Sensitivity of Ireland’s potential carbon budget pathways with varying social discount rates in an energy system optimization model Mr. Jason Mc Guire, UCC

1. Sensitivity of Ireland’s potential carbon budget pathways with
varying social discount rates in an energy system optimization
model
Jason Mc Guire, Fionn Rogan, Brian O Gallachóir & Hannah Daly
Energy Policy & Modelling Group at MaREI, UCC
IEA ETSAP Summer Workshop, 3rd July 2020

2. Ireland’s Carbon Budgets
Action 5 - Commence the process of forming
carbon budgets for 2021 to 2025, 2026 to 2030,
2031 to 2035 ahead of a new Climate Action
(Amendment) Bill 2019 being enacted
58.4 MtCo2eq –
• Transport 23.7 MtCO2eq
• Built Environment 18.1 MtCO2eq
• Agriculture 16.6 MtCO2eq
Requires approx. a 2% GHG reduction each
year up to 2030 and 7% after 2030 to
achieve net-zero by 2050.
{Source: Ireland Climate Action Plan 2019, Department of Communications,
Climate Action and Environment}
Non-ETS GHG Budget
378 Mt CO2eq
30% below
2005 levels

3. Carbon Budget Review
Methodology -
By Population
0.064%
2°C 66%
Probability
( 2020 - 2070 ) where exogenous
non-CO2 emissions are at the low
end of the feasible global range.
66%
Probability
1000 GtCO2
590 GtCO22°C
638 MtCO2
376 MtCO2
Why use Carbon Budgets?
Transient Climate Response to cumulative Carbon Emissions (TCRE) is a robust metric relating cumulative carbon emissions
to climate warming, this method can be used to achieve the Paris Climate Agreement.
Cumulative carbon budgets for Ireland utilized in this analysis are 376 MtCO2 & 638 MtCO2 (Glynn, J. et al., 2019 ).
( 2020 - 2070 ) where exogenous
non-CO2 emissions are at the high
end of the feasible global range.

4. Discount Rate Review
Discount rate - expresses the change in the value of
money over time. This is a critical part of a cost-
benefit analysis. This can be mathematically
calculated as shown below.
100.0
54.9
30.1
16.5
9.1 5.0
69.1
47.7
33.0
22.8
15.7
0
20
40
60
80
100
120
2020 2030 2040 2050 2060 2070
Euro(2020€)
YEAR
6% 3.70%
“Social Discount Rate (SDR) is a rate of discount applied within the
public sector to future streams of costs and benefits in order to
determine a present value for a given investment project in an
economic appraisal.”
𝑁𝑃𝑉 = ෍
𝑟=1
𝑅
෍
𝑦∈𝑌
1 + 𝑑 𝑟,𝑦
𝑅𝐸𝐹𝑌𝑅−𝑦
× 𝐴𝑁𝑁𝐶𝑂𝑆𝑇 𝑟, 𝑦
TIMES objective function:
{Source: Central Technical Appraisal Parameters Discount Rate, Time Horizon, Shadow Price of Public Funds and Shadow
Price of Labour, Oct 2018, Department of Public Expenditure and Reform }

5. Discount Rate Review
Large amount of variation in both the academic literature and
international practice with regards to the discount rate
applicable for any one country.
The Social Discount Rate (SDR) can be calculated based on several different theoretical approaches including social rate time
preference (SRTP) and the opportunity cost of capital (SOC).
4.5
3.5
4.0
3.0
4.0
6.0
8.0
7.0
0
1
2
3
4
5
6
7
8
9
SocialDiscountRate(%)
Social Rate of Time Preference Opportunity Cost of Capital
{Source: Central Technical Appraisal Parameters Discount Rate, Time Horizon, Shadow Price of Public Funds and
Shadow Price of Labour, Oct 2018, Department of Public Expenditure and Reform }
• Debate within the literature on the theoretical
underpinning and calculation of the social discount rate.
• 4% rate does not include an adjustment for risk and is for
use across sectors.
• It is appropriate for the discount rate to decline over longer
time periods to reflect future uncertainty (4% to 2.5% after
100 years) .

