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One of the core ideas of this newsletter is that you can’t fight climate change without altering the stuff of the world. The vehicles that people use to commute, the chemical processes by which steel and cement are made, the serpentine machines that turn fossil gas into electrons—these all have to be rapidly reworked or replaced if we want to keep global temperatures within a survivable margin.
This will be expensive, which means it will involve the financial system at every step. Think of the humblest unit of the fossil-fuel economy, the gas-burning car. Most cars on the road (at least in the United States) are financed, that is, people took out loans to buy them. Go and look at a car—in all likelihood, a bank literally created money so someone could buy it.
The owner pays back that loan to the bank. Banks then roll many of these loans together into financial instruments that can be bought and sold on financial markets. Each car owner’s auto-loan payments then flow to whoever happens to own that financial instrument.
This is how someone defaulting on their SUV loan in San Diego can affect a pension fund in St. Louis. And this, remember, is one of the simplest chains in the global network of fossil-fuel finance. A new coal plant or fracking well generates far knottier networks of money.
This is why one of the Biden administration’s goals—to “green” the financial system—is so important. By changing how money enchants the world of stuff, policy makers might change what stuff gets built in the first place. Today, we have an exclusive peek into how the Biden administration is thinking about this.
The nonprofits Public Citizen and Americans for Financial Reform have released an early copy of their new “roadmap” for climate-finance reform to The Weekly Planet. It’s a guide to what the new executive branch might do to shift the flows of capital toward greener investments.
But it’s also a guide to plans that are already in motion. The report was written last year, and there’s some overlap between the report’s authors and Joe Biden’s financial team. (One author of the report, Andy Green, has been appointed as an official at the Department of Agriculture.)
I recently spoke with David Arkush, one of the report’s lead authors. He laid out a three-part checklist for me—the most important things the government can do to fight climate change through financial regulation. They are:
1. Appointing climate-aware officials to the top of financial agencies and empowering them with regulators.
“Financial regulators need strong climate ‘units’ at the highest level,” Arkush told me. “Those units need to be both inward-looking and have stature within the agency to get this taken seriously … They also need to have an outward focus and coordinate with other agencies.”
They will need to coordinate because, well, “the way we regulate financial markets in this country is kind of crazy,” he said. An alphabet soup of agencies governs financial markets in the United States: “We spread it out across 10 or 12 agencies instead of having one or two.”
Arkush stressed that these units are already coming together. In January, the Federal Reserve hired the respected regulator Kevin Stiroh to lead its climate unit; the Commodities Futures Trading Commission established a Climate Risk Unit this month. Treasury Secretary Janet Yellen has also said that she will open a climate unit at the highest level of her department.
2. Making climate risk part of the government’s “supervision and macroprudential” regulation—the set of rules ensuring that the financial system as a whole is functioning well.
The government constantly works to make sure individual banks aren’t doing something that could bring down the entire financial system. The Fed, for instance, runs a “stress test” in which it grades the country’s largest banks on whether they can survive a simulated recession.
The Biden administration should fit climate risk into those sorts of tests, Arkush said. It should first make sure that banks don’t face too much “physical risk,” the name for damages wrought directly by the floods, wildfires, and droughts of climate change. (This kind of risk took California’s largest utility, PG&E, into bankruptcy in 2019.)
But it should also grade banks on “transition risk,” the chance that fast-changing climate policy could leave their investments worthless. “If it actually looks seriously like the world is gonna cut carbon emissions in half by 2030, you could, overnight, see fire sales of fossil-fuel assets,” Arkush told me. Then, in addition to facing climate change, he said, we might also be facing a financial crisis.
Under Dodd-Frank, the financial-reform bill that was passed after the global financial crisis, the government can also run stress tests on financial institutions that aren’t banks. Ambitious regulators could use this law to investigate whether BlackRock, the world’s largest asset manager, or Berkshire Hathaway, one of the country’s largest stock-holding companies, is adequately prepared for climate change.
3. Changing market rules so that investors have more information about how climate change affects their investments.
Right now, the government forces companies to disclose a variety of information about themselves in order to help people make investments. It should require similar disclosures about how companies contribute to and could be affected by climate change, Arkush said, so that investors can both pick the least risky stocks and invest in line with their values.
Large investors should also be made to survey their clients about how to invest, he said: If their clients don’t want to damage the climate with their investments, then asset managers should act accordingly. The government should also generally ensure that investments labeled “green” are actually green.
Climate-finance regulation is a heated topic right now. For the past few months, the European Union has been engaged in a bizarrely meticulous effort to define exactly what kinds of investments are green. This regulatory scheme, called the “green taxonomy,” has become about as politically messy as you can imagine. Is a natural-gas plant green? What about a nuclear plant? Each decision prefigures who will win and who will lose.
It’s almost as if Continental bureaucrats are spinning up a climatic version of the Napoleonic Code, specifying each possible offense and how it should be punished. The American legal system doesn’t work like that. Here, lawmakers lay out abstract principles, then regulators and judges apply them.
That’s the ultimate goal of the roadmap. The Biden administration will probably never say This investment good, that investment bad, but it will fit the climate transition into our existing systems for governing the market.
Not that this will be easy. Yesterday, Senator Pat Toomey, a Republican from Pennsylvania, wrote a letter to the San Francisco Fed implying that it should stop researching “climate economics,” labeling the topic “bitterly partisan.” He’s not wrong—climate change is bitterly partisan. But all of the country’s largest banks have issued climate policies nevertheless. And if it is partisan, that is because partisans fought greenhouse-gas regulation for so long that climate change has become a costly and whole-of-society issue. The financial system is where those costs come to roost. Any big problem, ignored for long enough, becomes a financial issue.
Someone Else’s Weather
Our reader Nico Mira shared this photo of cherry blossoms blooming in Tokyo on Friday, March 26.
A little more than 200 miles to the west, the cherry blossoms reached peak bloom in Kyoto on the same day—the earliest day since records started being kept more than 1,200 years ago.
Here in Washington, D.C., our cherry blossoms are also blooming—about a week ahead of the 100-year average.
Every week, I feature a weather photo from a reader or professional in this part of the newsletter, because the climate is someone else’s weather. If you would like to submit one, please email firstname.lastname@example.org.
3 More Things
1. Volkswagen appears to be rebranding as Voltswagen in the United States to show off its new electric vehicles. The company insists that this is not an April Fools’ joke. It reminds me of when IHOP briefly changed its name to IHOB to showcase its burgers, but I suppose this is the company that brought us Fahrvergnügen. (Update: After writing this, but before sending the newsletter, Volkswagen clarified that it was an April Fools’ joke after all—a demonstration, if nothing else, of VW’s commitment to Vaterhümor.)
2. The Biden administration is advancing plans to develop wind farms off the coast of New York and New Jersey, and it’s set a goal of building 30 gigawatts of offshore wind power by 2030. That would more than double current global offshore-wind capacity.
This is a big deal for New York City residents, who might (in a decade or so) boast of their clean, cheap zero-carbon power. It’s also our first taste of how Biden will try to use the federal government to nurture climate-friendly domestic industries. This particular push involves billions of dollars and the Departments of Commerce, Energy, Transportation, and the Interior.
3. The pandemic is fading, and America’s greenhouse-gas emissions are rising again. Flying for leisure is picking back up. And as oil and gas production has resumed in Texas, drillers are once again venting huge amounts of the super-warming pollutant methane into the atmosphere. Drillers also burned off methane during Texas’s deep freeze last month, because they could not sell it and had no way to store it.
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