1) Council of Economic Advisers and OMB, Climate-Related Macroeconomic Risks and Opportunities
Climate change is generating increased challenges to the environment, public health, and the economy. President Biden has set an ambitious goal for the United States: to rapidly reduce greenhouse gas emissions to net zero by 2050. This means that the United States will need to reduce reliance on unabated, carbon-intensive fossil fuel technologies and transition the economy to produce and make use of clean energy and other low-carbon goods and services. The President is mobilizing a whole-of-government approach to climate action through policies in his fiscal year 2023 budget that hasten and smooth the transition to a net zero emissions economy.
The economics literature provides robust evidence that the welfare benefits of well-designed climate policies exceed the costs, providing a strong rationale for urgent action to address the risks of climate change. Preserving the planet’s environment will benefit human health globally, reduce the risk of conflict and migration, and ensure the viability of ecosystems. Many of these benefits to human welfare are largely not valued in market transactions; given this, climate action is desirable even if climate change were to have little impact on macroeconomic aggregates.
On top of these substantial non-market benefits, there are benefits that can be valued in market transactions, which would be reflected in gross domestic product (GDP) and other macroeconomic aggregates. A primary tool to assess these aggregates are macroeconomic models, which are used to assess aggregate economic conditions with and without shifts in policy. These models incorporate what is known from the research about the relationships among macroeconomic indicators—such as labor force participation, investment levels, and economic output—to provide projections of the future path of growth.
Given both the pace of climate change and the scale and scope of the economic consequences, integrating the effects of climate change and climate policy into macroeconomic projections is increasingly important (we will use the shorthand “climate-macro” going forward). Indeed, professional macroeconomic forecasters and financial institutions have begun to incorporate climate change into their macroeconomic forecasts (Lafakis et al. 2021). Yet, at this time, most of the macroeconomic models that the Federal government relies upon do not explicitly incorporate future climate risks and opportunities.
Within the Executive Branch of the Federal government, the macroeconomic projections underlying the President’s Budget provide a foundation for analysis of the macroeconomic impacts of climate change. That is why the President’s “Executive Order on Climate-Related Financial Risk” tasked the Office of Management and Budget (OMB), Department of the Treasury, and policy councils with “develop[ing] methodologies to quantify climate risk within the economic assumptions … of the President’s Budget.” Climate risks are defined to include both the physical risks to Federal and private assets, publicly traded securities, private investments, and companies as well as the risks caused by the global transition away from carbon-intensive energy sources and industrial processes to companies, communities, and workers (Exec. Order 14030).
As part of fulfilling these tasks, this Council of Economic Advisers (CEA) and Office of Management and Budget (OMB) White Paper lays out some of the macroeconomic implications of climate change and the transition to a lower carbon economy in the United States, reviews available climate-macro research and methodologies, and identifies relevant resources in the Federal government for generating climate-macro projections. The White Paper is a first step towards climate-macro projections developed by the Federal government. Earlier this year, CEA and OMB also launched a Climate-Macro Interagency Technical Working Group (ITWG) to develop the capacity to produce climate-macro projections within the Federal government.
2) Congressional Research Service, How Climate Change May Affect the U.S. Economy
There is general consensus within the scientific community that human activities have increased greenhouse gas concentrations in the atmosphere and that the increased concentrations have contributed to a rise in global average temperatures. The United Nations’ Intergovernmental Panel on Climate Change recently assessed, “Overall adverse economic impacts attributable to climate change, including slow-onset and extreme weather events, have been increasingly identified.”
Two of the main avenues through which climate change can affect GDP in the short and long terms are productivity and investment effects. Productivity is a key determinant in long-term economic growth—as productivity increases, economies can produce more goods and services with the same level of resources, which in turn tends to increase well-being and income. Business investment is also a determinant of long-term growth insofar as it contributes to the domestic capital stock, which is directly related to the economy’s overall productive capacity. Research suggests that climate change could negatively impact productivity and business investment, as rising temperatures and heat waves could result in lower output per worker. Declines in productivity and production could decrease businesses’ incentive to invest, particularly in a scenario in which physical capital is routinely damaged or destroyed due to the effects of extreme weather events to a point where further investment becomes unattractive.
