A recent article on Sarah Bloom Raskin, who was recently nominated to be the Fed’s lead bank regulator, made these claims:
“To the extent that her confirmation is viewed as a referendum on getting central banks involved in climate-related risks, it’s possible there’s going to be a lot of controversy surrounding that,” said Richard Berner, an Obama-era director of the Treasury Department’s Office of Financial Research. He currently co-directs New York University’s Volatility and Risk Institute.
But ultimately, Berner added, “Ms. Raskin’s outspokenness on climate is completely legitimate because it is an existential threat, and because climate-related shocks do pose threats to financial stability, and to the safety and soundness of financial firms and markets.”
Here are some of my views on climate change:
1. Global warming is real and it is mostly man-made.
2. Global warming is a very big problem.
3. Governments should aggressively address global warming with policies such as a revenue neutral carbon tax.
Based on these views, you might expect me to support Fed efforts to address climate change. Not so. To begin with, it’s absurd to claim that climate change is an existential threat, at least for humans over a time horizon relevant for current policy decisions. (Some animal species might become extinct due to global warming.) Even experts that worry about global warming typically predict only modest reductions in real GDP over the next 100 years. Of course, even a small percentage decline in global GDP is a bad thing, and there are other factors such as distributional effects and impact on the natural world that deserve some consideration. But it isn’t even close to being an existential threat. It is discouraging to see the left, which has been so critical of anti-scientific vaccine opinions among some on the right, have such disregard for studies of the impact of global warming.
Because climate change will not have a major impact on our economy for many decades, if not centuries, it makes no sense to try to figure out its impact on financial stability. Most of the instability in our financial system comes from two factors, government-created moral hazard (FDIC etc.), and unstable monetary policy (i.e. unstable NGDP.) All other factors, including climate change, are relatively unimportant for financial stability. Furthermore, no one really knows how climate change would affect financial stability.
I suspect that people who worry about climate change are using it as an excuse to inject the Fed into a policy area that should be the responsibility of Congress.
PS. While I’m skeptical of Raskin’s views on the Fed’s role in climate change, this particular post addresses the views of Richard Berner, as reported in the media.
PPS. In the past, I’ve advocated separate boards for monetary policy and banking. I still hold that view, indeed now more than ever. All Federal Reserve Board members should be outstanding experts on monetary policy. Unfortunately, neither political party in America looks at things that way.
READER COMMENTS
Stéphane Couvreur
Feb 4 2022 at 2:28am
Hello Scott,
I suspect that this kind of declaration, which is becoming quite common among central banks, is simply cheap PR.
“Look, I’m fighting against climate change!” moves the conversation away from more sensitive topics – name your favorite! If it requires not buying Shell Oil bonds, it leaves 90% of assets open for purchase and has no real impact on the conduct of monetary policy and the operations of the central bank.
As for your point #3, I wonder why such a large majority of economists declare their default instrument against CO2 externalities to be a pigouvian tax, when property rights should be the first best. Property rights in polluting rights exist, they are called free emission quotas and they are currently working for SO2 in the U.S. and CO2 in the EU with the European Trading System.
I have asked several economists why -oh why!- do you keep taking about a carbon tax? The answer is usually that a revenue neutral carbon tax and free quotas are “almost equivalent”. Well… no, if only because one of them has the word “tax” but mainly because neutrality means redistributing the tax receipts, which raises the risk of rent-seeking, uncertainty, and politicians buying constituencies.
What do you think?
Best,
Stéphane
Scott Sumner
Feb 4 2022 at 11:57am
Stephane, I’m told by people who study this issue that bank regulators are already pressuring banks on climate issues.
As for a carbon tax, it is perceived as being more efficient. Tradable permits seem to work fine when there are a very limited number of major polluters, as in the case of SO2. But I don’t see how they work for greenhouse gases emitted by 100s of millions of people. Still, I have an open mind.
Yes, politics might get in the way of the efficient implementation of a carbon tax, but I’d say the same about the alternatives.
Stéphane Couvreur
Feb 4 2022 at 1:07pm
Thanks for your reply! I agree that the central bank as a regulator could have more weight than the central bank as a simple issuer of base money.
As for the difficulty of giving permits to millions of polluters, I believe it’s not a problem if there is, somewhere along the value chain, a bottleneck with a small number of emitters. In the case of ETS in the EU, the large emitters are electricity-intensive industries, cement manufacturers, metallurgy, airline companies, etc. The fact that millions of consumers buy their by-products down the line doesn’t matter. As long as permits are given to the large actors, they bear the opportunity cost of CO2 emissions and they pass it on to consumers. The current ETS already cover 50% of emissions in the EU. To extend this perimeter, the fuel wholesalers would be a good choice to reduce emissions in transports and heating, which are among the largest emitters. They can certainly be monitored in a cost-effective way. Agriculture might be trickier, I’m not sure.
