Fed Commodities Regulators Break the Mold with Call for Carbon Pricing

17 Sep 2020

The climate crisis threatens the stability of the U.S. financial markets, warned commissioners appointed by the current president to the Commodity Futures Trading Commission in a recent report.

Although their report has not been approved by the full commission, Emilie Mazzacurati, founder/CEO of climate risk analyst 427, called it miraculous in the current political environment. She added that it sets out principles a new administration could use to ameliorate climate risks.

“Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health,” states Managing Climate Risk In The U.S. Financial System, the Sept. 9 report led by CFTC commissioners.

Source: National Oceanic & Atmospheric Administration

Takeaways

One of the report’s most important takeaways was its recognition that lack of prices on carbon emissions “is a massive market failure.” Mazzacurati said.

With wildfires in the West, droughts in the Midwest, and hurricanes in the Southeast, “it is becoming undeniable that many financial risks lead back to the climate,” Saber Partners CEO Joseph Fichera said. “Risks in a single sector like insurance or real estate flow through the entire system and consequences to winners and losers will be magnified because capital markets are brutal reactionaries.”

Without carbon pricing, there may be “disorderly price adjustments in various asset classes, with possible spillovers into different parts of the financial system, as well as potential disruption of the proper functioning of financial markets,” the report acknowledges.

But the report sidestepped a carbon tax or cap-and-trade approach to pricing carbon, ​stressing only ​the need to price emissions. Policymakers must choose between them.

A “phased-in carbon tax would be difficult politically, but more efficient,” Fichera remarked.

Cap and trade systems, including California’s, seek to “avoid high carbon prices because of potential economic impacts,” Mazzacurati added. ​California’s ​​program works as ​a ”backstop” to the state’s other climate policies.

Calls for improved disclosure and oversight

A less controversial but also important part of the report proposes regulatory strategies like better disclosure by emitters, stronger regulations, and changes in oversight.

Those strategies are about understanding how companies are managing risk, whether they are exposed, and to what extent, Mazzacurati said. “That missing data is needed to identify the best ways to address the physical and transitional risks of climate change.”

Together, a carbon price and regulatory strategies will support “a large-scale transition to a net-zero emissions economy,” ​helping ease transition difficulties​, ​CFTC said. ​

​“New financial products, services, and technologies can help the U.S. economy better manage climate risk and help channel more capital into technologies essential for the transition,” according to the CFTC.

Barriers include investor perceptions that sustainable investments are less lucrative, less available, and less reliable. Better policy support is especially needed “to confirm the appropriateness of making investment decisions using climate-related factors in retirement and pension plans,” according to the report.

Last week’s CFTC report was endorsed 34-0 by the commission’s advisory subcommittee formed by three Republicans and two Democrats appointed by the president. Subcommittee members included Morgan Stanley and Citigroup, the Environmental Defense Fund and the Nature Conservancy, and ConocoPhillips and BP.

The unanimous endorsement suggests “politics are ripe for taking on this challenge,” World Resources Institute Sustainable Finance Center Global Director and subcommittee member Leonardo Martinez-Diaz wrote.

-Herman K. Trabish

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