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Environment & Energy Report

Fed Sounds Alarm on Climate Change’s Harm to Global Economy

Nov. 9, 2019, 12:01 PM

Climate change makes investments riskier, blunts workers’ productivity, and shakes up monetary stability, economists told the Federal Reserve Bank of San Francisco.

The central bank’s decision to host a daylong series of climate talks this week—the first ever for the Federal Reserve system—marks another step in its growing public recognition that climate change is creating financial uncertainty.

“The Federal Reserve’s job is to promote a healthy, stable economy,” San Francisco Fed President Mary Daly said at the Nov. 8 event. “This requires us to consider current and future risks, whether we have a direct influence on them or not. Climate change is one of those risks.”

The conference also heightens tensions between the Fed and President Donald Trump, who has called climate science a hoax, and repeatedly blasted the bank on Twitter—mostly for not cutting interest rates.

Risks from Higher Temperatures, Inflation

One conference paper, presented by Dana Kiku, an associate professor of finance at the University of Illinois Gies College of Business, detailed how rising temperatures create long-term economic risks.

Another paper, offered by Sandra Batten, a senior economist at the Bank of England, concluded that the risks of climate change can trigger inflation, and cause businesses and individuals to think poorly about how the economy will perform.

Rising temperatures also reduce the labor supply for outdoor workers in industries such as construction, mining, and manufacturing, said Solomon Hsiang, a public policy professor at the University of California at Berkeley Goldman School of Public Policy. That leads them to quit working earlier, thereby hurting firm profits, Hsiang said.

Other economists spoke about the link between pollution and economic output, the possibility of anti-oil policies generating a run on oil, and how differences in nations’ trade policies create implicit subsidies to carbon emissions.

Banks’ Stress Tests

Fed Chairman Jerome Powell wrote that severe weather events “have the potential to inflict serious damage on the lives of individuals and families, devastate local economies (including financial institutions), and even temporarily affect national economic output and employment,” according to an April 18 letter to Sen. Brian Schatz (D-Hawaii).

As a result, “these events may affect economic conditions, which we take into account in our assessment of the outlook for the economy,” Powell said.

Damage from severe weather in the U.S. cost insurers more than $50 billion in 2018, Daly said. That figure nearly doubles if uninsured damage is taken into account, she said.

“This impacts banks’ customers, making it harder for them to satisfy their loan obligations,” Daly said. “And this can ultimately stress banks’ balance sheets. So ensuring financial institutions are regularly evaluating their exposure to climate-related risks is an increasingly important part of our work.”

Congress may also step into the mix.

Schatz, who sits on the Senate Banking Committee, told Bloomberg Environment that he is readying legislation that would direct large banks and other financial institutions to conduct stress tests to gauge whether they are well-positioned to absorb climate change risks.

To contact the reporter on this story: Stephen Lee in Washington at stephenlee@bloombergenvironment.com

To contact the editors responsible for this story: Gregory Henderson at ghenderson@bloombergenvironment.com; Anna Yukhananov at ayukhananov@bloombergenvironment.com