Study model assesses additional emission costs through sector-specific tax imposition
11/21/2024
The Financial Stability Report (FSR) for the first half of the year indicated that a simulation measuring the effects of implementing a carbon tax to address climate risk shows a “limited impact” on Brazil’s National Financial System. The FSR was released by the Central Bank on Thursday (21).
“The results suggest the impact on the capital of institutions is limited, due to a moderate increase in Non-Performing Assets in sectors most affected by the carbon tax.”
The study evaluated gross greenhouse gas emissions, sector exposure relative to added value, and dependency on international markets. The model incorporates an additional cost for emissions by imposing a tax on economic sectors.
Two scenarios were considered, with gradually increasing costs starting in 2025, reaching $50 per tonne emitted by 2030 in one scenario, and $100 per tonne in the other. According to the FSR, financial institutions experienced losses concentrated in the manufacturing, construction, and transportation sectors “due to the rise in non-performing assets.”
The study highlighted that sectors such as agriculture and transportation show “the largest reductions in added value compared to a scenario without a carbon tax.” This reduction “results from increased production costs within the sector and the cost of inputs used in production sourced from other sectors.”
In the agricultural sector, the study noted, the proportion of non-performing assets is low, despite high exposure, “which explains the lesser impact compared to other sectors.”
Floods
The FSR also reported that the impact of the floods faced by the Rio Grande do Sul state earlier this year on the National Financial System was “less than initially expected.” According to the report, no “systematically relevant changes” were observed in deposits, liquidity, or credit risk of supervised entities operating in the state. “Regarding the agricultural sector, losses from Proagro [Agricultural Activity Guarantee Program] coverage payments were significantly lower than losses caused by the droughts of 2022 and 2023.”
The document noted that the floods occurred after most of the harvest had been completed. The FSR also highlighted a “slight increase” in deposits in the state, “possibly due to the lack of alternative allocations for clients.” Few physical structures of institutions were significantly affected, according to the report.
Regarding portfolio impact, the FSR emphasized that some entities renegotiated “substantial” installments, but the issues remained limited in scope.
“The volume of restructured credit operations with borrowers in Rio Grande do Sul increased significantly, especially for individuals and in rural credit. However, the volume of renegotiations is small compared to the portfolio as a whole.”
The document noted that initiatives by the National Monetary Council and the Central Bank protected service provision and avoided “unnecessary burdens” on individuals and businesses. “The measures aimed to preserve financial stability and protect consumers. The Central Bank continues to monitor financial intermediation in the region, with less emphasis, due to the perceived reduction in risks.”
*By Gabriel Shinohara, Valor — Brasília
Source: Valor International