Climate Change and the Balance of Payments: Considerations for Trinidad and Tobago

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 14 WP 02/2024 March 2024 Climate Change and the Balance of Payments: Considerations for Trinidad and Tobago Kester Thompson, Lauren Sonnylal and Ashley Bobb Research Department Climate change mitigation and adaptation policies entail significant risks to commodity exporters such as Trinidad and Tobago. In particular, transition risk can negatively affect domestic economic activity and the external accounts. Consequently, this paper seeks to assess the impact of transition risk on Trinidad and Tobago's balance of payments. Utilising the International Monetary Fund’s (IMF) “At-risk” framework, relevant domestic and external factors affecting the current account balance are identified, which are then used to estimate the probability distribution of the current account balance forecast. Based on quarterly data from 2012 to 2022, results show that external factors such as the Energy Commodity Price Index (ECPI), and domestic factors such as energy output significantly influence the current account balance. Further, shocks to international energy commodity prices in line with the Paris Agreement Net Zero Emissions (NZE) objectives represent major downside risks to the probability distribution of the current account balance. Consequently, policymakers should intensify efforts to manage exposure to fossil fuels, increase investment in renewable energy and expand production and exports of the non-energy sector. JEL Classification Numbers: Q54, F32, C32 Keywords: Climate Change, Balance of Payments, ‘At-risk’, Quantile Regression, Probability Distribution The Working Papers Series includes papers that are primarily written by Central Bank of Trinidad and Tobago research economists in order to solicit comments from interested readers and to stimulate discussion. The views expressed are those of the authors and not necessarily those of the Central Bank. Please send comments to commentsWP@central-bank.org.tt. © Central Bank of Trinidad and Tobago, 2024 Working Papers

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 14 Climate Change and the Balance of Payments: Considerations for Trinidad and Tobago Kester Thompson, Lauren Sonnylal and Ashley Bobb 1.0 Introduction Human activity has warmed the Earth’s average surface temperature by roughly 0.07oC per decade since the 1880s (Ghosh 2021). Society’s dependence on fossil fuels has accelerated the pace of heating at an unprecedented rate in the past decade which has led to extreme weather events such as, heat waves, cold snaps, droughts and floods, as well as natural disasters. To meet this threat of climate change, in 2015 the Paris Agreement was adopted by 196 parties with the aim of reducing global temperatures to below 2.0oC, compared to pre-industrial levels (UNFCCC 2015), through the reduction of greenhouse gas (GHG) emissions to net zero by 2050. On a macroeconomic level, the consequences of climate change can be defined in two broad categories; physical risks which arise from the direct economic losses and fatalities associated with an extreme weather hazard, and transition risks which refer to the uncertainties and policies that follow from a societal and economic shift to a low-carbon environment (Li and Chua Shu Yi 2022). Concerns about the energy transition’s real economic costs have delayed the adaptation of key climate-related policies for decades. Furthermore, with recent surges in commodity prices, concerns relating to energy security may further stall the implementation of necessary climate mitigation policies (IMF, WEO October 2022). Developing countries bear the burden of disproportionate economic costs associated with climate change due to an inability to adapt as effectively as their developed country counterparts. In particular, commodity-dependent developing countries (CDDC’s) face a more pronounced impact given their fossil fuel dependence as the race to eliminate carbon emissions by 2050 threatens a key source of income. Domestically, Trinidad and Tobago’s economic characteristics make the economy a unique case when assessing the possible implications of the climate change agenda. Trinidad and Tobago has benefitted financially from a long history in the petroleum industry which dates back more than 100 years. Overall, given its small size and its highly energy-intensive industries that primarily rely on the use of fossil fuels, the country’s carbon dioxide (CO2) emissions from energy use make the small-island state one of the highest emitters per capita in the world. As an energy commodity-exporter, the economy relies heavily on earnings from natural resources (oil and gas) to support economic development, with the energy sector representing the key source of foreign exchange earnings. In light of this, the transition to a low-carbon environment could result in output losses, shrinking exports and significantly lower foreign exchange reserve accumulation. These impacts can be captured in the movement of key balance of payments (BOP) variables, making climate change an important avenue of the macroeconomic investigation. As the dangers of global warming continue to be felt globally, researchers have increased their interest in understanding the impact of this phenomenon on the macroeconomy. While numerous studies have focused on the effects of transition risks in the international arena, including the impact of mitigation strategies on economic activity, the labour market and international trade, there is a dearth in the literature on the effects of green transition policies on the Caribbean. For Trinidad and Tobago in particular, the green transition will induce a significant economic transformation which may elicit external account adjustments over time. In this vein, the paper aims to determine the impact of climate-related transition risks on Trinidad and Tobago’s BOP aggregates, in particular the external current account, by employing the IMF’s “At-risk” framework.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 2 The research paper is structured as follows: Section 2.0 contains a review of the literature surrounding the channels through which climate-related risks, particularly transition risks, can affect specific accounts in the BOP. The potential effects of transition risk on selected oil-exporting economies are also discussed. Section 3.0 presents Trinidad and Tobago’s economic characteristics as well as key country-specific climate change developments. Section 4.0 highlights the data and methodology employed in the “At-risk” framework. The results and analysis are presented in Section 5.0 along with recommendations for the support of the green transition in the context of the external current account. The paper concludes in Section 6.0. 2.0 Literature Review Trade liberalisation has increased cross-border economic activity, contributing to a rise in overall GHG emissions. In light of this, international trade can play a key role in the global response to climate change and the transition to low-carbon economies and a greener, more sustainable society (Farrohki 2021; WTO 2023). Several countries are considering incorporating tools, such as carbon pricing, in their international trade frameworks to advance their individual climate agendas. Over recent years, carbon pricing, which can take the form of carbon taxes or Emissions Trading Systems (ETS), has increased in popularity (Parry et al. 2022). Given the lack of uniformity across individual countries in climate ambitions and implementation, border carbon adjustments (BCAs), which are taxes on imports and rebates on exports based on the emissions from the production of a good, have emerged as a possible solution to level the playing field (Kortum and Weisbach 2017; Parry et al. 2022). As part of its framework, the European Union (EU) established an ETS (the largest ETS in the world), and proposed a home-grown BCA known as the Carbon Border Adjustment Mechanism (CBAM). According to the European Commission, the CBAM, which will become fully operational in 2026, is an EU tool to put a fair price on the carbon emitted during the production of carbon intensive imports (cement, iron and steel, fertilisers, etc) to the EU and to encourage cleaner industrial production in non-EU countries. Meanwhile, consistent with its climate goals, the United Kingdom (UK) indicated its commitment to ending fossil fuel subsidies by 2025 and cease supporting overseas fossil fuel energy sectors (UK Government 2020; HM Government 2023). Additionally, to promote its green transition, the UK unilaterally removed tariffs to improve market access for green goods and services (Jozepa 2021). Similarly, to incentivise the transition to a clean energy economy, the United States (US) Parliament passed the Inflation Reduction Act in August 2022. This legislation, labelled as the largest climate investment in US history, provides incentives such as tax credits and subsidies to reduce renewable energy costs for organisations (United States Enironmental Protection Agency 2023). Climate change disproportionately affects developing countries as they are less able to adapt when compared to developed countries (WTO 2009, Wade and Jennings 2016). Particularly affected are CDDC’s. Notwithstanding their modest contribution to GHG emissions, CDDCs would be strongly affected by the implementation of the Paris Agreement (UNCTAD 2019). Climate change and the global climate agenda can potentially alter a country’s external position with the rest of the world. These effects can be measured through movement in the BOP accounts. Merchandise Trade Climate change can alter traditional comparative advantages such as agriculture and tourism- essential sectors in many low- and middle-income countries (LMICs) (WTO 2009). This leads to transitions in the pattern and volume of international trade flows. In particular, CDDCs are susceptible to shifts in climate change mitigation policies by importing countries and their renewable energy strategies. For instance, for a small energy-exporting such as Trinidad and Tobago, the implementation of a foreign oil substitution policy by the US, its main trading partner, could result in a reduction in Trinidad and Tobago’s exports of liquefied natural gas (LNG) and an estimated falloff in exports earnings equivalent to 2.2 per cent of 2009 Gross Domestic Product (GDP) (CEPAL 2011).

