In o he wo ds, a CGE model examines how inpu s and ou pu s
flow be ween p oduc ion sec o s o he economy and, finally, esul in final
goods consumed by households. Figu e 2.1 gi es an o e iew o he
in e linkages wi hin he I3E model.
FIGURE 2.1: INTERLINKAGES WITHIN THE I3E MODEL
6|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
In he emainde o his chap e , he p oblems o households and fi ms will
be explained fi s , and he ole o he go e nmen and he labou ma ke
dynamics will be discussed. A comple e echnical desc ip ion o he model
and he de ails o da a used in he calib a ion can be ound in de B uin and
Yaku (2021b,a), espec i ely.
The explici modelling o sec o al in e linkages makes i possible o in es iga e
he wide economic impac s o a specific shock o policy h ough he diffe en
ansmission channels in he economy. The model enables us o quan i y he
impac s o a policy change on he mac oeconomic agg ega es, labou ma ke ,
fiscal balances, households, and emissions, as well as on o he sec o s, i.e.
he spillo e effec .
2.1.1 Households
The e a e en ep esen a i e Household G oups (RHGs) in he model. Each
RHG sol es he ollowing in e empo al u ili y maximisa ion p oblem whe e
he u ili y unc ion is in he o m o Cons an Rela i e Risk A e sion (CRRA):
max
CChh,
∞
∑
=11+g w
1+ρhh (CChh, )1−θhh
1−θhh
s.
PCChh, CChh, +SAVhh, ≤WINChh, +CINChh, +TRhh, +
PENhh, +FAIhh, +NMT TRhh,
(2.1)
whe e g w is he economic g ow h a e in he pe iod ,ρhh is ime
p e e ence a e, θhh is in e empo al elas ici y o subs i u ion, CChh, is
household-specific composi e consump ion and PCChh, is i s p ice, SAVhh, is
sa ings, W INChh, ,CINChh, ,TRhh, ,PENhh, ,FAIhh, , and NMTTRhh, a e
ne -o - ax wage income, ne -o - ax capi al income (dis ibu ed di idends),
ans e s om he go e nmen , pension income om he go e nmen ,
income om o eign asse holdings, and non-means- es ed ans e income
om he go e nmen , espec i ely. The o al alues o income i ems a e
disagg ega ed ac oss RHGs based on he sha e pa ame e s calib a ed om
he Su ey on Income and Li ing Condi ions (SILC). Fo ins ance, he o al
Me hodology and Scena ios | 7
ne -o - ax wage income ecei ed by he labou ype lis dis ibu ed ac oss
households, and WINChh, is he sum o hese incomes o e labou ypes.
FIGURE 2.2: NESTED STRUCTURE OF CONSUMPTION
CC
σ=2
TRP
σ=0
LND
σ=0
PRV
σ=1.2
TElec
TDie
GAL
LTS
WTS ATS
REN
σ=0
RHC
σ=1.2
NGS
HElec
SLD
σ=1.5PEA COA
LQD
σ=0KRS LPG HDie
LElec
NTR
σ=2
AGR
FBT
SER
σ=2
ACC
TEL
FSR
RES
PSE
ADS
PUB
EDU
HSS
OSE
OTC
σ=2
all
o he
COMs
Each RHG chooses he le el o composi e consump ion o maximise he
p esen discoun ed alue o in e empo al u ili y. The fi s -o de condi ion
(FOC) o his p oblem, eq. (2.2), is he well-known consump ion Eule
equa ion and sol es o he sequence o composi e consump ion whe e DR
is he domes ic in e es a e.
CChh, +1
CChh,
=(1+g w )1+DR +1
1+ρhh
PCChh,
PCChh, +11
θhh (2.2)
8|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
The CC is disagg ega ed ac oss commodi ies in he second s age based on
he consump ion nes depic ed in Figu e 2.2, whe e T anspo a ion (TRP),
Residen ial Ene gy (REN), Nou ishmen (NTR), Se ices (SER), and o he
commodi ies (OTC) a e he main composi e commodi ies. The alues o
elas ici y o subs i u ion pa ame e s, σ, a e chosen ei he as 0 o in a ange
o 1.2 and 2 o eflec he diffe en subs i u ion possibili ies ac oss diffe en
commodi ies ha cons i u e he composi e commodi y.7
2.1.2 P oduc ion and In es men
Fi ms a e di ided in o wo b oad ca ego ies: di idend maximise s, dm, and
non-di idend maximise s, ndm. The dm fi ms maximise he p esen alue o
he fi m (Vdm, , o equi alen ly he p esen discoun ed alue o hei di idend
s eams, DIVdm, ) by choosing he le el o physical in es men , PSIdm, , he
sec o -specific capi al, FDdm,k, , and composi e labou , CLDdm, .
max
PSIdm, ,FDdm,k, ,CLDdm,
Vdm, =qdm, FDdm,k, =
∞
∑
=11+g w
1+DR
DIVdm,
s. (2.3)
FDdm,k, +1= (1−δdm, )FDdm,k, +PSIdm, (2.4)
FDdm,k, e ol es acco ding o he capi al accumula ion unc ion (2.4) and
dep ecia es a he a e δdm, . The Lag ange mul iplie o his maximisa ion
p oblem is Tobin’s q8:
DIVdm, = (1−co p ax )FPdm,k, FDdm,k, −INVdm, (2.5)
INVdm, =PPSI PSIdm, +PVAdm, ADJdm, (2.6)
ADJdm, =φdm,
PSI2
dm,
FDdm,k,
(2.7)
whe e FPdm,k, and PPSI a e he p ices o capi al and in es men ,
espec i ely. The sec o al di idend equals ne -o -co po a e ax p ofi minus
in es men expendi u es, INVdm, , including he cos o new in es men
7The ull lis o commodi ies is a ailable in Table A.1.
8Tobin’s qis he a io o he ma ke alue o exis ing capi al o i s eplacemen cos , also known as he ma ginal
alue o capi al. See Hayashi (1982) o u he discussion.
Me hodology and Scena ios | 9
equipmen and he adjus men cos , ADJdm, wi h a pa ame e φdm, ,
measu ed by he p ice o he alue added, PVAdm, . Adjus men cos is an
inc easing and con ex unc ion o in es men ; o a gi en le el o sec o al
capi al s ock, he cos o ins alling new capi al equipmen will be g ea e . Fo
he gi en le el o φdm, ,qdm, and δdm, a e calib a ed.
