Übung 1

Terms of trade (TOT) represent the ratio between a country's export prices and

its import prices. TOT indexes are defined as the value of a country's total exports minus total imports. The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100.

When more capital is leaving the country than is entering the country then, the TOT will be less than 100%. When the TOT is greater than 100%, the country is accumulating more capital from export than it is spending on imports.

Understanding Terms of Trade (TOT)

The TOT is used as an indicator of a country’s economic health, but it can lead analysts to draw the wrong conclusions. Changes in import prices and export prices impact the TOT, and it's important to understand what caused the price to increase or decrease.

TOT measurements are often recorded in an index for economic monitoring purposes.

An improvement or increase in a country's TOT generally indicates that export prices have gone up as import prices have either maintained or dropped. Conversely, export prices might have dropped but not as significantly as import prices. Export prices might remain steady while import prices have decreased or they might have simply increased at a faster pace than import prices. All these scenarios can result in an improved TOT.

Terms of trade for a country can be calculated by dividing its price index of exports by its price index of imports. This ratio is then multiplied by 100:

TOT = Pexports/Pimports x 100

An increasing TOT ratio indicates that a country is exporting relatively more goods than it is importing. Over time, this can lead to a trade surplus. The opposite would be true if TOT were decreasing.

Langfristige Szenarien sind nützlich, um ein nachhaltiges zukünftiges Betriebsmodell und Netto-Null-Ziele festzulegen. Kurzzeitszenarien hingegen ermöglichen den Nutzern neue Einblicke in die kurzfristigen Bedrohungen.

Die von uns analysierten Szenarien ergaben:

• ein geringeres BIP-Wachstum

• höhere Inflationsraten

• größere Volatilität anderer makroökonomischer Indikatoren

Dies zeigt, dass klimabedingte Ereignisse zu Störungen der Wirtschaft und damit der Finanzmärkte führen können.

• is the country a Green Club member, and how much trade with GC countries

• Energieintensität des Landes

• flexibility of production structure

• sensitivity to inflation

• how much revenue is collected due to NEW taxes

BCA = border carbon adjustment

Gemeinsame politische Anstrengungen werden in einer Untergruppe von Ländern auferlegt: China, die Eurozone, das Vereinigte Königreich und die USA, genannt Grüner Club.

Wenn eine Kohlenstoffsteuer auf Waren und Dienstleistungen aus Ländern mit weniger strengen Emissionsstandards in den Volkswirtschaften des Grünen Clubs eingeführt wird:

• Verlust der Wettbewerbsfähigkeit

• Verlagerung von kohlenstoffintensiven Tätigkeiten in Länder mit weniger strengen Emissionsrichtlinien

• politisches Instrument unwirksam in Bezug auf die Verringerung der globalen Kohlenstoffemissionen (McKibbin et al, 2018).Translated with DeepL

The macroeconomic transmission of an oil price rise is similar to that of a carbon price.

The higher price reduces demand for oil overall, leading to a decline in the energy input into the economy

and, therefore, potential output.

One important difference compared to the carbon price scenario is that the higher oil price delivers favorable terms of trade shock for oil exporters, stimulating domestic demand. However, this is partially offset by the decline in the volume of oil exported.

Two other distinctions

(1) the oil price does not necessarily impact the price of coal and gas and

(2) a higher oil price does not generate fiscal revenue for oil-importing countries.

due to energy efficiency, we could offset a large share of the decline in energy input, if we stop using fossil fuels

The TOT is used as an indicator of a country’s economic health, but it can lead analysts to draw the wrong conclusions. Changes in import prices and export prices impact the TO. It's important to understand what caused the price to increase or decrease.

An improvement or increase in a country's TOT generally indicates that export prices have gone up as import prices have either maintained or dropped.

Conversely, export prices might have dropped but not as significantly as import prices. Export prices might remain steady while import prices have decreased or they might have simply increased at a faster pace than import prices.

All these scenarios can result in an improved TOT.

An increasing TOT ratio indicates that a country is exporting relatively more goods than it is importing. Over time, this can lead to a trade surplus. The opposite would be true if TOT were decreasing.

• level of the carbon price

• how much energy-intensive production

• energy mix

• flexibility in the economy

1. Sudden rise in carbon price Scenario

2. Spike in oil price

3. Trade war

A carbon tax, or carbon price, is a policy instrument that can create the necessary incentives to spur the energy transition and encourage energy efficiency gains. It raises the costs of carbon-intensive activities relative to low-carbon activities, transferring some of the social costs of emissions back to the emitter and encouraging households, firms and governments to invest, adopt and instil practices that limit or even help reverse the damage caused by carbon-intensive activities.