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 3 Nevertheless, new trade opportunities are made available from changes in demand to products that are less carbon-intensive, such as electronics and other light manufacturing (Brenton and Chemutai 2021, Bems and Juvenal 2022). There are substantial emerging opportunities to diversify exports in the transition to a low-carbon economy. However, LMICs face severe challenges regarding resource and capacity constraints and may not be able to capitalise on carbon competitiveness. Domestic firms’ inability to measure and verify carbon reductions for a given good or service may result in exports from LMICs being unfairly taxed at the border and risk being excluded from international value chains (Brenton and Chemutai 2021). The shift toward a low-carbon economy requires financing, investment in green energy and renewables, technology transfer, and cooperation between advanced and developing countries (WTO 2009, Bems and Juvenal 2022). Trade facilitates technological transfer to developing countries through imports of intermediate and capital goods, which these countries cannot produce independently, and knowledge sharing from developed countries to developing countries on production methods and designs. However, depending on the degree of protection of intellectual property rights, developing countries may be financially constrained in the acquisition of expensive patented technologies. Services Cross border transport (air, sea, road and rail) plays a key role in fostering increased globalisation (OECD 2010). However, transport contributes to over one-quarter of global CO2 emissions and is one of the few industrial sectors where GHGs emissions are still growing (Chapman 2007). In general, GHG mitigation and the transition to a low￾carbon economy require a wide range of services, including imported services, to complement the deployment of appropriate technologies. Steenblick and Grosso (2011) outlined some of the main cross border services; business services, telecommunications services, financial services, and construction and related engineering services. These services can be provided via the internet, training of clients’ personnel, construction and operation of production facilities and temporary physical movement of natural persons for expert judgement or supervision. Specific examples of prominent services related to GHG mitigation and adaptation are those associated with renewable energy-based electricity, fossil-fuel electricity production, steel production, finding leaks in natural gas pipelines, data analysis services, services associated with CO2 capture and storage and carbon-market services. Foreign Investments Climate change related risks can adversely impact selected capital inflows into an economy. Historically, environmental considerations in a firm’s decision to engage in overseas investments focused on the extent to which a host country may have less stringent regulations requiring the firm to internalise environmental externalities (Li and Gallagher 2022). However, with the growing threat of transitional climate change risks, multinational companies have begun to incorporate this exposure into their foreign investment decisions. Increasing climate change risks have been felt in varying industries. Gu and Hale (2022) examined whether multinational firms react to climate change risks by changing their level of foreign direct investment (FDI). It was noted, in part, that higher transitional risks reduce FDI in the affected country. Importantly, evidence showed that industries with high emissions tend to experience more transition risk as the parent companies take on the responsibility of mitigating and adapting to climate change. It has also been argued that climate change variability may reduce the local productive capacity of an economy, thereby lowering its ability to effectively absorb foreign investment inflows (absorptive capacity) and benefit from the economic returns of additional capital (Dell, Jones and Olken 2012, Drabo 2021). Absorptive capacity can be reduced through the destruction of infrastructure, loss of human life, and deterioration of the macroeconomic environment and

