The Corner

Energy & Environment

‘Climate Risk,’ the Fed, and AOC

Federal Reserve building in Washington, D.C. (crbellette/Getty Images)

The Fed should not have a climate policy, but it’s 2021, and so the central bank has been edging towards having one.

CNBC (from March):

The Federal Reserve has taken another step forward in efforts to ensure that the financial system is protected against climate risks.

As the central bank turns its attention increasingly toward the matter, the Fed has created a Financial Stability Climate Committee and a Supervision Climate Committee.

The panels will focus on “the potential for complex interactions across the financial system,” Fed Governor Lael Brainard said in remarks Tuesday.

“Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. So a second core pillar of our framework seeks to address the macrofinancial risks of climate change,” Brainard added.

The Supervision Climate Committee will focus on identifying risks and putting together a program to address them. The Financial Stability Climate Committee will address “macroprudential risks” for how climate could pose systemic risks to the institutions the Fed supervises.

The argument that the Fed has to get involved because of “risk” is almost entirely bogus, for the reasons neatly summarized for Project Syndicate by John Cochrane:

In the United States, the Federal Reserve, the Securities and Exchange Commission, and the Department of the Treasury are gearing up to incorporate climate policy into US financial regulation, following even more audacious steps in Europe. The justification is that “climate risk” poses a danger to the financial system. But that statement is absurd. Financial regulation is being used to smuggle in climate policies that otherwise would be rejected as unpopular or ineffective…

Such an event lies outside any climate science. Hurricanes, heat waves, droughts, and fires have never come close to causing systemic financial crises, and there is no scientifically validated possibility that their frequency and severity will change so drastically to alter this fact in the next ten years…

To be sure, it is not impossible that some terrible climate-related event in the next ten years can provoke a systemic run, though nothing in current science or economics describes such an event. But if that is the fear, the only logical way to protect the financial system is by dramatically raising the amount of equity capital, which protects the financial system against any kind of risk. Risk measurement and technocratic regulation of climate investments, by definition, cannot protect against unknown unknowns or un-modeled “tipping points.”…

I described the notion of risk (in this context) as almost entirely bogus, because I can see how some companies, primarily in the fossil-fuel sector, could perhaps come under pressure from new climate regulations, and if they come under pressure that might, in turn, affect some banks with exposure to them.

Cochrane, I suspect, would not be convinced:

What about “transition risks” and “stranded assets?” Won’t oil and coal companies lose value in the shift to low-carbon energy? Indeed they will. But everyone already knows that. Oil and gas companies will lose more value only if the transition comes faster than expected. And legacy fossil-fuel assets are not funded by short-term debt, as mortgages were in 2008, so losses by their stockholders and bondholders do not imperil the financial system. “Financial stability” does not mean that no investor ever loses money.

He adds:

If one is worried about the financial risks associated with the energy transition, new astronomically-valued darlings such as Tesla are the danger. The biggest financial danger is a green bubble, fueled as previous booms by government subsidies and central-bank encouragement. Today’s high-fliers are vulnerable to changing political whims and new and better technologies. If regulatory credits dry up or if hydrogen fuel cells displace batteries, Tesla is in trouble. Yet our regulators wish only to encourage investors to pile on.

Ouch.

To be fair, for a long time, Powell appeared to have reservations about taking the Fed into the climate wars, and probably still does.

CNBC:

For his part, Powell has indicated that climate change is not central to the Fed’s mission but is nonetheless important.

“It’s really very early days of trying to understand what this all means. It clearly can have longer-term implications for our economy, our financial system and the people who we all serve,” Powell said. “It’s early days, but we feel like we have the responsibility to start the process of understanding” the risk.

This reticence may have landed him in trouble with AOC and other progressives in congress.

CNN:

Progressive Democrats, including New York Rep. Alexandria Ocasio-Cortez, are calling on President Joe Biden to give the Federal Reserve a sweeping makeover by replacing Jerome Powell as chairman.

“We urge President Biden to reimagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice,” the lawmakers said in a statement Tuesday morning.

In addition to Ocasio-Cortez, the statement was issued Reps. Rashida Tlaib of Michigan, Ayanna Pressley of Massachusetts, Mondaire Jones of New York and Chuy Garcia of Illinois, all members of the Congressional Progressive Caucus.

In their statement, Powell’s critics noted that:

The Federal Reserve received a D- rating for its approach to climate risk policies from Positive Money’s Global Central Bank Scorecard, placing it at the bottom of the G20 Central Banks.

There is no better endorsement for Powell than the fact that he has disappointed Positive Money. That AOC and her cohort regard that coterie of scolds as an authoritative source is, in its own way, revealing.

Check out its website and the Positive Money report entitled The Tragedy of Growth (my emphasis added) :

To protect wellbeing and avoid ecological disaster we must abandon GDP growth and transform our economic system…

Widespread acknowledgment of the limitations of GDP as an indicator of progress is a positive step, but insufficient to achieve human wellbeing and environmental sustainability. Calls for more ‘green’ or ‘inclusive’ growth fail to address the negative consequences of growth. This report has shown that continuous GDP growth consistently fails to deliver enhanced life satisfaction, alleviation of poverty, or environmental protection.

Just remember that the next time you hear AOC touting the prosperity that will be built by the Green New Deal.

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