Ireland's State of the Environment Report 2024

104 Chapter 4: Climate Change by 2050. This private sector investment target will only be met through significant financing by banking or capital markets. In addition, private individuals and businesses may require support or incentivisation to finance their own decarbonisation journeys, for example, by the continued planned increase in the carbon tax rate up to €100 per tonne and provision of retrofitting and electric vehicle incentives. International finance Under the United Nations Framework Convention on Climate Change, Ireland as a developed country is committed to mobilising finance to assist climate action in developing countries. Ireland has committed to providing at least €225 million per year in climate finance to developing countries. Ireland will support a just transition beyond our borders by working towards this objective, with finance being directed to the Least Developed Countries and Small Island Developing States most vulnerable to climate impacts. It is also intended that this funding will be targeted at initiatives that support biodiversity, protection of the oceans, and loss and damage. Risk management Transition risk. The decarbonisation of the economy gives rise to potential risks for the financial system, which must be managed to progress the transition to net zero. Transition risks include the negative changes to business costs, revenues and profits as a result of future climate-related shifts in consumer or investor sentiment or government policy. Transition risks are unevenly spread, being more significant in carbon- intensive sectors, where support and regulation are likely to be required to drive decarbonisation. Physical risk. Climate change is already leading to higher damage costs, with the World Meteorological Organization estimating that economic losses from weather, climate and water have increased sevenfold since the 1970s (WMO, 2023). Businesses and households affected by flooding, for example, experience damage to buildings, possessions, machinery and stock, and disruptions to production and output. Such events may affect business costs, insurance coverage and revenues. These impacts affect the financial system in two ways: firstly, by increasing the risk of default on existing loans and, secondly, by reducing the value of collateral and the debtor’s future access to finance. The European Central Bank estimates that the Irish financial system’s exposure to flood risk in the commercial sector is among the highest in the euro area (ECB, 2024). Development of flood protection schemes is advancing in Ireland, and it is critical that this continues, together with the management of the insurance market, to protect people, property and the stability of the financial system in the face of increasing flood risks. It is also likely that diversifying local climate risks through reinsurance will become more costly and restrictive as climate impacts increase globally. Therefore, managing risk through adaptation is important for enabling the insurance market in Ireland to function effectively in the future. However, it will also be important for the financial sector to adapt its own practices by embedding the unique nature of climate risk considerations into operational models. The consideration of climate risk will require financial institutions to look beyond business cycles in the future towards multi-decadal time horizons to appropriately stress test their decisions for resilience. 8. Just transition The European Commission’s European Green Deal recognises that the climate transition must be just and inclusive, putting people first, and must pay attention to the regions, industries and workers who will face the greatest challenges. This represents a framework for understanding how the transition to a low-carbon society can be equitable and seek to leave no one behind. A just transition moves beyond protecting the rights of vulnerable individuals to understanding the causes of vulnerability and how responding to climate change is an opportunity to engage in justice. It is necessary to actively engage vulnerable and under- represented groups in terms of gender, ethnicity and socio-economic status while developing responses to climate change. Therefore, dialogue to develop successful policy responses needs to be considered and deliberate. The projected economic impacts of the deep transformation are expected to be positive, despite the significant additional investments required in all sectors of our economy (EC, 2018). Ensuring that these benefits are shared equitably requires a just transition framework. The EU will support the transition through the introduction of the Just Transition Mechanism, including the Just Transition Fund, from which Ireland may receive up to €84.5 million by 2027.