Market Forces

Addressing Gaps in Disaster Recovery for South Carolina Households through Inclusive Insurance Models

This blog was authored by Environmental Defense Fund economists, Karina French and Carolyn Kousky. See their report here. 

South Carolina is no stranger to the devastating effects of extreme flooding, with hurricanes like Matthew and Florence leaving a trail of destruction in their wake. As the state faces escalating flood risk due to climate changes and continued building in vulnerable areas, it is crucial to address existing gaps and inequities in disaster recovery. In a new report, we provide a comprehensive review of the current resources available to households for post-disaster economic recovery in South Carolina and explore the extent to which innovative disaster insurance policy designs can fill these gaps and improve equity in recovery. 

The Current State of Economic Recovery 

Severe floods can have significant financial consequences, particularly for low-income individuals and communities of color who lack access to adequate financial support systems. The existing resources for economic recovery, including savings, loans, federal aid, and insurance, often fall short in meeting the needs of these vulnerable groups. Insufficient and inaccessible funds, delays in accessing recovery funds, inadequate support for renters and rural areas, and unaffordable disaster insurance for low-income households all further exacerbate recovery challenges. 

The Role of Inclusive Insurance 

While insurance plays a crucial role in improving recovery outcomes, many of those who need it the most lack access to it. Inclusive insurance initiatives for climate disasters can build a system that is affordable, accessible, transparent, people-centered, and just. Implementing inclusive insurance requires regulatory changes, new public policies, partnerships, and innovative risk transfer approaches.  

This report explores two new insurance designs that have gained attention as potential solutions to improving recovery outcomes and enhancing equity: microinsurance and group disaster insurance.  

Microinsurance offers affordable baseline disaster coverage with low-cost premiums. Microinsurance benefits include affordability, fast payments, reduced documentation burdens, and the potential to increase trust among marginalized communities. However, limitations such as limited payout amounts and potential ineligibility for FEMA assistance should be considered.  

Group disaster insurance involves an intermediary institution that facilitates insurance coverage for a group of households or individuals, ensuring wider take-up and creating an easier approach for cost-sharing. Group disaster insurance benefits include expanding those with financial protection, tailored support, cost-sharing opportunities, and incentives for community-level risk reduction. Challenges include the capacity of intermediaries and ongoing affordability concerns. 


Charting a Path Forward for South Carolina 

Both microinsurance and group disaster insurance have the potential to address the recovery needs in South Carolina by broadening coverage, enhancing affordability, and tailoring solutions to specific needs. However, regulatory structures and implementation strategies must be carefully considered. In our previous study titled “Inclusive Insurance for Climate-Related Disasters: A Roadmap for the United States,” EDF and Ceres highlighted the insufficient coverage provided by the national U.S. insurance industry for climate-related disasters. This new report released in May 2023 builds upon the prior national perspective and focuses specifically on South Carolina’s recovery needs, States across the country, however, are facing similar climate-related challenges and could also learn from this analysis.   


The Importance of Comprehensive Approaches 

While there is no one-size-fits-all solution to address the gaps and inequities in disaster recovery, understanding the current challenges and exploring innovative insurance tools can inform conversations and shape tailored solutions. South Carolina’s vulnerability to climate-related disasters, including coastal and inland flooding, necessitates robust recovery strategies. Enhancing financial recovery also needs to be complemented by other programs to reduce underlying risk and improve risk awareness.  

By embracing inclusive insurance models and implementing targeted policies, South Carolina can bolster its resilience and ensure economic stability for all communities in the face of future disasters. We hope to see the insights from this report serve as valuable guidance for other states nationwide that are also grappling with similar climate-related challenges. 

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A New Pilot Launches to Support Equitable Flood Recovery in NYC

This blog was authored by Environmental Defense Fund economist, Carolyn Kousky.

Facing $150 billion annually in direct costs from climate-related disasters, the current system of disaster recovery in the U.S. is failing many families and communities.

Most households struggle with timely access to sufficient financial support for the wide-ranging expenses disasters impose. And without adequate financial resources for recovery, natural disasters can become tipping points that set back hard-earned financial gains — especially for low-income households.

