The material scenario of potential carbon border taxes

Global - Jul 18 2019
  • #carbon
  • #esg

The material scenario of potential carbon border taxes

Interest is growing in the idea of carbon border taxes. Indeed, the possibility of such a carbon tax on imported goods is more and more discussed, particularly in Europe.

It is noteworthy, for example, that the EU’s largest business lobby group (BusinessEurope) recently considered carbon border adjustments as a possible option to be assessed as “additional safeguards depending on international actions”[1], thus dropping a long-standing opposition[2] to this idea. And we can also remember the position explicitly expressed by steel mogul Lakshmi Mittal in 2017[3] in favour of a carbon border tax.

Some countries also support carbon border tariffs. The idea is not new and in the past France and Italy already supported it in the public debate. It is true that in the last 10 years, some countries have also expressed hesitation or concerns regarding impacts on their exports, but the question remains discussed at high-level. For example, French President Emmanuel Macron[4] has already supported several times the idea, and recently Spain[5] also expressed official support to such a scheme. In France, it can even be noted that most parties[6] agree on this. In this context, we cannot escape taking into consideration a scenario in which international trade prices could be readjusted by carbon intensities.

The idea has also widened its support from economists. Last January, more than 3 500 of them in the U.S.[7] (including 27 Nobel laureates, 4 former Chairs of the Federal Reserve, and 2 former Treasury Secretaries) backed carbon tariffs on key imports. This was followed by a similar call by European economists[8] in June 2019, and the subject is now an area of academic research, for example, to address the challenges[9] linked to the design of border adjustments: e.g. technical feasibility, data availability, risk of retaliation from some countries, compatibility with World Trade Organization rules, etc. Now, the question is essentially political even if there are of course issues to be aware of.

The implementation of carbon border adjustments in one or several of the world’s regions remains uncertain – and there would be uncertainties in the precise conditions of its implementation –, but the impacts would be significant so that macro-financial and sovereign analysis should closely consider such scenarios.

To this end, our data provide useful resources for investors to assess what could be the impacts of carbon border adjustments on trade flows, whether looking at the competitiveness of exports or the carbon intensity of imports. We are for example able to model carbon intensities of traded goods and services for each country, sector and country-sector segment, based on 26 sectors. This allows us, for instance, to assess what is the carbon intensity of exports of the United Kingdom, or what is the carbon intensity of its imports from China, Germany or the USA (overall and for a given sector).

MATERIAL ISSUES FOR INVESTORS IN SOVEREIGN AND CORPORATE ASSETS

In this context, some countries can be at a disadvantage regarding their exports because of carbon-intensive energy mixes, the poor energy efficiency of their industrial systems, a focus on high carbon-intensity production, or a particularly strong reliance on high-carbon exports.

It is therefore of interest for investors to be able to position countries based on both the weight of exports in their economies and the greenhouse gas emissions (GHG) intensity of their exports, as described below.

Figure 1: GHG content of exports and exports/GDP % for the top 20 countries (81% of world GDP)

Figure 2: GHG content of exports and exports/GDP % for the top 100 countries (98% of world GDP)

This analysis is material for sovereign investors – as an area of potential reshuffling of cards in the global economy –, but it is also obviously material for the long-term financial analysis of corporates, in particular in some concentrated and carbon-intensive sectors being significantly exposed to exports (e.g. steel, other materials, capital goods, automotive, etc.). In this context, such analysis should also be conducted at the sector level as well as by taking into account the specificities of companies’ positions.

In fact, both for companies and countries the analysis of the carbon intensity of traded goods and services should be a starting point rather than the only metric by which to assess risk and opportunity levels. It is certain that carbon border adjustments would also result in some trade and industrial “adjustments”. This is indeed the goal that such policies would target: favouring the development of less carbon-intensive economic production.

However, other factors would drive country-, sector- and company-specific impacts. This includes, for example, the pricing power of exporting countries and price-elasticity of demand for their products. In addition, carbon border taxes would also impact countries through their imports (see appendices). For example, for importing countries, a notable factor can be their capacity (or not) to use, develop or find alternatives.

Lastly, it should be noted that the carbon intensity does not fully reflect risks associated with fossil fuels exports. Of course, fossil fuel exports can be relatively carbon-intensive because of production emissions, but most emissions related to fossil energy occur in the importing country. This is also something to look at when assessing the international impacts that would result from a deeper integration of climate considerations into international trade.