Some assets will become stranded, a lot of uncertainty will hit the financial market and therefore will be higher borrowing costs and less investment.

On the long run, the carbon tax will generate income for the government, which then can be given back through tax cuts on other parts, for example lower income taxes.

In response to the higher carbon price, demand for carbon-heavy fuels such as coal and oil can be expected to decline, and with them, carbon emissions will decline. Country-specific adjustments in energy consumption depend on a range of factors, including the level of carbon price in the country, the energy intensity of production, the baseline energy mix and the flexibility of the economy.

The decline in demand for carbon-heavy fuels can also be expected to put downward pressure on the (pre-tax) price of fossil fuels. Countries that continue to rely heavily on fossil fuel exports can be expected to suffer a significant loss in potential export revenue, stemming from both a decline in the volume of demand for fossil fuels and a decline in the value of each ton of fossil fuel that continues to be exported. This will deliver significant terms of trade losses for fossil fuel exporters, acting as a constraint on GDP as income losses feed into lower levels of domestic demand.

• Primary energy refers to energy resources in their original form before any transformation or conversion takes place. Examples include coal, uranium, and barrels of oil.

• Secondary energy is obtained by converting primary energy into a more portable or usable form. Electricity, liquid fuels like gasoline and diesel, and heat are examples of secondary energy.

• Final energy is the energy delivered to and used by the end consumer. It includes electricity in homes, heating, and fuel purchased at the pump.

• Useful energy is the energy that contributes to the desired output or functionality of an end-use application. For instance, it can be the light produced by a lightbulb or the kinetic energy that powers a car.

Why this (spike in oil prices) may happen?

• Fossil fuel exporters => losses in export revenue and high levels of stranded assets.

• The price of fossil fuel exports increases, to partially offset the expected decline in the volume of sales.

• Others producers may exit the market prematurely, leading to disruptions in supply that could also drive prices higher in the short term.

• For example, coal prices in China surged in mid-2021, as new regulations came into force with strict limits on coal production, leading to widespread coal shortages and power cuts.

• Transitional shortages of fossil fuels may also arise as a result of underinvestment. Widespread cuts in investment, in anticipation of the future decline in demand, could drive a price spike if supply capacity declines faster than demand.

The macroeconomic transmission of an oil price rise has many similarities to that of a carbon price.

The higher price reduces demand for oil overall, leading to a decline in the energy input into the economy

and, therefore, potential output.

One important difference compared to the carbon price scenario is that the higher oil price delivers a positive terms of trade shock for oil exporters, stimulating domestic demand, although this is partially offset by the decline in the volume of oil exported.

Two other distinctions (1) the oil price does not necessarily impact the price of coal and gas and

(2) a higher oil price does not generate fiscal revenue for oil importing countries.

Transitions towards a low-carbon economy => dramatic shift in the composition of energy demand. Burning all of the resources of oil, gas and coal => release at least 11,000 Gt of CO2

But to limit the global warming to 1.5 degrees Celsius => cumulative emissions of CO2 should remain below 1,100 Gt, meaning that the vast majority of remaining resources must remain untapped.

The profitability and viability of sectors and technologies will be significantly impacted.

Serious economic implications for the many governments and firms that continue to rely on fossil fuel production, fossil fuel-based power supply, and fossil fuel-intensive industry.

Firms may face bankruptcy, bank balance sheets face deterioration, and Governments that rely on income streams from these activities face increasing budget constraints and a deterioration in sovereign bond value.

BCS = border carbon adjustment

Ein BCA wirkt im Wesentlichen wie ein direkter Handelszoll auf Nicht-Green-Club-Länder. Wenn es zu Vergeltungszöllen und -schranken kommt, hat dies das Potenzial, eine Art globalen Handelskrieg auszulösen, ähnlich wie der starke Anstieg von Vergeltungsmaßnahmen nach der Einführung von Zöllen auf Stahl, Aluminium und chinesische Produkte durch die Trump-Regierung im Jahr 2018 (Liadze, 2018).

In each of these scenarios we analysed the results were: decreased GDP growth, higher inflation rates, and greater volatility in other macroeconomic indicators This demonstrate the potential for climate- related events to cause economic and thereby financial market disruption.

• many similarities to that of a carbon tax (carbon price rise)

• higher price reduces demand for oil, decline in energy input into the economy and therefore less potential output

• difference to carbon price: positive terms of trade shock for oil exporters, stimulating domestic demand, but less volume of oil is exported, which makes this effekt smaller

• oil price does not necessarily impact the price of coal and gas

• higher oil prices do not generate fiscal revenue for oil importing countries