A new pilot program that just launched in New York City could help address gaps in assistance and increase equity in recovery. Supported by a National Science Foundation Civic Innovation Challenge award, the effort focuses on the delays low- and moderate-income households can face in accessing funds for immediate post-disaster needs, which can range from buying a generator to mold remediation to temporary housing.

The small pilot aims to get funds to people very quickly after a flood.

One in six adults in the U.S. in 2021 experienced financial hardship from a natural disaster and people with low incomes and people of color are disproportionally harmed by these events. Many households do not have enough savings to repair, rebuild, and recover, and low- and moderate-income households are often denied post-disaster loans. Federal disaster assistance is insufficient, can miss those who need it the most, and can be slow to disburse. Disaster insurance can provide funds for property repairs and reconstruction, but can be too expensive or unavailable, or may not meet the needs of certain populations.

A team that crosses sectors and expertise— including Environmental Defense Fund, the Center for NYC Neighborhoods, the New York City Mayor’s Office of Climate & Environmental Justice, SBP, Guy Carpenter, Swiss Re, and ICEYE — has been reimagining how to help low-income households with the growing risk of flooding from extreme rainfall. As heavy precipitation events increase, it imposes serious costs on households that are often unaware of the risk and lack needed financial resources.

Fast and flexible support after a disaster

Not receiving needed funding for weeks or months — as is the case with other sources of assistance — can be problematic for households without financial buffers or safety nets. To cover emergency expenses, for example, they may be forced to reduce spending on important things, such as medical care, or may fall behind on bills.

To increase the speed of assistance, the Center for NYC Neighborhoods, a nonprofit that promotes and protects affordable home ownership, is piloting a program that would make small emergency grants available immediately after a flood hits. This requires disaster financing that isn’t slow, cumbersome, or restricted. We turned to a special insurance-like tool to meet this need: parametric risk transfer.

Parametric risk transfer is an innovation that can provide fast and flexible dollars after a disaster. With a parametric product, a measurable event, such as wind speed at a certain location, automatically triggers a payout. This means funds become available incredibly quickly.

Our team worked to develop a parametric product that will pay the Center for NYC Neighborhoods when certain pilot neighborhoods flood following extreme rainfall. Rainfall flooding was fairly new to parametric markets, so we had to work with partners to determine the specific measurement that would trigger a payment. In the end, we settled on measurement of the footprint of the flood, determined by combining information from on-the-ground flood sensors, satellite data, and social media pictures and videos taken during the flood.

Here’s how the program will work: Once a severe flood happens in a pilot neighborhood, payment will quickly be sent to the Center for NYC Neighborhoods from a reinsurance company (for this pilot, Swiss Re). The center will use those funds to activate an assistance program of emergency cash grants to cover immediate post-flood needs while households wait for other forms of assistance that take longer.

An urgent need for new models of disaster recovery

Going forward, maintaining such a program will require a fundamental shift in disaster financing.

Many institutions, for example, are happy to donate relief funds following a disaster. If some donors would instead donate smaller amounts before a disaster to cover the costs of the premium on the risk transfer product, this could generate much greater payouts when a disaster occurs and reduce the amount of time it takes for nonprofits working on disaster recovery to receive funds.

We are testing one small pilot, but there are other innovative models that could also improve climate resilience and equity in recovery: microinsurance policies for households; coupling insurance to loans made by Community Development Financial Institutions; community-based models of disaster insurance; forecast-based financing; and others.

Now is the time to test these models, in partnership with researchers, in order to evaluate their effectiveness, and then refine their design to optimize their ability to meet social goals.

These new models are urgently needed. In our pilot, we have learned that designing a new approach takes committed partnerships, conversation, and dialogue. It takes collaboration between nonprofits, community groups, insurers and brokers, local governments, researchers, and data providers. It takes an ability to listen, a willingness to try something new, and a commitment to learn by doing.

The most important thing we’ve learned? We achieve more when we work together.

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Economic Resilience to Climate Impacts Requires Making Disaster Insurance More Inclusive in the US 

This blog was authored by Environmental Defense Fund economists Karina French and Carolyn Kousky. See their report: Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap.  

