March 11, 2020

Time to Wake Up: Blaring Economic Alarms

As-prepared for delivery

Mr./Mdm. President, I rise today, for number 268, to urge colleagues here in the Senate:  wake up, and see the looming danger we face from climate change.

Look at recent climate effects in our Southern Hemisphere.  The most devastating wildfires anyone can remember have ripped across Australia, burned more than a fifth of Australia’s forests, destroying thousands of homes, killing an estimated 1 billion animals, and making a day of breathing air in Sydney like smoking 37 cigarettes.

In the ocean off Australia, new warnings that the Great Barrier Reef, a wonder of the world visible from space, is doomed.  

The warmest temperatures ever were recorded in Antarctica, a 70-degree day when the average February temperature is 33 degrees.

On Antarctica’s Thwaites Glacier, scientists drilled through 2,000 feet of ice to ocean water below, and discovered water 2 degrees above freezing.  Losing that glacier triggers almost 3 feet of sea level rise, and it’s going.

Sea level rise brings me to the crash warnings flashing about the economy, because some of these warnings revolve around sea level rise crashing coastal property values.  Others’ warnings are of a crash in what economists call the “carbon bubble.”  

Here’s a binder of these warnings.  I sent this binder to every member of the Senate in February of 2019.

Here is a letter, following up on the warnings in the binder, about warnings that emerged since I sent the binder.  I sent this to members of the Senate Banking Committee.  I would like to enter this into the record.

The warnings are serious.  They come from some of our foremost financial experts.  Let’s walk through what we have in store if we keep sleepwalking through the climate crisis.

Warning one:  coastal property value crash. 

Freddie Mac warned that rising sea levels will prompt a crash in coastal property values worse than the housing crash that triggered the 2008 Financial Crisis.  First Street Foundation found that rising seas have already caused $16 billion in lost property value in coastal homes from Maine to Texas.  Moody’s, the bond rating agency, warns that climate risk will trigger downgrades in coastal communities’ bond ratings.  BlackRock—the biggest asset manager in the world—estimated that by the end of the century, climate change will cause coastal communities annual losses averaging up to 15 percent of local GDP, with hardest-hit communities hit far worse.

Warning two:  a carbon asset bubble crash. 

The Bank of England, Bank of France, Bank of Canada, and European Central Bank — backed by top-tier, peer-reviewed economic papers — all warn that fossil fuel assets are dramatically overvalued on fossil fuel companies’ books, that these assets are actually uneconomic and will become stranded, and that the resulting “carbon asset bubble” crash will swamp the world economy. 

How bad is it?  It’s called “systemic financial risk.” That’s finance-speak for risk to the entire economic system.  Remember the 2008 Financial Crisis?  Bad home mortgages blew up more than mortgage companies.  They caused a brutal economic recession — millions of people lost their jobs, their homes, and their retirement savings.  We are still recovering from that collapse.  That’s systemic financial crisis.  The warnings are, this one will be worse. 

In my recent letter, I looked at recent warnings.  Here’s the Bank for International Settlements’ recent “Green Swan” report.  The title is a reference to the metaphorical black swan:  an unpredictable event with calamitous consequences for the economy.

Here’s what my letter quoted from this report.

Page 1 warns that “[c]limate change could … be the cause of the next systemic financial crisis.”   

From page 65: “Central banks, regulators and supervisors have increasingly recognized that climate change is a source of major systemic financial risks,” and “climate catastrophes are even more serious than most systemic financial crises.” 

Again from page 1: “Exceeding climate tipping points could lead to catastrophic and irreversible impacts that would make quantifying financial damages impossible.” 

A little aside here, it’s an odd coincidence that the report’s language mirrors President Trump’s 2009 warning in a New York Times ad that climate change consequences would be “catastrophic and irreversible.”

Page 3:  “The complex chain reactions and cascade[ing] effects associated with both physical and transition risks could generate fundamentally unpredictable environmental, geopolitical, social and economic dynamics.” 