To put it simply, the development of carbon border tariffs is a scenario to consider in the fundamental analysis of sovereign and corporate assets. It is, of course, uncertain (as illustrated for example by the recent trade deal between the EU and Mercosur[10]), but it deserves attention as its impacts could be significant for investors. If climate issues are more integrated in trade in the future, there will unavoidably be losers and winners. Such changes could be more or less progressive or non-linear, strong or moderate, but they would be meaningful.

APPENDICES

Figure 3: GHG content of imports and imports/GDP % for the top 20 countries (81% of world GDP)

Note: Top countries by GDP size in 2018; excluding non-available and extreme values
References: Beyond Ratings, PRIMAP-hist, Eora, IMF, World Bank.

 

Figure 4: GHG content of imports and imports/GDP % for the top 100 countries (98% of world GDP)

Note: Top countries by GDP size in 2018; excluding non-available and extreme values
References: Beyond Ratings, PRIMAP-hist, Eora, IMF, World Bank.

Guillaume Emin, Carbon/Climate Analyst

___

[1] BusinessEurope. (2019). European business views on a competitive energy & climate strategy.

[2] Simon, F. (2019). BusinessEurope warms to Macron’s EU carbon tariff idea, EURACTIV.

[3] Mittal, L. (2017). A carbon border tax is the best answer on climate change, Financial Times.

[4] Simon, F. (2018). France to push for EU carbon price floor and border tariff, EURACTIV.

[5] Reuters. (2019). Spain proposes EU carbon tax on energy imports, Reuters.

[6] Barbière, C. (2019). Most French parties agree on carbon tax at EU’s borders, EURACTIV.

[7] Turner, A. (2019). The Case for Carbon Tariffs, Project Syndicate.

[8] Strauss, D. (2019). EU economists call for carbon taxes to hit earlier net zero goal, Financial Times.

[9] Rocchi, P.; Serrano, M.; Roca, J.; Arto, I. (2017). Border Carbon Adjustments Based on Avoided Emissions: Addressing the Challenge of Its Design, Elsevier.

[10] Brunsden, J. (2019). EU and South American bloc reach trade deal to cut tariffs, Financial Times.

Weekly digest publications:

