{"id":5730,"date":"2021-09-14T06:58:51","date_gmt":"2021-09-14T06:58:51","guid":{"rendered":"https:\/\/euromenaenergy.com\/?p=5730"},"modified":"2021-09-14T06:58:51","modified_gmt":"2021-09-14T06:58:51","slug":"the-reality-of-climate-financial-risk","status":"publish","type":"post","link":"https:\/\/emimer.com\/?p=5730","title":{"rendered":"The Reality of Climate Financial Risk"},"content":{"rendered":"<p>Those who argue that climate change has little to do with macroprudential risk management are offering a counsel of despair. If the 2008 global financial crisis revealed anything, it is that regulation matters, even if it isn&#8217;t always politically popular or easily optimized.<\/p>\n<p>LAUSANNE, SWITZERLAND \u2013 In a recent\u00a0commentary, John H. Cochrane, a senior fellow at the Hoover Institution, argues that \u201cclimate financial risk\u201d is a fallacy. His eye-catching premise is that climate change doesn\u2019t pose a threat to the global financial system, because it \u2013 and the phase-out of fossil fuels that is needed to address it \u2013 are developments that everyone already knows are underway. He sees climate-related financial regulation as a Trojan horse for an otherwise unpopular political agenda.<\/p>\n<p data-line-id=\"66ba1b79355f493d8cc9257e374739fc\">We disagree. For starters, one should acknowledge the context in which regulation emerges. With respect to climate policy, the Intergovernmental Panel on Climate Change has set the stage with its\u00a0sixth assessment report, which concludes with a high degree of certainty that the Earth\u2019s climate is changing, and that human activities are the cause. Ecologist William Ripple, the co-author of another recent\u00a0study\u00a0of planetary \u201cvital signs,\u201d goes further: \u201cThere is growing evidence we are getting close to or have already gone beyond tipping points associated with important parts of the Earth system.\u201d<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"ed812e63ff244fd1b436f8c0bcf67076\">Unlike the 2008 global financial crisis \u2013 when banks that took excessive risks were bailed out, and global financial regulation was overhauled in light of our new understanding about interdependent financial markets \u2013 unmitigated climate change will lead to a crisis with irreversible outcomes.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"f9ea1efa8a3745f1b84f60fad8a43183\">The question, as Cochrane puts it, is whether climate-related financial regulation can do anything to help us avoid such outcomes. Although the answer is complex and currently incomplete, we would argue that it can. Financial regulation to mitigate climate risk is indeed worth pursuing, because the stakes are too high to let the perfect become the enemy of the good.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"320e9e6ab79d46bab9b4ecebc26df1e9\">Consider some of the arguments about systemic financial risk and extreme climate events. First, we are told that the risk of \u201cstranded assets\u201d \u2013 particularly fossil-fuel assets \u2013 will become a fact of life, to be borne only by investors. Here, Cochrane points out, correctly, that fossil-fuel investments have always been risky. But can we reasonably say that the prevalence of this energy source should be left to market players alone, or that only investors will bear the costs?<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"b82fa451e4d2483f9c586cbabe87a196\">Though per capita fossil-fuel consumption in countries such as the United States and the United Kingdom has\u00a0declined\u00a0since 1990, total consumption has grown dramatically elsewhere, rising by 50% globally over the last 40 years. In 2020, China and India were the planet\u2019s two largest coal-energy producers, relying on coal for\u00a061% and 71%\u00a0of their electricity, respectively. Their economies, and those of many other developing countries, simply would not sustain a precipitous reduction in fossil-fuel energy.<\/p>\n<p data-line-id=\"e3298f90e3b743aba59d0ce8a01afb47\">Cochrane also suggests that there is no scientifically validated possibility that extreme climate events will cause systemic financial crises over the next decade, and that regulators are therefore stymied from assessing the risks on financial institutions\u2019 balance sheets over a five- or ten-year horizon. But the sheer scale of the challenge should make us reconsider the temporal dimensions of regulation.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"bf4598faaf064861921b7ececd5567ce\">If temperature increases are to be kept within 2\u00b0 Celsius of pre-industrial levels this century, about 80% of all coal, one-third of all oil, and half of all gas reserves must be left\u00a0unburned. All of the Arctic\u2019s oil and the remainder of Canada\u2019s oil sands \u2013 the world\u2019s largest deposit of crude oil \u2013 must be left in the ground, starting almost immediately.