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Fuel Pricing and Subsidy Reforms in Asia after the 2014 Oil Price Crash: a Comparative Study of Strategies

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Empowering Public Private Collaboration in Infrastructure


Fuel Pricing and Subsidy Reforms in Asia after the 2014 Oil Price Crash: a Comparative Study of Strategies

A sustained plunge in benchmark crude oil prices from a peak of around $115/barrel in June 2014 to $30-50/barrel levels through the first half of 2016 provided a major impetus to governments across Asia to resume cutting back their fossil fuel subsidies and accelerating energy pricing reforms, which had been all but suspended in the years following the 2008 Global Financial Crisis.

Liberalization of oil products pricing in developing Asia’s major consuming countries has occurred in fits and starts over the decades, often dictated by the price cycles in the international markets, with every upswing in prices halting or sometimes even reversing the progress made during a period of low prices. Though GFC had sent Brent crude crashing nearly 74% from its historic high of more than $146 in July 2008 to a trough of around $36 by the end of that year, Asian governments, wrapped up in economic woes and concerns over inflation driven by their monetary easing, stood still on fuel subsidies in the months that followed. By the fourth quarter of 2009, crude had climbed back to around $80/barrel. It then went on to settle in a relatively high band of around $110-120 over the period of early 2011 to Q3 2014.

Withdrawing fuel subsidies from populations accustomed to cheap oil is especially difficult when international oil prices are high and the gap with subsidized fuel prices in the domestic market is big. The crude price tailspin that began in mid- 2014, however, largely eliminated that hurdle.

As declining international prices of fuels converged with their subsidized rates, calling an end to subsidies lost some of its political sensitivity. Besides, this time round, not only were the countries on a more solid economic footing, but the view that crude prices would likely remain depressed for a few more years as the market gradually worked its way out of oversupply and historically high inventory overhang in the absence of an OPEC intervention, encouraged bigger and bolder moves toward liberalization.

The Paris agreement on climate change adopted by 195 countries in December 2015 (Conference of Parties or COP21) served as a fresh reminder of the environmental imperative of adopting market pricing for consumer fuels.



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

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Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Highlights

- Adaptation financing needs to substantially increase to address the higher impact of extreme weather to society due to climate change.

- Adaptation projects are typically cost effective and bring wide range of resilience benefits.

- To demonstrate the value of resilience benefits to various stakeholders we consider that it is important to quantify those benefits based on a robust modeling framework.

- We expect that due to the large size of the adaptation gap and constrained public finances,private investment would need to make a considerable contribution to adaptation financing.

Dec. 07 2018 — We believe the recent surge in economic damage from extreme climatic events may focus the attention of public authorities about the need for adaptation investments and accelerate investment in this area.The United Nations Environment Program (UNEP) forecasts adaptation costs in developing countries at between $140 billion and $300 billion by 2030, and $280 billion and $500 billion by 2050. That is approximately 6x-13x above the amount of international public-sector finance available today--just to meet 2030 costs.

Over the last two years,the world has seen a flurry of extreme weather, which has exposed the vulnerability of many countries to these events. Climate change may make matters worse, irrespective of whether we manage to keep global warming to 2 degrees Celsius or not. Attention to climate change adaptation is therefore increasing, especially about how to finance it, given the need to raise enough public and private investment to fortify exposed countries and communities against the potentially devastating effects of physical climate risk.

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Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.