Guest essay by Eric Worrall
Climate change is huge risk for the American financial system, a major new bipartisan report says
Last Updated: Sept. 12, 2020 at 11:34 a.m. ETFirst Published: Sept. 9, 2020 at 2:34 p.m. ETBy
Rachel Koning Beals
A carbon tax features in CFTC report that aims to unite disparate federal efforts
The U.S. financial system, including banks, agricultural and oil interests, as well as regulators and investors, requires a unified front in accounting for climate-change risk, says the first comprehensive government report on such efforts.
Notably, the report released Tuesday by the Commodity Futures Trading Commission and an affiliated panel representing several sectors revives a call for taxing carbon pollution.
“As we’ve seen in the past few weeks alone, extreme weather events continue to sweep the nation from the severe wildfires of the West to the devastating Midwest derecho and damaging Gulf Coast hurricanes. This trend — which is increasingly becoming our new normal — will likely continue to worsen in frequency and intensity as a result of a changing climate,” said CFTC Commissioner Rostin Behnam, one of two Democrats on the five-member body.
“Beyond their physical devastation and tragic loss of human life and livelihood, escalating weather events also pose significant challenges to our financial system and our ability to sustain long-term economic growth,” he said. While wildfires and hurricanes occur for myriad reasons, their frequency and intensity has factored into the climate-change discussion.
The commission report, MANAGING CLIMATE RISK IN THE U.S. FINANCIAL SYSTEM, is available here.
From the report;
This report begins with a fundamental finding—financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions. Addressing climate change will require policy frameworks that incentivize the fair and effective reduction of greenhouse gas emissions. In the absence of such a price, financial markets will operate suboptimally, and capital will continue to flow in the wrong direction, rather than toward accelerating the transition to a net-zero emissions economy. At the same time, policymakers must be sensitive to the distributional impacts of carbon pricing and other policies and ensure that the burden does not fall on low-to-moderate income households and on historically marginalized communities. This report recognizes that pricing carbon is beyond the remit of financial regulators; it is the job of Congress.
In addition to the absence of an economy-wide carbon pricing regime in the United States, other barriers are holding back capital from flowing to sustainable, low-carbon activities. One involves the misperception among mainstream investors that sustainable or ESG (environmental, social, and governance) investments necessarily involve trading off financial returns relative to traditional investment strategies. Another is that the market for products widely considered to be “green” or “sustainable” remains small relative to the needs of institutional investors. In addition, lack of trust in the market over concerns of potential “greenwashing” (misleading claims about the extent to which a financial product or service is truly climate-friendly or environmentally sustainable) may be holding back the market. And policy uncertainty also remains a barrier, including in areas such as regulation affecting the financial products that U.S. companies may offer their employees through their employer-provided retirement plans.
These barriers can be addressed through a variety of initiatives. For example, a wide range of government efforts—through credit guarantees and other means of attracting private capital by reducing the risks of low-carbon investments—catalyze capital flows toward innovation and deployment of net-zero emissions technologies. A new, unified federal umbrella could help coordinate and expand these government programs and leverage institutional capital to maximize impact and align the various federal programs. Climate finance labs, regulatory sandboxes, and other regulatory initiatives can also drive innovation by improving dialogue and learning for both regulators and market innovators, as well as via business accelerators, grants, and competitions providing awards in specific areas of need. In addition, clarifying existing regulations on fiduciary duty, including for example, those concerning retirement and pension plans, to confirm the appropriateness of making investment decisions using climate-related factors—and more broadly, ESG factors that impact risk-return—can help unlock the flow of capital to sustainable activities and investments.
Climate risk backed by a carbon tax would be a dream product for commodity traders, because the underlying problem doesn’t actually exist. Profitable companies could be hit with an endless series of terrifying shakedowns, from risk traders in smart suits offering protection from SEC demands for more disclosure of climate risk exposure. Traders could bundle and sell subprime climate audit risk insurance products to pension funds. The products could be financed indirectly with soft loans, which are also part of the commission recommendation. No end of fun.
The only people who would suffer from this brutal climate rent seeking proposal would be ordinary people, who would shoulder the ultimate cost burden of all these expensive new risk products through higher prices and poorer quality of life.
The pressure on politicians standing in the path of this gigantic bipartisan money printing scheme must be utterly immense. Billions of dollars for the taking. All they need is for one man, or one small group of people, to say “yes”.
via Watts Up With That?
September 16, 2020 at 04:51AM