Over the past year, the U.S. has seen yet again how climate-driven disasters threaten lives and livelihoods, from the devastating hurricanes, Ian and Fiona, in Florida and Puerto Rico to catastrophic rainfall flooding in California. These types of severe climate shocks cause disproportionate harm to people with low income and people of color, driven by inequitable housing and planning policies, underinvestment in resilient infrastructure and buildings, and barriers to accessing disaster recovery dollars. 

Insurance is one key tool for financial protection from the economic shocks resulting from disasters. However, despite a relatively robust insurance market in the US, many of the people most in need of financial resources to recover face a disaster insurance system that is inaccessible, unaffordable, and/or not designed for their needs.  

In a new report published this week in partnership with Ceres, we offer a roadmap for how local, state, and federal policymakers can improve the disaster insurance system to make it more inclusive.  

The Economic Burden of Climate-Driven Disasters 

Natural disasters create unexpected and widespread economic costs for households. In the short term, people face the immediate costs of evacuation, temporary housing, generators and fuel to deal with power outages, and direct damage to homes, personal items, and vehicles. In the long term, disasters can have a significant effect on economic well being, causing a loss of income or loss of a job when industry is disrupted, persistent increases in housing costs as housing stock suddenly declines, and permanent displacement and relocation. Without financial safety nets, the financial shocks of disasters can be tipping points into poverty and cause an increase in wealth inequality within a community.  

Millions of Americans face these costs each year. The Federal Reserve estimates that in 2021, one in six adults were directly affected by a natural disaster, and this will only increase as climate change makes extreme rainfall, wildfire, and hurricanes more frequent and severe. Studies consistently find that more than one in four American households could not pay for an unexpected expense of $2,000; this economic precarity is even more acute for Black and Hispanic households, where 35 – 40% of households report facing difficulties paying bills if faced with a small emergency expense.  

Households generally have four main sources of financial resources for disaster recovery: savings, loans, federal aid, and insurance. While the U.S. has more wealth to help in recovery compared to other countries, low-income households and people of color still face barriers to accessing all of these. On average, low-income, Black, and Hispanic households have lower cash savings and liquid assets to rely on for emergency expenses. Some households can make use of debt to finance recovery, such as federal Small Business Administration disaster loans, but research has shown that lower-income households face higher loan denials due to credit and debt-to-income requirements. Federal disaster aid, distributed through The Federal Emergency Management Agency (FEMA)’s Individual Assistance program, is not guaranteed, slow to distribute, and limited in quantity: from 2010 to 2022, FEMA provided grants to households in only 43% of major disaster declarations, and the average payment to impacted households was just $2,860 (Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap).  

Insurance can be a financial resilience tool that fills some of these gaps. Insurance payment distribution is faster, as it does not rely on lengthy bureaucratic processes. Research shows that households with insurance recover better and faster after a disaster. But disaster insurance remains unaffordable and inaccessible to many low-income households.  

The Challenge of the Disaster Insurance for Low-income Households 

Why are so many households locked out of the disaster insurance market? Our research identified three main drivers of exclusion: unaffordability, direct and indirect discrimination, and lack of coverage for unprofitable market segments.  

Natural disasters are inherently more challenging and expensive to insure. When a major storm or wildfire strikes, the losses across a community and group of policyholders are correlated, making it difficult for insurers to pool risk and cover costs over time. To do so, insurers must tap into large resources of capital (reinsurance, reserves, etc.), which makes disaster insurance expensive and less readily available. Advocates for frontline communities emphasize how low-income households simply cannot afford to purchase disaster insurance over other immediate costs, such as housing or auto payments.   

Some households face systematically higher insurance costs or lower payouts. Insurers base underwriting and pricing decisions on how likely it is they will need to make payments back to policyholders; while insurers are banned from using factors like race and income to set rates in most states, there are many aspects of the insurance contract that can indirectly lead to differential impact along race, class, and gender lines, such as the use of proxy variables and procedural barriers to negotiating claims. A handful of qualitative and quantitative studies have shown discriminatory outcomes in insurance prices, payment times, and payment amounts. 