The FOCs o his di idend maximisa ion p oblem w. . . he le els o physical
in es men and capi al s ock, espec i ely, a e as ollows.
qdm, =PPSI +2PVAdm,
ADJdm,
PSIdm,
(2.8)
qdm, (1+DR ) (1+g w ) = qdm, +1(1−δdm, ) +
PVAdm, +1
ADJdm, +1
FDdm,k, +1
+ (1−co p ax +1)FPdm,k, +1
(2.9)
Fo he ndm fi ms, he capi al s ock accumula es by (2.4) and dep ecia es a
he a e o 0.05, and he in es men (by des ina ion) expendi u e in pe iod
is a fixed γin des
ndm, ac ion o i s o al ne -o -co po a e ax p ofi s in pe iod .
INVndm, =γin des
ndm, FDndm,k, FPndm,k, (1−co p ax )(2.10)
The o al alue o p oduc ion, he LHS o eq. (2.11), is equal o paymen s o
ac o s o p oduc ion, i.e. alue added, p oduc ion axes paid o he
go e nmen , he o al cos o in e media e inpu s, and he ne cos o he
Emissions T ading Sys em (ETS).
PXa, QXa, =PVAa, VAa, +PRODTAXSa, +PCINa, CCINa, +
CETSa, −∑
c
CTXADJc,a,
(2.11)
whe e QXa, is he o al p oduc ion and CCINais composi e in e media e
inpu demand; PXa, and PCINa, a e hei p ices, espec i ely. The e m
(CETSa, −∑cCTXADJc,a, ) is he ne cos o ETS, which excludes ca bon ax
eba es as fi ms co e ed by he ETS a e exemp om paying he ca bon ax.
10|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
FIGURE 2.3: NESTED STRUCTURE OF ELECTRICITY PRODUCTION
QX
σ=2
VA
σ=2
K CLD
σ=2
LSL MSL HSL
BEN
σ=1.3
NGS ELC OTE
σ=1.5
PEA COA CRO GAL KRS FUO LPG DIE
OTI
σ=2
All
o he
inpu s
The p oduc ion nes s o elec ici y p oduce s and all o he sec o s a e
depic ed in Figu es 2.3 and 2.4, espec i ely. The p oduc ion QX is an
agg ega e o alue added (VA), business ene gy (BEN), and o he inpu s
(OTI). VA is a CES agg ega e o ac o s o p oduc ion, and OTI is an agg ega e
o all in e media e inpu s bu ene gy. The composi e labou is a CES
agg ega e o h ee ypes o labou . Fo all ac i i ies, excep elec ici y
p oduc ion, he commodi y BEN is assumed o be an agg ega e o ene gy
elec ici y (EElec), uel (FUE) and business hea ing (BH). The alues o σBEN
and σOTE shown in Figu e 2.3 a e o he con en ional elec ici y p oduc ion
sec o (A_CLC), which uses all ene gy commodi ies. Howe e , hese
pa ame e s a e 0 o he elec ici y p oduce s using wind (A_WND) and
o he enewables (A_ORE).
The co e age o sec o al emissions by he ETS is 100% o he ene gy
p oduc ion, pe oleum efining, mine al, and a ia ion sec o s. On he
con a y, land anspo a ion ( oad o ailway), ag icul u e, was e, and
esiden ial sec o s a e exemp ed om he ETS bu a e subjec o he I ish
ca bon ax. Fo he o he sec o s, he ETS co e age a ies based on he
a e age size o p oduc ion uni s ega ding he combus ion capaci y,
p oduc ion capaci y, e c. (En i onmen al P o ec ion Agency (EPA),2018). As
he I ish go e nmen exemp s he ETS emissions om he ca bon ax o
p e en double axa ion, I ish fi ms subjec o he EU ETS legisla ion mus
di ec ly in e nalise bo h he cos o ETS and he ca bon ax exemp ions in
Me hodology and Scena ios | 11
FIGURE 2.4: NESTED STRUCTURE OF PRODUCTION, EXCEPT ELECTRICITY PRODUCTION
QX
σ=2
VA
σ=2
K CLD
σ=2
LSL MSL HSL
BEN
σ1=0,
σ2=1.3,
σ3=1.5
FUE
σ1=0,
σ2=1.3,
σ3=1.5
GAL KRS FUO LPG DIE
EElec BH
σ1=0,
σ2=1.3,
σ3=1.5
PEA COA CRO NGS BElec
OTI
σ=2
All
o he
inpu s
hei cos minimisa ion p oblems. As an example, he op imal le el o
in e media e inpu in he composi e commodi y o business hea ing (BH) is
INTc,a, ="PCINBH,a, γbh
c,a,
PQDc, +ET SADJc,a, −CTXADJc,a, #σbh
a,
CCINBH,a, (2.12)
whe e INTc,a, is in e media e inpu demand o commodi y cby ac i i y a,
CCINBH,a, is in e media e demand on he composi e commodi y BH by
ac i i y aand PCINBH,a, is i s p ice, and γbh
c,a, and σbh
a, a e sha e and
exponen pa ame e s o he CES unc ion, espec i ely. The denomina o in
he pa en heses is he sec o -specific uni cos o a commodi y c o ac i i y
awhe e PQDc, is he pu chase p ice o commodi y c,ETSADJc,a, is he
ETS adjus e and CTXADJc,a, is he ca bon ax exemp ion adjus e . The
alues o hese adjus e s a e equal o
ET SADJc,a, =PET S ET S oEa, (1−A oTa, )ca conc
CTXADJc,a, =PCAR ET S oEa, ca concαc, (1+s axc, )(2.13)
whe e PETS is he EU ETS p ice o a pe onne emission allowance,
ET S oEa, is ETS emissions- o- o al ac i i y emissions a io, A oTa, is he
a io o ETS allowance o ETS emissions o ac i i y, ca concis he ca bon
12|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
emission ac o o commodi y c,PCAR is he uni ca bon ax pe onne
eq-CO2,αc, cap u es he ca bon leakages in he economy, and s axc, is he
sales ax a e.
