The current EU policy architecture assigns quantified emission ceilings to member states and penalties are imposed on the national treasury for any country which fails to meet them.
Within each State, there is latitude to pursue the ceilings with a range of policy instruments, including carbon taxes and regulatory impositions.
In Ireland, ceilings have been allocated to the various sectors, including agriculture, with as yet little detail as to how they might be pursued.
One possibility is herd limits, reminiscent of the milk quotas regime abandoned in 2015.
The spirit of the EU’s single market is that production should choose freely the most advantageous location within the EU and limiting output in any country or region by regulation is a sharp departure from that approach.
Another possible instrument for influencing the level of sectoral emissions would be the imposition of discriminatory credit policies and financial institutions around Europe have been articulating ‘green’ lending targets and offering discounted loan terms for borrowers deemed deserving of favourable treatment.
This has not yet become official policy and could be regarded as harmless public relations by the banks, keen to be forgiven for their sins during the credit boom and bust of the bubble years up to 2008.
Last week, the Central Bank released a Climate Observatory report, the first of what is to be an annual exercise.
The Irish Times reported that “emissions per capita in Ireland are more than a fifth higher than the EU average because of agriculture, according to a report by the Central Bank”.
The report, based not on research by the Central Bank but on figures from the World Bank in Washington and from Irish State agencies, noted that “four sectors accounted for 83% of Irish greenhouse gas emissions: agriculture (38%), transport (18%), energy (17%) and residential (11%)”. The bullseye on the dart board is clear enough: surely the farmers are the culprits and there must be great scope to cut farm emissions.
Ensuring firms adequately assess and manage exposures to climate-related and environmental risks has been a supervisory priority for us for a number of years
In a follow-up address to the Climate Finance Week, the bank’s deputy governor Sharon Donnery noted the high share of farming in emissions as measured and stressed that eurozone Central Banks as regulators must pay attention to climate-related risks.
“Ensuring firms adequately assess and manage exposures to climate-related and environmental risks has been a supervisory priority for us for a number of years,” she said.
Banks in Ireland already have reporting requirements under this heading and not all have complied.
Risk is clear
It is too early to know where this might be heading, but the risk is clear.
Failure to cut farm emissions and an absence of alternative policies at national or EU level could lead to a default outcome: let’s just discourage lending to the sector, even if the normal metrics of collateral adequacy look OK.
Banks could be required to reduce lending into the sector, denying credit to otherwise credit-worthy borrowers as a tool of climate policy. This raises troubling issues about the design of policy.
Caution on the part of the Central Bank about keeping banks away from risky lending is not one of them.
Donnery and her colleagues are unlikely to repeat the mistakes that led to the banking bust.
However, sectoral discrimination in lending policies by financial intermediaries is simply not the textbook recommendation for containing carbon emissions.
The best policy for the EU would be to discourage consumption of carbon-intensive products and services in Europe and to cajole others, especially China and the US, to do the same in their domestic markets.
The European Commission’s Carbon Border Adjustment Mechanism (CBAM) initiative, threatening import tariffs on non-EU countries with inadequate climate policies is a welcome move in this direction.
The geographical distribution of farm output in Europe and its trading partners should be left to the market, which would see dairy output concentrated in Munster and south Leinster with banana producers thin on the ground in these parts. There are very good reasons why Ireland appears to have high per-capita carbon emissions.
They are measured largely on a territorial production basis and not by end-user demand, on which basis Ireland also has high emissions but so do other high-income European countries.
The farm organisations should be supportive
What is exceptional about Ireland is that it enjoys soil and climate conditions favourable to the existing pattern of agricultural trade in the single market.
The European Commission has recently been exploring possibilities for greater reliance on end-user charges to restrain demand for carbon-intensive industries including aviation, currently exempt from VAT on tickets and excise duty on fuel.
The farm organisations should be supportive.
They should also be engaging with the Central Bank of Ireland, and at European level with the ECB, before momentum gathers for a resort to policies that distort credit allocation in the banking industry.