Any day now, a catastrophic event caused by climate change could detonate a financial bomb that incinerates powerful companies, sends fireballs through our financial system, blasts the U.S. economy, and devastates millions of Americans. “This is an all-hands-on-deck moment,” warns a new paper from the left-leaning Center for American Progress. “It’s time for regulators to take decisive steps to ensure that the financial system can withstand climate-related shocks.”
Instead, Wall Street’s six largest banks are pumping money into fossil fuel investments that increase those risks. The over $700 billion those banks committed in financing to companies like ExxonMobil, Chevron, and BP from 2016 to 2018 is helping make possible Canadian tar sands expansion, drilling for Arctic oil and gas, fracking in West Texas, and other activities that drastically reducing our odds of being able to stabilize global temperature rise at the relatively stable threshold of 1.5 degrees Celsius.
“There’s a degree to which some of these [banks] are looking around and thinking, ‘OK where are we going here and what are the risks?'” said Graham Steele, a director at Stanford Graduate School of Business. “But in the meantime they’re going to keep trying to make as much money as they can.”
Steele, who co-wrote the paper with CAP policy analyst Gregg Gelzinis, explained that Wall Street’s denial of climate dangers is setting us up for a 2008-style financial explosion where “risk spreads in a way that cannot be contained or isolated.” Here are some of the ways that he can see this bomb being set off.
1. A devastating Florida hurricane bankrupts a major insurer
The world was shocked when Hurricane Andrew slammed into South Florida in 1992, causing $15.5 billion in damage and bankrupting at least 16 insurance companies. But that could be quaint compared to what the physical and financial risks of a disaster are today due to climate change. Modelers with the Centre for Risk Studies at Cambridge University’s Judge Business School estimated that a Category 4 hurricane that made landfall south of Miami, ripped into Tampa, and then made landfall again near Pensacola could cause $1.35 trillion in damage, as VICE reported earlier this year.
That level of financial destruction could easily bankrupt a major insurance company. “[Stress] could be transmitted to banks and other nonbank financial companies that serve as creditors or counterparties to the failing insurance company,” the CAP paper reads. In the Cambridge scenario, spirallng financial distress puts $2.35 trillion of global GDP at risk.
This will be doubly catastrophic for millions of ordinary people in the disaster zone. “You’re going to have the irreparable damage that’s caused by the climate and on top of that you’ll have these financial institutions that aren’t going to be able to provide the basic services to keep businesses, households and the rest of us going,” Steele said.
2. Insurers flee California wildfire zones and mortgages crater
Munich Re earlier this year drew an explicit connection between California’s wildfires and climate change, something no major insurance company had done before. It warned that with wildfire activity up 400 percent since 1970 and disasters including the Camp Fire causing $24 billion in losses, insurance rates might become unaffordable to many people. At some point insurers could withdraw completely from danger zones.
“This is just a hypothetical, but let’s say they say, ‘We’re no longer going to insure properties in Napa Valley, we’re too worried about wildfires,'” Steele said. “Suddenly you’re going to have a lot of difficulty writing new mortgages in that entire area and that’s going to dramatically reduce the value of existing loans that you’re making and the property values in that area.”
If this happened in enough major housing markets, it could wipe out the value of millions of people’s homes and potentially bankrupt local and state governments that rely on property taxes. “That would also make the assets on the balance sheets of the banks suddenly crater,” Steele said. One or two of these financial institutions collapsing could in turn instigate a cascading financial crisis similar in scope and scale to the hurricane scenario above.
3. Massive declines in oil demand make investors panic
In November, the International Energy Agency predicted that humankind’s thirst for oil could plateau within a decade. This puts the typically conservative agency in line with analysts from companies like Bank of America and Fitch Ratings, who have also predicted a peak by 2030 due to the adoption of electric vehicles and other fossil fuel-replacing technologies.
If something were to suddenly speed up the plateau’s arrival—like the election of a Democratic president and Congress in 2020 that immediately began moving forward with an economy-transforming Green New Deal—it could make many oil and gas reserves worthless and cause investors to flee from the companies that own them. “A price shock could ripple across the financial system as firms and investors offload assets at fire-sale prices,” the paper reads.
It’s hard to see things like the U.S. shale oil industry or the Canadian tar sands surviving the so-called “carbon bubble” being burst. And while in one sense that would be great for fighting climate change, an abrupt fossil fuel sector crash could also be terrible for many workers, which is why groups like the Climate Justice Alliance are pushing to ensure that a “just transition” easing the impacts for affected communities is central to the Green New Deal. “When bubbles burst, it’s usually the folks on the bottom that get hurt,” Steele said.
4. The housing market goes literally and figuratively underwater
Despite more than 311,000 U.S. homes being at risk of chronic flooding in the next 30 years, lenders are still giving people mortgages in vulnerable areas. Up to $100 billion of coastal mortgages are issued every year. “If sea levels rise by 6 feet by 2100, as has been estimated, about $900 billion worth of U.S. homes would be literally—and in turn financially—underwater,” the paper reads. “This includes more than half of the housing stock for almost 300 cities.”
But a financial crash could come well before that, as Big Short investor David Burt explained to VICE this October. It could be triggered by a climate disaster that causes a wave of foreclosures in a city, which is what nearly happened to Houston in 2017 after Hurricane Harvey. Or, like the fossil fuel scenario above, it might begin with an exodus of investors from the housing market once they appreciate the dangers they’re exposed to. “It could be just a mass realization that all of this property is severely compromised,” Alice Hill, a former Obama advisor who now works on climate change at the Roosevelt Institute, has warned.
For Steele the takeaway is obvious. Wall Street needs to stop investing in the fossil fuel companies driving climate change and making these scenarios more likely to occur. “You need government intervention,” he said. “You need financial regulators to come in and say, ‘You can’t keep financing fossil fuels, this is only creating risks for you and society’… because Wall Street will keep doing dangerous things until someone makes them stop.”
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Geoff Dembicki is the author of Are We Screwed? How a New Generation Is Fighting to Survive Climate Change. Follow him on Twitter.