Climate change may wreck economy unless we act soon, federal report warns


social costs —

Fires and floods are expensive and disruptive and we’re not ready, report finds.

Kate Cox

A deep orange sky covers an automobile bridge across a lake.

Enlarge / A boat motors by as the Bidwell Bar Bridge is surrounded by fire in Lake Oroville during the Bear fire in Oroville, California, on September 9, 2020.

The ever-worsening climate crisis is already causing waves of human suffering—both internationally and here in the United States. And now, a new report from a US financial regulator finds that climate change is also poised to do major damage to some of the institutions with the most power to help mitigate it: Wall Street banks and investors.

Climate change “poses a major risk to the stability of the US financial system and to its ability to sustain the American economy,” the report (196-page PDF) from the US Commodity Futures Trading Commission (CFTC) begins. Regulators “must recognize that climate change poses serious emerging risks to the US financial system, and they should move urgently and decisively to measure, understand, and address these risks.”

The report, called “Managing Climate Risk in the US Financial System,” was written by a group of 35 advisors from major banks such as Morgan Stanley and JPMorgan Chase, environmental groups such as The Nature Conservancy and Ceres, energy firms such as BP and ConocoPhillips, several investment firms, and experts from several universities. It is the first analysis of climate change to come from a US financial regulator looking specifically at how change, already underway, will affect trading of agricultural commodities and futures, the real estate and insurance markets, and all the complex financial instruments that are built on multiple industries taken together.

Climate change is already affecting financial markets, real estate, insurance, and infrastructure, the authors find. They conclude that if the US economy is going to survive, we need to first and foremost put a realistic, literal financial cost on the social toll of carbon emissions. Everything else can flow from there.

Growing costs, hard to predict

It is “no longer theoretical” that climate change will produce costly events, the report says, citing the combinations of hurricanes and wildfires that struck the United States in 2018 and 2019. The financial risks of such disasters are also real, and they grow throughout a system.

The report was commissioned by the agency that deals with commodities and futures, so the authors take time to examine what the market has or has not appropriately considered. Unfortunately, they find that present-day markets, such as they are, are basically ignoring climate change.

“Evidence is accumulating that markets are pricing in climate-related risks imperfectly, and sometimes not at all,” the report says, adding that studies have found “no association between current stock prices and measures of predicted changes in climate-related physical hazards.”

In other words: investors and businesses are carrying on as if nothing is changing, when in fact everything is. And if those financial institutions want to avoid “larger exposures to risky assets” than they want to have—and, for that matter, “disruption or impairment of all or part of the financial system”—that’s going to have to change.


The best way to go forward, the authors conclude, may be by going slightly backward and getting the United States back on board with the landmark international Paris Agreement to limit greenhouse gases.

The Trump administration pulled the US out of the Paris Agreement in 2017, and the withdrawal became official in 2019. But in order to mitigate climate change, the US—through Congress—needs to adopt a carbon pricing scheme that is “fair, economy-wide, and effective in reducing emissions consistent with the Paris Agreement.”

All the Federal financial regulators, including the Federal Reserve and the Securities and Exchange Commission, also need to “incorporate climate-related risks” into their mandates, analyses, and work, the report adds. The consideration of climate-related risk should persist at every level, including strategic planning and organizational structure, and agencies should put time and effort into researching the potential and likely financial implications—both systemic and sub-systemic—of climate risks.

The United States also can’t go it alone, the report finds, calling on US regulators to “actively engage their international counterparts to exchange information and draw lessons on emerging good practice” in how to handle climate-related risks.

Getting the US to change, however, is likely to be an uphill battle at least in the short term. The Trump administration has been on a deregulatory tear since 2017, killing off vehicle fuel efficiency rules, methane emissions rules, and a slew of other environmental regulations. Neither is Congress particularly inclined to act on anything at this moment in time, particularly not when it comes to crafting complex new legislation. This may or may not change in 2021, depending on the outcomes of the impending national election.

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