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The scorched orange sky by day indicates that the consequences of climate change are already here But while we tend to focus on the death and destruction resulting from the increasing frequency and severity of forest fires and other disasters, we often pay less attention to how their costs ricochet through the financial system, with the potential for widespread collateral damage
The raging wildfires in the West illustrate the problem Their unprecedented damage has scared insurance companies, who have raised rates, abandoned coverage for high-risk properties and even moved away from markets altogether, lowering property values This has forced states such as California to step in and offer more coverage to affected residents. In addition to putting taxpayers on the hook, it could also lead to municipal bankruptcies, significant losses for bondholders and financial crises.
Westerners Are Not Alone With These Problems Droughts and floods are becoming more common in many areas, including my own state of Indiana, threatening crops, property and land. infrastructure while driving up insurance premiums
As an expert on the impacts of climate change, I contributed to a recent report that examined what climate change means for the US financial system Our report includes many important findings and recommendations, perhaps especially since the US financial system is endangered by climate change
The subcommittee I served on was formed last November by the Commodity Futures Trading Commission, the government body that regulates complex financial instruments called derivatives That alone was a bit surprising given that the Trump administration, which appointed the commissioners, has historically been hostile to efforts to tackle or even assess the risks of climate change.
Our group included representatives from oil companies, agribusiness, banks, investment companies and environmental organizations, as well as a handful of academics like myself We were asked to assess globally the implications of climate change for the financial system and making recommendations to government And we did, by writing a 166 page report with dozens of recommendations, some potentially controversial, like adding the costs of climate damage at the cost of fossil fuels
Remarkably, this diverse group voted unanimously to adopt the report and forward it to the Commodity Futures Trading Commission, which released it on September 9.
Our main finding – and the one underlying each recommendation – is that climate change, in part by increasing the risks and severity of forest fires, hurricanes and other disasters, is a threat that permeates the world. ‘US financial system The government must therefore make climate-related risks more visible and prepare the financial system for disruptions
Physical risk has dominated the news lately in covering wildfires and storms It is simply the threat climate change poses to life, property and public health
Just as the smoke from the fires in the West has swept across much of the United States, the impacts of these fires, and other disasters, can drift through the US financial system with cascading consequences
Transition risk, on the other hand, relates more to the costs associated with our responses to climate change, such as sudden changes in policy or people’s preferences and behaviors
If governments take sudden and dramatic action to reduce the use of fossil fuels, by raising the price of carbon or strengthening the mandate, the values of the companies that find, extract, process and deliver these fuels could plummet. companies likely to suffer rapid devaluations as a result of government actions – or changes in societal preferences – therefore have a high transition risk, which should consequently reduce their value today
However, for investors to consider physical and transition risks, those risks need to be quantified and disclosed
A first step, and the report’s most important recommendation, is that lawmakers should put a price on carbon emissions The government is currently subsidizing the cost of fossil fuels through tax breaks and other mechanisms Embed the full cost of climate disruption in the price of these fuels would help redirect huge sums of money to climate-friendly technologies and industries
But on its own, this is not enough, as the climate is already disrupted and much remains to be done to help the financial system see and respond to a variety of changing risks
The government can help banks and other financial companies to do this by specifying how they should measure and report their financial risks related to climate change The government can also require that publicly traded companies in all sectors identify and report the climate risk using transparent measurement techniques, so that investors have confidence in the numbers, which should be comparable between institutions and, ideally, sectors, so that people can use them in their decisions manufacturing
The economic risks of climate change in the US financial system is currently too hard for investors and regulators to see
Enlightening them will help markets to function for the benefit of all First, it will reduce the risk of a sudden market crash Second, clear and comparable risk information will discourage investment in climate disruptive activities and provide incentives economic players to encourage new solutions
Climate change, financial system, finance, financial services, system
World news – United States – US financial system must prepare for climate disruption
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