On the supply side, it can be difficult for insurers to profitably offer products that are more widely affordable or that meet the needs of smaller market segments. There are also limited insurance products that address the many non-property losses that households incur. Insurers cite low profit margins and challenging regulatory environments for the lack of innovative or appropriate products that might address some of the needs low-income households and renters face. Because of this, there may be gaps in insurance that the private market cannot fill; providing affordable insurance to some households may require philanthropic support or public-private partnerships. 


Policies for Regulatory Reform and Market Innovation 

Given the increasing economic burden of climate-related disasters, systemic change is needed to ensure vulnerable households have tools for financial resilience. In our Inclusive Insurance report, we outline a suite of actions across sectors and scales that can be taken to create a disaster insurance system that is more affordable, accessible, transparent, people-centered, and just.  

With legislation and new programs, federal and state policymakers can take action to:  

  • Target financial resilience funding to households and communities who need it the most by subsidizing disaster insurance for low-income households to provide lower-cost coverage, or mandating that insurers provide fair underwriting and insurance offerings to disinvested communities through a Community Reinvestment Act for the insurance sector. Policymakers could also provide funding to communities in the form of community grants for insurance innovation, enabling them to design and test their own programs.   
  • Increase transparency and monitor the market by mandating data disclosures from insurers about the demographics they serve, such as in the Home Mortgage Disclosure Act (HMDA). This would enable researchers to better assess any disproportionate impacts in disaster insurance markets. 

Through regulatory reform, state insurance regulators can: 

  • Enable innovation in the insurance sector to meet the needs of underserved populations, by preemptively establishing regulatory frameworks for new insurance products like parametric or community insurance, or creating new regulatory sandboxes to enable insurers and regulators to test new products before scaling up.  
  • Provide more consumer protections and transparency to prevent differential treatment by reforming the claims contestation procedure to be more equitable and accessible and establishing complexity limits and coverage standards that give consumers the tools to better understand and compare insurance products. Regulators can also support research on the extent of direct and indirect discrimination in insurance markets, and the effectiveness of policies meant to address it.   

Through innovative programs, local government leaders can: 

  • Provide community-scale insurance support tailored to each context, such as insurance consultations for households to help individuals navigate the procedural barriers and find cost savings, and community-based insurance models where the local government serves as the aggregator for insurance purchase and distribution.  

Insurers and private sector leaders can:   

  • Expand product offerings to include innovative insurance products, such as parametric and microinsurance, that can be more affordable and serve households previously left out of the insurance market.  
  • Provide households tools for cost savings by increasing the transparency around the pricing of risk factors and offering opportunities for cost saving through risk mitigation that households can take advantage of, such as fortified roofs.  

Promising First Steps 

Already, local and federal leaders are taking action to better understand and fill the disaster insurance gap.  

Learn more about what state and local leaders can do to create a more inclusive insurance system in our report, Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap.  

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How can the U.S. gas pipeline system support a path to net-zero GHG emissions by 2050?

An economist’s guide to filling in the research gaps.

Natural gas currently accounts for more than a third of U.S. energy-related CO2 emissions, but efforts to decarbonize the economy – in particular by replacing gas with electricity in a wide variety of critical applications – imply decreasing future gas demand and CO2 emissions from the industrial and building sectors as well as the power sector.

Resolving the economic and regulatory challenges that follow from this will require filling in crucial knowledge gaps about the U.S. gas transportation system – and how that market could be designed to support the energy transition.

An energy system already in transition

Transitioning the U.S. to a clean energy system is a critical step toward the long-term goal of reaching net-zero greenhouse gas emissions by 2050. The U.S. power system has already taken steps in the right direction. More electricity is coming from variable renewable energy sources (VREs) like solar and wind, while coal plants are being retired.

But even when we factor in options like energy storage, demand response and build out of electric transmission capacity, gas-fired generators will likely continue to have a role in the next decades by providing peak and ramping capacity at times when electricity production from wind and solar is low or electricity demand is high.

This, in turn, means that the country’s vast network of interstate gas pipelines has its own role to play in the US energy transition.

