Could the climate crisis precipitate a financial crash akin to or even greater than the one in 2008? With markets currently in turmoil due to the coronavirus pandemic, experts testified Thursday that there is high risk for an even larger economic crisis absent urgent climate policy.
A panel of economic experts brought this message to a handful of senators on Capitol Hill during a March 12 hearing convened by the Senate Democrats’ Special Committee on the Climate Crisis. This hearing on the economic risks of climate change delivered a clear warning that continued inaction on climate will result in enormous economic and societal consequences.
“If we ignore climate change, we in essence destroy the economy,” Sarah Bloom Raskin, former member of the Federal Reserve Board of Governors, said during the question-and-answer period of the hearing. Another witness, Frédéric Samama, said simply, “we are putting humanity at risk.”
Heading for Another Financial Crash?
Witness after witness — including an investor who accurately forecasted the 2008 mortgage crisis — referenced the 2008 crash as they described the current risks posed by the impacts of a rapidly warming globe.
.@SenDemsClimate has an amazing group of witnesses testifying now including one of the investors who called the 2008 mortgage crisis. Like that crisis, the warning signs of an economic crisis are right in front of us, this time triggered by climate change:https://t.co/CivGa2j8XH
— Sheldon Whitehouse (@SenWhitehouse) March 12, 2020
“I bring up the financial crisis because like the belated and sudden devaluation that occurred in the context of subprime mortgages, one can imagine the effects of a belated and sudden devaluation that could occur in the context of mispriced carbon-dependent financial assets,” Raskin noted in her written testimony. “Climate change constitutes a material financial stability risk.”
“Think about what caused the last financial crisis. That was a classic case where we didn’t price the systematic risk in mortgages. Too much risk was created, and it blew up on us,” Bob Litterman, Chair of the Commodity Futures Trading Commission’s Climate Risk Working Group, wrote in his testimony. “We are not pricing climate risk; not creating appropriate incentives to reduce emissions: a tragic and potentially catastrophic mistake.”
Dave Burt, the investor who predicted the last financial crisis and who currently focuses on measuring the impact of climate risk on real estate markets, warned of another impending crash — this one climate-related. “I believe we are experiencing a similar value bubble today driven by the market’s failure to consider the increasing risk of damages resulting from climate change,” Burt said in his written testimony. This bubble of overpriced home values, he explained, leads to a sense of complacency and further increases risk.
“The complacency continues as we march towards a horrible climate outcome for future generations,” Burt said during the hearing.
Samama, head of responsible investment at the European asset manager Amundi and co-author of a recent “Green Swan” report on central banks and financial stability, explained that central banks are now sounding the alarm on climate risk.
“Central banks now recognize that climate change threatens financial stability,” he said. He warned that the climate crisis is an example of a “green swan,” which he defined as a “highly certain event with multiple non-linear and interacting causes that threatens life on Earth.”
How Bad Will It Get?
Not just the economy but the health and lives of people across the globe are at risk. Senator Sheldon Whitehouse (D-RI), who chaired the hearing, posed a question to the witnesses: considering extreme but plausible impacts, how bad might it get and how soon might it come?
According to Raskin, overall impacts could be “extremely bad,” and they are already starting to happen. “We are in the midst of the extraordinary destruction and deterioration of our economy now,” she said.
“The impacts on human health of climate change could be very dramatic,” Litterman added. “The melting of the tundra could release viruses that haven’t been seen for tens of thousands of years. So you can imagine pandemics … and there are the national security issues, and just in terms of the science there’s tipping points.”
The witnesses and senators agreed that policy change will be necessary to avoid complete calamity. Witnesses pointed to several policies that could help alleviate the economic risk, like carbon pricing, requiring firms to do climate “stress tests,” and mandating climate risk disclosure. But so far the federal government has largely failed in its political response to the climate crisis.
“I hope we don’t reach that point where we have to have the equivalent of a pandemic in climate terms in order to trigger that kind of policy change,” Senator Chris Van Hollen (D-MD) said.
Senator Rebukes Fossil Fuel Obstruction in Congress, Calls for Counterforce from Other Industries
In his closing remarks, Sen. Whitehouse called out the fossil fuel industry and its allies for continued obstruction of climate policy.
“At the moment, what I want to share with the panel and with the world, is that while some of the worst behavior of the fossil fuel industry has been moderated or obscured through deniable intermediaries, and while in my opinion evil institutions like the Heartland Institute appear to be suffering a collapse which could not be more helpful, nevertheless the prevailing political weight of the fossil fuel industry on this body, both directly and through its vast array of intermediary front groups, remains completely opposed to any serious climate legislation,” Whitehouse said.
“The fossil fuel industry is a persistent, determined, and remorseless obstructor of action today,” @SenWhitehouse at today's Senate Hearing on the Economic and Financial Risks of Climate Change.
— Jamie Henn (@jamieclimate) March 12, 2020
Given this powerful force of obstruction, he explained that a political counterforce is needed from other parts of the private sector. The rest of corporate America, Whitehouse said, needs to “show up” and align its political action with its stated values on climate action.
“In my world, the hydraulic pressure of the rest of corporate America to push back on the fossil fuel industry has not arrived,” he said. “If you can break the back of the fossil fuel industry’s lying and denial apparatus by putting an opposing force up against it, and the financial community easily has the wherewithal and the political knowledge to be that opposing force, as does Big Ag, then we’re in a whole new world in Congress.”