As he alue o he pa ame e ET S oEa, is 0 o non-EU ETS sec o s, e.g.
land anspo a ion, ET SADJc,a, =CTXADJc,a, =0holds and he incu ed
cos o commodi y cis equal o he pu chase p ice o i , PQDc, . As PQDc,
includes he ca bon ax, he sec o bea s he ca bon ax cos . I ETS oEa, is
posi i e, he sec o mus buy new allowances when i s o al ETS-co e ed
emissions exceed i s ee allowances. The e m ET SADJc,a, in oduces his
cos componen in o he op imali y condi ion s emming om he cos
minimisa ion p oblem. As he ETS p ice, he ETS emissions- o- o al
emissions a io, and he ca bon con en o a commodi y inc ease, he alue
o ET SADJc,a, also inc eases which, in u n, inc eases he sec o -specific
incu ed uni cos . On he o he hand, he highe alue o he a io o he
allowances- o-ETS emissions, A oTa, , which is an endogenous a iable o
he gi en sequence o ee allowances, lowe s ET SADJc,a, and hus he
incu ed uni cos . In o he wo ds, a highe le el o A oTa, dampens he
incen i es o ac i i ies o lowe hei ETS emissions. Al hough ac i i y ais
exemp ed om he ca bon ax based on i s ETS co e age, i pays he ca bon
ax-inclusi e p ice o commodi y c,PQDc, , a he ime o pu chase. The
e m CT XADJc,a, in oduces he ca bon ax exemp ions.
2.1.3 Go e nmen
The go e nmen collec s di ec axes on labou incomes and sec o al p ofi s,
indi ec axes on he sale o commodi ies, ca bon ax on ene gy
commodi ies, p oduc ion ax on p oduc ion ac i i ies, expo ax on
expo ed commodi ies, and ecei es hal o he o al ETS cos .9I alloca es
i s o al e enues o consump ion and ans e s o households ega ding
wel a e ans e s and pensions. The o al go e nmen consump ion o
commodi ies e ol es as shown in equa ion (2.14).
GOVCON =GOVCONA +mps GDP
(2.14)
9Expo ax is posi i e only o elec ici y, o which no domes ic sales bu expo s a e subjec o he ca bon ax.
Me hodology and Scena ios | 13
whe e GOVCONA is he au onomous expendi u es, fixed in nominal e ms,
mps is he ma ginal p opensi y o spend, and GDP
is he nominal GDP.
The le el o wel a e ans e o households is a unc ion o bo h he le el o
consume p ice index (CPI) and he unemploymen a e as ollows.
GTRHH =GT RHH +g hh un , TUNR +g hhcpi, CPI (2.15)
whe e GTRHH is he nominal alue o he o al go e nmen wel a e
ans e s, GTRHH is he fixed ans e s, TUNR is he o al unemploymen
a e, and g hh un , and g hhcpi, a e posi i e pa ame e s. The pa ame e s
we e es ima ed using a simple O dina y Leas Squa e es ima ion p ocedu e
co e ing he pe iod om 2000 o 2019 and hen sligh ly adjus ed o ensu e
he model dynamics we e in line wi h o he mac oeconomic models o
I eland, e.g., COSMO and HERMES, as explained in de B uin e al. (2020).
The diffe ence be ween o al e enues and expendi u es o he go e nmen
is public sa ings:
GSAV =GOVREV −GOVCON −GTRHH +
TOTPEN CPI − GFDS
(2.16)
whe e GTRHH is he o al wel a e ans e s, TOTPEN is he eal alue o
pension paymen s o households, is he o eign in e es a e, and GFDS
is he deb s ock, which g ows by he le el o go e nmen sa ings:
GFDS +1=GFDS −GSAV (2.17)
The domes ic in e es a e, DR , is one o he main de e minan s o
households’ and fi ms’ consump ion and in es men decisions, espec i ely.
DR =1−π
GSAV
GDP
(2.18)
whe e π is a posi i e pa ame e . Since GSAVT=0holds, DRT= Tholds,
whe e Tis he e minal pe iod and ensu es no-a bi age condi ion. In he
model, only he go e nmen has a deb s ock in he economy, and i can
bo ow om ab oad as much as needed o keep i s budge balanced. A
highe bo owing equi emen means ha he go e nmen dissa es, i.e.
14|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
GSAV <0, which makes he domes ic in e es a e highe han he o eign
in e es a e as he e m in he pa en heses is mo e han 1. In o he wo ds,
highe go e nmen indeb edness inc eases he isk p emium in he domes ic
ma ke .
2.1.4 Labou Ma ke
Ne mig a ion flow plays an impo an buffe ing ole in he I ish labou
ma ke . An inc ease in he wage a e du ing an economic expansion a ac s
ne mig a ion in o I eland, which, in u n, enla ges he o al labou supply
and hus hinde s u he inc eases in he wage a e. Highe emig a ion
dec eases he o al labou supply in an economic con ac ion, p e en ing
la ge wage a e declines and s abilising he unemploymen a e. The labou
ma ke in he I3E model allows in olun a y unemploymen , in e na ional
mig a ion, and labou o ce pa icipa ion o he I ish popula ion o adjus
endogenously o co e all o hose aspec s. The le el o ne mig a ion is a
unc ion o he wage-income diffe en ial be ween I eland and he es o he
wo ld.
The model inco po a es in olun a y unemploymen and in e na ional
mig a ion. To al ne mig a ion, NMIG , is a unc ion o he pe -employee
eal ne -o - ax wage income diffe en ial be ween I eland and he es o he
wo ld as ollows.10
NMIG =ζ0, +ζ1, (NWINC −NFWINC ER )(2.19)
whe e NWINC and NFWINC a e he pe -employee eal ne -o - ax wage
income in I eland and he es o he wo ld, espec i ely. The la e a iable is
exogenous and fixed in he model, whe eas he o me is calcula ed as ollows.
NWINC =∑hh WINChh,
CPI ∑a,lLDa,l,
(2.20)
10 Since he I3E model is a single coun y model, he e is no dis inc ion be ween he sou ce coun y o mig an s. In
he ela ed li e a u e, he ne mig a ion o I eland is modelled as a unc ion o he ela i e employmen and
wages (Kea ney,1998), he wage a e and unemploymen a e diffe en ials (Be gin e al.,2013), and he eal
a e - ax ea ning diffe en ial (Be gin e al.,2017) be ween I eland and he UK.
