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Unless urgent steps are taken to curb climate change the US economy will suffer irreparable damage.
This is the stark warning from a report compiled by a group of 38 professionals representing expertise in finance, investments, insurance, climate change, environmental risk management, real estate, and includes several special government employees. A major oil company is also part of the group.
Called, Managing Climate Risk in the US Financial System, the 196 report warns that, ‘’Climate change poses a major risk to the stability of the US financial system and to its ability to sustain the American economy.”
In other words, climate change is not only ravaging large swathes of nature, it’s also in the process of destroying the economy and economic infrastructure.
The report, initiated by the US Commodity Futures Trading Commission (CFTC), goes on to say “… financial 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.’’
What’s of utmost concern is that climate change is having a major impact on financial markets, real estate, insurance, and infrastructure.
The report finds that an economy-wide price on carbon must be put in place at a level that reflects the true social cost of those emissions. Only then will financial markets be able to channel resources to reduce greenhouse gas emissions.
Disturbingly, the authors found that markets are not taking the risks that climate change poses into account.
“Evidence is accumulating that markets are pricing in climate-related risks imperfectly, and sometimes not at all,” write the authors, adding that research suggests that climate risk is currently under-priced in some markets and that climate-exposed financial assets may be overvalued.
In other words, climate change and its risks are not properly assessed by the financial markets.
The fear is that ‘’a sudden revision of market perceptions about climate risk could lead to a disorderly repricing of assets, which could in turn have cascading effects on portfolios and balance sheets and therefore systemic implications for financial stability.’’
The authors recommend that the United States establishes a price on carbon. “It must be fair, economy-wide, and effective in reducing emissions consistent with the Paris Agreement.’’ This, the authors say, is the single most important step to manage climate risk and ensure the appropriate allocation of capital.
President Donald Trump famously withdrew the US from the Paris Agreement in 2017.
In addition, the pandemic has put unprecedented stress on financial markets. The long-term result is likely to be prolonged fiscal deterioration, stressed business balance sheets, and depleted household wealth, say the report writers.
In this context, the authors say, the management of risks related to climate change becomes even more urgent.
The authors point out that financial regulators are not equipped to develop the policies needed to effectively address climate change, the most important of which is effective carbon pricing. The financial industry can warn about the results of failing to act, but the action must come from congress.
