Climate crisis crashing the economy

We’d been watching the real-world risks of climate change looming and growing across the United States and around the world. And the costs, financially and otherwise, are quickly becoming untenable.

Lately, a steady march of searing heat, ruinous floods, horrific wildfires, unbreathable air, devastating hurricanes and other climate-related calamities has been traversing our screens and wreaking havoc to national and local budgets. And we’re only at 1C of increased global temperature rise. Just imagine what 2C or 3C or 4C will look like, and how much it will cost.

We may not have to wait terribly long to find out.

It’s natural to follow the people affected by all this: the local residents, usually in poorer neighborhoods, whose homes and livelihoods are being lost; the farmers and ranchers whose crops and livestock are withering and dying; the stranded travelers and the evacuees seeking shelter amid the chaos. And, of course the heroic responders to all these events, not to mention an entire generation of youth who fear their future is being stolen before their eyes, marching in the streets. So many people and stories.

But when talking about money, it doesn’t get better.

The financial climate, it seems, has been as unforgiving as the atmospheric one. Some of it has been masked by the pandemic and ensuing recession, but for those paying attention, the indicators are hiding in plain sight. And what we’re seeing now are merely the opening acts of what could be a long-running global financial drama. The economic impact on companies is, to date, uncertain and likely incalculable.

“The financial climate, it seems, has been as unforgiving as the atmospheric one.”

A subcommittee of the U.S. Commodity Futures Trading Commission (CFTC) issued a report addressing climate risks to the U.S. financial system. That it did so is, in itself, remarkable, given the political climes.

But the report didn’t pussyfoot around the issues: “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” it stated, adding:

“Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. 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.”

Among the “complex risks for the U.S. financial system,” the authors said, are “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.”

In other words: We’re heading into uncharted economic territory.

Climate change, said the report’s authors, is expected to affect “multiple sectors, geographies and assets in the United States, sometimes simultaneously and within a relatively short timeframe.” Those impacts could “disrupt multiple parts of the financial system simultaneously.” For example: “A sudden revision of market perceptions about climate risk could lead to a disorderly repricing of assets, which could in turn have cascading effects on portfolios and balance sheets and therefore systemic implications for financial stability.”

Sub-systemic shocks

And then there are “sub-systemic” shocks, more localized climate-related impacts that “can undermine the financial health of community banks, agricultural banks or local insurance markets, leaving small businesses, farmers and households without access to critical financial services.” This, said the authors, is particularly damaging in areas that already are underserved by the financial system, which includes low-to-moderate income communities and historically marginalized communities.

As always, those least able to least afford the impacts may get hit the hardest.

This was hardly the first expression of concern about the potentially devastating economic impacts of climate change on companies, markets, nations and the global economy. For example:

  • Two years ago, the Fourth National Climate Assessment noted that continued warming “is expected to cause substantial net damage to the U.S. economy throughout this century, especially in the absence of increased adaptation efforts.” It placed the price tag at up to 10.5 percent of GDP by 2100.
  • Last month, scientists at the Potsdam Institute for Climate Impact Research said that while previous research suggested that a 1C hotter year reduces economic output by about 1 percent, “the new analysis points to output losses of up to three times that much in warm regions.”
  • Another report last month, by the Environmental Defense Fund, detailed how the financial impacts of fires, tropical storms, floods, droughts and crop freezes have quadrupled since 1980. “Researchers are only now beginning to anticipate the indirect impacts in the form of lower asset values, weakened future economic growth and uncertainty-induced instability in financial markets,” it said.

Original article written by Joel Makower

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