JPMorgan, Morgan Stanley and others call for carbon pricing

U.S. government should price greenhouse gasses to ensure markets cut climate risk, advisory panel to CFTC said.


Bloomberg News

The U.S. government should start making businesses pay for their greenhouse gas emissions to help combat global warming, according to a powerful group of finance and energy titans including Morgan Stanley, JPMorgan Chase & Co. and BP Plc.

Climate change poses a significant risk to the financial system and regulators must “move urgently and decisively,” the group said in a report that was signed by executives from the three firms and more than two dozen other global businesses, investors and nonprofit organizations.

The document released Wednesday was produced by a committee that advises the U.S. Commodity Futures Trading Commission on climate-related market risks. The panel is sponsored by Rostin Behnam, a Democratic commissioner at the CFTC.

Extreme weather events, previewed by those the U.S. has seen all summer, “pose significant challenges to our financial system and our ability to sustain long-term economic growth,” Behnam said in a statement.

The report wasn’t voted on by commissioners at the Republican-led agency. CFTC Chairman Heath Tarbert said in a statement that he appreciated Behnam’s “leadership on convening various private sector perspectives,” but cautioned against moving too quickly.

The “report acknowledges that ‘transition risks’ of a green economy could be just as disruptive to our financial system as the possible physical manifestations of climate change, and that moving too fast too soon could be just as disorderly as doing too little too late,” he said.

Calls by corporate executives for a tougher government stance have had little success during President Donald Trump’s administration as officials have reversed policies implemented to cut emissions and the U.S. is withdrawing from the 2015 Paris Agreement on climate change. Wednesday’s report includes a series of non-binding recommendations, but it could serve as a blueprint if Democratic candidate Joe Biden wins the White House in November.

The U.S. should price greenhouse gas pollution to ensure that financial markets reduce risks “consistent with the Paris Agreement,” the report said. Its authors stressed how unprepared financial markets are to deal with climate change, warning that without a carbon price “capital will continue to flow in the wrong direction, rather than toward accelerating the transition to a net-zero emissions economy.”

Using carbon pricing to lower emissions has seen some success in Europe, where the rising cost of allowances and cheaper natural gas have helped reduce the role of coal in the power sector, leading to an 8.3% drop in emissions last year. The U.S. has some regional carbon markets, led by California’s, but nothing close to Europe’s scale.

Bob Litterman, a former Goldman Sachs Group Inc. executive and founding partner of Kepos Capital who chairs the CFTC advisory committee, led the call for U.S. carbon pricing in the group’s report. Litterman has spent much of the last decade writing and speaking about how a basic economic principle — that people respond to price incentives — applies to climate change. Carbon dioxide emissions inflict a cost on society that is not reflected in market energy prices, he has argued, and a carbon price is the most efficient way to fix it.

Nathaniel Bullard, chief content officer of BloombergNEF, is a member of the CFTC climate-risk subcommittee, which also included representatives from Marsh & McLennan Cos., Citigroup Inc., Cargill Inc. and ConocoPhillips.

A unanimous report from such a diverse collection of authors could also be a political signal to the ultimate authority in carbon policy: the U.S. Congress. There are existing laws that enable regulators to help markets deal with climate risk, including mandating material disclosures to protect investors and ensuring institutions have the ability to absorb climate-related losses.

Still, the threat goes beyond the finance industry, according to Jesse Keenan, a Tulane University professor who was an editor of the report. “This isn’t just about Wall Street,” he said. “This is about the entirety of the U.S. financial system, and that includes our housing and labor markets as well.”


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