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Carbon needs to cost at least $100/tonne now to reach net zero by 2050 : Reuters poll

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October 25, 2021

By Prerana Bhat

BENGALURU (Reuters) – Setting the global average price of carbon per tonne significantly higher at $100 or more is necessary right away to incentivise net zero emissions by 2050, according to a Reuters poll of climate economists.

    Carbon pricing has come to the forefront of policy measures seen as ways to reduce emissions to a level consistent with the Paris Agreement target of less than 1.5-2 degrees Celsius of warming.

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The G20 group of large economies recognized carbon pricing for the first time as a possible tool at a meeting in Venice in Italy this year.

A higher price for carbon is seen as essential to fund the transition to net zero emissions by 2050, which is estimated to cost $44 trillion or 2%-3% of annual global GDP.

The International Monetary Fund has recommended a global average carbon price of $75 per tonne by the end of the decade.

But that figure should be at least $100, and right away, to reach net zero emissions by 2050, according to the median view of about 30 climate economists from around the world polled from Sept. 16 to Oct. 20 ahead of the COP26 summit in Glasgow.

That is significantly higher than where most countries who set the price currently have it, including among high carbon emitters.

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Nearly 70% of respondents – 19 of 28 – said the cost of carbon per tonne should be above $75, of whom 17 suggested $100 or above. While six respondents agreed with the IMF recommendation, only three believed it should be lower than $75. Recommendations ranged from $50 to $250.

“Current carbon prices in G20 economies are between $3-$60 per tonne of carbon emissions, but many large emerging economies like Brazil, India, Indonesia still have no carbon prices,” said Patrick Saner, head of macro strategy at Swiss Re.

“We also need to recognize that carbon pricing in itself is no silver bullet.”

The top three largest emitters – China, the United States and India – account for approximately half of global carbon emissions today.

According to the International Energy Agency, current carbon pledges by governments are insufficient to reach targets, and closing the gap would need the global average price of carbon to be much higher than what the IMF recommends.

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Indeed, Julien Holtz, strategist at Pictet Wealth Management, argues the global average carbon price per tonne is really only around $2 given only about 20% of global emissions are currently covered by actual carbon pricing schemes.

While China, the biggest carbon emitter, kicked off its emission trading system on July 16, with an opening price of 48 yuan ($7.51) per tonne, the U.S. and India still do not have a national carbon pricing market mechanism.

Even the European Union, at the forefront of reducing carbon emissions, has set the carbon price at a little more than half the poll’s recommendation. Benchmark carbon prices in the EU Emission Trading System, the first such system, were last trading at 57.78 euros ($67.26) as of Oct. 20.

The EU price is expected to average around 55.88 euros ($65.07) and 69.87 euros ($81.36) per tonne this year and next, according to a separate Reuters poll.

Wide economic disparities pose a major challenge to all countries agreeing to a uniformly high global carbon price, which partly explains the wide range of recommendations provided by climate economists to reach net zero by 2050.

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With most emerging and some developed countries’ continued reliance on fossil fuel-based energy sources to meet their energy demands, a high carbon price will be hard to sustain.

“It should start modestly but (be) sufficient to push out coal in the electricity merit order, at least partially,” said Charles Kolstad, professor of economics at Stanford University.

Despite being crucial to fight climate change, experts say carbon pricing alone is not enough.

“While carbon prices in the major world economies are necessary, they are not by themselves sufficient to deliver net zero economies by 2050,” said Jon Stenning, associate director and head of environment at Cambridge Econometrics.

“The key issue is the need for supporting fiscal and regulatory policy, in addition to carbon pricing to ensure that economies can decarbonise at the pace required.”

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(For a story on the global economic cost of climate change:)

(For an EXPLAINER on the economic stakes of climate change:)

($1 = 6.3925 Chinese yuan renminbi, 0.8590 euros)

(Additional reporting by Swathi Nair; Polling by Swathi Nair, Prerana Bhat, Hari Kishan and Mumal Rathore; Editing by Ross Finley and Hugh Lawson)

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Investors brace for potential hit to earnings because of Omicron

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December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

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That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

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U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

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Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

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(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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Bank investment chiefs signal China and emerging market caution

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December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

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“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

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(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

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IMF says euro zone should keep supporting economy, high inflation is temporary

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December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

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“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

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