The problem is that the pipeline transportation market was built to support predictable, relatively constant demand (e.g. industry and buildings). It is not currently designed to accommodate the variability of demand from gas-fired power plants which can fluctuate significantly by the hour – or even more frequently. Nor is the pipeline system designed to be compatible with other low-carbon fuel options or phased down as electrification increases.

More economics research needed

To reconcile this disconnect, we need a much better understanding of how the pipeline market works, and how it could work. Compared to U.S. power markets, the interstate gas pipeline transportation market is characterized by opaque operations and practices and has not been studied much by economists. This has limited the economic analysis available to support decision-making by policy makers and stakeholders looking to address this problem.

More research and analysis is needed to inform how design, regulation and operation of the US gas transportation market can be improved, and the stranded asset risk and associated distributional impacts managed.

To stimulate and facilitate new research in this area important to the US energy transition, I recently published an introductory guide to the U.S. gas pipeline transportation market for researchers and energy market analysts. It outlines the main market features and regulations important for understanding the U.S. gas transportation market.

The objective is to facilitate further research that will help answer questions like:

  • Who is, or should be, shouldering the costs of gas transportation infrastructure and bearing the risk of some of these assets becoming stranded in a low-carbon-energy future? How should such long-term stranded asset risk be managed in the face of electrification and decarbonization?
  • What changes are needed in the gas transportation markets to provide more flexible gas delivery services to gas-fired generators that provide valuable balancing in the power markets?
  • What role can hydrogen play in U.S. decarbonization efforts? How could a potential hydrogen market be created and which parts of the gas pipeline network would be beneficial to make compatible with hydrogen transportation, given potential centers of hydrogen supply and demand.

By publishing this paper, we hope to inspire PhD students, researchers, consultancies and market analysts to conduct analyses on this topic crucially important to the U.S. energy transition. Such new research would ideally generate policy-relevant conclusions on how to reform the U.S. gas pipeline transportation market – and next be communicated to  energy market regulators and policy makers to support decision-making that will facilitate the US transition to net zero greenhouse gas emissions by 2050.

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Solar power can have positive health impacts for Chile’s most vulnerable. Here’s how.

We know that solar power helps replace fossil fuel generation, getting the world closer to the international goal of keeping global warming to 1.5°C. But does it have other benefits? What happens to people’s health if we replace coal generation with solar power?

The Atacama Desert in northern Chile is one of the world’s most extreme landscapes. It is often used by NASA and film companies to stand in for Mars and is the sunniest place on Earth. It is also the best place in the world for solar power.

Since 2012, Chile has installed over 3300MW of solar power throughout the country, with a large percentage built in the regions in and surrounding the Atacama Desert. This rapid introduction of large-scale solar capacity makes the Atacama region a perfect case study for us to look at the health benefits of solar power replacing fossil fuel generation.

Due to Chile’s heavy reliance on fossil fuels, the country’s power sector releases large amounts of local air pollutants, including sulfur dioxide (SO2), nitrogen oxides (NOX), mercury (Hg) and particulate matter (PM). All of these pollutants are associated with adverse health effects, along with increased hospital admissions, mortality risks and threats to life expectancy. Annual air pollution in Chile generally exceeds life-threatening levels with daily average fine PM concentrations well above World Health Organization guidelines. Thus, Chile’s growing reliance on renewables is extremely important from a health perspective.

To that end, my co-authors and I have spent the past two years investigating the health benefits that solar generation produced in northern Chile due to this massive solar expansion. Our research found that the investments in solar capacity led to a displacement of daily coal- and gas-fired power generation. We estimated a direct, causal link between greater installed solar capacity and fewer cardiovascular and respiratory admissions due to reduced pollution from fossil fuel generation. Importantly, reductions were largest among the most vulnerable age groups: infants, children (ages 6–14), and seniors.

To estimate the effect, we relied upon wind direction to identify which cities were downwind of and close to the fossil fuel plants we found to be displaced by solar. For the populations living within 10km of displaced plants, we estimate that 1GWh of solar generation reduced annual respiratory hospital admissions by 13% on average. Similar findings, with decreasing magnitudes, occur in cities 50km and 100km downwind of displaced coal and gas-fired generation.