Scott Sumner
Feb 4 2022 at 5:57pm
So are these permits sold or given away by the EU? It seems foolish to just give them away.
Stéphane Couvreur
Feb 5 2022 at 12:18am
Scott,
Yes, in the ETS most emission rights are given for free so far, basically to past polluters (unfortunately, this might not last: there are plans for auctions in the future). It may seem foolish, but it isn’t. Please think about it! It places a hard cap on the volume of emissions which decreases with time, thus ensuring the increasing scarcity of the resource, and it creates an opportunity cost, thus allowing the scarce resource to be efficiently allocated.
One again I a puzzled: why do economists spontaneously think “CO2 tax” when something analogous to property rights would solve the problem (more efficiently, I believe)?
Best regards,
Stéphane
Matthias
Feb 5 2022 at 8:12am
Giving your emission rights away for free to past polluters is foolish when people expect that this kind of policy is coming, so they pollute more now.
If you introduce the handout unexpectedly, the arguments you marshalled in defense apply.
However since you have to finance the government somehow, and the opportunity costs for an unanticipated handout Vs auctions are rather similar, you might as well auction the permits and cut some other tax.
Stéphane Couvreur
Feb 5 2022 at 8:53am
Hi Matthias,
Your first point is right and you suggest a solution. Indeed, the problem has been somehow solved for the ETS in the EU and the tradable SO2 quotas in the US.
As for the second part, yours is exactly the answer I usually get: “A revenue neutral carbon tax and emission quotas are almost equivalent, so let’s go for a tax”. If both were equivalent, why so much advocacy for the tax option? Why aren’t economists split 50/50 between both camps? Your post gives a hint: “We need to finance the government anyway” is, I believe, why the carbon tax has so much appeal. Rightly or wrongly, I have very little confidence in its alleged revenue neutrality. The wording of your post is itself ambiguous in this regard. Do you want to finance the government or to cut CO2 emissions with a revenue neutral scheme? Other actors will be skeptical, too, hence the uncertainty. Some on the contrary will be opportunistic, hence the risk of rent-seeking and politicking that I mentioned above.
Best,
Stéphane
Scott Sumner
Feb 5 2022 at 11:13am
Giving away valuable carbon permits is inefficient for the same reason that tax preferences are inefficient, they increase the deadweight cost of taxation.
I understand that you can create “rent seeking”stories to favor any potential public policy, including the ones I favor and the ones you favor. But if you are asking which policy is most efficient if done right, then selling permits is clearly more efficient than giving them away.
Stéphane Couvreur
Feb 5 2022 at 3:09pm
Scott,
I realize this discussion is not directly related your post, so thanks for taking the time. But I don’t want to pollute your blog, so just say when 😉
I don’t understand your first sentence. What do you mean by tax preferences? When you speak of deadweight loss (provided it concerns free quotas): “deadweight loss compared to what?” What is the counterfactual here?
Again, the ETS scheme has been working this way in the EU for several years now. It has achieved its goal in terms of reduction, which was admittedly not very ambitious-but that should not be blamed on the design of the scheme. And it has allowed actors to trade permits efficiently. In comparison, what country apart from Sweden has succeeded in implementing a significant carbon tax?
In all transparency, the main drawback I see with free quotas is that the incentive for the public authorities to monitor and enforce free quotas is not as strong as with a tax collection scheme, for obvious reasons. Yet, so far, the cases of fraud with the ETS have not been about actors exceeding their quota, but elaborate VAT fraud schemes. These existed long before the ETS, except that this time emission rights happened to be involved.
Best,
Stéphane
Mark Z
Feb 4 2022 at 3:37am
I think there are even more obvious reasons why the Fed shouldn’t do climate regulation, such as that climate change is a predictably increasing cost, not a source of systemic risk, as it is often mischaracterized. Climate change won’t make the financial system less stable.
It’s obviously just an effort to circumvent having to actually pass legislation. No one actually believes climate change is an urgent problem that warrants that kind of desperate measure, as no one has even tried to arrange a meaningful compromise in congress to get climate policy passed. I’ve yet to observe a politician or pundit behave as if climate change were more than a second tier issue at best.
Rajat
Feb 4 2022 at 6:17am
John Cochrane has written some quite scathing posts in a similar vein. To avoid getting put into moderation, I will post the links separately. Here’s one: https://johnhcochrane.blogspot.com/2020/10/challenges-for-central-banks.html
Rajat
Feb 4 2022 at 6:18am
Here’s another: https://johnhcochrane.blogspot.com/2021/07/climate-risk-to-financial-system.html
Scott Sumner
Feb 4 2022 at 11:58am
Yes, Cochrane is excellent.
