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Barriers to de-Dollarization Within BRICS

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This article explores systemic and market barriers preventing the wider use of BRICS national currencies in trade, including currency swaps mechanisms and reasons for BRICS exporters’ preference not to use national currencies. Design flaws are outlined in the New Development Banks’ Contingency Reserve Arrangement (CRA) in the context of de-dollarizing BRICS trade, namely its IMF linkage requirements and limited scope, symptomatic of a lack of trust between BRICS member states. The current levels of de-dollarization in Russia’s intra-BRICS settlements (as a representative sample) are used to find gaps between Russia’s stated de-dollarization goals and current initiatives, and market barriers are identified to explain this gap. Finally, the components of market mechanisms needed to de-risk Intra-BRICS trade and overcome the identified barriers are outlined.

Background to Challenge

The 2017 BRICS New Development Bank’s strategy report The Role Of BRICS In The World Economy & International Development detailed a long-term vision of the direction BRICS countries’ economic cooperation was headed in. The strategy report made the case that reforms in the existing western institutions would not be in BRICS countries’ favour in the near future, and hence emphasized the importance of a new Multilateral Clearing Union (MCU) which would serve as an intra-BRICS currency swap pool and tackle balance of payment shortcomings, trade finance, financial crisis aversion, and an overall restoration of sovereignty by de-dollarizing BRICS trade (NDB, 2017). This intention was also echoed in the 2017 BRICS Xiamen Summit declaration, which stated:

We agree to …enhance currency cooperation, consistent with each central bank’s legal mandate, including through currency swap, local currency settlement, and local currency direct investment….We commend the progress in concluding the Memoranda of Understanding among national development banks of BRICS countries on interbank local currency credit line and on interbank cooperation in relation to credit rating.

In parallel to the Xiamen summit, the R5+ (Real, Ruble, Rupee, Renminbi, Rand, in addition to the currencies of BRICS+ countries) currency initiative was launched, which sought to stimulate the use of national currencies for “investments, long-term projects, creation of common payment card systems and common settlement/payment systems, cooperation in promoting BRICS+ currencies towards reserve currency status.”

The New Development Bank’s proposed Multilateral Clearing Union was manifested in the form of a $100 billion Contingency Reserve Arrangement (CRA) that BRICS countries devised as a pool to swap currencies in times of need, increasing national currency settlement. The CRA included two currency swap instruments to support short-term balance of payment (BoP) pressures between a country’s current and capital accounts: 1) a liquidity instrument to provide support in response to current BoP gaps, and 2) a precautionary instrument to buffer against future BoP gaps. A country’s access to the shared capital funds was limited by conditionality, as only 30% of accessible funds (“de-linked portion”) were available on demand, whereas the majority, 70% of accessible funds require on-track arrangements with the IMF, as the CRA’s rationale document explains:

Where financing in excess of this 30% limit is required, an ‘IMF-linked portion’ will be made available. This will allow the country access to the remaining 70%, provided that a conditionality-based agreement with the IMF is concluded” (Biziwick, M., Cattaneo, N. and Fryer, D., 2015 (p. 316)).

CRA Defects

Of importance, it is worth noting that rather than having a mechanism for direct currency swaps, a swap transaction was defined as “the Requesting Party’s central bank purchases US dollars (USD) from the Providing Party’s central bank in exchange for the Requesting Party Currency, and repurchases on a later date the Requesting Party Currency in exchange for USD” (Biziwick et al., 2015 (p. 316)).

As a result, the CRA’s IMF linked component and USD reserve currency status raise questions about whether there is a potential mismatch between the stated goals of the MCU and the CRA’s implementation mechanism. In the RISS Joint Research Paper Use of national currencies in international settlements: Experience of the BRICS countries, Karataev et al state:

Though the BRICS countries have established a Contingent Reserve Arrangement… the currency swap under this arrangement is one between US dollar and local currencies of BRICS, not one among the BRICS currencies. Currently, there are few local currency swap agreements in force (between Russia and China, China and South Africa)” (Karataev et al., 2017 (p.110).

