Carbon border tax a potential “Green Swan”

ABG Sundal Collier (ABGSC) expects the European Union to institute border taxation on CO2 as a part of its European Green Deal, intended to slash greenhouse gas emissions by 55 percent over the next decade while helping the EU to transition towards carbon-neutrality by 2050. The tax would reflect the amount of carbon emissions attributed to goods imported into the 27-nation region. (All research by ABGSC is available for customers here.)
The suggested carbon border tax has support among several major EU-economies such as France, Germany, Poland and Spain. European Commission President Ursula von Der Leyen has also expressed her support for the idea. Potential hurdles along the way for the new legislation could include getting it past the WTO and gaining acceptance from countries like China and Russia.
ABGSC analysts Lukas Daul and Dennis Anghelopoulos nevertheless believe that capital markets will start pricing the tax in, triggering a “green swan” event for energy markets around the world.
“We believe that this could initiate an irreversible sequence of events, making the world’s Great Powers compete against each other in order to reach the ultimate goal of the 21st century – full decarbonisation and energy independence through renewable power generation”, says Lukas Daul.
With a carbon border tax in place in the EU, ABGSC believes that other countries and regions will have no alternative but to follow the EU’s example.
“This is what we mean by a green swan. It will incentivise other countries to set up their own systems for carbon pricing, and then there will be nowhere to hide anymore for emitters”, says Lukas Daul.
According to the ABGSC analysts, the EU’s new Green Deal and a potential carbon border tax will further spur interest for renewable energy and CO2-efficient companies amongst investors.
“Up until now, carbon pricing has been used to switch from coal-to-gas, and that goal has been arguably achieved. The fuel that the EU is switching its’ focus to now is hydrogen and the carbon price needs to increase significantly for hydrogen to compete with gas”, says Lukas Daul.
“The price on carbon will most likely have to double from today’s level of approximately 35 dollars per tonne to make this switch viable. An increased price would result in European industry being less competitive versus foreign competitors that do not pay for their carbon emissions”, says Dennis Anghelopoulos.
According to Anghelopoulos, “This will definitely be denounced by carbon-intensive trading partners, but we view it as the only way to incentivise the use of hydrogen in Europe versus other hydrocarbons.”