September 12, 2023

Climate Systemic Risks Are Mounting

Climate change is not only destroying lives and livelihoods, but also introducing new systemic risks to the financial system and the broader economy. The warning signs of another 2008-scale financial crisis are flashing red across multiple economic sectors, and behind them looms the collapse of Earth’s natural systems.

WASHINGTON, DC – This June was the hottest on record, and it was followed by the hottest-ever week in early July, which then turned out to be the hottest month on record. Canada’s unprecedented wildfires blanketed huge swaths of North America in smoke; storms in VermontNew York, and Pennsylvania triggered deadly floods; the Midwest has been experiencing its worst drought in over a decade; Europe is baking; China hit record-high temperatures; and Italy suffered its worst flooding in 100 years. 

Climate change is here, and it is destroying lives and livelihoods. In addition to causing some 250,000 deathsaround the world each year, fossil-fuel emissions are creating mounting economic costs. In 2022, weather-related damage in the United States topped $165 billion, making it the third-costliest year on record.  

Behind these headlines, the US Senate Budget Committee has taken a deeper dive into the economic and fiscal risks of fossil-fuel emissions. In ten hearings so far, we have heard from central bankers, financial experts, economists, insurance executives, political leaders, and others. What has stood out – and what I keep coming back to – is that behind the immediate cost of emissions-driven natural disasters loom “systemic risks” to the US and global economy. By definition, “systemic” risks cascade beyond immediately affected sectors and inflict widespread economic damage (recall how the 2008 financial crisis spilled well beyond banks holding bad mortgages). 

One predicted systemic risk is a crash in coastal real-estate values. More than 40%of America’s population live along 13,000 miles of coastline, which accounts for more than $1 trillion worth of residential and commercial real estate. On the Senate Budget Committee, we heard from a former chief economist at Freddie Mac, a federally backed home mortgage company, that coastal flooding risk was making properties uninsurable – and thus un-mortgageable – auguring a likely collapse in property values. Sure enough, we are now seeing property insurers go bust in, or flee from, coastal states like FloridaLouisiana, and Texas. So it begins. 

The risk of flooding within a mortgage’s 30-year horizon sets in motion a cascade of consequences. If it sweeps through today’s $1 trillion coastal property market, it could cause financial losses that exceed even those of the post-2008 Great Recession. Whereas that episode drove housing prices under water figuratively, flood risk threatens to do so literally. 

The same dangerous interplay is at work in wildfire zones. Half of all homes in the US – 71 million properties – are now at risk of wildfire, and one million more homes are being built in the fire-prone wildland-urban interface every three years. Yet climate change is increasing the frequency and intensity of wildfires. Between 2017 and 2021, eight million acres – an area roughly the size of Maryland – burned in wildfires each year, on average. Thirty years earlier, the annual average was half that. As in coastal states, insurers in fire-prone areas are fleeing: Allstate, State Farm, and American International Group have all announced that they will stop writing new homeowners’ policies in California

Our committee also heard warnings of a more general collapse in insurance markets as climate change makes risks unpredictable and therefore uninsurable. We heard warnings of the world’s economic “carbon bubble” collapsing when oil markets crash, either because cartel members decide to “fire sale” their oil while they still can, or because falling renewables prices will make oil and gas so uncompetitive that no amount of subsidy will save them. 

It’s not just the Senate Budget Committee hearing these climate warnings. In 2020, the Commodity Futures Trading Commission published a first-of-its-kind US government report on climate risks to the financial system and long-term economic growth. The following year, the Treasury Department’s Financial Stability Oversight Council for the first time identified climate change as an emerging and growing threat to the entire economy. 

Likewise, Treasury Secretary Janet L. Yellen delivered a speech earlier this year on the risk of climate damages cascading through the financial system and causing widespread instability. And just weeks later, the Economic Report of the President made the same point. The Department of Defense has also warnedthat climate change is threatening national security and costing billions of dollars in damage to US military installations. 

It is not just government; everywhere, private fiduciaries are reporting these risks to shareholders and customers. What science has predicted for decades is now so real and immediate that they have no choice but to do so, even under ordinary financial-risk reporting standards. 

The fossil-fuel industry has reacted to these developments by attacking ESG (environmental, social, and governance) investment guidelines as an instance of “woke” politics. Theirs is a coordinated effort, funded by the industry through dark-money front groups, and implemented by politicians who depend on those funds for their political survival. The use of such bullying tactics against well-established risk-mitigation practices ignores consumer demand and threatens US financial security. Exposing the fossil-fuel industry’s dark-money operation and its role in blocking climate action is essential to holding corporations accountable and finding a pathway to climate safety. 

To protect against economy-wide threats, we must zero out fossil-fuel emissions by 2050. That will give us a chance to limit temperature increases to 1.5° Celsius above pre-industrial levels – in line with the 2015 Paris climate agreement – and to prevent the worst climate-change scenarios. But success will require a regulatory framework that ensures corporate transparency and accountability with respect not only to firms’ own emissions and climate-risk exposure, but also to their political obstruction of climate solutions. 

The warning signs of another 2008-scale financial crisis are already flashing red across multiple economic sectors. Behind them looms the collapse of Earth’s natural systems – a catastrophe that scientists have warned us about, and predicted with precision, for decades. Policymakers must heed these warnings and put the US on a path to greater economic stability while there is still a path to take.

By: Sen. Sheldon Whitehouse (D-RI)