The key barriers hindering the CRA’s success towards its stated goals, including the CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking, stem from the CRA modelling itself after the ASEAN+3 Chiang Mai currency swap initiative, which had a limited scope, operated on a promissory model rather than an actual capital pool, and carried a significant IMF-linked portion due to the lack of financial surveillance capacity and moral hazard borrowing risk (Biziwick et al., 2015 (p. 318)). On a macro level, “the CMI/CMIM arrangement has been criticized as utterly ineffective (it did not play any role in the 2008 crisis, for example), and the concern is that, by adopting its form, the CRA is condemning itself to a similar fate. Size and IMF linking (along with the lack of a rapid response facility) seem to have been major problems with the CMI/CMIM arrangement…the IMF linking seems hard to reconcile with the intention to provide a counterweight to the IMF ” (Biziwick et al., 2015 (p. 318)). Thus, as was the case with the Chiang Mai currency swap initiative, the BRICS NDB’s CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking all stem from a fundamental lack of trust between BRICS member countries on their self-reliance for monitoring and governance of each others’ and common funds.

Despite their stated desire to break away from IMF’s conditionalities and dollar-denominated trade, at least in the CRA, a greater trust has been placed in the IMF for monitoring conditions for credit swaps. BRICS countries have thus inadvertently followed precedents set by hegemons.

This status quo is not inevitable, and can easily be overcome by coordinated CRA reform to introduce an internal trust-ensuring credit mechanism amidst financial instruments in national currencies to build the foundation for true independence from IMF and dollar-denominated transactions.

Market barriers to BRICS Trade De-Dollarization:

In addition to the CRA design flaws, BRICS Trade De-Dollarization is also held back by market barriers. As a representative sample to measure progress in de-dollarization, the currency composition of Russia’s publicly available intra-BRICS trade settlement since the launching of prominent de-dollarization initiatives in 2017 can be examined, as shown in figure 1 below. The percentage of Russian exports to BRICS countries settled in dollars has fallen from its peak of above 80% in Q1 2018 to 33.2% as of first quarter of 2020 (CBR, 2020). While Russian exports to BRICS have de-dollarized recently, it is apparent that rather than BRICS currencies, the Euro has replaced the dollar as the dominant export settlement currency (Russia is receiving only 13% of its exports in Rubles as of Q1 2020).

Figure 1: Settlement Currency Percentage for Russian Exports to BRICS (CBR, 2020)

This is due to Russian energy exporters preferring to denominate contracts in Euros rather than Rubles recently, for the same reason they previously preferred to denominate contracts in Dollars: greater volume of Rubles received in case of depreciation. By contrast, Russian imports from BRICS countries are still largely settled in Dollars as of Q1 2020, though there is a gradual de-dollarization trend present. The “other” currency slowly rising in imports settlements most likely being largely comprised of the Renminbi Yuan, as China and Russia have been accelerating ruble and yuan use in trade since 2019. Despite this, as demonstrated in Figure 1, it is worthy to note that Russia’s inter-BRICS trade is by far settled mostly in Dollars and Euros rather than Rubles or any other BRICS currency, indicating a gap of between Russian traders’ settlement currency choice and BRICS de-dollarization priorities.

To explain this phenomenon in greater detail, Karataev et al. outlined two key fundamental market barriers preventing the use of national currencies for BRICS trade finance specifically which need to be overcome as a supplement intra-BRICS currency swaps:

1. Currency Volatility:

Exchange rate fluctuations create uncertainty in optimizing settlement pricing and profitability at time of contract fulfilment from both exporters’ and importers’ perspective- “Exporters will seek to denominate their contracts in foreign exchange when their national currency is devaluing. It will allow them to receive additional profits in the national currency…(whereas) importers shall be encouraged to invoice a contract price in their national currency in order to reduce costs and prevent a decline in demand as a result of rising prices.” (Karataev et al., 2017 (p.20)).

2. Global Commodity Benchmarks:

 “Exporters of similar goods [i.e. commodities]… will seek to establish the contract price in the same currency as their competitors. That allows them to neutralize more successfully the adverse exchange rate fluctuations resulting in considerable price changes and therefore prevent the risk of reducing demand. As a result, the market price of such goods is denominated mostly in the US dollar….the global commodities exchange trade in these goods plays a significant role…if the global commodities market’s impact on the pricing model will decrease, the use of the USD as invoicing currency will decline too.” (Karataev et al., 2017 (p.19)).

Thus, the dominant factors preventing BRICS currency usage in trade were exchange rate fluctuations causing exporters to optimize profit margins by using foreign exchange (typically denominated in dollars), and industry benchmarks for export goods pricing, especially the influence of global commodities exchanges denominated in dollars. Amongst BRICS countries, this holds true for the largest Russian energy exporters, who often prefer to be paid in dollars or euros in order to maintain standardized price points and obtain additional rubles in case of depreciation.

