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Climate change, Keynesian stimulus and supervillainy

Summary:
Hawaii Senator Brian Schatz asked Fed Chair Janet Yellen an interesting question on day one of her semi-annual testimony to Congress:I wanted to ask you about climate change. It is affecting our economy in a number of ways, such as prolonged droughts that reduce agricultural yields, coastal flooding, increased severity of storms and the unpredictability of weather forecasts on which many of our industries depend. In 2016 NOAA reported 15 separate bn climate events… And lest we think this is an aberration, it’s important to remember that the number and the cost of these events has doubled over the last decade, and has increased eightfold over the last 30 years.So climate events are taking a toll on our economy and they are expected to become more and more intense going forward. So my

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Hawaii Senator Brian Schatz asked Fed Chair Janet Yellen an interesting question on day one of her semi-annual testimony to Congress:

I wanted to ask you about climate change. It is affecting our economy in a number of ways, such as prolonged droughts that reduce agricultural yields, coastal flooding, increased severity of storms and the unpredictability of weather forecasts on which many of our industries depend. In 2016 NOAA reported 15 separate $1bn climate events… And lest we think this is an aberration, it’s important to remember that the number and the cost of these events has doubled over the last decade, and has increased eightfold over the last 30 years.

So climate events are taking a toll on our economy and they are expected to become more and more intense going forward. So my question to you is, to what extent does the Fed take into account the impacts of climate change in assessing our economic outlook and future economic risks?

Some people on Twitter (your correspondent included) pointed out that government spending on climate change — disaster relief, storm-proofing cities, etc. — counts as Keynesian economic stimulus.

That’s been addressed many times, of course. One especially entertaining example comes from a decade ago. Back then, some part of the cultural subconscious, or maybe just one French sci-fi director, gave Keynesians supervillain status:

On a more serious note, let’s think about whether it’s valid to use the absolute value of “billion dollar events” to measure the economic impact of climate change.

First of all, viewing disaster relief as a burden causes some problems, since it puts the governmental responsibility of ensuring its citizens’ safety in an economic-risk frame. (Berkeley economist Solomon Hsiang takes a more nuanced approach in a 2014 paper, and finds that climate change could introduce a direct cost between 0.7 per cent to 2.4 per cent of US economic output.)

A lot of weather-related losses are insured. And speaking only from a financial stability perspective, it doesn’t really matter whether an insured loss is $2m or $2bn — it’s moat important that premiums are correctly priced, and that insurers don’t take on so much risk that they fail.

In the US, insurance coverage of weather-related losses varies widely. A 2015 NOAA paper found that participation in government-provided flood insurance is patchy, even in areas that sit on 100-year floodplains. Communities near rivers are particularly problematic, with just a 35 er cent likelihood of a homeowner buying insurance.

Without adequate insurance, the biggest risk is that the government’s disaster-relief efforts would end up giving a tacit subsidy to people living in risky areas, and the increased spending might cause runaway inflation. But the thing is, inflation isn’t exactly the most pressing problem faced by the US at the moment, and the federal government already serves as a backstop against the worst disasters.

So widening the reach of insurance companies and encouraging accurate pricing in that industry seems like a good place to start if you’re really worried about the US economic impact of climate change. Perhaps that’s what she’s referring to in her answer here:

Various international fora are looking into aspects of climate change that could affect financial stability and the exposures of financial organisations, and I think that’s appropriate. We recognise that risk events or severe weather or climate changes could have effects on the financial system. Our general approach since the financial crisis has been to try to build resilience among banking and financial organisations so they are well-positioned to deal with risk events. So those are a couple of reactions.

The good news is that insurance policies are usually written for one-year periods and renewed, which means those firms don’t need to model their risks decades into the future, when impacts will be less certain. That still leaves the risk that companies will face steep increases in premiums, of course. So a group of 32 global executives has developed recommendations for climate-change financial disclosures on the request of the Financial Stability Board and Mark Carney, who has been outspoken on this. (That’s probably one of the “international fora” Yellen references.)

Sen Schatz’s question doesn’t address the potentially severe effects of climate change on developing economies, which have been studied for years. But it could be tough to sell a humanitarian case in this “America First” political climate, since people appear to be on the fence about literal war refugees. So maybe border-adjusted carbon tax is the best way to go. (Possibly a border-adjusted labor-standards tax, too.)

Related links:
If you’re going to border-adjust a carbon tax, why stop there? – FT Alphaville
What if Trump’s wall were solar powered? – FT Alphaville
Trip be trollin’, Tesla climate change edition – FT Alphaville

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Alexandra Scaggs
Alexandra Scaggs is a markets reporter for the Wall Street Journal in New York. She writes about the U.S. stock market and investment trends. She also covers the business of markets research, writing on the calls, personalities and moves of high-profile analysts and strategists. Ms. Scaggs graduated from Washington & Lee University with a degree in business journalism.