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"d33a1f866e2e4620b4a7b4b0c528e080\">Finally, it is said that the technocratic regulation of climate investments cannot protect us against un-modeled tipping points. But this view simply ignores the extensive literature in climate economics. In this field, the work of Nobel laureate economist\u00a0William Nordhaus\u00a0is widely referenced. His Dynamic Integrated Climate-Economy (DICE) model has influenced many scientists\u2019 and economists\u2019 own modeling of tipping points, and the US government already\u00a0relies\u00a0on these \u201cintegrated assessment models\u201d to formulate policy and calculate the \u201csocial cost of carbon.\u201d<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"de42d8c8e536440ca8eb4e422c50e3ec\">This interdependency between economics, policy, politics, public opinion, and regulation should be familiar from the crash of 2008. The dangerous over-leveraging that generated that crisis was an open secret; but those in a position, politically and culturally, to do something about it were willing to deny the systemic risk it posed. One can find the same denialism in the climate debate. According to the Center for American Progress, 139 members of the current US Congress (109 representatives and 30 senators; a majority of the Republican caucus) \u201chave made recent\u00a0statements\u00a0casting doubt on the clear,\u00a0established scientific consensus\u00a0that the world is warming \u2013 and that human activity is to blame.\u201d<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"b79c8876c6c54abf87cb750efdcfef2c\">Cochrane makes an eloquent case for why policymakers should focus on creating coherent, scientifically valid policy responses to climate change and financial systemic risk separately, rather than pursuing climate financial regulation. But this isn\u2019t an either\/or choice. We need both kinds of policies, and we need coordination between the two domains.<\/p>\n<p data-line-id=\"5ad0b645087b4c0c9a3c04ba9a28edc1\">We therefore should welcome the approach being taken by US Secretary of the Treasury Janet Yellen\u2019s Financial Stability Oversight Council, which has brought together leading regulators and tasked them with preventing a repeat of the 2008 Wall Street meltdown. Yellen has said she will use this multi-regulator body as her principal tool to assess climate risks and develop the disclosure policies needed to shift to a low-carbon economy.<button class=\"comment__caller comment__caller--no-comment\" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"5ee0f6a05cab4ee3852405b43cc15282\">Counterintuitive though it may be, climate-related financial regulation could usher in a new form of political accountability, by putting governments and individuals (elected and unelected) on the hook for their decisions. Such accountability was notably absent before and during the 2008 crisis. With political will, serious thinking about regulating climate financial risk could open up a fruitful debate for similar action on all neglected policy fronts.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Those who argue that climate change has little to do with macroprudential risk management are offering a counsel of despair. If the 2008 global financial crisis revealed anything, it is that regulation&#8230;<\/p>\n","protected":false},"author":1,"featured_media":5731,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,8,9],"tags":[46,48,57,63,68,76,77,82,86,87,90,96,99,103,107,109,111,113,137,139,146,148,160,174,183,184,201,202,209,222,230,232,233,244,246,249,256,262,263,267,277,279,280,285,288],"class_list":["post-5730","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blue-economy","category-clean-energy","category-climate","tag-aramco","tag-athens","tag-baroudi","tag-blue-economy","tag-carbon","tag-climate","tag-climate-change","tag-co2","tag-cyprus","tag-decarbonising","tag-democracy","tag-doha","tag-eastmed","tag-egypt","tag-embargo","tag-emissions","tag-energy","tag-energy-peace","tag-gas","tag-gazprom","tag-greece","tag-greenenergy","tag-international-maritime-disputes","tag-lebanon","tag-maritime-boundaries-east-mediterranean","tag-maritime-disputes","tag-offshore","tag-oil","tag-opec","tag-pollution","tag-poverty-alleviation","tag-putin","tag-qatar","tag-rosneft","tag-roudi","tag-russia","tag-saudi","tag-solar","tag-solar-power","tag-straddling-hydrocarbons-reserves","tag-total","tag-trump","tag-turkey","tag-unclos","tag-usa"],"_links":{"self":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/5730","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5730"}],"version-history":[{"count":0,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/5730\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/media\/5731"}],"wp:attachment":[{"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5730"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5730"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5730"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}