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 4 institutions (Drabo 2021). These circumstances can easily alter a foreign firm’s decision to engage in investments within the host country, thereby lowering the level of inward foreign investment. Notwithstanding, the global push towards greener environmentally friendly practices to curb the effects of climate change has led to a ballooning of mitigation and adaption-related investments. As the race towards net-zero carbon emissions by 2050 becomes a key factor in policies at both the country and industrial levels, investment prospects are presenting themselves which can reduce GHG emissions and boost resilience to climate change (IPCC 2014). Innovative opportunities offered by enabling target countries, for instance public-private partnerships that can build capacity in impactful projects such as renewable technologies in low-carbon electricity supply and energy efficiency for economic key sectors (UNCTAD 2022a), can play a crucial role in redirecting some of the inward foreign investment back to these economies. According to the UNCTAD (2022b), international private investment in climate change is concentrated in mitigation measures accounting for roughly 95.0 per cent (the remainder in adaptation investments) of these investments, where renewable energy and energy-efficient projects represent the lion’s share of the investment. Given the scope of most mitigation projects, private foreign investment is usually crucial for both capital financing needs and intellectual know-how in order to effectively execute the project, particularly among developing economies. To attract international investment in these domestic infrastructure projects, Governments can provide public support through facilities including; equity participation, grants, incentives and tax breaks (UNCTAD 2022a). Remittances It has also been stated that migrants’ remittances are a potential source of funding that can bridge the gap in climate financing and building resilience. Research on the link between migrant remittances and climate change adaptation argued that remittances provide a complementary opportunity for funding which can have a significant impact on individuals who are particularly vulnerable to the effects of climate change (Musah-Surugu, et al. 2018). Traditionally, central government financing through debt, FDI, donor aid and other private sector financing represent the main streams of funding for climate change adaptation. However, migrants’ remittances represent a definite financial resource that has the propensity to reach targeted vulnerable houses more directly than public finance flows, thereby closing the gap at the local level (Musah-Surugu, et al. 2018). Prior to the coronavirus (COVID-19) pandemic and other episodes of financial crises, remittances have proved to be a vital income stream in supporting poorer households against shocks, making it an important asset in building climate change resilience (Malpass 2022, Musah-Surugu, et al. 2018). According to the World Bank (2022), remittance flows to LMICs are estimated to have increased by 4.9 per cent in 2022, reaching US$626.0 billion - surpassing FDI, official development assistance and portfolio investment flows for this group. External Debt In countries where access to climate financing in the form of investments is less available, Governments have had to rely on external debt to fund reconstruction and climate-resilient development activities. This increased indebtedness, accompanied by higher interest rates, makes it more difficult for countries to respond to the worsening impacts of climate change. The Intergovernmental Panel on Climate Change (2022) thoroughly explored the relationship between rising climate vulnerability and its impact on the cost of debt, with some emphasis on developing economies. Based on the report, from 2014 to 2018, financial commitments to developing countries were concentrated in the form of debt rather than grants. Excluding multilateral development banks, only 51.0 per cent of these commitments aimed at adaptation were dispersed.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 5 While climate change has touched all corners of the globe, Small Island Developing States (SIDS) are disproportionately affected with high human vulnerability. In fact, SIDS are facing growing climate change-related costs amid eroding capacities and resources to address the ensuing loss and damage, including diminishing national capital reserves (IPCC 2022). This vulnerability has the potential to plunge SIDS into a mounting climate￾debt trap that can increase capital outflows and deteriorate the country’s BOP position over time. However, international sources for climate finance, such as the Green Climate Fund, which was established in 2010 and is the world’s main and largest dedicated multilateral climate fund, are aimed at supporting developing countries in achieving a reduction in GHG emissions and an enhancement of their ability to respond to climate change. Additionally, multilateral financial institutions such as the IMF and World Bank have recently scaled up their climate finance for emerging market economies. In particular, the IMF’s Resilience and Sustainability Trust (RST) provides low-income and vulnerable middle-income countries with longer-term, affordable financing, while the World Bank delivered a record US$31.7 billion in financing for fiscal year 2022, up from US$26.6 billion during the previous year, to help developing countries address climate change needs (World Bank 2022). The introduction of mitigation policies could have far-reaching implications for fossil-fuel dependent economies. Al￾Sarihi (2018) indicated that implementing mitigation measures to reduce carbon emissions could change the trading landscape of hydrocarbon markets by reducing the demand for fossil fuel exports, leading to lower prices and diminished GDP growth. Mercure et al. (2018) pointed out that the rapid reduction in fossil fuel consumption and transition toward renewables will result in a decline in the value of fossil fuel assets and a loss in income. Similarly, Gallagher et al. (2021) illustrated that introducing a large carbon tax would impact developing countries that are highly dependent on oil and gas as a source of exports. A shock to oil or gas prices lowers exports and immediately impacts BOP (Figure 1).

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 6 Figure 1: Macro-Critical Aspects of Spillover ‘Transition Risk’ Source: Gallagher et al. (2021) Campiglio et al. (2021) examined the transboundary climate-related and financial risks that could result from a decarbonisation of the world economy. The study employed a global macro-econometric model to assess the potential impacts of a decarbonisation of the world economy on trade, output, investment and employment as well as international macroeconomic and financial spillovers for over 70 regions and 43 industrial sectors. The results suggest that a reduction in fossil fuel consumption, together with a rise in renewable energy usage and trade in low-carbon technology/capital goods and critical minerals, will have implications for global trade and financial flows. More specifically, changing trade patterns in energy commodities will impact the BOP of both exporting and importing countries and the size and direction of international financial flows. Case Studies This section highlights individual country assessments of climate-related risk, particularly transition risk, and associated mitigation policies implemented by oil-exporting economies. Country cases include Norway, Russia, and other selected emerging and developing countries. More specifically, reference will be made to the impact on firms and the Norwegian economy (via the oil sector) from an increase in domestic carbon prices, as well as the impact of transition risk on the demand for exports and the availability of financing for Russian companies. The implications of achieving climate targets for oil production in regional and emerging markets economies are also discussed. Russia, one of the largest fossil fuel exporters in the world, faces significant risks as the world aggressively moves to reduce carbon emissions. For instance, Makarov et al. (2021) examined the effect of the introduction of the EU’s CBAM on Russia’s exports to the EU and European Free Trade Association (EFTA) countries. The study revealed that the implementation of the CBAM will lead to a reduction in Russia’s exports due to European countries’ substituting their imports for domestic production, and switching to imports from other regions where the production emission content might be lower. More specifically, the introduction of CBAM in the Carbon price/CBAM scope 1 (direct emissions) and scope 2 (indirect emissions) will result in an average loss of 7.1 per cent of real exports to the EU in 2030–2035. However, if only scope 1 emissions are covered, the loss will account for 2.8 per cent.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 7 Meanwhile, Norway is considered a small player in the oil and gas market, accounting for approximately 2.0 per cent of global crude oil production and 3.0 per cent of natural gas (Jordhus-Lier et al. 2022). However, Norway is the world's third largest exporter of gas and accounts for 20.0-25.0 per cent of the gas consumed in the EU. The oil and gas sector represents 14.0 per cent of Norway’s GDP and 41.0 per cent of exports. Therefore, a sharp slowdown in the oil and gas sector could create a trade imbalance with significant macroeconomic effects, including on the exchange rate. Grippa and Mann (2020) assessed the impact of higher global carbon prices on external demand and the Norwegian economy. The result, through comparative statistics, revealed that the imposition of a global carbon price of US$75 per tonne of CO2-equivalent would correspond to a tax of US$31.4 per barrel of oil, reducing the equilibrium quantity by roughly 7.0 per cent. Additionally, the consumer price would increase by about 36.0 per cent, while the producer price would fall by about 16.0 per cent, and global producers would face a 26.5 per cent drop in revenues. Concerning the Norwegian economy, it was estimated that the changes in global oil markets following a $75.0 carbon tax would lead to a reduction in Norwegian oil revenue of 26.5 percent. Moerenhout and Bellmann (2021) noted that net-zero and circular economy commitments appear likely to have a larger potential impact on Sub-Saharan African exports of crude and refined oil, and smaller potential short-term effects on export markets for LNG and coal- although all three fossil fuels are likely to face a tightening market in the medium-term. Meanwhile, Leke, Gaius-Obaseki and Onyekweli (2022) highlighted several challenges facing South Africa’s oil and gas sector. Firstly, countries dependent on oil and gas exports would find it increasingly difficult to sustain high returns as companies will be impacted by the introduction of carbon pricing and taxes. Additionally, oil and gas sector projects face greater scrutiny as investors have incorporated other factors including environmental, social, and governance into their decisions, resulting a widening gap between oil and gas company valuations and renewable energy company valuations. Notably, more than half of African oil and gas producing countries rely on oil and gas exports for more than 50 percent of their total export earnings. Further, several countries are dependent on global capital pools to fund their hydrocarbon projects and maintain their oil and gas operations. Leke, Gaius-Obaseki and Onyekweli (2022) noted that as global capital pools for hydrocarbon projects begin to reduce, the cost of oil and gas production in Africa is expected to rise, making African oil and gas projects potentially even less competitive in global markets. The Latin American and Caribbean region could also be impacted as the global economy moves towards a low￾carbon environment. Mercure et al. (2018) estimated that the losses associated with stranded fossil fuel assets in the Latin American region could account for an approximate GDP loss of US$300.0 billion up until 2035. 3.0 Stylized Facts Trinidad and Tobago has a long history in the petroleum industry which dates back more than 100 years. As early as 1857, the first oil well was drilled in the vicinity of the Pitch Lake located in La Brea1 . By 1914, driven by the start of World War I, oil production received a significant boost, bringing production to over one million barrels per year. As the industry continued to develop, the first oil refinery was commissioned in 1917. Since then, the country’s energy landscape has evolved to include other related streams, playing a central role in propelling economic growth. During the 1970s, Trinidad and Tobago’s energy production structure diversified from a predominately oil￾based system to include natural gas and gas-based petrochemical production. The development of the natural gas sub-sector and its pivotal role in spawning the burgeoning petrochemical sub-sector, largely for the purpose of exports, supported the development of LNG which led to the establishment of the Atlantic Liquefied Natural Gas Company (ALNG) in 1999. By 2000, the energy sector accounted for 31.3 per cent of GDP, which gradually increased to a high of just over 50.0 per cent of GDP in 2008 (Figure 2).