MarkW
Feb 4 2022 at 6:58am
Of course Sarah Bloom Raskin doesn’t really think climate change poses a risk to the stability of the financial system any more than the leadership at the Pentagon think climate change is a pressing national security risk. But they do believe that their agency can used as yet one more tool to advance their preferred climate policies and that, individually, they can advance their careers by making climate actions a high priority for whatever agency they might be leading.
Raskin, however, did do a some apparent backtracking during her hearing:
So apparently she’s now in agreement with Scott — at least until she’s been confirmed.
Scott Sumner
Feb 4 2022 at 12:00pm
I believe you are being too optimistic about her statement. She might claim that she doesn’t want to pick winners and losers, but nonetheless wishes to regulate banks so that they don’t take unnecessary risks. She can then claim that climate is an unnecessary risk.
Keenan
Feb 4 2022 at 8:15am
I have a few questions.
What is the optimal global temperature? Global temperatures have swung from ~23c to ~10c 3.5 times before humans existed. Were humans to be living back then, what would’ve been desirable?
What is the optimal global co2 ppm? It has ranged anywhere from ~7000ppm to ~100ppm in the era before humans, and is at ~400ppm right now.
The climate has been, is, and will be hostile to humans at all times. Making it non-hostile is a good goal, whether that is artificially decreasing or increasing temperature/co2/methane/water vapor.
I’m also trying to square these two statements which don’t seem to agree: “2. Global warming is a very big problem.” vs. “Because climate change will not have a major impact on our economy for many decades, if not centuries”.
I propose switching the framing from “global warming” (formerly called “global cooling”) to “Climate Control”. Of course, few are on board with the agenda of solving Very Big Problems, but these are theoretical blog posts, if not here, where?
Scott Sumner
Feb 4 2022 at 12:10pm
Previous climate changes occurred before civilization. Nonetheless, events like ice ages caused big problems for humans in certain regions. So you certainly don’t want to artificially create that sort of major climate change if it is not occurring naturally.
Also, the animal kingdom was able to gradually adjust to climate change, before humans controlled the planet. With humans now controlling most of the environment, the animal kingdom will have a far more difficult time adjusting. They are effectively stranded on “islands”, unable to migrate as climate changes.
I’d say the optimal temperature for the foreseeable future is close to the temperature of the 20th century.
As for my seeming inconsistency, I see a problem that reduces GDP by say 2% to 3% in 100 years as a really big problem, even if it doesn’t destabilize the financial system. Solutions such as carbon taxes are not very costly at all, and hence are “no-brainers”
MarkLouis
Feb 4 2022 at 10:15am
As you’ve heard me say in the past: all the time spent debating what specific metrics central banks should target, would’ve been much better spent debating how to better insulate central banks from politics.
A central bank subject to the whims of politics can’t be trusted to reliably target anything.
Todd Ramsey
Feb 4 2022 at 10:18am
“All Federal Reserve Board members should be outstanding experts on monetary policy. ”
But don’t most monetary policy experts have different macroeconomic models than you? And even worse, with a rigid “certainty” they justify with their years of study?
In March 2020, weren’t we better off with a relative amateur like Powell, who, unburdened by “certainty”, was willing to embrace a new, somewhat radical “whatever it takes” approach? As opposed to Bernanke’s Fed in 2008-09.
Mostly your point is well taken. I’m just afraid that experts are more likely to be “certain”, even if they are wrong.
Scott Sumner
Feb 4 2022 at 12:14pm
Todd, The Fed’s improvement since the Great Recession is not just about who is in charge, it reflects the fact that the Fed has learned over time. When Yellen and Powell were serving at the same time, Yellen’s views were sounder. I believe she would have handled policy in the Covid crisis more effectively than Powell. Powell has been too aggressive in 2021.
When Bernanke was at the Fed, his views (and those of Frederic Mishkin, another expert) were much sounder than the views of the less expert members of the board.
Lizard Man
Feb 4 2022 at 12:12pm
Can Fed Board members rein this in? It seems that what to do about climate change is a politically contested question, in a way that monetary policy is not. If the Fed starts to involve itself in political questions like this, I would expect a backlash against Fed independence, and more of an effort to vette Fed nominees for ideology and for loyalty to one or the other major political party.
Scott Sumner
Feb 4 2022 at 12:18pm
There’s a deeper problem here. The Fed should not even be regulating banks—that should be done by the Treasury, or FDIC, or some other branch of government.
The Fed should specialize in monetary policy.
Kevin
Feb 4 2022 at 4:21pm
Thanks, Scott. It’s nice to hear a reasoned view that doesn’t involve alarmism or denialism. When people make claims of an ‘existential threat,’ they often make it sound as though we have a decade or so to completely overhaul the way we do everything, or we are all dead. The science definitely doesn’t support their assertions. While the Fed should definitely stay out of this, I’m not sure that Congress should do much more than shift incentives through eliminating fossil fuel subsidies, and enacting the carbon tax you have referred to.
