Commodity Futures Trading Commission Warns of “Financial Havoc From Climate Change”

Maisum Murtaza and Stephen Herzenberg |

As forest fires rage in California, and flooding and drought become more common in many parts of the country, is has become increasingly obvious to most people that climate change is adversely affecting our weather and our economy. As with economic shocks that stem from other sources, vulnerable people and regions will be hurt the most—for the simple reason that they have fewer resources to buffer them from negative impacts. This vulnerability is one reason that it would serve the Ohio Valley spanning SW PA, SE OH, WV, and eastern KY, a region with both persistent poverty and stagnant incomes for working people, to be a champion of an aggressive federal response that limits global warming. Yet not everyone in the region buys the idea that climate change is real or sees a self-interest in embracing a climate response vision such as ReImagine Appalachia which would reduce carbon emissions AND leverage federal resources to expand economic opportunity in the Ohio Valley.

Now, confirmation of the reality of a changing climate comes from an unlikely source—financial traders on commodities markets. These traders make fortunes by forecasting the future accurately—and lose fortunes when they forecast badly. This means that commodities traders approach climate change with a powerful self-interest in accurately forecasting what could happen—they want to know the climate’s likely impact on future prices.

The financial self-interest of traders led the Commodity Futures Trading Commission to recently conduct a study of climate change’s impacts on commodities markets. The Commission is made up of three Republicans and two Democrats, all appointed by President Trump. Its new report has several authors from investment firms, oil companies, agricultural traders, among others—not a soft-hearted liberal in sight. The basic conclusion of the report: “a world wracked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system.”

The report compares the potential financial shocks from global warming to two other recent sources of financial market uncertainty: the housing market crash and plunge in the value of mortgage-backed securities in 2008; and the current global pandemic. Climate change consequences will spread more gradually, the authors conclude. It will create financial uncertainty in different regions and markets at different and unpredictable points in time. But in market after market and region after region, climate change could lead to a situation in which actuaries can no longer project the share of homeowners who will need to repair a damaged home after a fire or flood, or the possibility that the orange crop will be wiped out. (Remember Trading Places?) When commodities markets and insurance markets can no longer “manage risk”—put probabilities on events with economic consequences—they break down.

Robert Litterman, the chairman of the panel that produced the report and a partner in a New York investment firm, said, “It was shocking when they asked me to do this…This is members of the entire community involved in financial markets saying with one voice, ‘This is a serious problem, and it has to be addressed.’”

So that the commodities futures markets don’t disappear with a collective throwing up of the hands, the Commission’s report weighs in with the following recommendations for strong action to reduce the impact of climate change.

  • Put a price on carbon emissions either through taxing or through an emissions cap.
  • Reverse a proposed rule by the Trump administration that would stop retirement investment managers from considering environmental concerns in their financial recommendations.
  • Add climate risks to the annual report created by the Financial Stability Oversight Council created after the 2008 economic crisis.
  • Create stress tests for bank regulators to assess how bank balance sheets would react to climate-related financial shocks.
  • Strengthen regulations for companies to disclose any risks to their revenues and production associated with climate change.

According to The New York Times, “…some of the authors of the report acknowledged that if Mr. Trump is re-elected, his administration is all but certain to ignore the report and its recommendations… Instead, they said they saw the document as a policy road map for a Joseph R. Biden Jr. administration.” Cover your eyes, shut your ears, act mum. It worked last time, right?