The far-reaching effects of climate change have the potential to cause instability in the financial system and disrupt the economy, states a federal study.
The report, by the US Commodity Futures Trading Commission’s (CFTC) climate subcommittee, calls on the world to rapidly implement a price on carbon and encourages financial regulators to work “more aggressively and decisively” to recognize and minimize the potential economic risk caused by climate change.
The Advisory Committee on Climate Change comprises members from banks, environmental organizations, investors and a major oil firm.
Scientists have also recognized climate change to be responsible for catastrophic weather events throughout the United States, including wildfires, extreme flooding and major hurricanes.
Jobs, income to be affected
The report warns of possible “financial system stress” that could damage the economy by restricting access to credit.
“Over time, if significant action is not taken to check rising global average temperatures,” the report said, “climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income, and opportunity.”
The environmental organizations participating in the study emphasized the urgent need for action.
Climate crisis to financial crisis
The study indicates that the climate crisis could possibly turn into a financial crisis.
“Climate change could pose systemic risks to the financial system,” said the report.
This could happen through a “disorderly reprising of assets” that has “cascading effects” on investment portfolios and balance sheets.
Other reports, outside the federal government, have also warned of the serious economic effects of climate change.
In December, the Principles for Responsible Investment cautioned that climate change — and policies designed to tackle it — could wipe out $2.3 trillion in value from global stocks.
Researchers at Stanford University reported last year that climate change is making developing countries poorer and increasing inequality in the world.
Prepare markets for climate change
But the CFTC Climate Subcommittee stressed that “the single most important move in mitigating climate risk” is to set a “fair, economy-wide and effective” carbon price. The aim will be to guide capital into renewable energy and ensure that markets are adequately prepared for the disruption caused by climate change.
Legislators and corporate leaders have been debating carbon prices, such as carbon taxes, for decades.
Carbon costs refers to a cost collected for carbon pollution and is used to persuade polluters to minimize the amount of greenhouse gasses they release into the atmosphere. It typically takes the form of a carbon tax.
Recommendations
The CFTC Climate Subcommittee made 53 recommendations to address climate risk, including mandating businesses to report specifics of their greenhouse gas emissions, to perform climate stress tests and to compel banks to manage financial risks related to climate change.
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