However, empirical research demonstrated by Nakajima et al. with the vine copula method and value-at-risk model has found that using BRICS currencies in energy trade resulted in more stable prices and avoided translation risks compared to using dollars due to counter-balancing movements with oil prices (Nakajima et al, 2020). Thus, though dollar-denominated oil contracts may provide short-term gains for exporters, the overall commodity trade between BRICS countries would benefit from the use of national currencies. In addition, though the Euro is replacing the Dollar as Russia’s preferred export settlement currency within BRICS, the Euro poses lesser but similar risks to being weaponized by sanctions, given that it is still a third party non-BRICS currency and European Union sanctions against Russia could be expanded in the near future in light of political events unfolding in 2020 (i.e. EU-Russia differences over Belarus protests, Navalny incident, etc.).

Current Steps:

To overcome the remaining barriers to using national currencies, current steps being taken in BRICS include developing an in-house settlement system for trade finance based on Russia’s SPFS alternative to SWIFT, linking domestic payment systems to create the New International Payment System (NIPS), and researching feasibility requirements towards a common BRICS cryptocurrency. In addition, while progress has been made in diversifying the NDB’s loan denominations to include more local currencies, with a goal of 50% project financing in the near future according to NDB’s president, the more widespread internationalization of BRICS currencies would require mature bond markets to be created in all BRICS countries to compete with western bond markets. This was initiated by the creation of BRICS Local Currency Bond Fund during the 2017 BRICS Xiamen Summit declaration:

We agree to promote the development of BRICS Local Currency Bond Markets and jointly establish a BRICS Local Currency Bond Fund, as a means of contributing to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic and regional bond markets, including by increasing foreign private sector participation, and enhancing financial resilience of BRICS countries.

Though these steps are cumulatively designed to increase autonomy over intra-BRICS fund flows, they do not, however, address the fundamental gap in de-risking the barriers to using national currencies in BRICS settlements which are holding back their more widespread use. Central Bank of Russia Governor Dr Elvira Nabiullina echoed this sentiment in 2019 when she claimed that while gold-pegged cryptocurrencies are being researched, it was more important to develop international settlements using national currencies. Thus, while BRICS payment and settlement systems are being integrated, BRICS local bonds are being developed, direct currency swap lines are being expanded, and an intra-BRICS cryptocurrency architecture conceptualized and brought to market, a crucial intermediate supplementary step in de-dollarizing inter-BRICS trade finance is establishing de-risked and mutually trustable intra-BRICS trade contracts to expand national currency settlement, overcoming the market barriers mentioned previously.

Gap Identification: Steps Needed for De-Risking Trade

Karataev et al. proposed a multi-tiered circular system whereby national and intra-BRICS financial institutions complement and coordinate with BRICS trade settlement transactions to create a robust system for using local currencies. The components steps were outlined as follows: 1) direct currency trading expansion and lowering transactions costs 2) creation and use of hedging instruments in BRICS currency pairs which would reduce risk management costs 3) widening of Swap Agreements and limiting liquidity risk, 4) local currency bond market development in conjunction with trade and development goals 5) trade surplus re-investment into local bond markets 6) diversification of bond markets and BRICS policy coordination for using these instruments to achieve currency internationalization goals (Karataev et al., 2017 (p. 111)).

Out of these measures, the CRA was designed to meet the needs of step 3, whereas progress has been started on steps 4-6 by the New Development Bank based on initiatives launched during the Xiamen summit. However, concrete initiatives are needed to fulfil steps 1 and 2. Karataev et al. specified three key exchange mechanisms in particular which need to be established to lower transaction costs and de-risk the use of national currencies in intra-BRICS trade contracts to overcome the aforementioned barriers for steps the first two steps mentioned above:

  1. BRICS Interbank foreign exchange market, whereby “companies should be able to purchase/sell a currency quickly and without additional costs to make settlements in such currency. This presumes the existence of a highly developed and liquid interbank and forex markets with large numbers of participants and convertible financial instruments” (Karataev et al., 2017 (p.18)).
  2. Currency Hedging instruments — “It will be necessary to encourage trading directly in BRICS currencies that will significantly contribute to lowering costs. This step [BRICS Trading pairs] has to be augmented with the creation and use of hedging instruments in BRICS currency pairs which might allow to reduce risk management costs. During the first stage leading public banks of BRICS countries may function as market makers on currency pairs to provide necessary liquidity.” (Karataev et al., 2017 (p.110)).
  3. BRICS Commodify Exchange — “Launching of a Commodity Exchange or some type of an e-trading platform for trade in goods and derivatives of various kinds can be one more instrument contributing to enhancing LCY [local currency] use in settlements in the BRICS countries…raw material trade could be mediated by setting market prices denominated in local currencies. With appreciable quantity of foreign investors trading on the exchange, this will lead to the internationalization of contracts denominated in local currencies” (Karataev et al., 2017 (p.112)).

