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Border Carbon Adjustments on Banks’ Radars

Author: Maria Butler
by Maria Butler
Posted: May 13, 2022

The Paris Agreement, which was adopted by 196 parties at Conferences of the Parties (COPs), aims at limiting global warming well below 2, preferably to 1.5 degrees Celsius. One of the most highlighted results was adoption of self-determined targets by the attending nations.

In response to the urgent need to cut CO2 emissions, several types of carbon pricing schemes have been created by individual governments to meet these goals. The two most common policy tools are carbon taxes, whereby a price is imposed on per tonne of carbon produced, or, the development of an Emission Trading Scheme (ETS).

An intended consequence of these national pricing schemes is carbon leakage. This refers to a situation where businesses transfer or shift their production factories to other countries with laxer emission standards to avoid higher costs. To safeguard the competitiveness of industries covered by the EU ETS, the production deemed to be exposed to a significant risk of carbon leakage receives a?higher share of free allowances?compared to other companies.

Carbon leakage leads to problems like:

  • Economic damage to countries with ambitious climate goals

  • An overall increase in GHG emissions globally, despite the targets being met regionally.

Border Carbon Adjustment (BCA)

A Border Carbon Adjustment (BCA), or Border Tax Adjustments (BTAs), or Carbon Border Adjustment

Mechanisms (CBAMs), is an environmental trade policy?that consists of charges?on imports, and sometimes rebates on exports. It aims at ensuring that goods entering a carbon-regulated country are charged an equivalent amount as though they are produced in the country.

The BCAs aim at:

  • Reducing climate change

  • Avoiding the emergence of trade advantages and disadvantages as different regions enact climate policies as per their goals.

It is a way to support a level playing field by making foreign importers face the same costs and incentives that domestic producers face,?to limit climate change.?This is to essentially prevent carbon leakage on an international level. These incentive misalignments between trading partners reduce the net effect of an ambitious country’s policies and could even end up increasing overall emissions.

Important factors of a BCA include:

  • Establishing scope

  • Calculating the cost of carbon emissions

  • Implementing import fees and export rebates

Currently, only California has implemented BCA, with the EU introducing its own CBAM to support the EU Green Deal. The EU’s CBAM uses a system of certificates that covers the cost of embedded carbon. This system requires importers to purchase emission-related certificates for a price equal to that which they would have paid if the goods had been produced within the EU.

This creates additional costs for firms in industries impacted by the BCA. These costs affect the business models and credit profiles of the firms, which have made banks, incorporate the climate change risk factor in loan pricing.

With GreenCap’s ‘Risk as a Service’ (RaaS) solution, banks can construct climate pathways to be applied to their balance sheets. This allows scenarios to be fine-tuned to capture the full extent of exposure, including the cross-border effects of BCAs, providing a complete view of the financial risks that banks will need to deal with as we transition to a green economy.

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Author: Maria Butler

Maria Butler

Member since: Dec 21, 2021
Published articles: 17

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