The Green Economy Transition and Its Fiscal Consequences

9th November 2017

Global Fiscal Policy Advisory

PwC - Global Fiscal Policy Advisory9th November 2017

Strictly private and confidentialPresentation to EBRD side event at UNFCCC 23rd Conference of Parties

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Contents

1 How could the Paris Agreement impact the debt positions of fossil fuel rich countries?

2 How do sovereign ratings agencies take into account the fiscal risks from assets and revenues that could be impacted by Paris?

3 Responding to the fiscal impacts of the Paris Agreement

PwC - Global Fiscal Policy Advisory Strictly private and confidential9th November 2017Presentation to EBRD side event at UNFCCC 23rd Conference of Parties

The Paris Agreement may impact the debt position of fossil fuel rich countries through asset ‘stranding’

1 How could the Paris Agreement impact the debt positions of fossil fuel rich countries?

International response to climate change

The impact of the Paris Agreement on public finance

Consequences for the debt position of fossil fuel rich countries

Paris Agreement & Nationally Determined Contributions

Political, technological & market momentum towards renewables

Contraction in demand for fossil fuels & downward pressure on prices

Fossil fuel assets become ‘stranded’ for financial or regulatory reasons

The government is impacted as ‘asset owner’ & ‘fiscal policy maker’

Potential deterioration in public finance could impact net debt

Budgetary shortfalls funded by debt or assets, e.g. sovereign wealth fund

PwC - Global Fiscal Policy Advisory Strictly private and confidential9th November 2017Presentation to EBRD side event at UNFCCC 23rd Conference of Parties

How does public finance feature in sovereign credit rating analysis?

1 How could the Paris Agreement impact the debt positions of fossil fuel rich countries?

T

T

t

Structural features• Institutions & governance• GDP per capita• Years since default

Economic strength• Macroeconomic performance• External finances• Diversification & commodity

dependence

Public finance• Budget balance• Gross debt & interest• Fiscal structure

Event risk• Political risk• Government liquidity risk• Banking sector risk

• External vulnerability risk

Text

Text

TextSovereign credit rating based on a weighting of

the criteria

PwC - Global Fiscal Policy Advisory Strictly private and confidential9th November 2017Presentation to EBRD side event at UNFCCC 23rd Conference of Parties

Sovereign ratings agencies factor in the ‘exposure’ to, and ‘resilience’ against, climate risk

2 How do sovereign ratings agencies take into account the fiscal risks from assets and revenues that could be impacted by Paris?

Susceptibility to climate riskSource: Moody’s Investors Service, ‘How Moody’s assesses

the Physical Effects of Climate Change on Sovereign Issuers’

Exposure Resilience

Economic diversification

Geographic location

Development level

Fiscal flexibility

Government policies

PwC - Global Fiscal Policy Advisory Strictly private and confidential9th November 2017Presentation to EBRD side event at UNFCCC 23rd Conference of Parties

How can fossil fuel rich countries use fiscal policy to respond to the impacts of the Paris Agreement?

Fiscal management

Incentive effects

Risk Opportunity

Optimisation Expansion

Changing behaviours

3 Responding to the fiscal impacts of the Paris Agreement

Example: Realising spending savings or increasing tax collection, such as through reducing the size of the informal economy

Example: Phasing out fossil fuel subsidies in times of low (or lower than expected) oil and gas prices

Example: Introduction of environmental taxes to create incentives for diversification away from carbon-intensive industries and means of production

Example: Providing subsidies for low-carbon technology to incentivise uptake

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