Don’t bet on catastrophic climate change


Although not very good at a variety of things, the Biden team is determined and persistent when it comes to using federal financial regulators to make their bid on climate change.

For example, the Federal Deposit Insurance Corporation – which is supposed to ensure banks remain solvent – ​​is currently working on a “Statement of Principles for Managing Climate-Related Financial Risks for Large Financial Institutions”.

This statement and the SEC’s proposed climate risk disclosure rule are just elements of the Biden administration’s whole-of-government assault on funding industries that the Biden team considers undesirable.

Whether bankers at any level or location need to create and adhere to climate policies is a different question than whether there might be man-made climate effects. The exposure of physical assets to weather damage is real and significant, but that does not necessarily make it climate damage or a systemic financial threat.

Should bankers be concerned about the potential risk posed by possible climate change? A recent staff report from the Federal Reserve Bank of New York posed the question this way: “How bad are weather disasters for banks? Their response: “Not really.

Will this answer change when the climate changes? It should be noted what is already changing and what is not.

Over the past half century or so, the world has warmed by about one hundredth of a degree Centigrade per year. This warming is not constant. There are times when it warms faster, times when it warms more slowly, and times when the world cools. The sea level is rising about 3 millimeters per year.

None of these pose a direct threat to financial decisions.

Do these slow changes increase the frequency of costly extreme weather events? So far, the answer is no. Trends in extreme weather events show few effects that could affect asset values. Examination of the scientific chapter of the latest assessment report of the Intergovernmental Panel on Climate Change shows that there is no long-term upward trend in:

• Tropical cyclones (hurricanes)

• Tornadoes

• Meteorological or hydrological droughts

• Floods

Although the recent wildfires in the United States have been devastating, linking them to climate change does not match the long-term data. Other factors, such as forest management, play a more important role.

The IPCC noted increasing trends in intense precipitation events, heat waves, agricultural and ecological droughts (categories not reported in their first five IPCC assessments), and the fraction of all hurricanes considered major.

However, these trends can be misleading.

For example, the trend in the number of hurricanes has slightly decreased. In particular, the number of minor hurricanes decreased slightly more than that of major hurricanes. An overall decrease in hurricanes is a good thing. The disturbing reports of the increasing ratio of major to minor hurricanes appear to be an almost intentional attempt to mislead.

Heat waves also need more context. It should come as no surprise that as the world heats up one degree, there will be an increase in the number of times the threshold for a heat wave is exceeded. It’s not because there are more episodes of warm weather. This is because very hot weather that would have been less than a degree below the threshold is now above.

It should also be noted that, despite increasing agricultural droughts, global food production has more than doubled since 1980. This highlights the human elements – creativity and adaptability – that alter all considerations.

Although most climate models have had a poor prediction record over the past 30 years, predictions of what might happen decades and centuries in the future are still, inexplicably, in the headlines.

The 1970s predictions of disasters from population growth and resource depletion were just as dire as current predictions of CO2 impacts. They were wrong.

Over the past 50 years, the world’s population has doubled and resource extraction has accelerated. Yet the planet is no closer to resource depletion than we thought at the time. More importantly, virtually every measure of human well-being has improved.

Eventually, there could be a worsening of extreme weather patterns which could impose more severe costs on banking risk. Or maybe not. Does the speculative possibility of additional risk compel bankers or regulators to address those risks now? If so, what should the rules be?

It should be noted that Enron and its accountants got into trouble for financial statements that were out of step with reality. In pursuit of its extreme climate agenda, the Biden administration now wants to impose essentially the same behavior by requiring a potential overstatement of climate change risks for businesses.

In fact, generally accepted accounting principles have strict requirements to address material risks versus non-material risks, as well as known risks versus speculative risks.

The absence of defining trends and the highly speculative quality of future catastrophic climate change claims ensure that the attribution of risk to specific entities will be more fiction than fact.

The proposed climate reporting measures and resulting Enron-quality financial statements will add more confusion than clarity for investors, bankers and citizens. They will make our government less responsive to real challenges in the banking and financial markets, which, in turn, will make our country and its citizens poorer.

• David W. Kreutzer is Senior Economist at the Institute for Energy Research. Donna Jackson is director of Project 21 at the National Center for Public Policy Research.


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