A Crash Course on the Economics of Climate

Little Washoe Lake - image: courtesy of Kyle Roerink.

Opinion           

By now, almost everybody (looking at you, Heartland Institute) knows that climate change is an environmental crisis that demands action. I won’t dwell on the PTSD-inducing drought, heat, and wildfires our state has suffered this year (while hurricanes and floods batter the eastern US) and how we’ve seen these steadily worsen over the last couple of decades. As we think about smoke, smog, and excessive heat, we quickly realize that the warming and drying climate is a public health emergency too. What I see less conversation about is the financial aspect of this crisis. 

Floods, hurricanes, and wildfires cause damage, and that damage has a price tag. That cost gets picked up by affected individuals and businesses; passed on to families, friends, and customers; and hopefully offset by taxpayers (paying for federal disaster relief) and insurance. Drought has all kinds of costs, from spending to preserve or enhance the water supply, to reduced crop yields and increased crop failures (that means higher food prices), and of course the link between dryness and wildfires.

And what about the impacts on recreation and tourism when a ski resort’s season is shortened or the majority of a national park is incinerated?

What about when families, insurance companies, and government health plans have to spend more on treatment for heat illnesses and lung diseases? And let’s not forget that all of these costs fall disproportionately on lower-income families and communities of color.

Maybe you’ve already thought about this. That’s why the polluters need to pay to repair the damage and keep the problem from getting worse, right? I could write a whole other column about that, and maybe I will. But let’s dig a little deeper into the numbers.

Climate is throwing decades of important financial calculus out the window. When fires become more frequent and more damaging, it becomes unaffordable to insure them – the risk is just too high. And when somebody can’t get insurance, they face the full force of tragedy without any safety net to help rebuild. 

Risk is also an important factor for governments and businesses seeking loans. The more stability you have to repay the bonds no matter what curveballs come your way, the lower the interest rate you get. The higher the risk of default, the more money a lender wants while the getting is good. The costs of hardening infrastructure and dealing with climate megadisasters are now being factored into credit ratings, and I’m willing to bet the overall trend will be higher interest costs for borrowers.

Still hungry for more after Climate Econ 101 and 202? Let’s move on to the advanced course: Climate and the Federal Reserve. As the nation’s foremost investor and economic protector, the Federal Reserve could adopt a significant role in mitigating the impacts of climate change. And yet Trump-appointed Chairman Jerome Powell has, perhaps unsurprisingly, refused to do so.

I will give Powell some credit. Instead of trumpeting the Big Lie, he’s realized there is a new administration with new priorities, and has made a couple of pro-climate gestures to indicate he understands the gravity of a changing climate.  The Fed joined the Network for Greening the Financial System, an international group of central banks and financial regulators that analyze climate-based risks. He has also established committees within the Federal Reserve to study climate change. But we need more than words; the crisis demands action with meaningful results. 

The Federal Reserve can and must steer funding away from fossil fuels and toward renewable energy. As a juggernaut in the financial sector that interacts directly every day with the world’s biggest banks – including JP Morgan, Bank of America, and Wells Fargo – the Fed could discourage them from funneling billions of dollars into fossil fuels. Powell could use his platform to discuss how the risks, damage to the gross domestic product, and likely loss of value to clean technology makes such investments unwise for the financial sector. The fed could even test the durability of institutions’ balance sheets if or when fossil fuel assets decline to ensure we don’t end up in another financial catastrophe. 

Unfortunately, under Powell’s leadership, the Fed is unwilling and uninterested in doing any of this. By choosing to maintain the status quo, Powell is putting our country’s economy on the line. We have to understand that some people won’t be stirred by moral calls or impacts they may have the means to largely dodge. But the pocketbook issues will affect everybody, and we should use them to get more folks engaged. A good starting place for action? President Biden can appoint a new chair of the Federal Reserve who’s a star student when it comes to the economics of climate.


Howard Watts is a two-term Nevada Assemblyman who represents District 15 in Las Vegas.


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