Resul s | 21
well-designed I ish wel a e sys em compensa es o ad e se implica ions o
he labou ma ke ou comes and plays a cushioning ole (Sa age e al.,2019;
Doo ley e al.,2021;Yaku and de B uin,2023). Al hough he esponse o he
I ish wel a e sys em wi h espec o infla iona y p essu es, o cos -o -li ing
c isis in gene al, is c i icised o being ad hoc (PBO,2021;CBO,2022), he
o al budge o he wel a e ans e s in he I3E model is a posi i e unc ion o
bo h he consume p ice index and he agg ega e unemploymen a e. As
bo h a iables inc ease in all scena ios, he o al amoun o wel a e ans e s,
dis ibu ed ac oss households in a ou o poo e ones, also inc eases.
Dynamic CGE models con e ge o a new equilib ium a e a shock is
in oduced. A he new equilib ium, economic agen s end no o change
hei decisions. This equi es any adjus men s in he model economy o be
comple ed. In his analysis, he shocks in oduced o p ices a e no
comple ed un il 2030. The e o e, he con e gence o he new equilib ium
con inues a e 2030. To assess whe he his con e gence displays new and
diffe en dynamics, esul s o he yea 2040 ha e also been epo ed in
Table 3.1. The esul s o 2040 a e consis en wi h he esul s ob ained o
2030. The economic con ac ion con inues, wi h eal GDP alling by 0.9%,
1.7%, and 2.1%, in he HEP, CT and CT_ETS scena ios, espec i ely. This
con ac ion is once mo e eflec ed in p i a e consump ion expendi u es,
whe eas he e a e small imp o emen s in in es men expendi u es
compa ed o he 2030 esul s. As in es men expendi u es d i e capi al
accumula ion, he sligh imp o emen in hese expendi u es p e en s a
la ge de e io a ion in he labou ma ke ou come in 2040 compa ed o
2030. The imp o emen in he ade balance, p ima ily due o he economic
con ac ion, is mo e p onounced. In he CT_ETS scena io, al hough he
go e nmen s ill ecei es hal o he EU ETS e enues, he inc ease in he
deb - o-GDP a io becomes la ge han ha o he CT scena io in 2040. By
2040, he educ ion in o al emissions eaches 20.6% in he HEP scena io. In
he CT and CT_ETS scena ios, o al emission educ ions each 32% and 40%,
espec i ely, wi h he la ge alls in ETS emissions d i ing he dec ease. The
cumula i e emissions educ ions in 2040 in he CT_ETS scena io, compa ed
o BaU a e 28%, 28%, and 21% in he o al, ETS, and non-ETS emissions,
espec i ely.
22|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
3.2 Sec o al Impac s
The esul s o he agg ega ed sec o s and he manu ac u ing sub-sec o s
a e p esen ed in Table 3.2 and Table 3.3, espec i ely. The modelling o how
fi ms in e nalise he cos s o ca bon p icing (ca bon ax and EU ETS p ice)
should be ei e a ed o be e unde s and he sec o al impac s o policy
changes. The I ish go e nmen exemp s he sec o al emissions ha all
unde he EU ETS om paying he ca bon ax o a oid double axa ion.
Howe e , hose fi ms subjec o EU ETS pay he ca bon ax when pu chasing
an ene gy commodi y, as he e ail p ices include he ca bon ax. In he I3E
model, like all CGE models, all agen s a e p ice- ake s, i.e., hey pay he same
e ail p ice. Howe e , we in oduce wo componen s ( he so-called ETS and
ca bon ax adjus e s as p esen ed in eq. 2.13) o he op imali y condi ions o
fi ms’ (eq. 2.12) ene gy demand o diffe en ia e he uni p ices o ene gy
commodi ies. These adjus e s ake diffe en alues o each sec o and
ene gy commodi y depending on he EU ETS co e age o sec o al emissions,
he sec o al ee allowances- o-ETS emissions a io, he le els o EU ETS
p ice and ca bon ax, and he ca bon con en o he ene gy commodi y. The
uni sec o - and commodi y-specific incu ed cos o ene gy commodi y is
calcula ed by he e ail p ice o commodi y plus he ETS adjus e minus he
ca bon ax adjus e . These adjus e s a e ze o i he sec o is no subjec o EU
ETS, e.g., land anspo a ion, mining, and cons uc ion, and i only pays he
ca bon ax.
Resul s | 23
TABLE 3.2: AGGREGATED SECTORAL RESULTS, % CHANGE W.R.T. BAU
Sec o al Ac i i y Emissions
Value addedaEmploymen Non-ETS ETS Cos o ETS
HEP CT CT_ETS HEP CT CT_ETS HEP CT CT_ETS HEP CT CT_ETS HEP CT CT_ETS
To al -0.5 -1.1 -1.4 -0.8 -1.5 -1.8 -18.0 -32.9 -36.1 -23.3 -25.5 -39.5 5.3 0.5 31.1
Ag icul u e -0.4 -0.8 -0.9 -1.0 -1.8 -2.1 -14.5 -31.6 -32.9
Mining -1.5 -4.7 -6.4 -1.9 -6.6 -8.4 -11.0 -55.3 -57.4
Cons uc ion -0.7 -1.5 -1.7 -1.0 -2.0 -2.3 -15.9 -33.5 -34.9
T ade -0.5 -1.1 -1.2 -0.9 -1.7 -2.1 -15.9 -32.2 -33.8
Financial Se ices 0.0 -0.4 -0.3 -0.5 -1.2 -1.3 -18.4 -34.2 -36.0
Accomm. & Ho el Se . -0.3 -0.6 -0.7 -0.5 -0.9 -1.0 -15.1 -31.1 -32.4
Public Se ices -1.2 -1.7 -2.1 -0.8 -1.4 -1.6 -16.1 -32.1 -33.5
Elec ici y 3.3 1.2 3.7 1.0 -1.1 -0.1 -41.9 -43.4 -66.9 -11.8 -14.1 -8.2
Manu ac u ing -0.3 -0.8 -1.0 -1.1 -2.0 -2.5 -24.7 -30.3 -40.1 -21.1 -24.6 -38.1 11.4 4.0 39.1
T anspo a ion -2.2 -3.1 -4.8 -1.9 -3.2 -4.3 -18.0 -36.2 -38.0 -14.2 -15.1 -23.5 13.3 11.0 61.5
2030
