The U.S. should establish a price on carbon and push financial institutions to be better prepared for the economic instability likely to be caused by climate change, according to a new report from the U.S. Commodity Futures Trading Commission (CFTC).
“Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” the report states, adding that climate change is “anticipated to impact nearly every facet of the economy.”
“Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income, and opportunity," it continues.
The report makes a call for an idea that has long failed to gain traction in Congress: that the U.S. needs a price on carbon that would force polluters to contend with their emissions.
“Financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions,” according to the report.
“In the absence of such a price, financial markets will operate suboptimally, and capital will continue to flow in the wrong direction, rather than toward accelerating the transition to a net-zero emissions economy," the report says.
Sen. Elizabeth WarrenElizabeth WarrenSenate GOP blocks defense bill, throwing it into limbo Restless progressives eye 2024 Poll: Harris, Michelle Obama lead for 2024 if Biden doesn't run MORE (D-Mass.) has been one of the main voices calling for more climate change consideration in the banking industry, pushing for banks to evaluate their climate risks.
The report called such disclosures “an essential building block to ensure that climate risks are measured and managed effectively.”
Banks have become increasingly vocal about climate change, but not always in a way that evaluates risks to the companies themselves.
As part of a growing movement, some financial institutions have announced they would not back some oil and gas projects or have pledged to back away from fossil fuels entirely.
The government typically evaluates the cost of carbon emissions in its policy decisions, but how that is evaluated has changed over the last several years. In July the Government Accountability Office found the Trump administration has been systematically underestimating the damage caused by carbon pollution, using a $7 per metric ton cost for carbon rather than the $50 figure used under the Obama administration.
While the report makes a case for transitioning to 100 percent clean energy, it also warns banks may not be ready to adapt to an ever shortening runway as climate action is delayed.
“A large-scale transition to a net-zero emissions economy will pose risks to the financial system if markets and market participants prove unable to adapt to rapid changes in policy, technology, and consumer preferences. Financial system stress, in turn, may further exacerbate disruptions in economic activity, for example, by limiting the availability of credit or reducing access to certain financial products,” it states.
Democrats have introduced a number of plans to address climate change, including a report from the House Select Committee on the Climate Crisis billed as a “road map” for fighting climate change along with another bill forwarded by the companion Senate committee. The House Energy and Commerce Committee also has a draft proposal it’s developing.
However, none of those proposals have yet been brought to the House floor, and all would be unlikely to be taken up in the Senate.
The CFTC report urges lawmakers to start taking other actions now, including incorporating climate risk into fiscal policy, though some actions can already be taken by regulators directly.
“Existing legislation already provides U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now,” the report said.
“Presently, however, these authorities and tools are not being fully utilized.”