Our latest
publications

Title
Category
Tag
Country
Date
Analyst insight
#ESG
Global
2019-10-19
Analyst insight
#Carbon #ESG
Global
2019-10-19
Analyst insight
#ESG
Global
2019-10-19
Research note
#ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Analyst insight
#Credit Risk #ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Environment
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Analyst insight
#Carbon
Europe
2019-10-19
Weekly food for thought
#Carbon
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#Credit Risk
United States
2019-10-19
Analyst insight
#Environment
Northern Area
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Europe
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Weekly food for thought
#Credit Risk
Peru
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
World
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Weekly food for thought
#Credit Risk #GDP
Europe
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#Credit Risk
France
2019-10-19
Analyst insight
#Credit Risk #France
Europe
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#GDP
Europe
2019-10-19
Analyst insight
#ESG
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#Carbon #ESG
France
2019-10-19
Weekly food for thought
#Credit Risk
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Europe, USA
2019-10-19
Weekly food for thought
#GDP
France
2019-10-19
Analyst insight
#Environment
France
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #ESG
Global
2019-10-19
Weekly food for thought
#Credit Risk #GDP
China
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
USA
2019-10-19
Weekly food for thought
#GDP
Global
2019-10-19
Analyst insight
#Credit Risk #Sovereign Debt
Global
2019-10-19
Weekly food for thought
#Carbon #Climate #IPCC #WMO
Global
2019-10-19
Weekly food for thought
#Carbon #Inequality #Paris Agreement
France
2019-10-19
Weekly food for thought
#GDP #Sovereign Debt
Italy
2019-10-19
Analyst insight
#Credit Risk #GDP #Geopolitics #Sovereign Debt
Global
2019-10-19
Weekly food for thought
#Environment
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #GDP
Global
2019-10-19
Weekly food for thought
#GDP
France
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Environment
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Environment
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Environment
Global
2019-10-19
Analyst insight
#GDP
Brasil
2019-10-19
Weekly food for thought
#Environment
Venezuela
2019-10-19
Weekly food for thought
#Environment #Natural Capital
Norway
2019-10-19
Analyst insight
#Carbon #Carbon/Climate Change #Climate
United Kingdom
2019-10-19
Weekly food for thought
#Agriculture #Biodiversity #Climate #GHG #Greenhouse gases
Global
2019-10-19
Weekly food for thought
#Biodiversity #Climate #Environment #ESG #IPCC #Oceans #SIDS
Global
2019-10-19
Weekly food for thought
#Credit Risk #GDP
France
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Europe
2019-10-19
Weekly food for thought
#Carbon/Climate Change
France, Canada
2019-10-19
Weekly food for thought
#Credit Risk #GDP
Argentina
2019-10-19
Analyst insight
France, Egypt
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate
France
2019-10-19
Weekly food for thought
#GDP #Sovereign Debt
Germany
2019-10-19
Weekly food for thought
#Environment #ESG
Global
2019-10-19
Analyst insight
#GDP #Natural Capital #Sovereign Debt
South Africa, France
2019-10-19
Weekly food for thought
#Credit Risk #Sovereign Debt
United States
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Environment #ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Climate
Global
2019-10-19
Weekly food for thought
#ESG
India
2019-10-19
Weekly food for thought
#Credit Risk #GDP
USA, Japan, European Union
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #GDP #Paris Agreement #Sovereign Debt
Global
2019-10-19
Weekly food for thought
#Climate #Environment #Paris Agreement
Small Island Developing States, Global, Barbados, Fiji
2019-10-19
Weekly food for thought
#Credit Risk #GDP #Sovereign Debt
Venezuela
2019-10-19
Analyst insight
#Carbon #Carbon/Climate Change #Climate #Credit Risk
Global
2019-10-19
Analyst insight
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate
Global
2019-10-19
Weekly food for thought
#Credit Risk #GDP
Global
2019-10-19
Analyst insight
#Biodiversity #Environment #Natural Capital
Brazil
2019-10-19
Weekly food for thought
#Credit Risk #Sovereign Debt
United States
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Analyst insight
#Credit Risk #Sovereign Debt
United States
2019-10-19
Analyst insight
#Carbon/Climate Change #Credit Risk #ESG #Natural Capital
Global
2019-10-19
Analyst insight
#Carbon #Carbon/Climate Change
Europe
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Paris Agreement
France
2019-10-19
Weekly food for thought
#Credit Risk #Sovereign Debt
Europe
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
Global
2019-10-19
Weekly food for thought
France
2019-10-19
Weekly food for thought
#Carbon/Climate Change #ESG
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
#Biodiversity #Climate #Environment #Natural Capital #Paris Agreement
Global
2019-10-19
Weekly food for thought
United States
2019-10-19
Weekly food for thought
Italy
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
Middle East & North Africa
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Research note
#Carbon #Carbon/Climate Change #Climate #Paris Agreement
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
United States
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Climate #Credit Risk
England
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Germany
2019-10-19
Analyst insight
Brazil
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Italia
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Canada
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Analyst insight
Sweden
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Italia
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
USA
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
United Kingdom
2019-10-19
Weekly food for thought
United Kingdom
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Research note
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Russia
2019-10-19
Analyst insight
Argentina
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
European Union
2019-10-19
Analyst insight
European Union
2019-10-19
Analyst insight
Greece
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
European Union
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Cuba
2019-10-19
Weekly food for thought
All
2019-10-19
Analyst insight
Greece
2019-10-19
Weekly food for thought
European Union
2019-10-19
Weekly food for thought
French Guyana
2019-10-19
Weekly food for thought
#Sovereign Debt
Russia
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Venezuela
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
United Kingdom
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
France
2019-10-19
Weekly food for thought
European Union
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
France
2019-10-19

Let's keep in touch!

This field is required
Invalid email

Register to our newsletter to be the first to hear about ...

By submitting this form, you consent to receiving email communications from Beyond Ratings. Beyond Ratings will update your email preferences and hold your details in its contact database. For more information on how Beyond Ratings uses your data, see our Privacy Policy.

Get started

More investors are choosing Beyond Ratings' proprietary ESG-augmented financial metrics to gain a 360° view of company and country ESG performance.