One thing is clear after the failure of the Glasgow climate conference: the 1.5-degree Centigrade target is dead. Net zero by 2050 is not going to happen, yet, as part of its whole-of-government approach, the Biden administration is continuing to push the Fed and the SEC to incorporate climate financial risk into the way they regulate the financial system in order to deliver the administration’s goal of net zero by 2050.
The mandates given by Congress to the Fed and the SEC do not include climate policy. As I show in a report published by the RealClear Foundation last week, mandatory climate disclosures only make sense when viewed as part of the Fed and the SEC’s undisclosed and unlegislated green mandates and that climate financial risk is too nebulous a concept to have the sharpness required of a regulatory principle.
A couple of years ago, the Bank for International Settlements and the Banque de France – the founder of the Network for Greening the Financial System which the Fed joined after Donald Trump had lost the election – produced a book, The Green Swan. It’s full of tales of radical uncertainties, catastrophes and climate tipping points. There’s no timeline for the latter, but there is a map showing one of the earliest being the melting of the Greenland ice sheet.
So let’s see what the Intergovernmental Panel on Climate Change (IPCC) said in its fifth assessment report, the most recent IPCC report available to the authors of The Green Swan.
“The available evidence indicates that sustained global warming greater than a certain threshold above pre-industrial levels would lead to the near-complete loss of the Greenland ice sheet over a millennium or more.”
If anything, the IPCC’s Sixth Assessment Report is more cautious still, talking about the irreversible loss of the Greenland ice sheet “over multiple millennia.”
It should be obvious that the real motive for the climate stress tests envisaged by the Fed has nothing to do with the threat of physical climate risk, which will remain within the wider envelope of natural variability at least until the second half of the 21st century.
The Green Swan even finds an example of that rarest thing, a supposedly catastrophic combination of physical and transition climate risk:
“Extreme weather events could have major impacts on socio-economic systems and lead to unexpected new regulations (such as the Fukushima Daiichi accident leading to an unexpected ban of nuclear power plants in Germany).”
In fact, the Fukushima incident was caused by a tsunami. Tsunamis are not weather events, but are caused by earthquakes. German nuclear policy had been in flux since the formation of Germany’s first Red-Green coalition in 1998. And, by the way, the German government has agreed to pay the owners of nuclear power stations €2.4bn in compensation. If financial regulators think that constitutes a threat to financial stability, they ought to find themselves alternative employment.
On climate transition risk, the SEC wants to force filers to disclose their and their value chains’ emissions. These are meant to serve as indicators of exposure to climate regulatory risk. With the Glasgow climate conference behind us, it is blindingly obvious that the world is not a single homogenous regulatory space, as the SEC assumes. The Paris climate agreement embodies what Mikhail Gorbachev called the Sinatra Doctrine – You do it your way, or even, don’t do it all — and is based on Nationally Determined Contributions. For this reason, SEC emissions disclosures are systematically misleading as indicators of regulatory risk.
Final proof that climate financial risk is poorly disguised climate policy comes from the Glasgow climate conference and a speech by the British Chancellor of the Exchequer. Rishi Sunak didn’t mention climate financial risk at all, but the same disclosure tools were all there, but to enforce net zero transition on UK listed companies. Same tools, different policy objective? Pull the other one.
Making the financial system entirely focused on net zero itself constitutes a grave threat to financial stability by creating a green bubble which could make 2008 look like a small shake. We know what can happen when governments favor worthy causes. The housing and the savings and loans busts of the late 1980s and the 2007/8 crash spring to mind.
But here, there’s a double whammy. In the 1970s, we had the Gulf oil producers imposing an oil embargo on the United States, heralding the end of the post-1945 economic boom. Now the government of the United States in league with Wall Street is imposing an investment embargo on oil and gas producers. Spiraling energy prices makes it harder to service the billions and trillions of green debt being pumped into the system. With central bankers and financial regulators forsaking their role as umpires to become net zero players, we have all the makings of a bust to end all busts.
Rupert Darwall is a senior fellow of the RealClear Foundation and author of “Climate-Risk Disclosure: A Flimsy Pretext for a Green Power Grab.”
