In Senate Hearing, Economic Experts Warn Climate Crisis Could Spur Financial Crash Like 2008

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Could the climate crisis precipitate a financial crash akin to or even greater than the one in 2008? With markets currently in turmoil due to the coronavirus pandemic, experts testified Thursday that there is high risk for an even larger economic crisis absent urgent climateย policy.

A panel of economic experts brought this message to a handful of senators on Capitol Hill during a March 12 hearing convened by the Senate Democratsโ€™ Special Committee on the Climate Crisis. This hearing on the economic risks of climate change delivered a clear warning that continued inaction on climate will result in enormous economic and societalย consequences.ย ย ย 

โ€œIf we ignore climate change, we in essence destroy the economy,โ€ Sarah Bloom Raskin, former member of the Federal Reserve Board of Governors, said during the question-and-answer period of the hearing. Another witness, Frรฉdรฉric Samama, said simply, โ€œwe are putting humanity atย risk.โ€

Heading for Another Financialย Crash?ย 

Witness after witness โ€” including an investor who accurately forecasted the 2008 mortgage crisis โ€” referenced the 2008 crash as they described the current risks posed by the impacts of a rapidly warmingย globe.

โ€œI bring up the financial crisis because like the belated and sudden devaluation that occurred in the context of subprime mortgages, one can imagine the effects of a belated and sudden devaluation that could occur in the context of mispriced carbon-dependent financial assets,โ€ Raskin noted in her written testimony. โ€œClimate change constitutes a material financial stabilityย risk.โ€

โ€œThink about what caused the last financial crisis. That was a classic case where we didnโ€™t price the systematic risk in mortgages. Too much risk was created, and it blew up on us,โ€ Bob Litterman, Chair of the Commodity Futures Trading Commissionโ€™s Climate Risk Working Group, wrote in his testimony. โ€œWe are not pricing climate risk; not creating appropriate incentives to reduce emissions: a tragic and potentially catastrophicย mistake.โ€

Dave Burt, the investor who predicted the last financial crisis and who currently focuses on measuring the impact of climate risk on real estate markets, warned of another impending crash โ€” this one climate-related. โ€œI believe we are experiencing a similar value bubble today driven by the marketโ€™s failure to consider the increasing risk of damages resulting from climate change,โ€ Burt said in his written testimony. This bubble of overpriced home values, he explained, leads to a sense of complacency and further increasesย risk.

โ€œThe complacency continues as we march towards a horrible climate outcome for future generations,โ€ Burt said during theย hearing.

Samama, head of responsible investment at the European asset manager Amundi and co-author of a recent โ€œGreen Swanโ€ report on central banks and financial stability, explained that central banks are now sounding the alarm on climateย risk.

โ€œCentral banks now recognize that climate change threatens financial stability,โ€ he said. He warned that the climate crisis is an example of a โ€œgreen swan,โ€ which he defined as a โ€œhighly certain event with multiple non-linear and interacting causes that threatens life onย Earth.โ€

How Bad Will Itย Get?

Not just the economy but the health and lives of people across the globe are at risk. Senator Sheldon Whitehouse (D-RI), who chaired the hearing, posed a question to the witnesses: considering extreme but plausible impacts, how bad might it get and how soon might itย come?

According to Raskin, overall impacts could be โ€œextremely bad,โ€ and they are already starting to happen. โ€œWe are in the midst of the extraordinary destruction and deterioration of our economy now,โ€ sheย said.

โ€œThe impacts on human health of climate change could be very dramatic,โ€ Litterman added. โ€œThe melting of the tundra could release viruses that havenโ€™t been seen for tens of thousands of years. So you can imagine pandemics โ€ฆ and there are the national security issues, and just in terms of the science thereโ€™s tippingย points.โ€

The witnesses and senators agreed that policy change will be necessary to avoid complete calamity. Witnesses pointed to several policies that could help alleviate the economic risk, like carbon pricing, requiring firms to do climate โ€œstress tests,โ€ and mandating climate risk disclosure. But so far the federal government has largely failed in its political response to the climateย crisis.

โ€œI hope we donโ€™t reach that point where we have to have the equivalent of a pandemic in climate terms in order to trigger that kind of policy change,โ€ Senator Chris Van Hollen (D-MD)ย said.

Senator Rebukes Fossil Fuel Obstruction in Congress, Calls for Counterforce from Otherย Industries

In his closing remarks, Sen. Whitehouse called out the fossil fuel industry and its allies for continued obstruction of climateย policy.

โ€œAt the moment, what I want to share with the panel and with the world, is that while some of the worst behavior of the fossil fuel industry has been moderated or obscured through deniable intermediaries, and while in my opinion evil institutions like the Heartland Institute appear to be suffering a collapse which could not be more helpful, nevertheless the prevailing political weight of the fossil fuel industry on this body, both directly and through its vast array of intermediary front groups, remains completely opposed to any serious climate legislation,โ€ Whitehouseย said.

Given this powerful force of obstruction, he explained that a political counterforce is needed from other parts of the private sector. The rest of corporate America, Whitehouse said, needs to โ€œshow upโ€ and align its political action with its stated values on climateย action.ย 

โ€œIn my world, the hydraulic pressure of the rest of corporate America to push back on the fossil fuel industry has not arrived,โ€ he said. โ€œIf you can break the back of the fossil fuel industryโ€™s lying and denial apparatus by putting an opposing force up against it, and the financial community easily has the wherewithal and the political knowledge to be that opposing force, as does Big Ag, then weโ€™re in a whole new world inย Congress.โ€

Main image:ย Senate Democratsโ€™ Special Committee on the Climate Crisis Hearing March 12, 2020.ย Credit: Senate Democrats onย YouTube

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Dana is an environmental journalist focusing on climate change and climate accountability reporting. She writes regularly for DeSmog covering topics such as fossil fuel industry opposition to climate action, climate change lawsuits, greenwashing and false climate solutions, and clean transportation.

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