At the end of March, Glenn D. Rudebusch, Executive Vice President and Senior Policy Adviser for the San Francisco Federal Reserve Bank penned a commentary describing how “the consequences of climate change are relevant for the Fed’s monetary and financial policy.”

Climate change is one of three major forces transforming the economy this century, the others being demographics and technology.  Citing the fourth National Climate Assessment, he explains that the U.S. will likely sustain increasing losses to infrastructure and other property that will likely impede the rate of economic growth.  He cites a number of researchers that find losses due to climate events are already slowing U.S. economic growth.

Economists attribute the effect of greenhouse gasses to a mis-pricing of carbon in our economy, according to Rudebusch, which fails to provide the incentive to release less carbon into the atmosphere.  Given this, government intervention with a carbon tax could be the answer.  However, he suggests that future catastrophic damage could occur that even a carbon tax may be insufficient to change.  In that case comprehensive public policy to increase carbon re-capture, incentives for people to reduce carbon, clean energy investment and more public sector low carbon investment are called for.

In January, 48 top economists, including four former Federal Reserve chairs, 27 Nobel Laureates, two former Treasury Secretaries and 15 former chairs of the Council of Economic Advisers signed a policy statement that “global climate change is a serious problem, calling for immediate national action” and advocating a carbon tax.  Along with the carbon tax is a proposal to return all revenues collected to U.S. citizens in equal lump-sum rebates

BlackRock, which had nearly $6 trillion AUM at December, 2018, has invested heavily in research to understand the impact of climate change.  In April, the BlackRock Investment Institute published an Insight paper on physical climate risks, covering municipal bonds, commercial mortgage-backed securities and electric utilities – with published analysis on other sectors to follow at a later date.

Working with Rhodium Group and using vast amounts of data, they mapped potential changes in GDP within metropolitan areas that can be expected under a “no climate action” scenario from 2060-2080.  Major areas of economic loss include coastal Florida, eastern coastal Massachusetts, southern coastal Texas as well as inland agricultural and ranching areas of Nebraska, Iowa, and riverbed communities in the Midwest.  Areas that gain include the northwest, parts of Maine, the Dakotas and Minnesota.

In addition to matching the probabilities of extreme weather with physical damage, investors should be looking at the interaction of other factors.  What we mean is that transportation systems, for example, may be out of the control of a particular municipality or company, but damage to the mobility of goods and people affect a region’s GDP as much as a direct hit from a storm.  From a bigger picture, supply chains today are global, so a destructive weather event in one part of the world may affect the GDP in another, even though that location is less susceptible to extreme weather.

Other perils, too, not directly associated with weather, should not be overlooked.  For example, the report highlights gains that northwestern U.S. may see gains from climate change.  However, Seattle, Portland and other less populous parts of the northwest are seismically active and could sustain major physical damage from a catastrophic earthquake.  (If you wish to go further, see this article.)

The Military Connects Climate Change With Security Threats

The U.S. intelligence community (CIA, FBI, NSA and other intelligence agencies) submitted its 2019 “Worldwide Threat Assessment”.  Much of the report focuses on a broad range of current threat but page 23 connects climate change.

On April 2nd, the House Foreign Affairs held a hearing on the topic “How Climate Change Threatens U.S. National Security”. At the hearing, Vice Admiral Dennis McGinn (ret.) elaborated on how climate change is a “threat multiplier” that requires military response.  On April 4th, the Secretary of the Air Force, Heather A. Wilson and Chief of Staff of the Air Force, General David F. Goldfein described the USAF’s posture on climate change.

In response to the President’s plans to create a panel designed to counter the validity of the climate change consensus 58 former senior military and security officials wrote a letter to the White House rebuking this effort.  

“…we are deeply concerned by reports that National Security Council officials are considering forming a committee to dispute and undermine military and intelligence judgments on the threat posed by climate change. This includes second-guessing the scientific sources used to assess the threat, such as the rigorously peer-reviewed National Climate Assessment, and applying that to national security policy. Imposing a political test on reports issued by the science agencies, and forcing a blind spot onto the national security assessments that depend on them, will erode our national security.”

In addition to U.S. and global threats that are tied to climate change, each of the Armed Services face threats to coastal bases and elsewhere.  The letter to the White House pointed out the $3.6 billion damage from Hurricane Florence to Marine Base Camp LeJeune, North Carolina.  Tyndall Air Force Base in the Florida panhandle as well as Navel Support Activity just west of Panama City suffered catastrophic damage from Hurricane Michael in 2018.  Tyndall houses many of the nations F-22 Raptor aircraft.  While many were flown to safety ahead of the storm, Senator Marco Rubio (R, Fla.) noted that an estimated 17 sustained  damage.