The Implications of National and International Carbon-Pricing Policies for the South African Reserve Bank

Climate change mitigation policies have global economic ramifications, which means central banks worldwide must consider how international shifts in carbon prices impact their core mandates.

In this 2022 working paper, the South African Reserve Bank (Sarb) explores the impact of changing carbon pricing schemes and carbon border taxes on its mandate, by considering the implications for the country’s financial stability, with a particular focus on the financial and banking sectors. The authors recommend that the Sarb establish a more robust carbon pricing risk monitoring system.

The paper explores the transmission of financial risk from international mitigation policies to the national economy. Unless South Africa reduces the carbon footprint of its tradables, carbon pricing will have serious consequences for its monetary policy. As a high-carbon economy and net carbon exporter with low carbon pricing, South Africa is highly exposed to risk caused by increased carbon border taxes by its main trading partners, such as the UK, the EU and China.

According to the authors, as the price of carbon increases, many dimensions of the real economy and financial sector are exposed to risk, such as through effects on the value chain (particularly in trade-exposed sectors), the possibility of stranded assets, and price shocks caused by structural shifts in the international financial system to promote net-zero goals.

The paper recommends that the Sarb establishes a robust monitoring framework to better assess the impact of international decarbonisation policies. The framework should analyse the role between carbon price related shocks to the real economy and financial stability. Once this framework is established, authors say the prudential authority “should consider” reflecting climate risks in its calculation of risk-weighted capital requirements.

Properly assessing carbon risk is complicated by a lack of data and the heterogeneity of carbon pricing mechanisms. For effective risk assessments, the authors say the Sarb needs to gather and maintain detailed emissions data aggregated by sector and firm, adding that the bank can play a key role in accelerating the establishment and enforcement of reporting standards. Data will also be needed on the nation’s main trading partners, including a breakdown of trade flows, comprehensive emissions data, and an up-to-date record of their carbon policies.

Together, this data can be used to calculate the carbon intensity of firms whose liabilities are held in banks’ asset portfolios and to estimate and monitor exposures. The report also states that the Sarb should invest in developing forward-looking scenarios that consider how international climate strategies affect South African financial stability. This context-specific analysis should include internationally recognised scenarios and other climate-related shocks.

Finally, the authors say Sarb should consider how carbon pricing schemes influence its gap analysis, to ensure changes in South Africa’s neutral interest rate and potential output that are induced by mitigation policies are “accurately estimated”.