A new advisory panel report on climate risk to the financial system could help shift the political calculus in Congress that has stymied action on a carbon price, a key Democratic US senator said Sept. 10.
A lengthy report released by a stakeholder advisory panel to the US Commodity Futures Trading Commission on Sept. 9 found that climate change poses a "major risk to the stability of the financial system" and identified setting an economy-wide price on carbon as the only way to ensure financial markets will be able to channel resources efficiently.
It cited risks of 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."
Risk calculations
"One of the good things about this report is that it puts a lot of industries on notice that this is going to get worse and requires their risk calculation" said Senator Sheldon Whitehouse, Democrat-Rhode Island, suggesting the report could "affect their calculus about how to behave politically."
"Whether you're the ag sector or the tech sector, or a coastal economy or Wall Street or finance or the insurance industry, this is going to hit you right in the middle of your business plan," he said.
Whitehouse, who sits on the finance, judiciary, public works and budget committees in the Senate, described Congress as a "choke point" for those that want to advance a carbon price. In his view the fossil fuel industry knows that and has "set up a very defensive operation around that choke point."
Whitehouse saw the possibility that counterpressures from other industries could help restore bipartisanship on climate matters. Right now, he said, there is a disconnect between the CEO-level talk about climate change and what the trade groups and the lobbing apparatus pursues.
"They're just on totally different courses. And when that course correction is made, and the political side aligns with what the industry and the CEOs are saying, it's going to be a whole new day," he said.
The 165-page advisory panel report was approved by a diverse group of stakeholders on the CFTC's climate-related market risk advisory subcommittee. It recommended multiple steps regulators could take to better grasp the risks to financial markets and begin taking action. Several oil companies participated in the committee as did a representative of S&P Global Market Intelligence, a division of S&P Global.
'Fundamental flaw'
CFTC Commissioner Rostin Behnam, the advisory panel's sponsor at the CFTC, said during the panel discussion that he didn't view the issue as partisan.
"It's not about red states or blue states," he said, expressing the hope that people on both sides of the aisle, and policymakers and regulators would begin thinking about what was needed collectively to build a more resilient financial system and economy.
Bob Litterman, chairman of the advisory subcommittee, said he wanted to emphasize "over and over" that appropriate financial incentives were needed. "That is the fundamental flaw. ...We do not have appropriate incentives to reduce emissions." One of the most important lessons from the coronavirus pandemic, which is also a risk management crisis, he said, is that "if you delay you can't get that time back," added Litterman, founding partner at the investment firm Kepos Capital.
The idea of setting a carbon price, while gaining traction from some industry groups such as the Natural Gas Supply Association, and a number of oil majors, still faces an uphill climb garnering enough support to advance in Washington.
Representative Garret Graves, Republican-Louisiana, pushed back on the notion a carbon price was needed, during the panel discussion. "I think it's important to note that we've had all of this success [in reducing US power sector emissions] without putting a price on carbon, without federal requirements in place, allowing the markets to do what they do and they have done it better than any other country in the world," he said.
