A number of measures affecting the car industry were announced in the budget.
A 1% surcharge on Vehicle Registration Tax (VRT) will be levied on all new diesel cars, as well as diesel cars imported here.
The Minister had been expected to increase excise duty on diesel and increase the carbon tax but decided against those measures in the end.
Minister Donohoe also extended the current €1,500 relief on regular hybrids and €2,500 on plug-in electric hybrids.
The Society of the Irish Motor Industry described the decision to increase VRT on diesel cars as 'poorly considered'.
Alan Nolan, Director General of SIMI said the move could have some unintended consequences.
"It may cause some purchasers to postpone their car change, reducing the potential to add cleaner new cars into the fleet.
"The real disappointment for businesses and jobs in our sector is that we were already facing an increase in VRT in January, only on the price of a new car, in the region of €450, due to the new EU Emissions test. This additional 1% surcharge is likely to add a further €400 on average to a new diesel car from January."
According to research by SIMI, almost three quarters of franchise dealers were already anticipating a worse year in 2019 with Brexit approaching.
"Our sector has been the worst impacted to date by Brexit and the 14% fall in new car sales since Brexit is likely to accelerate further next year," Alan Nolan said.
The environmental coalition, Stop Climate Chaos, said the failure to introduce a carbon tax increase would make meeting Ireland’s climate commitments even harder to achieve.
The U-turn follows the publication yesterday of the IPCC report which highlights impending climate chaos without rapid and far-reaching action to drastically cut pollution.
"The ESRI... reported research findings which showed that a doubling of the carbon tax to €40 per ton of carbon would result in a 7% increase in diesel prices, and a 5% decrease in polluting emissions," Sadhbh O’Neil of Friends of the Irish Environment said.
"The government is throwing away a perfect opportunity to act resolutely."