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Pricing Climate Change Into Import Tariffs

Business, China, Company Strategy, Economics, Environment, Naphtha & other feedstocks, Oil & Gas, Polyolefins, Sustainability, US
By John Richardson on 24-Jun-2015


By John Richardson

SO, following on from my blog post yesterday, how might developing countries calculate import tariffs on petrochemicals in response to the rising social, political and economic costs of climate change?

One good starting point in just a few years’ time, when these tariffs are sure to be under serious evaluation, might be studies such as this one, which was published by the IMF in May of this year. The report’s key findings are that:

  • Post-tax fossil fuel subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5% of global GDP) in 2013, and projected to reach $5.3 trillion (6.5% of global GDP) in 2015.
  • Post-tax subsidies are large and pervasive in both advanced and developing economies and among oil-producing and non-oil-producing countries alike.
  • The fiscal, environmental, and welfare impacts of energy subsidy reform are potentially enormous. Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6% of global GDP), cut global CO2 emissions by more than 20%, and cut pre-mature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2% of global GDP).

The $5.3 trillion of subsidies in 2015, which is equivalent to $10 million a day, was based on the global total of fuel-price subsidies and tax breaks for energy companies. Crucially, also, this figure took into account the health damage caused to local populations by air pollution, as well as the  impact of more floods, droughts and storms resulting from climate change.

And helpfully, for anyone wanting to use this report as way of calculating import tariffs, the IMF provides a list of the countries that are the worst offenders. In pole position is China, which provides $2.3 trillion of energy subsidies every year, followed by the US at $700b billion, Russia at $335 billion, India at $277 billion and Japan at $157 billion.

Let’s take Bangladesh as one example of one of the many poor tropical countries that are likely to be severely affected by climate change. The World Bank warns that Bangladesh faces:

More intense cyclones, more days of extreme rainfall, greater flooding, longer dry spells, greater groundwater stress, and lower crop yields. These add to hazards that Bangladeshis already face, including regular inundations and contamination of freshwater sources from salinity, which will be an addition to the devastating economic, social and vulnerable ecological consequences.

The risks from climate variability and change are geographically concentrated in six specific regions of the country, which also have higher concentrations of the poor—the subsistence farmers, the rural landless, fishing communities, and urban poor.

How do you respond if you are the Bangladeshi government?

You could slam import tariffs on Chinese goods and services, based around that $2.3 trillion IMF estimate of China’s energy subsidies . This might help you recoup some of the costs of climate change. And even if this doesn’t happen, it will still at least feel like the “right thing to do”.

That is not going to happen because Bangladesh stands to gain billions of dollars of infrastructure investment from China through China’s “Belt and Road” diplomacy. This is another term for the New Silk Road investment initiative, which is being funded by the China-led Asian Infrastructure Investment Bank (AIIB). Bangladesh has applied to join the AIIB.

Bangladesh’s government might instead decide to penalise imports from India and Japan. Again, this is not going to happen in the case of India because India is, of course, an economically vital near-neighbour – and has also signed up to the AIIB.

That leaves the US and Japan that have so far declined to join the AIIB.

In terms of petrochemicals import tariffs, Japan really is a non-issue because of the poor competitiveness of most of its industry resulting from high feedstock costs and old and therefore non-world scale plants.

But the US is another story altogether. Its producers have huge feedstock advantages, thanks to the shale-gas revolution. They are thus building millions of tonnes of new world scale capacity, especially in polyethylene (PE).

So let’s once again wind the clock forward five or ten years. China has invested billions of dollars on vastly improving Bangladesh’s ports, roads and railways. It has also outsourced some of its lower-value manufacturing to Bangladesh, including a smartphone assembly plant.

China still has some of its own smartphone assembly plants in poorer provinces such as Yunnan, but across most of China, wage costs are too high to justify this kind of basic manufacturing. Hence, some smartphone assembly plants have moved to countries such as Bangladesh, Pakistan and Myanmar, where labour costs are a lot lower.

You own the smartphone assembly plant in Bangladesh and also run a local plastics conversion business. You need to buy PE resin to make packaging materials so you can ship your smartphones to eager, very price-sensitive Western markets.

Sourcing this PE from China, rather than the US, is an absolute no-brainer because:

  1. US imports carry heavy import tariffs, based on the country’s energy subsidies, because the current White House administration did not make enough concessions at the key UN Climate Change Conference, which took place in Paris in November-December 2015. Plus, quite a few of the people you know at oil, gas and petrochemicals companies in the US are still arguing that climate change is not man-made.
  2. You owe the very existence of your business to China’s decision to outsource manufacturing, which is part of the “Belt and Road” initiative.

Bangladesh is just one example, of course. The same could well apply to other developing countries that are both very vulnerable to climate change and are involved in the “Belt and Road” initiative. In total, no less than 65 countries are part of Belt and Road, which are home to 4.4 billion people.

Exactly how much lost export potential are we perhaps looking at for PE producers that are operating in countries which end up on the wrong side of this new climate-change consensus?

To give you a very rough idea only, as I don’t at the moment have the full list of all the 65 countries that are part of Belt and Road, I took just linear-low density PE (LLDPE) and Asia and Pacific as a whole (many of the countries in Asia and Pacific are, of course, both developing and part of the Chinese economic initiative).

By 2025, we expect the region’s LLDPE consumption to total around 9.9 million tonnes compared with production of 8.2 million tonnes (see the above chart).

All is far from being lost, though. PE companies that are unlucky enough to be in countries with the wrong climate-change policies can still gain access to this approximately 1.7 million tonnes export opportunity.

What do these companies need to do? This will be the subject of tomorrow’s blog post.