1 For historical information on Trinidad and Tobago’s energy sector see link.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 8 At this point, Trinidad and Tobago became a significant exporter of ammonia and methanol and the number one exporter of LNG in the Western Hemisphere2 . However, by the end of the year, faced with multiple exogenous shocks, such as the 2008 Global Financial Crisis, falling external demand for energy products and anaemic energy prices3 , the contribution of the energy sector to GDP began to decline. Subsequently, this relationship has gradually decelerated to a low of 15.0 per cent of GDP in 2020 amid the disruption to economic activity brought on by the COVID-19 pandemic. Despite the boost to energy prices in the following years (2021 and 2022), owing to the combined effects of a resumption in economic activity and the Russia-Ukraine war, the contribution of the energy sector to GDP remains significantly below the level recorded in 2008. Figure 2: Energy Sector’s Contribution to Gross Domestic Product /Per Cent/ Source: Central Statistical Office Historically, a direct link can be traced from the developments in Trinidad and Tobago’s hydrocarbon industry to trends in the country’s energy intensity, measured as the primary energy consumption per unit of GDP4 , and CO2 emissions in metric tonnes per capita (mt/cap). During the 2000s, as the sector experienced significant milestones, including the expansion of ALNG to include Trains 2 and 3 (2000), the commissioning of bpTT’s offshore gas processing facility (Cassia B in 2003), the establishment of two new petrochemical plants (Atlas Methanol and N2000 in 2004) and the construction of ALNG’s Train 4 (2005), increases were noted in both energy intensity and the level of CO2 emissions. In particular, energy intensity increased by 27.2 per cent from roughly 5.0 Kilowatt￾hours (kWh) in 2000 to 6.3 kWh in 2010, while the level of CO2 emissions almost doubled, moving from approximately 7.7 mt/cap in 2000 to 15.2 mt/cap in 2010. During the following decade, as the momentum in energy sector developments moderated, which coincided with the closure of the domestic steel plant ArcelorMittal (2016) and the state-owned oil refinery Petrotrin (2018), energy intensity and the level of CO2 emissions displayed a downward trend (Figure 3). Consistent with these closures, Trinidad and Tobago’s energy intensity experienced year-on-year declines of 6.5 per cent and 5.1 per cent in 2016

2 Information on energy sector developments in 2008 is sourced from Trinidad and Tobago’s Budget Statement 2008. 3 In June 2008, the oil price as measured by the West Texas Intermediate (WTI) benchmark, was US$133.9 per barrel. However, by December 2008, it plummeted by 69.1 per cent to US$41.4 per barrel. Similarly, the natural gas price, as measured by the Henry Hub benchmark, fell from US$12.7 per million British thermal units (mmbtu) in June 2008 to US$5.8 per mmbtu in December 2008. 4 Energy intensity is measured in kilowatt-hours (kWh) per 2011 $ purchasing power parity (PPP). 0 20 40 60 80 100 120 Total GDP Energy Sector

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 9 and 2018, respectively. Notwithstanding the falloff in CO2 emissions over the reference period to 11.3 mt/cap in 2019, Trinidad and Tobago remained one of the highest emitters per capita in the world. Despite limited data availability since then, given the significant reduction in domestic energy sector activity and global energy demand in 2020 owing to the COVID-19 pandemic, it can be assumed that energy intensity and CO2 emissions were lower during the year. Efforts towards reducing emissions are expected to continue as part of the national climate change agenda which was outlined in the country’s Nationally Determined Contributions (NDC). The aim is to reduce cumulative carbon emissions by 15.0 per cent by 20305 from business as usual (BAU) in three key sectors: power generation, transport, and industrial processes6 . Figure 3: Trinidad and Tobago’s Energy Intensity and Carbon Dioxide Emissions Sources: World Bank Data, Our World in Data, and Ministry of Energy and Energy Industries Trinidad and Tobago’s energy sector is a significant contributor to its external accounts. The exports of energy products are the country’s main foreign exchange earner representing, on average, 82.7 per cent of total exports from 2000 to 2022. Consistent with the developments in the local energy sector, increased export volumes coupled with the high-price environment led to a rise in energy export earnings in the early 2000s7 (Figure 4). Exports peaked at US$18.6 billion in 2008 before falling by 50.5 per cent (to US$9.2 billion) in 2009 due to the sharp decline in international energy prices8 and subdued external demand in the country’s major trading partners. The rapid pace of ongoing infrastructural developments, mainly within the energy sector, led to a steady rise in imports during 2000 and 2008. Imports fluctuated thereafter before experiencing a fall-off in 2019 due to the reduction of crude oil imports, for refining, at Petrotrin. Over the review period, Trinidad and Tobago’s external current account recorded consecutive surpluses, except for 2016 and 2020, driven primarily by net earnings on the merchandise account9 . The intensity of the impact of the COVID-19 pandemic in 2020 and the resultant lock-down measures of key economic sectors led to energy exports recording a sharp fall-off to roughly US$4.4 billion, losing more than one-third of its value compared to