Our conclusions remained unchanged after several robustness checks, including the use of cities upwind of displaced facilities and those downwind of non-displaced units, as well as the use of hospital admissions of patients with diseases presumably not related to air pollution.

This research quantifies some of the benefits that solar power can provide in terms of reducing health impacts of air pollution in developing nations, yet our findings are likely an underestimate of the total health benefits that can emerge from solar generation. This is because:

  • Chile’s northern region has limited healthcare infrastructure. This means any reduction in hospitalizations increases the number of hospital beds available, which helps reduce the number of untreated unrelated injuries and illnesses.
  • Reductions in air pollution exposure for young children and infants has a lifelong benefit in terms of reduced illnesses and improved economic outcomes.
  • As demonstrated in both the US and India, disadvantaged populations often live closer to large air polluters. If this is the case, improvements in air quality may also help to reduce inequality.
  • Though the area we studied has relatively low population density, we were able to estimate a significant benefit on health outcomes- thus, solar’s contribution to cleaner air will produce even larger benefits in more populated regions or countries.     

Our research is a working paper published in the Environmental Defense Fund Economics Discussion Paper Series. You can download the paper for free here. This blog was co-authored with Nathaly M. Rivera, Research Fellow at the University of São Paulo.

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Canaries in the mine of climate cooperation

Strong emissions trading system prices encourage and facilitate climate action but also reflect private sector confidence in governments’ commitments to long-term transformation.

Every evening in my Brooklyn neighborhood we come out onto our stoops with our children, dogs, bells, horns and pots (my contribution – inspired by the Colombian cacerolazos I witnessed protesting – non-violently, though I can’t say quietly – in Bogotá). We make a big noise to thank and celebrate the generosity and selflessness of the medical personnel and essential workers who are keeping life going during the crisis. Their example is an inspiration to us all and reminds us that humans are at essence a cooperative species. This same spirit of cooperation, backed up by strong social and political institutions including effective emissions trading systems, can help protect our climate in these difficult times.

Our focus now must be on flattening the curve, caring for the sick and vulnerable, and then getting back to work. But as we recover from this crisis, we need to do so in a way that helps us confront the next one: global climate change. Lawmakers in many countries are beginning to pivot from relief to recovery, focusing on the longer-term work of getting the economy back on track. We need that economy to have low greenhouse gas emissions.

No one should take false hope from the temporary decline in greenhouse gas emissions we have seen recently. In the short term, when economic activity falls, pollution falls. During the financial crisis of 2007-9 global greenhouse gas emissions did drop, slightly and briefly. The current economic crisis is deeper but will also pass and when it does, so too will the dip in climate pollution.

To make declines in emissions permanent, we need to seize this moment of fundamental change to ensure effective, efficient, resilient policies to lock in economic and behavioral shifts that do contribute to a transition to a low emission future where all people thrive.

One key element of the policy mix in an increasing number of countries and jurisdictions is an Emissions Trading System. These systems limit greenhouse gas emissions while allowing flexibility around where and when emissions occur.  They provide price signals to help guide clean investment and other climate actions. The limit, or cap, controls emissions; the marginal cost of achieving that limit, which depends on technology and other climate policies among other things, drives the ETS price.

What drives emission prices?

Those ETS price signals have been affected by COVID and its economic consequences. The climate challenge is no less urgent, but is the private sector feeling less pressure from governments to act? Are the canaries who sing in the healthy cooperation mine falling quiet?

Initially both the European Union and New Zealand ETS prices dropped dramatically, but they have since clawed back much of their initial losses. Will they recover and even move to levels consistent with modeled estimates of prices required to stabilize the global at less than two degrees above pre-industrial levels? A recent survey by IETA suggests not. It finds private sector expectations of emissions prices over the next 10 years have fallen relative to expectations a year ago by 12% (EU and the Western Climate Initiative (WCI) – California and Quebec), 27% (Regional Greenhouse Gas initiative), and 35 – 38% (New Zealand and Mexico). What does this mean?

During a recession, when capital is scarce, because ETS units are assets their price will also tend to fall in a similar way to other assets. As the financial sector recovers, asset prices should also recover. These price adjustments, like those driven by new information about mitigation technology provide useful signals. However, general economic factors and new information about the true costs of achieving our climate goals are not the only drivers of these changes in prices.

