Can the pandemic teach us how to stop climate change?

Climate Economy

Can the pandemic teach us how to stop climate change?

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Ex-Goldman Sachs risk exec explains how the hard lessons of COVID-19 can help thwart climate catastrophe

What do the COVID-19 pandemic and climate change have in common? They were both a failure to assess risk, says a veteran investment banker.

Robert Litterman is the former head of risk management at Goldman Sachs. He also chairs the Commodity Futures Trading Commission subcommittee on climate-related market risk. For him, cutting CO2 emissions and halting the spread of a deadly contagion require the same approach: pricing and mitigating risk to prevent catastrophic damage–whether for global healthcare or our planet.

“Coronavirus is a risk-management failure,” Litterman explains. He argues that COVID-19 has been able to thrive in the United States because we didn’t price the risk early and adequately enough. “We have exacerbated an already difficult situation by not having the necessary tests and by not taking appropriate lockdown measures.”

In fact, mere weeks before the virus was declared a global pandemic, Litterman made an identical case before congress, but for the climate crisis.

“Right now, we are not pricing climate risk,” he told the Senate Democrats’ Special Committee on the Climate Crisis. “We are not creating appropriate incentives to reduce emissions, a tragic and potentially catastrophic mistake.”

The upshot: The United States can learn from a blunder it made in the early stages of the pandemic and use the lesson to battle climate change.

But at the moment the opposite is happening.

A report by Kepos Capital, of which Litterman is a partner, found that the global average incentives to decrease emissions were about two dollars per ton of carbon. Yet incentives to increase carbon were more than five dollars per ton. The fossil fuel industry, for example, may have received as much as $4.7 trillion in annual subsidies in 2015, according to the International Monetary Fund–a far cry from Litterman’s goal of increasing climate-friendly incentives to more than $100 a ton.

“Incentives are currently directing capital in directions that increase emissions, causing a growing accumulation of greenhouse gases in the atmosphere, which in turn is creating a rapid increase in the risk of permanent damage to the planet.”

Yet Litterman has a sliver of hope. Since the start of the global pandemic, global emissions have gone down. “So from a climate perspective, that’s a good thing. It’s almost as if time has slowed down and that gives us a little more time to address climate.”

Litterman also believes climate friendly legislation will get passed. That’s largely due to his experience at the Climate Leadership Council (CLC), which works to promote carbon dividends as a way of dealing with climate change. The council is currently pushing for its Baker-Schultz Carbon Dividends Plan, a scheme to charge a fee for each ton of carbon produced and funnel the money directly to American households. The fee would start out at $40 per ton and increase five percent every year. Not only would it cut emissions in half by 2035, the CLC claims, but it would provide $2,000 to each family of four within its first year.

Those seem like lofty goals, but the council has members one might not expect. Along with environmentalists and economists, its meetings include executives from Exxon, ConocoPhillips, BP, Total and Shell, and other major oil companies, as well as General Motors and Ford. With this strong roster from both the nonprofit and private sectors, Litterman expects to get legislation on the floor within a year or two.

“We have everyone from Exxon Mobil to WWF,” Litterman said. “Of course, I feel confident we’ll get this done. Who’s outside of that coalition?”

Sheldon Whitehouse, a national senator from Rhode Island and a leading proponent of climate legislation, is not so sure. He dismisses climate-mitigation efforts by the carbon industry as mere lip service. “You have one of the most powerful political forces in America highly dedicated to stopping any climate action,” Whitehouse says. “Their CEOs may say they support a carbon price, but the real message is ‘keep doing what you are doing.’”

Litterman argues that incentives are a necessary treatment for the private sector’s reluctance to cut carbon. “Changing incentives is the key that will lead to the massive changes in economic investment that are required,” he told the Senate.

And like the pandemic, the incentive for cutting carbon emissions is simple: halting worldwide catastrophe.

Written by

Sam Seifman