5 This is equivalent to 103 million tonnes of carbon dioxide. 6 According to the Ministry of Planning, the agency responsible for coordinating the country’s overall climate change policy, the estimated cost of meeting this objective is US$2.0 billion, which is expected to be funded by both international and domestic sources. 7 In 2000, the sharp rise in the value of exports was underpinned by higher oil prices and increased output of LNG associated with a full year of production from the new LNG train. In that same year, ammonia, urea and methanol accounted for approximately 20.0 per cent of total exports. 8 WTI prices declined by 38.1 per cent to average US$61.7 per barrel in 2009, and Henry Hub natural gas prices fell by 56.2 per cent to average US$3.9 per mmbtu. 9 The deficits registered on the current account were reflective of the falloff in the value of exports, mainly underpinned by the reduction in non-energy exports from the closure of ArcleorMittal, together with a subdued energy price environment (2016). Meanwhile, the closure of the nation’s borders amid the pandemic was responsible for the deficit in 2020. 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18 Kilowatt-Hours Metric Tonnes per Capita C02 Emissions Energy Intensity Expansion of ALNG’s Trains 2 and 3 bpTT’s Offshore Gas Processing Facility Two new Methanol Plants Atlas Methanol, N2000 Commissioning of ALNG’s Train 4 Closure of Steel Plant ArcelorMittal Closure of Oil Refinery Petrotrin

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 10 2019. This was the lowest level seen since 2002. Despite the simultaneous decrease in the value of imports due to supply disruptions, the net goods trading position remained in surplus, albeit at a historically lower level. Figure 4: Selected Components of Trinidad and Tobago’s External Current Account /US$ Millions/ Sources: Central Bank of Trinidad and Tobago and Central Statistical Office The financial account mainly recorded net outflows from 2000 to 2022. This movement largely stemmed from transactions in direct investment, particularly from a reduction in liabilities and increased domestic holdings of portfolio investment assets abroad. FDI is a major source of financial flows for Trinidad and Tobago, of which the energy sector has been the primary recipient. Apart from the energy sector, the local iron and steel industry was also a beneficiary of inward FDI. In particular, ArcelorMittal was the largest earner of foreign exchange outside the energy sector (Bobb et al. 2020). Its closure in 2016 not only affected non-energy exports but also led to a reduction in FDI in the domestic economy. Trinidad and Tobago’s exposure to transition risk is anticipated to be high given that large energy multinationals such as BP Global, Shell and EoG Resources, which have subsidiaries in the local economy, have begun implementation of climate change mitigation strategies, setting targets to become net-zero energy businesses by 2050 or sooner. More specifically, BP Global’s objective inter alia, includes a 20.0 per cent reduction in operational emissions by 2025 and 50.0 per cent by 2030 against its 2019 baseline (54.4 MtCO2e), a 10.0-15.0 per cent reduction in CO2 emissions from the combustion of upstream production of crude oil, natural gas and natural gas liquids (NGLs) by 2025 and 20.0-30.0 per cent by 2030 against its 2019 baseline (361MtCO2e), and a 50.0 per cent reduction in methane intensity10 from upstream operations (BP 2023). Similarly, Shell set a target to reduce absolute emissions from their business operations (direct and indirect) by 50.0 per cent by 2030 (compared to 2016 levels on a net basis), as well as the short, medium and long-term targets to reduce the net carbon intensity of their energy products. By 2025, the company aims to eliminate flaring of gas, which generates carbon emissions from its upstream operations. Shell expects a reduction in its annual oil production of 1.0-2.0 per cent, including divestment and natural decline, from its upstream operations (Shell Global 2021). EoG Resources’ has outlined its net-zero plan for GHG emissions by 2040. Some of EoG Resources’ near-term emission targets (by 2025)

10Methane intensity refers to the amount of methane emissions from BP’s operated upstream oil and gas assets as a percentage of the total gas that goes to the market from those operations. -4,000.0 -2,000.0

2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0 16,000.0 18,000.0 Current Account Energy Exports Merchandise Trade Balance

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 11 highlighted are a 13.5 per cent GHG intensity rate by 2025, 0.06 methane emissions percentage, and zero routine flaring (EOG Resources 2023). Movements in the current and financial accounts resulted in surpluses in the overall BOP and accumulation of reserves in the early 2000s (Figure 5). However, given the reversal of the trend in the overall balance to mostly deficits from 2015 onward, the country’s stock of official reserves fell from a high of US$11.5 billion in 2014 to US$6.8 billion in 2022. Notwithstanding, Trinidad and Tobago’s external accounts managed to remain resilient based on traditional indicators of reserve adequacy11 . Figure 5: Trinidad and Tobago’s Financial Account, Overall Balance and Net Official Reserves /US$ Millions/ Source: Central Bank of Trinidad and Tobago Based on the literature and Trinidad and Tobago’s economic characteristics, it is anticipated that the energy transition is likely to have an adverse impact on the country’s BOP, ceteris paribus (Diagram 1). The reduction in domestic energy production from multinationals transitioning to net-zero, coupled with lower international energy prices, underpinned by the reduction in global energy demand, would reduce the value of energy exports and fuel imports. However, the decline in imports may only partially offset the falloff in exports, leading to an overall deterioration in the merchandise trade balance. Trinidad and Tobago’s services (net) mainly recorded deficits over the review period and with the anticipated increase in imports of services (to complement the deployment of appropriate technologies), the deficit on the services account is expected to widen. This movement may be tempered somewhat by improvements in the primary income account from the effects of a reduction in repatriated earnings (lower payments/outflows), which is concentrated in the energy sector. Despite this avenue for improvement in the current account balance, given that merchandise trade is the main driver of the current account, it is expected that the overall current account balance would narrow. At the same time, net outflows12 are likely to be recorded in the financial account from transactions in the investment categories. Direct investment liabilities (direct investment in Trinidad and Tobago) may be reduced as parent energy companies deploy strategies to adapt to and mitigate climate change related risks. Additionally, as environmental, social and governance (ESG) investments become more popular, domestic investors may also factor these securities into their portfolios, leading

