Emissions reductions due to COVID-19 business interruptions will be short-lived and will not help Ireland reach its emissions targets

New research from the ESRI analyses how the COVID-19 crisis will impact upon the Irish economy and environment. It finds that Irish GDP is expected to decrease by around 13 per cent in 2020 as a result of the economic disruptions caused by the COVID-19 crisis. From an environmental perspective, economy-wide CO2 emissions are expected to decrease by 9.5 per cent this year. However, this reduction is short-lived as the low current energy prices increase energy demand and emissions rise again in 2021. The results come from research funded by the Department of Communications, Climate Action and the Environment (DCCAE) applying the ESRI’s environment, energy and economy (I3E) model for Ireland. 

This study incorporates several recent changes in the structure of the Irish economy due to the COVID-19 crisis and recent international energy price movements. The model applied considers among others different production sectors and their interconnections, carbon inputs and emissions. COVID-19 related production shutdown in specific sectors, changes in consumption habits due to restrictions, declining labour force participation, trade impacts and the governments initial response are analysed. Each of these changes impacts the economy, where it is found that the largest impact comes from the production side. This work assumes that the economic structure of the Irish economy will recover in 2021. 

The business interruption erodes total household disposable income due mainly to decline in both wage and capital income. The crisis will increase inequality across household types, but the governments initial response measures will alleviate the most harmful economic impacts on the most vulnerable household groups in urban and rural areas and inequality will decrease. With the stimulus, household disposable income will decrease by 8 per cent on average, where rural households are still hit the hardest.  

The substantial decline in investment expenditures will continue to suppress economic production over the next decade. Moreover, deterioration in public balances due to decreasing tax revenues alongside increased government expenditures in the form of household transfers will have long-lasting repercussions. 

The decreased energy prices will help Ireland in reducing both the cost of production and the import bill which, in turn, positively affects trade balance. Though initially, emissions will fall due to the economic downturn, in the medium-to-long term, however, lower energy prices will lead to an increase in energy demand, and hence an increase in emissions as restrictions are lifted. This will lead to a failure to meet the Irish EU legally binding emissions targets in 2030.  

Uncertainty remains around the possible duration of the current health and economic crises, and the negative economic impacts found in the report will be exacerbated further, the longer the crises continue. 

Co-author of the report, Dr Kelly de Bruin, said, “Though the economic impacts of the COVID crisis are severe, due to among others the decreased energy prices, we do not expect large emissions reduction as seen during the financial crisis of 2008. Ireland would still need to put in considerable effort to reach its EU emission goals. The results of the study underline the importance of having a well-designed government response policy package, which considers the unique economic and environmental challenges presented by the COVID-19 crisis.”