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June 30, 2014

Next financial crush is the climate bubble, carbon tax the solution: Henry Paulson

The former US Secretary of the Treasury in George Bush’s administration, Henry Paulson, has drawn an analogy between the financial crisis of 2008 and the risks posed by climate change in the US economy, calling for the introduction of a carbon tax as part of the solution.

Paulson made his remarks in a New York Times’ op-ed ahead of the publication last week of a report entitled A climate risk assessment for the United States, sponsored by the Risky Business Project.

Paulson, as well as Michael Bloomberg who was recently appointed chair of the Sustainability Accounting Standards Board, are among the leaders of this project.

"For too many years, we failed to rein in the excesses building up in the nation’s financial markets. We are making the same mistake today with climate change. We’re starting a climate bubble that poses enormous risks to both our environment and economy," Paulson wrote.

To mitigate this source of risk, Paulson argued that a tax on carbon emissions would use the market forces to incentive the development of technologies, lower energy costs and create jobs.

But levying a tax might not be in tune with many segments of US society, the Republican Party to begin with, as Paulson foresees: "Some members of my political party worry that pricing carbon is a ‘big government’ intervention."

Paulson maintains that quite to the contrary a carbon tax would reduce the role of government, which is already paying with taxpayer dollars the damages caused by climate-related disaster such as floods, extreme weather and crop failures.

Paulson placed his remarks above those who still cast doubts about the link between climate change and human activity. "I’ve spent a considerable amount of time with climate scientists and economists who have devoted their careers to this issue. There is no debate among them that the planet is warming and that the burning of fossil fuels is largely responsible."

Risk managementEqually the goal of the report published by the Risky Business Project, according to the authors, is not to confront the doubters but to bring them together with believers in the task of assessing the potential risks posed by climate change.

The report analyses those risks region-by-region against the backdrop of different scenarios, underscoring that if the level of emission continues as usual, the US economy could be exposed to different dangers:

  • Losses of coastal property and infrastructure, with between $66bn to $106bn worth of existing property below sea level nationwide by 2050;
  • Extreme heat threatening labour productivity, human health and energy systems (including higher demand of electricity for air conditioning);
  • Shifting agricultural patterns and crop yields, with Midwest and Southern areas risking up to a 50% to 70% loss in crop yields per year by the end of the century.

The report stated it aimed at applying risk assessment to those critical issues encouraging a non-partisan discussion about the actions that need to be taken.

As a starting point, the report called on investors to incorporate risk assessment into capital expenditures and balance sheets, so that they gain a more forward-looking approach to investments.

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