11 Traditional reserve adequacy metrics (and associated international benchmarks) include import cover (6.0 months of import cover), the ratio of reserves to broad money (0.2 or 20.0 per cent), and the ratio of reserves to short-term external debt (1.0 or 100.0 per cent). 12 Net outflows can arise from an increase in outflows or a decrease in inflows. -8,000.0 -6,000.0 -4,000.0 -2,000.0 0.0 2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0 Financial Account Net Official Reserves Overall Balance

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 12 to an increase in domestic holdings of these instruments abroad. Other investment assets may also be affected by lower inflows from energy exports which could translate to lower currency and deposits held abroad. Counteracting this may be an increase in loan liabilities from the contracting of external debt for climate financing.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 13 Diagram 1: Transmission Channels to the Balance of Payments Source: Author’s Illustration Domestic: Lower Energy Production External: Lower Energy Prices Current Account Financial Account Exports Services Primary Income Direct Investment Portfolio Investment Other Investment Energy exports

Fuel imports Transport services

Insurance services Other business services Repatriation of earnings Inward investment Holdings of foreign assets Currency and deposits

Loan liabilities Overall Worsening of the Balance of Payments

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 14 4.0 Data and Methodology The methodology primarily follows the “At-risk” framework as developed by Prasad et al. (2019)13 which was recalibrated to represent the external accounts for the purposes of the current research. This framework estimates the severity and the likelihood of a sharp economic slowdown. In line with Prasad et al. (2019), the analysis first establishes the relationship between future current account balances and macroeconomic variables using the quantile regression approach. Following this, the current account distribution is derived by fitting a parametric distribution using the estimated current account quantiles. The distribution of the future current account balances is estimated based on information contained in macroeconomic variables. The advantage of employing the “At￾risk” approach is it produces an entire distribution allowing for the assessment of upside and downside risks compared to other models that make point forecasts. In terms of the present investigation, this feature will facilitate the analysis of key drivers of future current account balances, including their relative importance, which varies across the current account balance distribution and the forecasting horizon. The first step involves selecting appropriate variables and the construction of partitions, which are groupings of related macroeconomic variables instead of individual variables. The use of partitions helps to extract common trends among relevant macroeconomic variables and remove idiosyncratic noise, thereby improving the quality of the subsequent quantile regressions. The most relevant indicators for each partition are determined based on principal component analysis, which extracts common trends from a large array of indicators. Given that Trinidad and Tobago is an energy-based economy, the performance of the current account is driven by both domestic and external factors. Consequently, domestic factors (domestic partition) comprise energy GDP, non-energy GDP, domestic inflation and the trade-weighted real effective exchange rate (TWREER). Similarly, external factors (external partition) that affect the performance of the current account include the Energy Commodity Prices Index (ECPI)14, global growth, global inflation and the US Federal Funds rate (Table 1). In the second step, quantile regressions are used to estimate the relationship between selected explanatory variables and future quantiles of the current account balance. Notably, a quantile regression at the 10th percentile would estimate a relationship when the current account balance is weak, while a quantile regression at the 90th percentile would be based on stronger current account outcomes. For a set of horizons ℎ ∈ {1, 4, 8, 12} where h represents the number of quarters ahead, the following specifications are estimated: 𝑦𝑡+ℎ = 𝛼 𝜏 + ∑𝛽𝑖 𝜏𝑋𝑖,𝑡 𝑖 ∈𝐼

• 𝜀𝑖,𝑡 𝜏 Where 𝑦𝑡+ℎ represents the future current account position h quarters ahead, 𝑋𝑖,𝑡 is the partition i (domestic and external factors), 𝛽𝑖 𝜏 the coefficient of the 𝜏 quantile regression, 𝛼 𝜏 the associated constant and 𝜀𝑖,𝑡 𝜏 the residual. The quantile regressions are estimated at different points of the distribution of 𝑦𝑡+ℎ, 𝜏 ∈ {0.1, 0.25, 0.5, 0.75 , 0.9}. Each 𝛽 represents the macroeconomic linkage between the variable 𝑋𝑖,𝑡 and the future current account balance at different points of the distribution. The final step involves the generation of future current account distributions. Following the quantile regression estimation based on partitions of macroeconomic variables, the conditional distribution of the future current account is derived by fitting a t-skew distribution to predicted values of the estimated conditional quantile regressions. The

13 The growth-at-risk (GaR) framework links macrofinancial conditions to the probability distribution of future real GDP growth utilising an Excel/Python-based tool. 14 The ECPI is a summary measure of the price movements of Trinidad and Tobago’s top ten energy-based commodity exports. LNG, Crude oil, Ammonia, Methanol, Gas oil (Diesel), Motor gasoline, Natural gasoline, Jet fuel/Kerosene, Propane and Urea.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 15 complete distribution of future current account balances, conditional on the state of the macroeconomic environment, enables assessments of the likelihood of future current account balances. Over the medium-term, the International Energy Agency’s (IEA) Net Zero by 2050 A Roadmap for the Global Energy Sector and the World Energy Outlook 2022 indicated that energy prices and output are anticipated to decline in line with the NZE objectives, reflecting a rapid drop in oil and natural gas demand. Further, prices are increasingly set by the operating costs of the marginal project required to meet demand, resulting in significantly lower fossil fuel prices than in recent years. Therefore, in order to capture the impact of transitional risks on the domestic economy’s current account balance, this study assumes that crude oil prices and output are anticipated to fall by 21.0 per cent and 14.0 per cent, respectively, over the period 2023 to 2025. It is also assumed that other international energy commodity prices such as natural gas and petrochemicals follow a similar trend. Consequently, the ECPI was shocked to reflect the decline in crude oil prices while domestic energy output was shocked in line with the reduction in crude oil supply15. Quantile regressions are used to project the entire current account distribution over the next 12 quarters. Regarding a priori expectations, the IMF (2012) indicated that the macroeconomic performance of commodity exporters tends to move with commodity price cycles. Consequently, it is anticipated that the ECPI is positively associated with the current account balance. Increases in international energy prices lead to higher export earnings and a widening of the current account balance. At the same time, a decline in global energy prices is expected to result in a falloff in energy export earnings and a narrowing of the current account balance. Similarly, it is anticipated that domestic energy and non-energy GDP are positively associated with the current account balance. Expansions in energy and non-energy output increase exports and result in an overall improvement in the current account balance. The converse is true. A pickup in global growth represents an increase in economic activity amongst Trinidad and Tobago’s main trading partners, such as the US, the EU, and CARICOM, which could lead to an improvement in the current account balance. While a slowdown in global output entails a deceleration in real GDP among the domestic economy’s main trading partners, resulting in a reduction in exports and a deterioration in the current account balance. A negative relationship is expected between the real effective exchange rate (REER) and the current account balance (Altayligil and Çetrez 2020). Changes in the REER affect the prices of exports and imports. An appreciation of the REER results in exports becoming more expensive while imports become cheaper, thus leading to a deterioration in the current account balance and vice versa. Clausen and Kandil (2005) explained two channels through which domestic inflation affects export growth - a scale factor and a relative price channel. The scale factor channel suggests increased export growth with improved economic conditions and, hence, domestic price inflation. Regarding the relative price channel, inflation makes domestic goods more expensive, decreasing export competitiveness. The net effect on exports will depend on the relative strength of the scale and competitiveness channels. It is anticipated that increases in the US Federal Funds rate will lead to higher earnings on the primary income account and improve the current account balance. In an effort to capitalise on higher US interest rates, it is expected that domestic residents would increase their holding of external assets primarily in the form of portfolio investment assets. This, in turn, will result in an uptick in income received on the primary income account. Data for the current account balance, the ECPI and the TWREER are obtained from the Central Bank of Trinidad and Tobago, while energy GDP, non-energy GDP and domestic inflation are obtained from the Central Statistical Office (CSO). Global variables such as real GDP growth and global inflation are obtained from the IMF’s World Economic Outlook (WEO) database. Data relating to the US Federal Reserve target range is sourced from the US