In addition to the above three suggested exchanges, intra-BRICS trade de-dollarization requires the IMF-linked portion of the CRA to be removed to enable direct currency swaps to take place, granted the existence of bilateral swap agreements between all BRICS countries. A necessary replacement for the IMF on-track arrangement must be established between BRICS countries: a counter-party de-risking mechanism which serves as an independent source of trust to validate the fulfilment criterion of trade-necessitated direct currency swaps, thus eliminating the need for IMF on-track arrangements and consequent USD conversion.

Currently, all BRICS countries are largely reliant on western facilities for the above four types of exchanges. SWIFT largely dominates international interbank transfer settlement, with the Russian and Chinese SWIFT alternatives operating mostly domestically, though there are plans for integration of BRICS settlement systems as mentioned previously. BRICS countries have yet to develop a comprehensive intra-BRICS hedging mechanism for mitigating currency volatility risk directly independent of dollar and euro-denominated western capital markets.

Conclusions and Recommendations:

BRICS countries have maintained a longstanding goal of de-IMFing and de-dollarizing their trade settlements and reserves in order to increase their sovereignty over transactions and avoid currency crisis, and proposed the creation of a Multilateral Clearing Union towards that goal. However, design flaws in the Multilateral Clearing Union, a lack of an independent credit monitoring mechanism, and lack of currently de-risking mechanisms in intra-BRICS trade finance prevented the wider use of national currencies.

To overcome the reluctance of BRICS traders to take trade finance loans and settle in BRICS national currencies, there is a need to introduce forward hedging options with minimal cost of carry so traders can avail direct hedging options simultaneously with trade contracts to de-risk their trade contract in national currencies. As Karatev et al. concluded, in the long term goal, boosting demand for direct BRICS currency settlement would itself partially smooth out some of the volatility experienced by cyclical western capital flight, thus lowering the risk premium and cost of carry for forward contracts, making BRICS currencies the natural preferred choice in trade finance (Karataev et al., 2017 (p.110).

After a currency options market, a BRICS commodity exchange specifically needs to be created in which commodity prices are denoted in national currencies, and are accompanied by derivatives and other risk hedging options that minimize the combined effects of currency and commodity price fluctuations, essentially serving as a favoured market for BRICS commodity importers and exports to set contracts in national currencies and have instruments to de-risk any expected volatility. The most significant example of a local currency commodity exchange within BRICS was the Petro-Yuan futures market launched in China in 2016, which served as a viable alternative to the dominant dollar-denominated WTI and Brent oil exchanges. Though Russia has set up a similar exchange in the form of the Ural Oil Futures market, work remains to be done to achieve maturity and usage to the level of established commodities exchanges.

Combined with direct currency swap lines and an intra-BRICS free trade zone, the implementation of the above mechanisms would lower the transaction cost of BRICS national currency trade settlement, by lowering the risk premium for importers and exporters to set contracts in national currencies amidst exchange rate uncertainty. Thus, these exchanges would fulfil the BRICS goals of “focus[ing] joint efforts on providing companies engaged in foreign trade from BRICS countries with the same, or lower transaction (compliance) costs, guarantees of settlement and risk management that they currently have in utilizing the dollar, euro or yen” (Karataev et al., 2017 (p.110-111)).

In 2018, export-oriented development banks from all BRICS countries signed a MoU to enhance understanding of distributed ledger or blockchain technology for solving challenges in trade finance, with the aim of identifying areas to improve operational efficiencies and tackle common financial challenges. In 2019, the BRICS Business Council formed a working group exploring how a special trade-facilitating BRICS crypto-currency could be created to ensure the smooth flow of paperless document flow for trade obligations.