Se ices -0.7 -1.4 -1.6 -0.6 -1.2 -1.4 -17.3 -33.5 -35.0 -18.1 -33.9 -35.8 23.2 -1.9 74.1
To al -0.7 -1.4 -1.7 -0.9 -1.6 -1.9 -17.7 -33.3 -36.6 -25.0 -27.6 -43.1 4.6 -0.4 28.6
Ag icul u e -0.8 -1.5 -1.7 -1.0 -1.9 -2.2 -14.2 -32.0 -33.2
Mining -2.2 -5.9 -8.5 -2.0 -5.9 -8.1 -10.2 -52.7 -54.7
Cons uc ion -0.8 -1.6 -1.8 -0.9 -1.8 -2.1 -15.6 -33.7 -35.0
T ade -0.7 -1.4 -1.6 -0.9 -1.7 -2.0 -15.5 -32.5 -34.0
Financial Se ices -0.1 -0.6 -0.5 -0.4 -1.1 -1.1 -17.9 -34.5 -36.2
Accomm. & Ho el Se . -0.5 -0.9 -1.1 -0.6 -1.1 -1.3 -15.0 -31.7 -33.0
Public Se ices -1.3 -1.9 -2.4 -1.1 -1.7 -2.0 -16.1 -32.8 -34.3
Elec ici y 5.1 2.4 6.0 -0.3 -2.5 -3.5 -49.0 -50.7 -75.4 -22.5 -25.2 -31.8
Manu ac u ing -0.6 -1.2 -1.6 -1.1 -1.9 -2.5 -24.4 -30.6 -41.6 -21.6 -25.6 -40.5 11.5 4.0 39.1
T anspo a ion -2.8 -4.0 -6.3 -1.9 -3.3 -4.4 -17.7 -36.7 -38.5 -15.8 -16.9 -27.7 16.2 13.7 63.3
2040
Se ices -0.8 -1.5 -1.8 -0.7 -1.4 -1.6 -17.1 -34.0 -35.7 -18.1 -34.7 -36.7 23.5 -2.5 72.6
a: In eal e ms.
24|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
Highe in e na ional ene gy p ices in he HEP scena io, compa ed o BaU,
lowe he agg ega e eal alue added and employmen by 0.5% and 0.8%,
espec i ely, in 2030. The o al sec o al non-ETS15 and ETS emissions
dec ease by 18% and 23%, espec i ely, and he o al cos o he ETS
inc eases by 5.3%. The sec o -specific esul s show ha only he agg ega e
elec ici y p oduc ion sec o is posi i ely affec ed. Al hough he cos o
elec ici y p oduc ion by he con en ional elec ici y p oduc ion sec o
inc eases due o highe ene gy p ices, he elec ici y mix ac oss sec o s shi s
owa ds he wind and o he enewable sec o s. Despi e he decline in
demand o all ene gy commodi ies, including elec ici y, he sec o al shi
igge s he in es men expendi u es o he wind and o he enewable
esou ces sec o , inc easing he agg ega e alue added. This is also eflec ed
by he subs an ial educ ion in he sec o al emissions, which a e en i ely
subjec o he EU ETS.
All ene gy p ices inc ease, bu he change in pea p ice is negligible as i is
no subjec o in e na ional ade and is unaffec ed by in e na ional p ices.
The e o e, he educ ion in i s demand is also negligible in he HEP scena io,
compa ed o BaU, bu he educ ion in he mining sec o ’s alue added is
he second-highes as he sec o ’s main ou pu is pea . The educ ions in he
sec o al non-ETS emissions a e he highes o he manu ac u ing sec o . As
e iden in Table 3.3, all sec o s bu he pe oleum sec o , o which all
emissions a e subjec o EU ETS, a e affec ed nega i ely, and hei non-ETS
emissions decline subs an ially. The pe oleum sec o is affec ed posi i ely
due o he p ice diffe en ial be ween c ude oil and oil- ela ed p oduc s, e.g.,
diesel, gasoline, and ke osene. As he p ices o oil- ela ed p oduc s a e
highe in in e na ional ma ke s han c ude oil, hei impo demand declines
mo e, which igge s domes ic p oduc ion.
The inc ease in he ca bon ax lowe s he eal alue added and employmen
in all agg ega ed sec o s (Table 3.2), and he mining and anspo a ion
sec o s a e hi he ha des . In addi ion o highe in e na ional ene gy p ices,
which inc ease he cos o impo , he educ ion in he ou pu o ene gy
p oduc ion sec o s, e.g., pe oleum and na u al gas supply wi hin
manu ac u ing (Table 3.3), inc eases domes ic ene gy p ices e en mo e han
15 Household emissions, including esiden ial and p i a e anspo a ion- ela ed emissions, and go e nmen
emissions cons i u e o he non-ETS emissions.
Resul s | 25
jus he impac o he highe ca bon ax. The highe ca bon ax lowe s he
demand o all ene gy commodi ies, bu he impac on coal (no p oduced in
I eland) is subs an ially highe han o he ene gy commodi ies. E en hough
he elec ici y p oduc ion sec o does no pay he ca bon ax, he addi ional
impac o he axa ion is second-highes ( he diffe ence be ween he CT and
HEP scena ios) as he inc ease in ene gy p ices lowe s he demand o
ene gy commodi ies. The land anspo a ion sec o mainly d i es he
esul s o he agg ega e anspo a ion sec o since a ia ion does no pay
he ca bon ax, which is also eflec ed in he non-ETS emissions (i s
educ ion is doubled in he CT scena io compa ed o he HEP scena io) and a
e y limi ed u he educ ion in he ETS emissions o he agg ega e
anspo a ion sec o . The impac s o he highe ca bon ax on sec o al
non-ETS emissions a e in line wi h he sec o al economic impac s.
The highe ca bon ax hi he na u al gas supply, o he non-me allic
p oduc s, basic me als, wood and wood p oduc s, and ubbe and plas ic
sec o s he ha des ac oss manu ac u ing sec o s, compa ed o BaU, Table
3.3. The addi ional cos s emming om he highe ca bon ax ( he diffe ence
be ween he CT and HEP scena ios) affec s he na u al gas supply sec o he
mos . The pe oleum sec o ’s eal alue added s ill expe iences an inc ease,
compa ed o BaU, bu he highe ca bon ax educes i by a ound 5 pp.
