The climate poses many threats to the US financial system and natural gas could pose a major risk
Climate change could bombard America’s financial system on many fronts, and the country’s growing dependence on natural gas for heat and electricity requires special consideration as regulators scramble to catch up with the threat.
That’s the conclusion of a landmark report by the Financial Stability Supervisory Board, the federal entity created after the Great Recession to guard against future economic disasters. This is the first time that the board has viewed climate change as an “emerging threat” to the US economy since its inception as part of the 2010 Dodd-Frank financial reforms.
“Are we late? Of course we are, ”said a senior council administration official, who declined to be officially named, during a press call. “This is the start of the US financial regulatory system.”
The assessment came just days after UK regulators called on companies to disclose strategies to quickly eliminate pollution from global warming and their counterparts in the European Union presented plans to test the capacity of banks to withstand climate-related shocks. Highlighting the political challenges the United States faces in dealing with the crisis, the Biden administration’s plan to cut about a third of the country’s emissions appeared to die out in Congress, forcing policymakers to seek alternatives.
“This is the step we are taking to catch up and place ourselves in a leadership role internationally, and this is where we want to be,” said the staff member, who works at the FSOC. for 10 years. “And that’s the way to do it.”
The myriad ways in which global warming disasters, or the unsuccessful attempts to avoid them, could wreak havoc on the U.S. economy are played out in dry, understated language across the 133-page report.
Financial contagion could spread from the physical injuries of climate change. Extreme weather conditions and flooding can make parts of the country too expensive to insure, condemning entire communities – households, businesses and governments – to economic and financial precariousness with unclear options. The increasing number of physical damages could wipe out income properties, generate or destroy the value of assets used as collateral, “posing the credit and the market rrisks for banks, insurers, pension plans and others, ”the report says.
Another threat could come from the solution to climate change itself. With each passing month pollution from burning fossil fuels and cutting down forests for cattle ranches increases, the speed of change needed to avoid a cataclysmic rise in temperature increases. If countries take divergent paths and fail to coordinate, it could “confuse or create great inefficiencies, straining the financial system.”
Rapid changes could also quickly render previously valuable investments virtually worthless. “Delays and years of appeasement ultimately require larger and more disruptive policy adjustments… which would likely have more dramatic effects on economic activity and asset values.”
Coal, the report notes, is already widely considered to be in irreversible decline, with 65% of U.S. factories closed in the past decade. But in 2019, the United States had nearly 200 gas-fired power plants under construction. While natural gas produces less carbon than coal, it still releases tons of climate pollution, including methane, which is a heat scavenger 86 times more powerful over a two-decade period than CO2.
Reaching the US goal of net zero emissions by 2050 “would require significant reductions in natural gas use,” the report warns, suggesting that the value of gas assets could fall even more chaotically than coal.
“Are we late? Of course we are. “
– Member of the Financial Stability Supervisory Board
“A thorough assessment of the potential for stranded assets in these sectors should be a priority for financial institutions in their risk management processes and a component of a regulatory scenario analysis,” the report said. The senior official declined to comment further.
The report, which President Joe Biden called for in an executive order this spring, is “unprecedented” and “sends a strong signal to the industry, on Wall Street, that regulators are aware of this problem and take it seriously. ”Said David Arkush. , director general of the climate program of the consumer watchdog Public Citizen.
Yet, he said: “It is extremely far from what is needed. It almost reminds me of the memo that should have started this process in May when the president issued the executive order. ”
The document could have offered more prescriptive solutions, including calling on the Federal Reserve to cap the share of an investor’s portfolio that can include unmitigated fossil fuels or offering banks that hold risky oil and gas assets to keep a certain amount of money on hand, said Ben Cushing. , the campaign manager for the Sierra Club Fossil-Free Fundraising Program.
“This report makes it clear that financial regulators understand the need to act to ensure that the climate crisis does not cause the next financial crisis,” he said in an emailed statement. “However, leaving out key harm reduction tools, it is not addressing the problem with the urgency it deserves.
Simon Johnson, an economist at the Massachusetts Institute of Technology, said he was “optimistic that the needle is starting to move.”
Asked that US financial regulators are only beginning this process now, as the number of billion-dollar weather disasters increases every year and UN scientists say the emissions crisis has reached a level “code red”, the senior administration official said: “I reject this conclusion.”
“The point of all of this is to communicate the opposite,” the official said. “We are ready. Ready means we are making a meaningful commitment.