Because an emissions trading system is a market created by regulation, the price in each ETS is deeply dependent on expectations about the future stringency of that regulation. Because allowances in emissions trading systems are ‘bankable’ (they can be saved for future use by those who emit less and hence surrender fewer allowances today), as long as there is a ‘bank’ of units available their price depends on what people expect demand and supply will be in future, not just on current scarcity. That makes ETS prices a barometer of both the stringency of policy that politicians are willing to implement—and also of the private sector’s expectations about how stringent policy is likely to be over the long term.

In 2008 there was some international optimism about climate action. The Kyoto Protocol had come into force in 2005; obligations began in 2008. Climate policies were gaining traction in many countries. The EU emissions trading system started its second phase with a healthy price, and New Zealand’s ETS kicked off with similar prices. These reflected that optimism. In the US, the Regional Greenhouse Gas Initiative held its first auction in 2008, and California was moving forward after passing the ambitious Global Warming Solutions Act in 2006. But by December 2009, the price of carbon allowances in the EU emissions trading system had fallen, partly as a result of economic contraction, and more importantly things were beginning to fall apart internationally starting with an unsuccessful U.N. Climate Summit in Copenhagen. By the end of 2012 emission prices had largely collapsed (though prices in the California ETS, launched one year later, were protected by a price floor). Recession was not the only driver, and it’s always hard to disentangle various causes, but the financial crisis did not help.

After the financial crisis and recession, the private sector clearly did not believe that policy makers would impose stringent caps in emissions trading systems; this kept prices low. Optimism around government-led climate action had evaporated. Emission prices, and the signals they provide to investors and companies, only really recovered after 2016 in New Zealand and 2018 in Europe. We can’t wait that long again.

How we can protect climate action from shocks like COVID

Recessions don’t have to lead us to fall even further behind in addressing climate change. The way we manage ETS can help protect the continuity of climate efforts and returns on clean investments against short-term loss of confidence in governments’ commitments to climate cooperation. Possibly the smaller shifts in expectations of prices in the EU and in California and Quebec reflect their more mature institutions and price management approaches—the Market Stability Reserve in the EU and the auction price floor in California and Quebec. Market players have more confidence that the institutions will manage short-term shocks. Critically though, they also have more confidence—though still not enough—that these jurisdictions have a sustained commitment to real long-term change.

When ETS participants believe in society’s commitment to long-term, transformational change to low emissions, ETS prices will reflect only the cost of achieving that.

Recent reductions have come at an enormous cost to human wellbeing. This is not what a transition to a low-emissions economy looks like. The good news: there is still time to stop climate change in ways that allow people and nature to prosper together, and human well-being to burgeon. But the window for such action is rapidly closing. We need a positive and attractive transformation, not economic crises that cause distress and bring only temporary reductions.

We can’t avoid the worst impacts of climate change unless we transform our energy and food systems—changing not only our production but also our culture and the stories we tell ourselves about how we can flourish in balance with our environment. This requires a shift in the fundamental assumptions of all key actors (politicians, business people, officials) and a change in institutions (public and private—e.g. banks, regulations, education, supply chains) so they support of a new set of clean investments and activities and discourage emissions-intensive activities. This won’t happen through forced change. It needs leadership and steady effort.

Once the immediate health crisis from COVID abates we don’t want policy makers (and the public) to lose sight of climate policy and action and focus only on short-term economic concerns. This is what we experienced after 2009 when unemployment levels stayed high long after the global recession passed. We need to find a way to address these critical economic needs while also moving even more aggressively towards a strong, longer-term economic future that offers high wellbeing in a stable climate.

When ETS market players believe we are really on this track, ETS prices will reflect their prediction of the costs of achieving global climate goals—not their assessment of political will.  Maybe we are closer than we think. Prices in the EU-ETS recently passed €30 for the first time since 2006 (briefly before falling a little with bad economic news) and NZ-ETS prices have reached their highest level ever around NZ$34 despite the announced closure of a major emitter. I’m optimistic. The canaries are singing again.  We need to help them to sing even louder.


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