The inc ease in he EU ETS p ice, he CT_ETS scena io, lowe s he o al ETS
emissions by a ound 40%, and he o al cos o he scheme o he I ish fi ms
inc eases by 31% in 2030, compa ed o BaU. Among he agg ega e sec o s
subjec o EU ETS, he anspo a ion sec o (d i en by he con ac ion in he
a ia ion sec o ) is hi he ha des . The cos o EU ETS dec eases o he
elec ici y p oduc ion sec o o wo easons. Fi s , he lowe sha e o ossil
uels in elec ici y p oduc ion lowe s he ou pu le el in he con en ional
elec ici y p oduc ion sec o , which has o buy allowances om he EU ETS
ma ke o co e all i s emissions as i has ze o ee allowances. Secondly, he
cu en e sion o he model does no allow o he sec o s o swi ch om
ossil uels o enewable ene gy esou ces, e.g., biomass, biodiesel, and
enewable was e. As I eland inc eases i s use o enewable esou ces in
elec ici y p oduc ion, fi ms can swi ch o elec ici y, which lowe s sec o al
and, hus, economy-wide emissions. Howe e , as he equi ed in es men
expendi u es o ensu e he ansi ion in elec ici y p oduc ion a e financed
26|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
by elec ici y p oduce s h ough e ained ea nings, he highe sha e o
enewable esou ces does no lead o lowe elec ici y p ices. The e o e,
non-elec ici y p oduce s do no pay he cos o hei ene gy sys em
ansi ion o low-ca bon op ions bu pay he cos o he ansi ion in
elec ici y p oduc ion. I should be no ed ha he scena io includes
assump ions nei he on he sha e o enewable esou ces no he le el o
equi ed in es men . The model endogenously esponds o he policy shock
conside ed (along wi h o he assump ions imposed, e.g., he COVID-19
impac s, e c.), and he le el o in es men expendi u es made by elec ici y
p oduce s may no be equal o he le el en isaged by he au ho i ies o
ene gy companies. The 21 pp inc ease in he sha e o enewable esou ces in
elec ici y p oduc ion posi i ely affec s he agg ega e elec ici y p oduc ion
sec o h ough highe in es men expendi u es o he wind and o he
enewable sec o s and also hinde s he decline in he agg ega e in es men
expendi u es. The ansi ion in elec ici y p oduc ion also lessens he
nega i e employmen impac o he CT scena io while educing he sec o ’s
emissions subs an ially by a ound 67%, compa ed o BaU.
Resul s | 27
TABLE 3.3: MANUFACTURING SECTORS RESULTS, % CHANGE W.R.T. BAU
Sec o al Ac i i y Emissions
Value addedaEmploymen Non-ETS ETS Cos o ETS
HEP CT CT_ETS HEP CT CT_ETS HEP CT CT_ETS HEP CT CT_ETS HEP CT CT_ETS
Food, Be . and Tobacco -0.6 -1.0 -1.1 -1.1 -2.0 -2.4 -25.6 -29.2 -42.6 -25.6 -29.2 -42.6 8.3 2.2 45.4
Tex ile -0.8 -1.4 -1.7 -1.1 -2.0 -2.4 -18.1 -32.3 -34.8
Wood and Wood P od. -1.6 -2.7 -3.4 -1.7 -3.0 -3.7 -16.3 -31.0 -33.4
O he Indus ial P od. -0.6 -1.2 -1.4 -0.9 -1.7 -2.0 -17.8 -33.5 -35.4
Pe oleum 6.0 1.1 -2.5 4.6 -0.3 -3.8 -13.6 -20.5 -36.7 28.1 16.0 60.5
O he Manu ac u ing -1.5 -2.0 -2.7 -1.8 -2.7 -3.7 -28.9 -32.2 -47.6 -28.9 -32.2 -47.6 6.2 1.0 40.2
Chemical P od. 0.3 0.2 0.5 -0.5 -1.1 -1.2 -25.6 -28.5 -42.6 -25.6 -28.5 -42.6 10.2 5.5 51.2
Basic Pha maceu ical P od. 0.4 0.4 0.8 -0.3 -0.9 -0.9 -18.7 -21.6 -19.9 -18.7 -21.6 -19.9 68.1 100.3 231.2
Rubbe and Plas ic P od. -1.5 -2.5 -2.9 -1.7 -2.9 -3.5 -15.6 -33.3 -34.7
O he Non-me allic P od. -3.3 -3.8 -8.6 -3.3 -4.0 -8.8 -17.8 -19.0 -28.3 -7.9 -8.5 -17.0 27.3 25.4 81.3
Basic Me als -3.8 -3.7 -6.6 -4.3 -5.2 -6.9 -29.4 -32.6 -39.6 -29.4 -32.6 -39.6 -5.5 -17.0 6.3
High-Tech P od. -0.2 -0.6 -0.7 -0.7 -1.4 -1.6 -24.2 -27.0 -40.8 -24.2 -27.0 -40.8 13.3 8.8 58.7
T anspo a ion Equipmen -0.9 -1.7 -2.0 -1.1 -2.0 -2.4 -15.3 -30.3 -32.2
Na u al Gas Supply -1.9 -8.4 -15.8 -2.0 -8.5 -15.7 -33.4 -40.4 -64.3 1.1 -9.4 -0.8
2030
Wa e and Sewe age -1.5 -2.3 -3.1 -0.6 -1.2 -1.4 -15.1 -30.5 -32.1
Food, Be . and Tobacco -0.9 -1.6 -1.8 -1.1 -2.0 -2.4 -25.9 -29.9 -44.2 -25.9 -29.9 -44.2 9.5 2.9 45.6
Tex ile -1.0 -1.7 -2.0 -1.0 -2.0 -2.3 -17.4 -32.4 -34.7
Wood and Wood P od. -1.7 -3.0 -3.6 -1.6 -2.8 -3.4 -15.4 -30.9 -32.8
O he Indus ial P od. -0.8 -1.4 -1.7 -0.9 -1.7 -2.0 -17.4 -33.8 -35.6
Pe oleum 7.1 0.3 -4.6 4.7 -0.7 -4.5 -13.9 -21.6 -38.9 28.5 15.5 58.2
O he Manu ac u ing -2.1 -2.7 -3.9 -1.9 -2.8 -3.8 -29.0 -32.8 -48.8 -29.0 -32.8 -48.8 6.5 0.5 38.3
Chemical P od. 0.1 0.0 0.3 -0.4 -1.0 -1.0 -25.6 -28.9 -43.4 -25.6 -28.9 -43.4 11.0 5.7 51.0
Basic Pha maceu ical P od. 0.3 0.3 0.7 -0.2 -0.7 -0.6 -17.4 -20.8 -22.5 -17.4 -20.8 -22.5 -71.2 -95.2 -113.0
Rubbe and Plas ic P od. -1.7 -2.9 -3.5 -1.6 -2.9 -3.4 -14.9 -33.4 -34.5
O he Non-me allic P od. -4.4 -4.9 -11.9 -3.9 -4.6 -10.7 -20.7 -22.0 -34.9 -9.4 -10.0 -21.1 28.5 26.9 81.8
Basic Me als -4.6 -5.2 -7.7 -4.1 -5.2 -6.9 -27.9 -31.9 -41.2 -27.9 -31.9 -41.2 -14.5 -24.0 -1.3
High-Tech P od. -0.4 -0.8 -0.9 -0.6 -1.3 -1.4 -23.8 -27.1 -41.1 -23.8 -27.1 -41.1 14.3 9.2 59.2
T anspo a ion Equipmen -1.0 -1.8 -2.2 -1.0 -1.9 -2.2 -14.6 -30.3 -31.9
Na u al Gas Supply -2.9 -11.9 -21.5 -2.2 -9.0 -16.1 -33.8 -41.4 -65.2 0.6 -10.9 -3.5
2040
Wa e and Sewe age -1.4 -2.2 -2.8 -0.7 -1.3 -1.6 -14.9 -31.0 -32.5
a: In eal e ms.