The sun is an existential threat over a long enough time scale. Does that mean we should pour $10 trillion a year into the space program to figure out where we need to go to find safety? I should say not, but of course, some people have proposed this for the climate. Granted, climate change is more pressing, but as you stated, we’re talking about something that will have a minimal impact for a hundred years or so. I’d prefer Congress doesn’t spend much money on trying to keep temperatures slightly lower than they might otherwise become, and seeing if we can maintain sea level increases of roughly 13 inches a century. India and China don’t seem very motivated at the moment either.
Lots of smart people disagree about the climate, but they seem to be parroting political talking points more than they are examining scientific realities. The phrase ‘existential threat,’ has become incredibly fashionable. Again, thanks for providing a more nuanced view.
Jens
Feb 5 2022 at 1:24am
You write:
“But it isn’t even close to being an existential threat.”
Do you think that climate change could be an existential threat to some larger groups of people ? Do you think that dealing with the distinction “existential threat to humanity as a whole” vs. “existential threat to some relevant groups of people” could be an indication of social Darwinism ?
This is not meant to be an accusation. I understood the sentence here as serving only to classify climate change. But quite fundamentally, a repeated and explicit emphasis on the lack of existential threat from climate change to all of humanity (or to the entire biosphere – it’s not a near supernova after all, take it easy!) can also be an expression of bad faith.
Mark Z
Feb 6 2022 at 1:59am
I don’t understand how disputing a claim someone else is making – especially if it’s a false claim – is evidence of bad faith? Are you suggesting that when people call climate change an ‘existential threat,’ they don’t really mean it, but mean something else, and that this should be obvious, and thus anyone taking it literally can be reasonably suspected of an ulterior motive?
Jim Thompson
Feb 5 2022 at 3:51am
Bit confused as to why you’ve posted a link to a strong critic of the moderately consensus view on economic GDP harms to seemingly attempt to show that this consensus view is well grounded. While Steve Keen is a bit of a nut, his points about the vast lack of proper inputs into mainstream climate models seem well grounded, so you should consider this and provide more info if there’s anything you think Keen has wrong, or reasons more generally why you believe the consensus to be accurate.
Scott Sumner
Feb 5 2022 at 11:17am
I try present both sides in my links, where possible. But if we are talking about public policy decisions, what basis do federal regulators have for ignoring the consensus? Are government regulators more knowledgeable about global warming than Nordhaus?
Mathieu Dufresne
Feb 7 2022 at 5:47pm
I don’t think it’s accurate to consider Nordhaus’s & co work as a consensus. Those estimates are largely regarded as utterly absurd among climate scientists and aren’t based on climate models. From what I see, those damage estimate does not appear anymore in the most recent IPCC reports and IAMs models are now used only to assess the cost of reaching a given carbon emission reduction target. To give an idea of the divide between Nordhaus and climate scientists, it is estimated that with a 6°C increase in global temperature, 3/4 of the world population would be exposed to at least 60 days of deadly temperature per year. Not only that, but we’re talking about massive climate disruptions (winds, humidity, precipitation patterns…) who will surely have significant impact on the biosphere but also on agriculture and food production. Sea level rise might also be a major issue for a lot of coastal cities. It is impossible to predict in any quantifiable manner the extent of those impacts, but they won’t be trivial. Trying to predict the impact of climate change on GDP 80 years in the future is a pointless exercise. Now, let’s take a look at Nordhaus estimates for a 6°C increase in temperature. The estimates vary depending on the papers but saying 8% reduction in GDP in 2100 compared to what it would have been without climate change is in the right ballpark. This amounts to a reduction in the annual growth rate of less than 0.1%. We cannot even measure last year GDP with that much precision. Ironically, Nordhaus criticized Limits to Growth for making one century predictions. The authors of LTG did not put graduations on time axis, as they understood that was not relevant. Now, Nordhaus does the same thing they criticized them for and even care to put 3 digits on his growth rates predictions. Go figure. I won’t detail the criticism of Nordhaus’s work, you can start by reading the reference you linked to. When I saw how he managed to derive those estimates, the only question that came to my mind was how on earth this could have been published in a peer reviewed journal. And he won the nobel prize for it, quite depressing. It is the work of a few dozen self referential economists, not the result of any scientific consensus and it isn’t grounded in climate science. It should not be taken for granted without critical thinking. I don’t see any line of defense to rescue such a poor work. So to answer your question, yes, policy makers have good reasons to ignore Nordhaus’s work and yes, they can be more knowledgeable than him on global warming, he is not a climate expert.
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