Nov 9, 2019

The economic toll of climate change

Illustration: Aïda Amer/Axios

Top economists say the economic effects of climate change are just starting to be felt — and they're likely to start snowballing.

Why it matters: Wildfires, floods, and other natural disasters could harm the nation's financial backbone, damaging vital electronic payment systems, causing bank failures, and disrupting the economy in myriad unanticipated ways.

Driving the news: The Federal Reserve — arguably the most influential economic body in the world — held its first-ever climate change research conference on Friday, where economists sounded the alarm about the toll the U.S. economy could face.

Among the findings:

  • Global GDP per capita could fall 7% by 2100 in the absence of climate change mitigation effects, according to a paper presented by Hashem Pesaran, an economist at the University of Southern California.
  • If countries abide by the Paris Accord, that would bring that loss down to 1%, the paper said.
  • Extreme heat impacts the productivity of workers. For each degree the temperature rises above above a daily average temperature of 59°F, productivity declines by 1.7% — a figure that Sandra Batten, a senior research economist at the Bank of England, cited in research presented Friday.

The big picture, via Axios' Amy Harder: The Fed's attention to the problem stands in stark contrast to that of President Trump, who mostly ignores the topic. He started the formal process to withdraw the U.S. from the Paris Climate Agreement this week and is working to repeal virtually every climate-related policy his predecessor pushed.

The Fed event took place in California, where increasingly destructive wildfires have pushed the state's top utility into bankruptcy. And it provided some of the firmest evidence to date that global warming could finally become a core issue in monetary policy, potentially influencing Fed decisions about interest rates.

  • "Early research suggests that increased warming has already started to reduce average output growth in the United States," San Francisco Fed president Mary Daly said at the gathering, which the regional bank hosted.
  • "And future growth may be curtailed even further as temperatures rise."

The backdrop: Compared with other central bank across the globe, the Fed has been slow to acknowledge the impact a warming climate could have on the health of the global financial system. This week, however, a lineup of Fed officials have been making amends:

  • "The U.S. economy has experienced more than $500 billion in direct losses over the last five years due to climate and weather-related events," Kevin Stiroh, a top regulator at the New York Fed, said in a speech.
  • Fed governor Lael Brainard, one of the most senior policy makers, told the conference Friday that the effects of a warming climate could have implications for the all-important "neutral" rate — the level where interest rates are neither stimulating or slowing the economy. Her comments mark the farthest a top Fed official has ever gone in tying monetary policy to climate change.
  • Brainard pointed out that increased spending on air conditioning or higher insurance premiums could have implications for economic activity and inflation — key factors the Fed looks at when setting monetary policy.

On the other hand: Fed chairman Jerome Powell, who did not attend Friday's conference, has been measured in his comments on climate change. And not all Fed officials are gung-ho to factor it in to monetary policy.

  • "Although addressing climate change is a responsibility that Congress has entrusted to other agencies, the Federal Reserve does use its authorities and tools to prepare financial institutions for severe weather events," Powell said in an April letter to Sen. Brian Schatz (D-Hawaii).
  • Minneapolis Fed president Neel Kashkari told Axios in an interview last month: "It's a reach for me to see how climate change affects the economic cycle over the next three to five years."

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Federal Reserve Chairman Jerome Powell's last word

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College students as the Fed

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The market got the rate cuts it wanted

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Fed chair Jerome Powell again laid out his rose-colored view of the U.S. economy on Wednesday, telling the congressional Joint Economic Committee that he sees the U.S. as “being in a good place." He reiterated that a "material reassessment" of the economic outlook would be required for the Fed to raise or cut interest rates any time soon.

Why it matters: Powell's testimony was the cherry on top of the good news sundae that has sent traders' appetite for risk soaring over the last two weeks, and priced out expectations for further U.S. interest rate cuts through the end of next year.

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