In fact, creating a specialized crypto-currency for document flow is not necessary to meet the BRICS goal of de-risking national currency trade settlement. The simplest yet most advanced and low-cost blockchain feature to enable the above four exchanges to take place directly between BRICS traders and banks (and allow a seamless disintermediation of transactions between separate parties without the need for outside third parties such as IMF) are Smart Contracts, an original feature of Ethereum networks but later adapted by other blockchain networks. Smart Contracts allow for multiple parties to program and pre-set conditional criterion for contracts based on fulfilment of services or market conditions, and automate the verification of fulfilment criterion via decentralized external verification engines known as Oracles, which are blockchain middleware that create a secure connection between Smart Contracts and various off-chain resources required for fulfilment. Funds needed to execute the contract can be temporarily pre-stored in a linked virtual escrow-like account associated with the contract to guarantee fund availability at the time of execution. Once the contract execution date arrives and conditional fulfilment checks have been completed, Smart Contracts self-execute and disburse associated payments to the contracting parties, automating execution and settlement and eliminating contract disputes and counter-party non-fulfilment risks.

Due to their automated fulfilment capabilities and dis-intermediation of third party legal and settlement entities, Smart Contracts are starting to be gain traction in western consortiums for trade finance, currency trading, and commodity trading in the mainstream dollarized economy. Trade Finance systems based on Smart Contract are currently enabling on average a 35% reduction in costs and the elimination of the 1–2 weeks of processing time for settlements, in addition to removing room for manual errors.

The author has proposed a solution implementing the above exchanges using Smart Contracts to De-Risk and De-Dollarize Intra-BRICS Trade—further details on this solution beyond those mentioned in this article can be seen in the December 2020 issue of the BRICS Journal of Economics.

Printed Sources Cited:

  • Biziwick, M., Cattaneo, N. and Fryer, D. (2015) “The rationale for and potential role of the BRICS Contingent Reserve Arrangement.” South African Journal of International Affairs. 22:3, 307-324.
  • Central Bank of Russia Trade Finance Settlement Data. “Credit Statistics” http://www.cbr.ru/vfs/statistics/credit_statistics/cur_str.xlsx translated into English, plotted in Excel.
  • Nakajima, Tadahiro, Yijin, He and Hamori, Shigeyuki. (2020). Can BRICS’ currency be a hedge or a safe haven for energy portfolio? An evidence from vine copula approach. The Singapore Economic Review. 65(4) 805-836. https://doi.org/10.1142/S0217590820500174.
  • NDB – New Development Bank. (2017) “The Role Of BRICS In The World Economy & International Development” BRICS New Development Bank Strategy Report. https://reddytoread.files.wordpress.com/2017/09/brics-2017.pdf.

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Director of US-Russia Relations, Russian American Youth Alliance. FinTech and Sanctions Specialist

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Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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The EU wants to cut emissions, Bulgaria and Eastern Europe will bear the price

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In the last few years, the European Union has been going above and beyond in dealing with climate change. Clearly, this is far from being a case of disinterested endeavour to safeguard the planet and the environment. On the contrary, the EU’s efforts aim at reinforcing its “normative power”.  In effect, the EU has gained some clout on the international stage, even vis-à-vis faraway countries like Vietnam and China. Yet, in doing so the Union embroiled in the apparent rush for more and more ambitious climate standards and targets. Therefore, Brussels needs to start acting and deliver on its promises to keep staying ahead of the pack. Even more so given US President Biden’s strengthened engagement with friends and foes alike on the climate and human rights.

Last week, the European Commission manifested its acknowledgment of this need by unveiling the Fit for 55 (FF55) growth strategy. Overall, this new, beefed-up Green Deal should reduce greenhouse gas emissions to 55% of their 1990 level by 2030. In some analysts’ view, the FF55 plan is a game changer in the long-term race towards climate neutrality alas. In fact, it could “both deepen and broaden the decarbonisation of Europe’s economy to achieve climate neutrality by 2050.” Moreover, they expect the FF55’s 13 measures to generate a number of positive ripple effects across EU economies.

True, wanting to reduce greenhouse gases significantly by 2030 and reaching net-zero-emission by 2050 goal is commendable under many regards. Still, the FF55 includes a number of measures that could impact ordinary people’s life massively across Europe. Nevertheless, the 27 Member States of the EU are responsible for as little as 8% of global emissions. As such, it is necessary to take a deeper look at how the FF55 will affect different countries and demographics.

The transition’s social cost

The realisation that reduction of capitalism’s dependence on fossil fuels will have serious socio-economic consequences is not at all new. Contrariwise, scholars and politicians have been outspoken about an indisputable “conflict between jobs and the environment”, since the early 1990s. Together, the pandemic-induced recession and the signing of the Paris Accord have brought the notion back on the centre stage.