15 Due to limited data on climate change mitigation policies' impact on domestic energy production, projected energy production data from the IEA was utilised.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 16 Federal Reserve. The examination of climate change on the current account balance employs quarterly data from the first quarter of 2012 to the fourth quarter of 2022. Table 1: List of Domestic and External Variables Domestic Variables External Variables Energy GDP (EGDP) Energy Commodity Price Index (ECPI) Non-energy GDP (NGDP) Global Growth (Growth) Domestic inflation (INF) Global Inflation (Inflation) Trade-weighted real effective exchange rate (TWREER) US Federal Funds Rate (US FED) Sources: The International Monetary Fund, United States Federal Reserve Economic Data, Central Bank of Trinidad and Tobago, Central Statistical Office.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 17 5.0 Results and Discussion The results show that the domestic factors index was largely negative over time, possibly attributed to the subdued economic activity over the reference period, particularly within the domestic energy sector (Figure 6). The energy sector contracted on average by 3.1 per cent from the first quarter in 2013 to the fourth quarter in 2022. Meanwhile, over time, the external factors index captures two major troughs in 2016 and 2020, coinciding with declines in global energy prices. In 2016, the plunge in energy prices reflected supply factors - higher US oil production and a shift in Organisation of the Petroleum Exporting Countries (OPEC) policies and demand factors - weakening global growth prospects. In 2020, international energy commodity prices fell sharply due to COVID-19 mitigation policies. Regarding the relative importance of external factors in explaining fluctuations in the current account balance, the ECPI, global inflation and global growth displayed the largest impact, while domestic variables such as energy output, non-energy output and domestic inflation exhibited the greatest influence on the current account balance. These results are consistent for small, open energy-exporting economies where global energy prices and domestic energy output drive economic activity and the external accounts. Regarding estimating the quantile regression used to predict the current account balance one quarter ahead, the results indicated a positive relationship between external factors and the current account as well as domestic factors and the current account in all quantiles (Figure 7). However, the external factors exhibited a stronger relationship than the domestic factors. This suggests that international energy commodity prices have a stronger impact on the current account than domestic conditions such as energy output.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 18 Figure 6: Relative Importance of External and Domestic Indicators Source: Authors’ Calculations

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 19 Figure 7: Short-Term Quantile Regression Coefficients (1-Quarter Ahead)

Source: Authors’ Calculations Based on the baseline regression, the future current account balance distribution is derived one quarter ahead. The conditional distribution of the current account balance one quarter ahead indicates a 5.0 per cent probability that the current account balance will record a surplus of US$18.3 million (Figure 8). Additionally, the probability of the current account recording a value below zero or a deficit is 0.0011 per cent. The results are consistent with the current energy price environment. Notably, global energy commodity prices are anticipated to remain elevated due to geopolitical conflicts such as the ongoing Russian-Ukraine war. Domestic Factors External Factors

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 20 Figure 8: Conditional Distribution of the Current Account Balance (1 quarter ahead) US$ Millions

Source: Authors’ Calculations Further to the quantile regression, scenario analysis was undertaken to determine the impact of transitional risk on Trinidad and Tobago’s current account balance. Under the baseline scenario, there is a 5.0 per cent probability that the current account balance will amount to US$18.3 million over the next 12 quarters and the probability of the current account balance recording a deficit is 0.0011 per cent. Therefore, under the baseline scenario, the current account is likely to remain in surplus over the next three years. Shocks to the ECPI and the EGDP were applied in line with the projected decline in crude oil prices and a reduction in crude oil supply from 2023 to 2025. In particular, crude oil prices were anticipated to decline by 21.0 per cent over the reference period, while crude oil output is projected to fall by 14.0 per cent over the forecast period. A shock to the ECPI based on the projected declines in crude oil prices and supply shifts the distribution of the current account balance to the left. Further, there is a 5.0 per cent probability that the current account balance will record a deficit of US$291.1 million over the next 12 quarters and a 100 per cent chance that the current account will record a deficit. Given that Trinidad and Tobago’s current account performance is driven by exports, particularly energy exports, shocks to global energy prices lead to a deterioration in the current account balance and represent significant downside risks to the domestic economy. These results are consistent with Al-Sarihi (2018), who indicated that the introduction of climate change mitigation policies would result in lower energy prices and GDP for energy exporters.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 21 CDDC’s such as Trinidad and Tobago can experience economic downturns during the transition towards a low￾carbon environment. In particular, for these countries the external current account balance is likely to deteriorate, reflecting a slowdown in global energy demand and prices. Consequently, policymakers will need to design and implement policies to reduce the reliance on fossil fuels while promoting broad-based growth. Diversification of the domestic economy including its production, exports and markets could help to alleviate the impact of climate change mitigation policies and build a more resilient economy. UNCTAD (2023a) indicated that diversification not only minimises risks associated with economic concentration, but also generates faster economic growth by expanding productive capacities and shifting resources from low to high-productivity sectors, and promoting economic structural transformation. Regarding production and exports, strategic steps should be taken to shift the composition of exports from crude oil, refined products, natural gas and petrochemicals (grey economy) to green hydrogen (GH2) and downstream green products. A report produced by the Inter-American Development Bank and the National Energy Corporation of Trinidad and Tobago in 2022 indicated that Trinidad and Tobago could leverage its existing petrochemical facilities, operational experience and associated infrastructure. The study proposed a 35-year plan which includes three stages for the investment in renewable energy16. The successful implementation of GH2 could assist the domestic economy in reducing its carbon footprint and boosting the production and exports of green energy products. With respect to markets, the penetration of new markets could boost non-energy output and exports. In that vein, Trinidad and Tobago could seek to expand its manufacturing exports across the Latin American region through partial scope agreements. FDI could play a critical role in the domestic economy’s shift towards a greener economy. UNCTAD (2023b) noted that international project finance accounts for 55 per cent of investment in renewables. Policymakers will need to strike a balance between incentivising green production and ensuring energy revenues are not depleted. Further, to provide investors with greater certainty on investment opportunities and to facilitate the construction and marketing of bankable projects, detailed planning including targets for emission reductions into a transition path for the energy mix, implied asset requirements and infrastructure gaps, and assessments of energy demand, potential and locations are necessary (UNCTAD 2023b). Overall, the promotion of green FDI should occur within the broader context of green fiscal policies. IMF (2023) outlined some elements of fiscal policy that are consistent with achieving net-zero emissions by 2050. These include revenue and expenditure measures, such as carbon pricing (to reduce emissions efficiently and generate fiscal revenues), green public investment (to complement green private capital), green subsidies (to encourage innovation and deployment of clean energy), and targeted transfers (to mitigate adverse impacts on households during the green transition). The decarbonisation of the domestic economy would require significant financing from both public and private sectors as well as international sources. In that context, one possible option for raising financing for climate change initiatives is through issuing of green bonds. World Bank (2015) defines green bonds as a debt security that is issued to raise capital specifically to support climate-related or environmental projects. Across the globe, several countries have issued green bonds. For instance, the International Finance Corporation (2022) indicated that green bond issuers in Emerging Market and Developing Economies (EMDEs) recorded their strongest year in 2021, with US$95.0 billion in issuance, up from US$41.0 billion in 2020 and US$53.0 billion in 2019. An additional US$64.0 billion of social, sustainability, and sustainability-linked bonds brought the total EMDE Green, Social, Sustainability and Sustainability-linked (GSSS) bond issuance in 2021 to US$159.0 billion. China remains the largest issuer of green bonds among EMDEs, with issuance of US$59.0 billion in 2021 (63.0 per cent of the total). Notably, within the Latin America and the Caribbean region, while Chile, Brazil and Colombia were the top three issuers of GSSS bonds, countries such as Dominica and Barbados also contributed to the issuance of GSSS bonds. In particular, the Dominican Republic issued green bonds with renewable energy firms for US$20.0 million, while Barbados

