Goldman sees cheaper energy from border tax but not in U.S.

A proposed U.S. border-adjustment tax would make fuels that provide half the world’s energy cheaper — for everyone except Americans.

That’s the conclusion of Goldman Sachs analysts including Damien Courvalin. A tax like the one being discussed in the U.S. Congress would cause the dollar to appreciate, driving down the price of coal and liquefied natural gas, which are priced globally in the U.S. currency, they said in a Feb. 9 report.

Although U.S. LNG exporters would profit, American consumers would see minimal gains from lower global prices as they use little imported gas or coal, Goldman said. The plan may also spur deal activity in the U.S. as LNG companies seek to maximize the benefits of the tax. Canadian gas prices would have to fall relative to the U.S. benchmark at Henry Hub in order to remain competitive.

“A U.S. shift to a border tax adjustment would lower global coal and non-U.S. LNG production costs via the U.S. dollar appreciation channel,” Courvalin said in the report. “There would be little impact on U.S. gas supply costs and domestic coal-to-gas switching and as a result Henry Hub prices would likely remain unchanged.”

Prices for thermal coal for April delivery at Australia’s Newcastle port, a global benchmark, rose to $78.40 per metric ton as of Feb. 9, according to globalCOAL, an industry-backed trading platform. Spot LNG in Singapore fell to $7.043 per million British thermal units on Feb. 9, according to Singapore Exchange Ltd.

U.S. House Speaker Paul Ryan has pushed a plan that would cut the corporate tax rate to 20 percent and tax U.S. companies on their domestic income and imports, while exempting their exports and offshore income. The so-called “border-adjusted” plan has run into widespread opposition from retailers, oil refiners and other industries including Wal-Mart Stores Inc. Major exporters, including companies like General Electric Co., have expressed support. Goldman said it gives the plan just a 20 percent chance of approval.


Separately, President Donald Trump said Thursday that a “phenomenal” plan to overhaul business taxes may be released within the next “two or three weeks.”

The impact of a border tax plan would more immediately be felt on coal prices, where a higher portion of production costs are in local currencies. The wild card there, Goldman said, would be China, the world’s largest coal producer. Goldman expects China will let its currency depreciate to make its exports more attractive, thereby allowing coal prices to fall.

Coal prices would fall faster in the near term than gas, where costs aren’t as susceptible to moves in the dollar, Goldman said. Within a few years, though, U.S. LNG producers would maximize their benefit from the tax break and lower the cost of their exports, driving global gas prices down and leaving the impact on the two fuels relatively even over the long run.

“The decline in U.S. LNG export prices post-tax credit would drive global LNG demand higher, in our view, reversing the loss of volumes that the greater decline in coal vs. foreign LNG costs had initially created,” Courvalin said in the note. “On our estimate, this would leave global LNG demand unchanged pre- and post- a border tax adjustment.”

Companies are capitalizing on the shale boom in the U.S. by building liquefaction units that will make up about 14 percent of the world’s LNG capacity. The impact the tax would have on those exports depends on which company is lifting them from the terminals. The benefit for foreign companies with little taxable income in the U.S. would allow them to lower their costs by 15 cents per million British thermal units, while an energy major would be able to shave off up to 70 cents, Goldman said.

In the years following the adoption of a border tax, majors could buy out asset-light companies, or the asset-light companies could buy larger business in the U.S. to realize the full tax benefit, Goldman said.

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us