Factually, pushing the energy transition entails facing mass lay-offs, generalised workforce retraining and taxes hikes on ordinary consumers. For instance, these hardships’ seriousness is evident in the progressive abandonment of coal mining for energy generation in the US. Moreover, the energy transition requires strong popular backing in order to be effective. Yet, measures pursued to achieve environmentally friendly growth tend to generate strong, grassroot opposition. Most recently, France’s gilets jaunes protests shows that environmental policies generate social discontent by disfavouring middle and lower classes disproportionately.

The poorest families and countries will bear the costs

One of the FF55’s main policy innovation regards the creation of a carbon trading market for previously exempt sectors. Namely, companies working int the transport and buildings sectors, be they public or private, will have to follow new rules. As it happened in the energy industry before, each company will have to respect a “carbon allowance”. Basically, it is an ‘authorisation to pollute’ which companies can buy from each other — but the total cannot increase. Despite all claims of just transition, this and other measures will have a gigantic, re-distributional effect within and between countries. And it will be of markedly regressive character, meaning that poorer families and countries will pay more.

Taxing transport emission is regressive

Historically, these sectors were trailing behind most others when it comes to decarbonisation for a variety of reasons. First of all, the previous emission trading system did not include them. Moreover, these are far from being well-functioning markets. As a result, even if the cost of emissions was to rise, enterprises and consumer will not react as expected.

Thus, even as they face higher costs, companies will keep utilising older, traditional vehicle and construction technologies. With taunting reverberations on those poorer consumers, who cannot afford to buy an electric car or stop using public transport. Hence, they “will face a higher carbon price while locked into fossil-fuel-based systems with limited alternatives.” Moreover, the EU could worsen these effects by trying to reduce the emission fees on truck-transported goods. Indeed, the commission is proposing a weight-based emission standard that would collaterally favour SUVs over smaller combustion-engine car and motorbikes. 

In a nutshell, higher taxes and fee will strike lower-class consumers, who spend more of their incomes for transportation. Even assuming these households would like to switch to low-emission cars and buildings, current market prices will make it impossible. In fact, all these technologies ten to have low usage costs, but very high costs of acquisition. For instance, the cheapest Tesla sells at over €95,000, whereas a Dacia Sandero “starts at just under €7,000.”

Eastern Europe may not be willing to pay

At this point, it is clear that the FF55 plan will deal a blow to ongoing efforts to reduce inequalities. In addition, one should not forget that EU Member States are as different amongst them as they are within themselves. Yet, the EU is not simply going to tax carbon in sectors that inevitably expose poorer consumers the most. But in doing so it would impose a single price on 27 very diverse societies and economies. Thus, the paradox of having the poorest countries in the EU (i.e., Central- and South-Eastern Europe) pay the FF55’s bill.

To substantiate this claim, one needs to look no further than at a few publicly available data. First, as Figure 2 shows, there is an inverse relation between a country’s wealth and consumers’ expenditures on transport services. Thus, not only do poorer people across the EU spend more on transport, poorer countries do as well. Hence, under the FF55, Bulgarians, Croatians, Romanians and Poles will pay most of the fees and taxes on carbon emission.

Additionally, one should consider that there is also a strict inverse relation between carbon emissions and the minimum national wage. In fact, looking at Figure 3 one sees that countries with lower minimum wages tend to emit more carbon dioxide. On average, countries with a minimum salary of €1 lower emit almost 4.5mln tonnes of carbon dioxide more. But differences in statutory national wages explain almost 32% of the cross-country variation in emissions. So, 1.5 of those extra tonnes are somehow related to lower minimum salaries and, therefore, lower living standards.

The EU’s quest for a just transition: Redistribution or trickle down?

Hence, the pursual of a ‘just’ transitionhas come to mean ensuring quality jobs emerge from these economic changes. However, many of the FF55’s 13 initiatives may worsen disparities both within countries and, more importantly, between them. Thus, the EU has been trying to pre-empt the social losses that would inevitably come about.

From the Just Transition Fund to the Climate Social Fund

In this regard, the European Union went a step forward most countries by creating the Just Transition Fund in May. That is, the EU decided to finance a mix of grants and public-sector loans which aims to provide support to territories facing serious socio-economic challenges arising from the transition towards climate neutrality [… and] facilitate the implementation of the European Green Deal, which aims to make the EU climate-neutral by 2050.

Along these lines, the FF55 introduces a Climate Social Fund (CSF) that will provide “funding […] to support vulnerable European citizens.” The fund will provide over €70bln to support energy investments, and provide direct income support for vulnerable households. The revenues from the selling of carbon allowances to the transport and building sectors should fund most of the CSF. If necessary, the Member States will provide the missing portion.