28|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
In he CT_ETS scena io, he g adually inc easing EU ETS p ice amplifies he
cos o p oduc ion in he sec o s subjec o he EU ETS. Compa ed o BaU,
he impac s a e he highes in he na u al gas supply, ollowed by o he
non-me allic mine als and basic me als sec o s (Table 3.3). Since he ETS
emissions o a sec o a e a fixed ac ion o i s o al emissions om he
combus ion o ossil uels, he pe cen age changes in he sub-sec o al ETS
and non-ETS emissions in Table 3.3 a e he same. The excep ion is he o he
non-me allic p oduc s sec o , which has, in addi ion o combus ion
emissions, p ocess emissions ha a e linked o he le el o sec o al ou pu .
The cos o EU ETS dec eases in he HEP and CT scena ios o he basic
me als sec o . In eq. (2.13), he a iable A oT, he ee
allowances- o-emissions a io, inc eases o he exogenous ee allowances
wi h a decline in emissions. As i inc eases, i educes he addi ional cos o
EU ETS in eq. (2.12). The cos educes mo e in he CT scena io han he HEP
scena io because he inc ease in he ca bon ax inc eases he ca bon ax
eba es ecei ed by he fi m, which u he educes he uni incu ed cos o
ene gy commodi ies, and, hus he cos o EU ETS. In he CT_ETS scena io,
howe e , he inc ease in he EU ETS p ice supp esses he impac o he
decline in he A oT and he cos o he scheme inc eases.
The p esen ed ou comes a e obse ed in 2040 as well. The agg ega ed
sec o al esul s in Table 3.2 confi m ha he con ac ion in he economy
con inues in 2040. Once mo e, he con ac ion is led by he mining and
anspo a ion sec o s. As expec ed, hese sec o s also accoun o he
la ges pe cen age o emissions alls. The agg ega e elec ici y sec o ’s ETS
cos declines due o he decline in he use o ossil uels in elec ici y
p oduc ion; he sha e o elec ici y p oduc ion om enewable esou ces
exceeds 70% in 2040. Wi hin he manu ac u ing sec o , he na u al gas
supply, o he non-me allic p oduc s, and basic me als sec o s a e he mos
ad e sely affec ed in e ms o alue added and employmen .
Conclusion | 29
CHAPTER 4
Conclusion
The ansi ion o a low-ca bon economy is c ucial in lowe ing ene gy- ela ed
emissions o each he a ge s se by en i onmen al legisla ion. The
ansi ion equi es all economic agen s o swi ch om ossil uels o
enewable ene gy esou ces. This swi ching can be accomplished by
eplacing all combus ion sys ems cu en ly in use, which equi es a huge
amoun o in es men . Howe e , a oiding unde aking he necessa y ac ions
would esul in no only keeping he le el o emissions highe bu also ha ing
a cos , especially when ca bon p ices ha e inc easing ends wi h subs an ial
ola ili y wi h unexpec ed spikes in ene gy p ices.
This epo in es iga es he implica ions o highe ene gy and ca bon p ices
unde he assump ion o no u he policy in e en ion and, hus, a emp s
o p esen a pic u e o he cos o no mo ing owa ds a low-ca bon
economy. The analysis u ilises an in e empo al compu able gene al
equilib ium model, namely he I eland En i onmen -Ene gy-Economy (I3E).
Gi en he peak ene gy p ices obse ed in 2022, h ee scena ios a e
conside ed. The fi s scena io, HEP, includes he spikes in in e na ional
ene gy p ices and he EU ETS p ice o quan i y he effec s o he p ice shock
in in e na ional ma ke s. The second scena io, CT, includes only he
inc eases in he ca bon ax un il 2030 o show how eaching he ca bon ax
a ge would affec he I ish p oduc ion sec o s in addi ion o highe ene gy
p ices. The hi d scena io, CT_ETS, examines he implica ions o g adually
inc easing he EU ETS p ice when ene gy p ices and he I ish ca bon ax a e
highe . The esul s o basic mac oeconomic agg ega es, he agg ega e
p oduc ion sec o s, and manu ac u ing sub-sec o s a e discussed. As he
main ocus o he epo is he p oduc ion sec o s, he dis ibu ional
implica ions o highe ene gy and ca bon p ices ac oss households a e
b iefly discussed, bu hei de ails a e a ailable upon eques .
The ex e nal ene gy and ca bon p icing shock ad e sely affec s he I ish
economy such ha eal g oss domes ic p oduc (GDP), in es men and
consump ion expendi u es decline, and labou ma ke ou comes
30|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
de e io a e. The only posi i ely affec ed mac oeconomic agg ega e is he
ade balance, which esul s om bo h he economic con ac ion ( he
educ ion in impo demand, i.e., he income effec ) and he lowe ene gy
bill. The educed economic ac i i y leads o educed emissions. Also, wi h a
sh inking economy, go e nmen e enues dec ease, and he go e nmen
deb bu den inc eases.