Climate change can also bring some benefits (such as fewer extreme cold events) and opportunities (opening of Arctic shipping lanes), although the net effects of climate change on the economy are generally expected to be increasingly adverse and widespread on net. Climate change—notably the projected increase in certain extreme weather events—is also expected to affect the overall economy through its impacts on specific sectors, such as housing, infrastructure, and agriculture. Nearly one-third of the U.S. housing stock could be at high risk of climate-change-induced hazards, and billions of dollars of property are vulnerable to complete destruction or being rendered unusable by flooding risk alone. Transportation infrastructure, which supports the production and movement of goods and services, could be damaged with climate change. While transportation systems are typically designed to withstand certain magnitudes of extreme weather events, an increase in the frequency and severity of extreme weather events would increase the residual risk. Heat waves, heavy precipitation, and other storms can additionally cause delays and disruptions on roads, public transit systems, airports, and the like, adding to the costs of production and interfering with consumption.
There are several considerations to take into account when analyzing research on the economic effects of climate change. One is that economic projection is an imprecise science and entails a degree of uncertainty, and uncertainty may increase over long time horizons. This research becomes more complicated when based on climate modeling results, which are often based on scenarios that may or may not be associated with likelihoods of occurrence or reflect future conditions. Additionally, there is no consensus on the best way to model the economic effects of climate change. Several different methodologies and types of modeling are used to estimate the impacts of various climate change scenarios on economic indicators such as GDP and personal income. Differing methods can make it difficult to compare results across studies. Currently, this field of study into the economic effects of climate change is relatively small compared to other types of economic or climate-related research. The relative dearth of studies makes it challenging to reach specific “mainstream” conclusions about economic impacts. Nonetheless, the large majority of existing studies tend to find that climate change impacts to longer-term economic output—either economy-wide or in impacted sectors—is likely to be negative and increasingly so, although the magnitude of these effects is not widely agreed upon.
3) OMB, Quantifying Risks to the Federal Budget from Climate Change
Today, for the first time in history, OMB is formally accounting in the Federal Budget for risks of climate change. OMB is publishing two new assessments, Federal Budget Exposure to Climate Risks and a new section in the Long-Term Budget Outlook focused on climate change. The first of these chapters is supported by an OMB white paper. Additionally, OMB and the Council of Economic Advisers have released a white paper that outlines how better modeling of the broader economic impacts of climate change can help to quantify economic and fiscal impacts of climate change and climate action.
OMB, CLIMATE RISK EXPOSURE: AN ASSESSMENT OF THE FEDERAL GOVERNMENT’S FINANCIAL RISKS TO CLIMATE CHANGE (120 pages) https://www.whitehouse.gov/wp-content/uploads/2022/04/OMB_Climate_Risk_Exposure_2022.pdf
Federal Budget Exposure to Climate Risks (16 pages) https://www.whitehouse.gov/wp-content/uploads/2022/04/ap_21_climate_risk_fy2023.pdf
New section in the Long-Term Budget Outlook focused on climate change https://www.whitehouse.gov/wp-content/uploads/2022/04/ap_3_long_term_fy2023.pdf
4) NY Fed, Climate Change and Financial Stability: The Weather Channel
Climate change could affect banks and the financial systems they anchor through various channels: increasingly extreme weather is one (Financial Stability Board, Basel Committee on Bank Supervision). In our recent staff report, we size up this channel by studying how U.S. banks, large and small, fared against disasters past. We find even the most destructive disasters had insignificant or small effects on bank stability and small and positive effects on bank income. We conjecture that recovery lending after disasters helps stabilize larger banks while smaller, local banks’ knowledge of “unmarked” (flood) hazards may help them navigate disaster risk. Federal disaster aid seems not to act as a bank stabilizer.
Liberty Street Economics blog: https://libertystreeteconomics.newyorkfed.org/2022/04/climate-change-and-financial-stability-the-weather-channel/
NY Fed Staff Reports, How Bad Are Weather Disasters for Banks? https://www.newyorkfed.org/research/staff_reports/sr990.html
5) Intergovernmental Panel on Climate Change (IPCC), Climate Change 2022: Mitigation of Climate Change
The Working Group III report provides an updated global assessment of climate change mitigation progress and pledges, and examines the sources of global emissions. It explains developments in emission reduction and mitigation efforts, assessing the impact of national climate pledges in relation to long-term emissions goals.
NYTimes, Stopping Climate Change Is Doable, but Time Is Short, U.N. Panel Warns https://www.nytimes.com/2022/04/04/climate/climate-change-ipcc-un.html
WSJ, Renewables Are Key to Cutting Emissions Over Next Decade, U.N. Panel Says: Human activities in the past decade resulted in the highest average annual global emissions ever recorded https://www.wsj.com/articles/emissions-cuts-in-next-decade-are-crucial-to-meet-paris-targets-u-n-panel-says-11649085009?st=kljbdgjwrekarxh&reflink=desktopwebshare_permalink