The EU Commission may give the impression of having design the CSF to favour poorer households and countries. However, it may actually be a false impression. In fact, it is clear that the entire carbon pricing initiative will impact poorer household and countries more strongly. However, only a fourth of the carbon pricing system’s revenues will go to fund the CSF. The remaining portion will finance other FF55 programmes, most of which have a negative impact on poorer communities. Thus, despite the CSF, the final effect of the entire FF55 will be a net redistribution upwards.

Stopping a redistribution to the top

Nevertheless, there is a way to fix the FF55 so that it can work for poorer households and lower-income countries. Given that the CSF is too small for the challenge it should overcome, its total amount should be increased. In fact, the purpose of higher carbon pricing is in any event not to raise revenue but to direct market behaviour towards low-carbon technologies—there is thus a strong argument for redistributing fully the additional revenues

Hence, the largest, politically sustainable share of carbon-pricing revenues from transportation and housing should ideally go to the CSF. In addition, the Commission should remove all the proposed provision that divert CSF money away from social compensation scheme. In fact, poorer families will not gain enough from subsidies to electric car, charging stations and the decarbonisation of housing. One contrary, “using the fund to support electric vehicles would disproportionally favour rich households.”

Finally, the allocation of CSF money to various member states should follow rather different criteria from the current ones. In fact, the Commission already intends to consider a number of important such as: total population and its non-urban share; per capita, gross, national income; share of vulnerable households; and emissions due to fuel combustion per household. But these efforts to look out for the weakest strata in each country could backfire. In fact, according to some calculations, a Member State with lower average wealth and lower “within-country inequality could end up benefiting less than a rich member state with high inequality.”

Conclusion

A number of well-known, respected economist have been arguing that environmental policies should account for social fallouts attentively. Goals such as emission reduction and net-zero economies require strong popular support in order for the transformation to succeed. Or at least, the acquiescence of a majority of the public. Otherwise, the plans of well-intentioned and opportunistic governments alike will derail. After all, this is the main lesson of the currently widespread protest against the mandating of ‘Covid passes’ and vaccines.

If the FF55 will deal poorer households a devastating blow, social unrest may worsen — fast. But as long as it will also hurt Eastern European countries as a whole, there is a chance. Hopefully, European parliamentarians from riotous Hungary or Poland will oppose the FF55 in its current shape. Perhaps, in a few years everyone will be thankful for these two countries strenuous resistance to EU bureaucracy. Or else, richer countries may force Central- and South-Eastern Europe to swallow a bitter medicine. Even though, whatever happens, Europe alone cannot and will not save the planet.

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Economy

Entrepreneurialism & Digitalization: Recovery of Midsize Business Economies

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Observe nations around the world, especially those with the largest numbers of IT professionals, rich and well-groomed government departments and their related agencies, with matured bureaucracies and unlimited numbers of computers but still no signs of thriving digital economies buzzing on global platforms. What is so mysterious about digitization of small medium businesses, smoothly leading to ‘virtualization of economies’ creating global bounce of trade? Well, it is surrendering to the realization that entrepreneurialism is the main driving engine of such challenges and not the herds of IT teams, deluxe bureaucracies and accountancy-mindsets.

What is a digital economy? It is definitely not when all businesses have websites and are all doing social media postings, at the outset understanding  digitalization of a single enterprise is already a fine art, and to make it fly on global trade platforms is a science. Unless economic development teams can articulate, what is and how ‘virtualization of economies’ work, uplift and upskill vertical trade sectors and create an entrepreneurial bounce of trades’, the entire exercise of digitization might as well leave to early video game players or early grader IT personnel. Observe how The Silicon Valley and e-Commerce revolutions of the world never created by large IT teams, but categorically by “techie-entrepreneurs” of the day that in turn occupied millions of IT professionals and created hundreds of millions IT experts driving e-commerce of today. Of course, IT teams needed but in very reverse order.

Why is the digital economy an entrepreneurial economy?  Digitization of the economy is simply not an IT exercise rather a strategic entrepreneurial maneuver of placing a midsize business economy on wheels using easily available digital platforms with abundance of software to choose from to make right entrepreneurial-based decisions to create creative bounce. The survival strategies for the post pandemic economies have less to do with accountancy-mindsets and bureaucratic attitudes, as it is all about entrepreneurial global age execution with superior digital performances.

