The cost of adopting carbon pricing systems could hit emerging economies hardest, according to a report by Moody’s.
In its report Credit impact of carbon pricing to depend on degree and speed of implementation, and use of proceeds, the ratings business said the disproportionate impact would be due these sovereigns tending to have more carbon-intensive exports and a higher proportion of fuels in their consumption baskets.
Anushka Shah, a Moody’s vice president and senior analyst and the author of the report, explained: “Economies with carbon-intensive exports will bear a larger economic cost from carbon taxes implemented globally.
“The costs will also likely fall on hydrocarbon-consuming nations, depending on the elasticity of demand, and more carbon-intensive industries, including transportation, coal mining and oil refineries. Conversely, economies or sectors that supply low-carbon technologies stand to gain competitiveness over time.”
Shah said carbon pricing could have a credit-negative impact by causing a reduction in competitiveness for some sovereigns. But, she added, this was less than the social and economic costs that sovereigns would face in the future if they failed to control emissions.
She also warned of the need to strike a balance where policies to mitigate the regressive effect of carbon taxes, such as targeted transfers or offsetting tax cuts, risk diluting emissions reductions.
The analyst said the economic cost of adoption will vary depending on the policies agreed. There are two main types of pricing, emissions trading systems and carbon taxes – both successfully incentivise higher carbon efficiency but studies show taxes are the slightly more effective option.
However, there have been low levels of adoption of carbon pricing mechanisms, Shah said, because of the challenge of getting political consensus. Some of the largest greenhouse gas emitters still have no carbon pricing frameworks in place.