Climate change poses “a major risk to the stability of the US financial system and to its ability to sustain the American economy,” according to a new report from the US Commodity Futures Trading Commission (CFTC).
“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,” the report said.
The nearly 200-page report warned that climate change is already impacting or is anticipated to impact “nearly every facet of the economy,” from infrastructure, agriculture, and residential and commercial property to people’s health and labor productivity.
The report added that the US, as well as other countries worldwide, will have to continue to deal with climate change-related impacts even under optimistic emissions reduction scenarios.
The report also noted that the US is not on track to meet either its 2020 or 2025 goals under the Paris Accord.
“While the COVID-19 pandemic and its attendant economic contraction will almost certainly significantly reduce emissions globally in 2020 and possibly beyond,” said the report, “those reductions are expected to be temporary in the absence of structural change.”
Some of the risks mentioned in the report include “disorderly price adjustments” among various asset classes and the potential disruption of the functioning of financial markets. It also cautioned that if markets and their participants are unable to adapt to rapid changes in policy, technology, and consumer preferences, the process of combating climate change, such as transitioning to a net-zero emissions, will pose risks to the financial system.
“Financial system stress, in turn, may further exacerbate disruptions in economic activity, for example, by limiting the availability of credit or reducing access to certain financial products, such as hedging instruments and insurance,” the report said.
Although research over the years has helped improve the understanding how climate change will affect the economy, one the biggest concerns for regulators like the CFTC, according to the report, is what they don’t know.
“While understanding about particular kinds of climate risk is advancing quickly, understanding about how different types of climate risk could interact remains in an incipient stage,” said the report, which added that climate risks may also exacerbate financial system vulnerabilities that have little to do with climate change, such as historically high levels of corporate leverage.
“This is particularly concerning in the short- and medium-term, as the COVID-19 pandemic is likely to leave behind stressed balance sheets, strained government budgets, and depleted household wealth.”
And the costs of tackling climate change are staggering, as the report said reducing emissions, limiting warming and adapting to the changing climate will require public and private investment “in the trillions of dollars.”
The key message of the report is that financial regulators should “move urgently and decisively to measure, understand, and address” climate risks, such as by strengthening regulators’ capabilities, expertise, and data and tools to improve the monitoring, analysis, and quantification of climate risks.
“Extreme weather events continue to sweep the nation from the severe wildfires of the West to the devastating Midwest derecho and damaging Gulf Coast hurricanes,” CFTC Commissioner Rostin Behnam said in a statement. “Beyond their physical devastation and tragic loss of human life and livelihood, escalating weather events also pose significant challenges to our financial system and our ability to sustain long-term economic growth.”