Sooner Or Later, Climate Change Is Coming For Your Wallet
The impact on the environment will soon extend to the economy.
4 min
Last week Gary Gensler, the chair of the Securities and Exchange Commission, made what seemed like an uncontroversial statement: “I think we can bring greater clarity to climate risk disclosures.” The SEC, he said, will begin to consider requiring public companies to tell their investors how climate change could threaten their business. That’s an important step, because for as much as we know about how the climate crisis is changing our lives, we’re only starting to get our heads around what it will truly cost you and me.
The oil and gas industry is already pushing back. Industry groups are stepping up lobbying to avoid disclosing their emissions, according to the Financial Times. These short-sighted attempts will unfortunately hurt our economy.
According to a report released in April by SwissRe, the global reinsurance company, the U.S. economy stands to lose 10% of its economic value by 2050 under a worst case scenario, where average global temperatures rise 3°C compared to pre-industrial levels. The SwissRe “worst case” scenario, however, is our current reality—one in which temperatures remain on their current trajectory, and both the Paris Agreement and 2050 net-zero emissions targets are not met.
To some, SwissRe’s projection of a 10% loss in 30 years may not sound alarming. But that datapoint can otherwise be stated as: The U.S. will suffer natural disasters such that it is not expected our economy will be able to recover from them. The prospect of suffering damage so profound that we are unable to economically recover is alarming. And it is not a distant future.
Scientists had hoped that Covid-related disruptions would produce a large reduction in carbon emissions. But the reductions were less than expected. The world produced only 6% less carbon last year than the one before. This modest response to an unprecedented synchronous global shutdown of economic activity puts the scope and scale of current emissions into perspective. To quantify the challenge, the Intergovernmental Panel on Climate Change indicates that emission reduction ranges must be around 45% lower than present to meet a 1.5°C temperature goal.
Weather and climate disasters cost the U.S. economy $450 billion (2.1% of GDP) in 2020, the highest year on record. And we hold the No. 1 spot for the number of disasters year-to-date according to EM-DAT, a database that tracks disasters globally. We also know climate change has made most of these events worse than they would have otherwise been.
The mere 1°C temperature increase that has already occurred has contributed to new water shortages in towns across California, Nevada, Arizona, and New Mexico. Increasing evaporation has also reduced soil moisture, which helps explain the $7 billion to $13 billion cost to insurers from the 2020 wildfires. Costs that will inevitably translate into a higher price tag to you, the consumer.
The future costs of climate change on the U.S. economy are uncertain, but what is worse is that they may be underestimated. Underestimation occurs because projections are often made using an enumerative approach, where losses are valued sector by sector and then tallied to estimate the total impact on social welfare.
In other words, current approaches miss cascading risks, problems that exacerbate other disasters in unforeseen ways. Global supply-chain disruptions are an example of why cascading risks are difficult to model—because all industries can be affected when businesses of all sizes as well as national and subnational governments are interdependent. Economic disruptions from Covid-19 provide a case in point. The pandemic highlighted the vulnerabilities of complex supply chains that are now ubiquitous. As severe weather events continue to worsen, the U.S. economy will continue to suffer shortages — not only from domestic disruptions to products like orange juice, corn, and soy, but also from disasters abroad. The regions that produce most semiconductor chips and rare earth elements, critical in computers, smartphones, aerospace and defence, and medical appliances are concentrated in regions particularly vulnerable to climate hazards.
The economic consequences of climate change are countless. Under the last administration, the U.S. Commodities and Futures Trade Commission released the first-ever assessment of the impact of climate change on the financial system. The 196-page report’s first sentence reads: “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”
The good news is that scientists, economists, and financial regulators agree on what needs to be done—even the oil and gas executives are on board. The key recommendation from the CFTC is that “The United States establishes a price on carbon. It must be a fair, economy-wide price… at a level that reflects the true social cost of those emissions.” The authors go further, stating that “a carbon price is the single most important step to manage climate risk and drive the appropriate allocation of capital.” The SEC’s moves toward mandatory climate risk disclosures are first steps on that path.
But if you’re not in a position to influence the risk calculus of public companies, there is something else you can do. You can buy insurance. The IMF’s researchers find that insurance penetration is a top factor in determining the resilience of a country to the impact of climate change. Yes, it might cost you a little more than you expected to spend this year. But climate change is coming for your wallet sooner or later.
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August 6, 2021
About the authors: Jennifer R. Marlon is a research scientist at Yale University’s School of the Environment. Bianca Taylor is founder of Tourmaline Group and a member of the Bretton Woods Committee. The two are public voices fellows of the OpEd Project and the Yale Program on Climate Change Communication.
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
4 min
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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