The highe ca bon p ice in he CT and CT_ETS scena ios amplifies he
nega i e implica ions o highe ene gy p ices on mac oeconomic agg ega es.
The CT_ETS scena io diffe s ega ding i s esul on he go e nmen deb
s ock, which inc eases less han in he o he wo scena ios as he
go e nmen eclaims hal o he ETS e enue. The posi i e con ibu ion o
he highe EU ETS p ice in he sho un, howe e , anishes in he medium
un as he decline in economic ac i i y supp esses he EU ETS impac . The
highe EU ETS p ice gene a es highe educ ions in o al emissions despi e
lowe educ ions in non-ETS emissions.
The b un o he economic con ac ion is bo ne by he mining and
anspo a ion sec o s, wi h subs an ially highe alls in eal alue added and
employmen . The elec ici y sec o is posi i ely affec ed in all scena ios due
o he inc eased p oduc ion in he wind and o he enewable sec o s. The
posi i e impac is he lowes in he CT scena io as he e is a subs an ial
educ ion in ene gy demand. The posi i e impac is he highes i he EU ETS
p ice inc eases as elec ici y p oduc ion shi s o enewable sou ces such
ha hei sha e inc eases om 40% o 70%. These h ee sec o s also
accoun o high emission educ ions. Wi hin he manu ac u ing sec o , he
pe oleum and na u al gas supply sec o s a e hi he ha des . The ca bon ax
and he EU ETS p ice changes a e assumed o end by 2030, bu he model is
un o a longe ime ho izon. An o e iew o he esul s o 2040 e eals
ha he co e esul s closely ollow hose in 2030.
The cos o no ansi ioning o a low-ca bon economy quan ified in he
epo should be conside ed as he uppe -end esul s as hey a e based on
he assump ion ha ene gy p ices will s ay cons an a hei ex emely high
le els and fi ms will keep hei cu en composi ion o ene gy demand ac oss
commodi ies. Al hough he cu en p ices a e subs an ially lowe han hei
assumed le els in he analyses, he epo p o ides impo an insigh s
Appendix | 37
Appendix
A Addi ional Tables
TABLE A.1: LIST OF COMMODITIES
CODE NAME CODE NAME
C_AGR Ag icul u e C_HTP High- ech p oduc s
C_PEA Pea C_TRE T anspo a ion equipmen
C_COA Coal C_ELC Elec ici y
C_CRO* C ude oil C_NGS Na u al gas
C_OMN* O he mining C_WAT Wa e and sewe age
C_FBT Food, be e age, and obacco C_CON Cons uc ion
C_TEX Tex ile C_TRD T ade
C_WWP Wood and wood p oduc s C_LTS Land anspo a ion
C_OIN O he indus ial p oduc s C_WTS Wa e anspo a ion
C_GAL Gasoline C_ATS Ai anspo a ion
C_KRS Ke osene C_OTR O he anspo a ion
C_FUO* Fuel-oil C_ACC Accom. and ho el se ices
C_LPG Liquid pe oleum gas C_TEL Telecommunica ion se ices
C_DIE Diesel C_FSR Financial se ices
C_OPP O he pe oleum p oduc s C_RES Real es a e se ices
C_OTM O he manu ac u ing C_PSE P o essional se ices
C_CHE Chemical p oduc s C_ADS Admin and suppo se ices
C_BPP Basic pha maceu icals C_PUB Public se ices
C_RUP Rubbe and plas ic C_EDU Educa ion
C_ONM O he non-me allic mine als C_HHS Heal h
C_BFM Basic ab ica ed me als C_OSE O he se ices
*: No subjec o p i a e consump ion.
38|The Implica ions o High Ene gy and Ca bon P ices on I ish Fi ms
TABLE A.2: LIST OF ACTIVITIES AND AGGREGATION KEY
CODE ACTIVITY NACE CODES AGGREGATE SECTOR
A_ACC Accommoda ion and Ho el Se ices 55-56 ACC
A_AGR Ag icul u e 1-3 AGR
A_CON Cons uc ion 41-43 CON
A_FSR Financial Se ices 64-66 FSR
A_PUB Public Sec o 84 PUB
A_TRD T ade 45-47 TRD
A_ELC Con en ional ELC
A_WND Wind ELC Elec ici y
A_ORE O he Renewables ELC
A_BFM Basic Me al Manu ac u ing 24-25 MAN
Manu ac u ing
A_BPP Basic Pha maceu ical P oduc s 21 MAN
A_CHE Chemical P oduc s 20 MAN
A_FBT Food, Be e age and Tobacco 10-12 MAN
A_HTP High-Tech P oduc s 26-28 MAN
A_NGS Na u al Gas Supply MAN
A_OIN O he Indus ial P oduc s 17,18,33 MAN
A_ONM O he Non-me allic P oduc s 23 MAN
A_OTM O he Manu ac u ing 31-32 MAN
A_PET Pe oleum MAN
A_RUP Rubbe and Plas ic P oduc s 22 MAN
A_TEX Tex ile 13-15 MAN
A_TRE T anspo a ion Equipmen 29-30 MAN
A_WAT Wa e and Sewe age 36,37-39 MAN
A_WWP Wood and Wood P oduc s 16 MAN
A_OMN O he Mining P oduc s MIN Mining
A_PEA Pea MIN
A_ATS Ai T anspo a ion 51 TRP
T anspo a ion
A_LTS Land T anspo a ion 49 TRP
A_WTS Wa e T anspo a ion 50 TRP
A_OTR O he T anspo (S o age and Pos al) 52-53 TRP
A_EDU Educa ion Sec o 85 SER
A_HHS Heal h Sec o 86-88 SER
A_RES Real Es a e Se ices 68 SER
A_TEL Telecommunica ion Se ices 61 SER Se ices
A_PSE P o essional Se ices 69-75 SER
A_ADS Admin and Suppo Se ices 77-82 SER
A_OSE O he Se ices emaining SER
*:I excludes NACE codes 5-9 (Mining, Qua ying and Ex ac ion), 19 (Pe oleum P oduc s), and 35
(Elec ici y and Gas Supply). The ac i i ies wi hou NACE codes a e u he disagg ega ed sec o s.
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