16 For more details, see The roadmap for a green hydrogen economy in Trinidad and Tobago.

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 22 issued a sustainability bond of US$7.0 million. Therefore, the issuance of GSSS bonds represents a major potential source of finance for investment into green products and renewable energy. Notwithstanding the pickup in EMDEs issuing GSSS bonds, careful attention should be given to the criteria to access green bonds as outlined by International Capital Market Association (2022). This includes; use of proceeds, the process for project evaluation and selection, management of proceeds and reporting. Additionally, Trinidad and Tobago should seek funding from international financial and developmental organisations such as the World Bank and the United Nations Green Climate Fund to help lower carbon emissions and boost the production of green products. Another possible source of financing is the Green Fund Levy. The Green Fund levy is charged at 0.3 per cent on gross income of companies. At the end of September 2020, the balance of the Green Fund amounted to $7.6 billion17 . Removing administrative barriers would increase accessibility to the Fund, allowing more institutions to undertake green initiatives in the domestic economy. Additionally, amid elevated international energy commodity prices, fiscal buffers should be strengthened by increasing savings from energy revenues and the building up of the Heritage and Stabilisation Fund (HSF). The HSF was established to: i) cushion the impact on or sustain public expenditure capacity during periods of revenue downturn whether caused by a fall in prices of crude oil or natural gas, or in the case of exceptional circumstances; (ii) generate an alternate stream of income so as to support public expenditure capacity as a result of revenue downturn caused by the depletion of non-renewable petroleum resources; and (iii) provide a heritage for future generations of citizens of Trinidad and Tobago from savings and investment income derived from the excess petroleum revenues18 . Therefore, over the medium- to long-term, the HSF could be used to support a just transition to a low-carbon environment. There is significant scope to improve the services account of the BOP. As aforementioned, the transition to a low￾carbon economy requires a wide range of services including business services, telecommunications services, financial services, and construction and related engineering services. Notably, this will require training and retraining of the labour market with the prerequisite skills to capitalise on the opportunity to supply these services. Additionally, deepening engagements between the Government and institutions such as the Trinidad and Tobago Coalition Services Industries (TTCSI) can spur improvements in the services account. In particular, the expansion of the TTCSI’s National Services Export Portal (NSEP), a platform that helps businesses and services providers to elevate their global presence, leverage market intelligence and explore new networking avenues as well as the Gateway To Trade (G2T) Export Accelerator Programme19 , which is geared towards strengthening the capacity of companies to engage in international trade, could serve to boost services exports and contribute to an overall improvement in the current account balance.

17 The Government of the Republic of Trinidad and Tobago, Ministry of Planning and Development: What it takes to tap into $8b Green Fund. 18 The Trinidad and Tobago Heritage and Stabilisation Fund Annual Report 2022 Government of the Republic of Trinidad and Tobago Ministry of Finance Confronting Global Turbulence: https://www.finance.gov.tt/2023/06/07/the-trinidad-and-tobago-heritage-and-stabilisation-fund-hsf-annual-report-2022/ 19 Trinidad and Tobago Coalition Services Industries. “Revolutionising Caribbean Services: Transforming Today, Shaping Tomorrow.” Annual Report 2022: https://ttcsi.org/ttcsi-annual-report-2022/

Central Bank of Trinidad and Tobago Working Papers—WP 02/2024 March 2024 Page 23 6.0 Conclusion The global thrust towards a low-carbon economy would significantly impact energy-exporting economies. Lower international energy commodity prices would adversely affect these countries’ fiscal and external accounts. Against this backdrop, the research paper investigated the potential impact of climate change and associated mitigation policies on Trinidad and Tobago’s BOP, mainly the current account. Through the employment of the IMF’s “At-risk” framework, the results indicated that both external and domestic factors influenced Trinidad and Tobago’s external current account balance. Notably, external factors such as the ECPI, had a greater impact on the current account balance than domestic factors such as energy output. Furthermore, the results from the current account distribution for one quarter ahead suggest that the current account balance is likely to record a surplus. Finally, scenario testing which incorporated shocks to the ECPI in line with the NZE objective, indicated a significant shift of the current account distribution to the left, suggesting a deterioration of the current account balance over the medium-term (2023 -2025).

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