Friday, September 11, 2020

Congressional and regulatory leaders engage in bipartisan discussion surrounding CFTC’s recently issued climate change report

By Brad Rosen, J.D.

As wildfires devastate major swaths of acreage in the western United States, rising sea levels threaten the nation’s coastlines, and floods increasingly plague the Midwest, the Bipartisan Policy Center hosted congressional and regulatory leaders to a panel discussion on climate risks in financial markets. The conversation featured Senator Sheldon Whitehouse (D-RI), Representative Garret Graves (R-LA), CFTC Commissioner Rostin Behnam, and Bob Litterman, Chair of the CFTC’s Climate-Related Market Risk Advisory Subcommittee. The web-based discussion, came on the heals of the CFTC’s recently issued report titled Managing Climate Risk in the U.S. Financial System . Jason Grummet, Bipartisan Policy Center’s president, moderated the discussion.

Incentives needed to address risk. Bob Litterman, chairman of the risk committee for Kepos Capital, gave a brief overview on the central lessons of risk management. He noted that incentives must be created to address any risk. In the climate risk context, that means that carbon must be appropriately priced, and simply, that is not being done. Litterman noted the market itself cannot address this problem; it will require legislation. Litterman also urged taking strong and immediate action on this score. He observed we don’t know how much time we have until there is a tipping point and the consequences become nonlinear.

Congress is the chokepoint. Senator Whitehouse, following on Litterman’s comments, underscored the point that if you want carbon pricing, you need to go through Congress. While up until now there has not been the will to do so, Whitehouse sees that sentiment softening. He sees financial, industrial, and coastal interests increasingly backing carbon pricing measures. If these interests showed up in Mitch McConnell’s office, "you’d see a pivot so fast your head would spin" observed Whitehouse.

Focus on resiliency. Representative Graves, a Republican representing southern Louisiana, advocated taking a somewhat different perspective with a focus on resiliency efforts. Graves acknowledged that climate change is real, noting the loss of 2000 square miles of coastal property in his state due to erosion and subsidence. However, Graves urged the adoption of shorter-term proactive resiliency measures rather than prioritizing actions around emissions reduction where it might take 50 years to yield meaningful results. Graves also sees the need for a multilateral approach when it comes to emissions reduction noting the U.S. has reduced emissions more than the next top emitting countries combined. He notes, the U.S. cannot solve this global problem on its own.

Realistic next steps. In response to a viewer question, Commissioner Behnam stated that he sees the release of the report as a significant first step towards raising the awareness around climate change-related financial risks. It is also important to have the report distributed widely to policy makers throughout the government according to the commissioner. At this juncture, Behnam doesn’t see any short-term deliverables resulting from the report but rather views it as a starting point for important conversations. The commissioner also indicated the importance of having a document that is driven by private market players. In his view, changes will be implemented over time.