6. Methodology
Technology Specific Hurdle Rates (TSHR) sensitivity analysis also performed. TSHRs are used to reflect risk and finance in
decision making across different economic sectors and specific technologies
Irish TIMESCarbon Budgets
638 MtCO2
10 Scenarios/Budget
Results
376 MtCO2
# Description Social Discount
Rate
Technology
Specific Hurdle
Rates
1 3% SDR, 0% TSHR 3% 0%
2 3% SDR, Default TSHR 3% Default
3 4% SDR, 0% TSHR 4% 0%
4 4% SDR, Default TSHR 4% Default
5 5% SDR, 0% TSHR 5% 0%
6 5% SDR, Default TSHR 5% Default
7 6% SDR, 0% TSHR 6% 0%
8 6% SDR, Default TSHR 6% Default
9 7% SDR, 0% TSHR 7% 0%
10 7% SDR, Default TSHR 7% Default

7. Results – Budget Trajectory
The biggest difference in the 5 year carbon budgets is the total cumulative carbon budget quantity.

8. 376 MtCO2 - TSHR
Technology Specific Hurdle Rate Sensitivity Analysis

9. Results – 376 MtCO2 & SDR

10. 376 MtCO2 – 2 Carbon Budgets
AGRI
2.0% BLD
18.8%
COMM
5.4%
ELEC
35.9%
IND
9.9%
TRAN
28.0%
AGRI
2.2% BLD
20.3%
COMM
5.9%
ELEC
39.9%
IND
9.9%
TRAN
22.0%

11. AGRI
2.2% BLD
17.4%
COMM
5.2%
ELEC
31.5%
IND
15.5%
TRAN
28.2%
AGRI
2.2%
BLD
17.4%
COMM
5.2%
ELEC
32.5%
IND
15.2%
TRAN
27.5%
376 MtCO2 – 3 Carbon Budgets

12. AGRI
1.1%
BLD
18.4%
COMM
7.2%
ELEC
48.0%
IND
7.2%
TRAN
18.1%
AGRI
1.2% BLD
18.8%
COMM
7.8%
ELEC
53.0%
IND
8.9%
TRAN
10.2%
638 MtCO2 – 3 Carbon Budgets

13. Summary
0%
5%
10%
15%
20%
25%
30%
CB1 (2021-
2025)
CB2 (2026-
2030)
CB3 (2031-
2035)
CB4 (2036-
2040)
CB5 (2041-
2045)
CB6 (2046-
2050)
Range(%)
Effect of SDRs on Ireland's Carbon Budgets – 376 MtCO2
Default TSHR 0% TSHR
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
CB1 (2021-
2025)
CB2 (2026-
2030)
CB3 (2031-
2035)
CB4 (2036-
2040)
CB5 (2041-
2045)
CB6 (2046-
2050)
Range(%)
Effect of SDRs on Ireland's Carbon Budgets -638 MtCO2
Default TSHR 0% TSHR

14. v
Summary:
• The least cost Carbon Budget trajectory is not linear
• Technology Specific Hurdle Rates have only a small effect on the Carbon Budgets.
• Transparency of the Social Discount Rate is important, due to the effect on the Carbon Budgets ( First two
carbon budgets ).
• Further analysis of renewable energy & costs may provide further insights.
• The most sensitive variable is the cumulative carbon budget ( 376 MtCO2 or 638 MtCO2 ).
Questions:
• What are the Technology Specific Hurdle Rates commonly used?
• Discounting unjustly promotes the interests of people in the present above those of people in the future. Should
decarbonization models consider human rights in the Social Discount Rate?

15. Thanks for listening.
Any Questions?
E-mail: jason.mcguire@ucc.ie
Twitter: @jayomacg