The Bank of Spain warns of lower GDP and more inflation for addressing climate change

It will generate competitiveness losses in those sectors and companies less adapted to the ecological economy

Considers that part of the current price tensions derive from the sustainable economy

The risks offered by climate change and the challenge of transforming an economy like Spain to achieve the environmental commitments committed at the international level, will lead to the deployment of a set of measures over the coming years that will cause a profound transformation in economic and social activity in the different economic sectors of production.

This transformation towards a sustainable economy will take its toll in the form of lower growth, new and additional inflationary tensions, as well as an increase in the tax burden through the environment and a loss of competitiveness of those sectors that do not adopt this fight against climate change with sufficient momentum.

Under the premise and the conviction that the scientific community considers that the Iberian Peninsula could be significantly affected by the physical risks associated with climate change, although very heterogeneously by region, the development and implementation of an ambitious strategy of mitigation and adaptation to climate change in Spain is imposed.

According to chapter 4 of the Annual Report of the Bank of Spain, “the Spanish economy in the face of the climate challenge”, one of the main measures that arises is the need for tax changes that raise the taxation of those most polluting activities, or in other words, the well-known ‘polluter pays’.

Already the Technical Building Code sets new requirements in the construction of buildings, with the aim of having a reduced energy consumption. Also the Recovery, Transformation and Resilience Plan presented by the Government in October 2020, already proposes to allocate to the ecological transition 39% of the resources that Spain could receive through the European Next Generation EU program.

According to the CATS model (Carbon Tax Sectorial model) that the Bank of Spain uses for the generation of medium-term climate stress scenarios, of the different productive sectors, in the face of an increase in the price of emission rights, the effects can be appreciable in GDP.

Thus, for an increase in the price of emission allowances similar to that observed in recent years, which has gone from 25 euros per ton of CO2 in 2019 to about 100 per ton in February 2022, it would translate into a reduction in GDP of 0.6% after three years, which would increase to 1.3% if they were included, as expected, emissions from other productive sectors within the European emissions trading system are now not contemplated. This would be the case for emissions associated with maritime transport, road transport and the building construction sector.

Eurostat data for 2019 show that household activity, especially that related to transport and heating, was responsible for 20.9% of greenhouse gas (GHG) emissions in Spain. The rest of the emissions originated in the productive sector. Manufacturing, agriculture, transport and the supply of electricity and gas, sectors that account for approximately 25% of the gross value added (GVA) of the economy, accounted for about 70% of GHG emissions.

Business risks

According to a survey carried out by the Bank of Spain to the business sector on the implications of climate change and the transition to a more sustainable economy, it shows that 35% of companies expected the impact of the challenge on their activity to be very negative (10%) or moderately negative (25%). In general terms, those companies that develop their activity in those sectors with the highest polluting emissions, are the ones that see it as blacker.

Size is also a determining variable when analysing the impact of environmental measures. Smaller companies are the least prepared for climate challenges. But nevertheless, the main concern that companies show in order to achieve a less polluting economy is the possible inflationary pressures derived from the process.

According to the work of the Bank of Spain, a part of the recent inflation could be due to the ongoing climate transition, to the extent that it has been partially associated with the shortage of supplies caused by the closure of some very polluting factories in China, the greater demand for gas as the abandonment of coal in the energy mix accelerates and very strong increases in the prices of certain raw materials, such as lithium, for the manufacture of batteries.

The administrative burdens linked to new obligations to provide information is another risk of the energy transition process. But for the Bank of Spain this risk is not unique for the private sector, when making decisions in its investment strategies, but also for public authorities, when designing possible compensatory policies, as well as for the financial system when it comes to efficiently allocating financing flows between sectors and companies.

Impact on households

The ecological transition is also going to be a process that will affect people although unevenly and not only depending on their residence, but also on health, age, educational level and income, in the sense that global warming and air pollution could have a considerable negative impact on health, with different incidences depending on health or age.

Between 2006 and 2020, the average Spanish household presented a consumption that generated 271 kg of CO2 per 1,000 euros of expenditure. Another verifiable fact is that the amount of emissions per euro spent is also higher among Spanish households with lower educational level, those who do not own their home, the most numerous and those who reside in smaller municipalities. The Bank of Spain recommends that public policies articulate mechanisms to compensate, on a temporary basis, the most vulnerable households.

There is scope for medium-eastern taxation

Lower collection. Spain is currently within the group of economies of the EU-27 the one with the lowest collection for environmental taxation. That is precisely why the monetary authority considers that at this time it is essential to promote and improve the so-called ‘green taxation’ so that the economy can advance efficiently and with lower costs in the process of ecological transition. However, the most novel message is that it defends that with the increase in collection that is achieved, a reduction of other taxes can be proposed, as well as to compensate for the transition costs of the most vulnerable companies and families.

Leadership. For the supervisor, public policies, especially in fiscal matters and in the field of the regulation of economic activity, are those that must play “a leading role” in the ecological transition. This is so given that governments and parliaments enjoy the necessary legitimacy to establish the times and the way in which the economy and society must undertake the structural transformation and have the “broadest, most granular and appropriate” set of instruments to achieve the proposed objectives in the most efficient way. Progress must be made in this area, taxation must be redesigned and optimised.

Source: Five Days