Page 1 again: “climate-related risks will remain largely unhedgeable as long as system-wide action is not undertaken.”

Back to page 3: Like the black swans from which the report derives its title, the “physical and transition risks are characterised by deep uncertainty and nonlinearity, their chances of occurrence are not reflected in past data, and the possibility of extreme values cannot be ruled out.”

Another big warning I quoted in this letter came from Blackrock CEO Larry Fink.  In an open letter to CEOs, he echoes the “Green Swan” warning, saying “[c]limate change has become a defining factor in companies’ long-term prospects,” and as a result “we are on the edge of a fundamental reshaping of finance,” one that is “compelling investors to reassess core assumptions about modern finance.” 

Blackrock is the biggest asset manager in the world.  When its CEO speaks of a fundamental reshaping of modern finance, shaking its core assumptions, that’s serious stuff.

In my letter I cite other recent warnings of this systemic risk, all since the binder; many just this year.   For instance:

In December, the Bank of England proposed climate stress tests for corporations under its regulatory supervision.  We started bank financial stress tests after the 2008 Mortgage Crisis; central banks are starting to do the same for climate change.

In January, massive management consultant McKinsey released a report warning that climate change could “make long-duration borrowing unavailable, impact insurance cost and availability, and reduce terminal values.”  Climate change could “trigger capital reallocation and asset repricing”—finance speak for fundamental upheaval of our economy.

January: the World Economic Forum’s Global Risks Report identified the five most likely global risks facing the world over the next 10 years – five for five, all were climate-related.

Finally, from the Stanford Business School’s Corporations and Society Initiative, a warning that “the financial risks from climate change are systemic” (there’s that word again!), that these risks are “singular in nature” (like black swans), and that “[g]lobal economic losses from climate change could reach $23 trillion – three or four times the scale of the 2008 Financial Crisis.”

Pause for a moment, and recall the agony of the 2008 Financial Crisis.  Losses in the stock market wiped out nearly $8 trillion.  Housing values cratered, retirement savings vanished, and Americans lost jobs, lost homes and lost nearly $10 trillion in wealth.  Global economic growth went negative 4 percent between pre-recession mid-2008 and the low point in the first quarter of 2009.  

“Three or four times” that — the Stanford report is telling us we are courting financial peril – systemic risk – the likes of which we cannot imagine. 

Mr./Mdm. President, climate change is a natural force.  It’s blown carbon dioxide levels way outside what humankind has ever experienced.  It’s depositing the equivalent of four Hiroshima-sized atomic bombs of excess heat per second into our oceans.  And it is an economic bomb positioned beneath our economy, its detonator ticking down steadily.

We have a chance to defuse the bomb.  With these warnings come a clear description of the solution:  government must act.  Here are solutions I quote in my letter: 

Page 66 of “Green Swan”:  End “[t]he procrastination that has been the dominant modus operandi of many governments for quite a while.”

Page 2: “The most obvious [steps] are the need for carbon pricing and for systematic disclosure of climate-related risks by the private sector.”

Fink’s letter echoes the call for carbon pricing: “carbon pricing [is] essential to combating climate change.”

When this blows, Senators who don’t help us act will have to come up with a better excuse than “well, we weren’t warned.”  We were warned.  We have been warned over and over and over again.  Colleagues, you have the warnings in your inbox.  When this blows up — when coastal property values crash, or when the carbon bubble bursts, or worse, when both happen — it’s not going to look good to say, “yeah, I was warned, but you see, my political party is funded by the fossil fuel industry so naturally I did nothing.”  That’s how you lose the privilege of representing people. 

I’ve lived that.  We had a financial crisis in Rhode Island in 1991, and the legislators who slept through the warnings lost their jobs in a tidal wave of popular outrage.  In the 1992 election, over a third of Rhode Island’s General Assembly was voted out or didn’t bother running again.

You think people are mad now?  Wait until this hits, and they know you were warned.  It is time to wake up. 

I yield the floor.