Calling Entrepreneurial Business Mindsets:  The new horizons beyond pandemic call for “simultaneous synchronization” a need to merge ‘mental-blocks’ the lingering ‘productivity-silos’ ‘digital-divides’ ‘mental-divides’ all such negative forces balanced with positive forces of ‘innovative excellence’ and ‘superior-performance’ thrown all in an entrepreneurial-blender to make a great progressive multi-flavored shakes. To mix and match with our realty checks of today and the blended calamites; Economy + SME + MFG + AI + VR + AR + Officeless + Remote + Occupationalism + Globalization + Exports + Upskilling, all in one single sandbox need progressive advancements with entrepreneurial guts and clarity of vision for any serious stable economic balance. If such were a monopoly game, printing of currency would be the norm.  

National Mobilization of Entrepreneurialism: Needed are deep studies of the prolonged trajectory of entrepreneurial intellectualism spanning a millennia… the word ‘entrepreneurialism’ was only invented over a century ago… but our civilization was built on similar principles, driven and strong people. Declare an economic revolution as a critical cure to desolate periods and call the nation but will they listen? With credibility of institution and political promises tanked, audible to the populace now is the grind of mobilizations, thundering deployments of action packed strategies, but how do you fund them? National mobilization of entrepreneurialism is the hidden pulse of the nation, often not new funding dependent rather execution hungry and leadership starved, so what makes it spin? Entrepreneurial warriors

As if a silent revolution mobilized, the nouveau entrepreneurialism in post pandemic economy in action, where talents on wings of digitalization, flying on trading platforms, visible in smart data and shining amongst upskilled midsize economies. Lack of upskilling, lack of global-age expertise, and most importantly lack of entrepreneurialism is what keeps digitization of economies lost in the past. How naïve is it to believe post-pandemic economic issues some PR singsong election campaigns? Only deployment, execution, mobilization will be the message now acceptable by the billions displaced, replaced and misplaced workers, but what is stopping nations, their Ministries and trade groups to have all out discussions and table immediate action plans? Ouch, do not forget the entrepreneurial blood in the economic streams, exciting the bureaucracies and accountancy-mindsets.  The next 100 elections over the coming 500 days will be full of surprises, but serious transformation for survival is inevitable, with or without upskilled ministries of commerce. Which nations and regions are ready to engage in this tactical battlefield of global-age skills?  Study how Expothon Africa is in deployments with selected countries.

The deciding factors: Never ever before in the history of humankind,the economic behaviorism across the world suddenly surrendered to a single calamity, affecting the majority of the global populace suffering in prolonged continuity. The side effect of such complexity juxtaposed with technological access can bring sweeping changes to our assumed complacency. All traditional problem solving and conventional thinking styles now considered too dangerous to economic growth and social balances.  

Recommendation and Survival Strategies: Discover and establish authoritative command on digitization and virtualization of economies, study more on Google.Allow micro-small-medium enterprises a tax-free window on the first USD$5-10 million revenues in exports, this will create local jobs and bring foreign exchange. Allow micro-small-medium enterprises free access to all dormant Intellectual Property, Patents rolled up due to lack of commercialization. Allow Academic Experts on innovative technologies and related skills on free voucher programs to the SME base to uplift ideas and special expertise. Optimization of telecommunication and internet structures worth trillions of dollars with global access at times completely ignored and wasted by wrong mindsets deprived of entrepreneurial undertakings. Allow micro-small-medium enterprises free full time MBA as 12 months interns so MBA graduates can acquire some entrepreneurialism while enterprises can uplift their ideas in practice.

“Allow Million qualified foreign entrepreneurs to park within your nation for 5-10 years under a special full tax-free visa and stay program. Which nations have qualified dialogue on such affairs? Bring in, land million entrepreneurs in your nation, and create 10 million plus jobs and new wealth in following years. Let your own institutions and frontline management learn how such economic developments created.  Be bold, as the time to strategize passed now time to revolutionize has arrived”. “Excerpted from keynote lecture by Naseem Javed, Global Citizen Forum, Dubai, 2013.”

Allow National Mobilization of Entrepreneurialism Protocols mandated to engage trade and exports bodies. Allow National Scoring of entrepreneurialism to measure, identify and differentiate required talents. Digitize from top to bottom and sideways, futurism fully digitized and without real transformation, it is like a nation without any internet. Act wisely. Digitalization of economies without entrepreneurial minds is more like pre-pandemic archives of mostly failures. Needed are the economic revolutions, based on entrepreneurial meritocracy and national mobilization of midsize economy.
The rest is easy 

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