Market Forces

Moody’s Challenge: Prepare for Climate Change or Risk Credit Rating Downgrades

By / Published: December 19, 2017

This post was co-authored by Aurora Barone

In the face of havoc wrought by recent storms and hurricanes, Moody’s Investors Services, Inc. has declared that state and local bondholders must account for climate change or face downgrades. It is the first of the three major credit rating agencies to incorporate climate change risks into its ratings assessment, a move that may incentivize policymakers to make smarter, long-term investments in resilience efforts like stormwater systems or flood management programs.

Bond rating agencies like Moody’s help investors determine the risk of companies and governments defaulting on repayments. Revenue, debt levels, and financial management are all common measures of creditworthiness.

States at high risk–mainly on the coast–including Texas, Florida, Georgia and Mississippi, will have to account for how they are preparing for the adverse effects of climate change, including the effects of storms and floods, which are predicted to become more frequent and intense as temperatures climb.

In its report to its clients, Moody’s outlined parameters that it will use to assess the “exposure and overall susceptibility of U.S. states to the physical effects of climate change.” Some of these parameters include reviewing an area’s economic, institutional, fiscal strengths, and susceptibility to event risk – all of which will influence the borrower’s ability to repay debt. Coastal risks, like rising sea levels and flooding, and an increase in the frequency of extreme weather events, like tornadoes, wildfires, and storms, are just a few of the indicators that will be incorporated into the rating.

This wasn’t always the case. Take New Jersey’s Ocean County, for example. In 2012, Hurricane Sandy devastated Seaside Heights, destroying local businesses and oceanfront properties. Yet, last summer, Ocean County sold $31 million in bonds maturing over 20 years – bonds which received a perfect triple-A rating from both Moody’s and S&P Global Ratings. In 2016, major bond companies issued triple-A ratings for long-term bonds to Hilton Head and Virginia Beach, despite the U.S. Navy’s warnings that the latter faced severe threats from climate change. A recent World Bank study calculated future urban losses that many coastal cities may face because of climate change; Miami, New York, New Orleans, and Boston ranked highest in overall risk.  In March 2016, Moody’s and S&P gave top ratings to bonds issued by Boston of $150 million maturing over 20 years, evidently not accounting for any associated climate risks.

In Moody’s new effort to incorporate the risk of climate change into its ratings, it is trying to account for “immediate and observable impacts on an issuer’s infrastructure, economy and revenue base, and environment” as well as economic challenges that may result, such as “smaller crop yields, infrastructure damage, higher energy demands, and escalated recovery costs”.

The hope: in facing the threat of a rating downgrade and more expensive debt, local governments should move to implement major adaptation and resilience projects as a way to entice investors, and of course, to plan for the effects of climate change.

 

Posted in Uncategorized / Comments are closed

California Bucks Global Trend with another Year of GHG Reductions

By / Published: November 20, 2017

This post was co-authored by Maureen Lackner and originally appeared on the EDF Talks Global Climate blog.

The California Air Resources Board’s November 6 release of 2016 greenhouse gas (GHG) emissions data from the state’s largest electricity generators and importers, fuel suppliers, and industrial facilities shows that emissions have decreased even more than anticipated. California’s emissions trends are showing what is possible with strong climate policies in place and provide hope even as new analysis projects that global emissions will increase by 2% in 2017 after a three-year plateau.

California’s emissions kept falling in 2016

The 2016 emissions report, an annual requirement under California’s regulation for the Mandatory Reporting of Greenhouse Gas Emissions (MRR), shows that emissions covered by the state’s cap-and-trade program are shrinking, and doing so at a faster pace than in prior years. Covered emissions have dropped each year that cap and trade has been in place, amounting to 31 million metric tons of carbon dioxide-equivalent (MMt CO2e) over the whole period, or 8.8% reduction relative to 2012. The drop between 2015 and 2016 accounts for over half of these cumulative reductions (16 MMt CO2e; 4.8% reduction relative to 2015). The electricity sector is responsible for the bulk of this drop: electricity importers reduced emissions about 10 MMt CO2e while in-state electricity generation facilities reduced emissions by about 7 MMt CO2e.

Some sectors’ emissions grew in 2016. Just as with global transportation emissions, California’s transportation emissions have steadily crept up in recent years, and the MRR report suggests this trend is continuing. Transportation fuel suppliers, which account for the largest share of total emissions, reported a 1.8 MMt CO2e increase in emissions covered by cap and trade since 2015. Cement plants and hydrogen plants also experienced small increases in covered emissions. One of the benefits of cap and trade, however, is that if the clean transition is occurring more slowly in one sector, other sectors will be required to reduce further to keep emissions below the cap while the whole economy catches up.

Emissions that are not covered by the cap-and-trade program dropped, from 92 MMt CO2e in 2015 to 87 MMt CO2e in 2016. While small, this represents the largest reduction in non-covered emissions since 2012 and is mostly driven by suppliers of natural gas/NGL/LPG and electricity importers. Net non-covered and covered emissions reductions resulted in a 20.5 MMt CO2e drop in total emissions from these sectors.

These results are a welcome reminder that the cap-and-trade program is working in concert with other policies to accomplish the primary objective of reducing emissions.

The California climate policies are accomplishing their emissions reductions goals

The 2016 MRR data indicate impactful reductions in GHG emissions and progress toward reaching the state’s target emissions reductions by 2020. The 2016 emissions drop is a consequence of several factors: a CARB analysis of the year’s electricity generation points to increased renewable capacity, decreased imports of electricity from coal-fired power plants, and increased in-state hydroelectric power production. To put it in perspective, the 20.5 MMt CO2e emissions reductions is equivalent to offsetting the energy use of about 2.2 million homes, or 16% of California’s households.

Emissions below the cap are a climate win, not a concern

Total covered emissions in 2016 were about 324 MMt CO2e, well below California’s 2016 cap of roughly 382 MMt. Some observers of the cap-and-trade program worry that an “oversupply” of credits will result in reduced revenue for the state and lesser profits for traders on the secondary market. This concern was especially pronounced when secondary market prices dipped below the price floor in 2016 and 2017.

Importantly, oversupply of allowances is not a bad thing for the climate. As Frank Wolak, an energy economist at Stanford, points out, oversupply may be a sign of an innovative economy in which pollution reductions are easier to achieve than anticipated. Furthermore, having emissions below the cap represents earlier than anticipated reductions which is a win for the atmosphere. Warming is caused by the cumulative emissions that are present in the atmosphere so earlier reductions mean gases are not present in the atmosphere for at least the period over which emissions are delayed.

While market stability is a valid concern, the design of the program has built-in features to prevent market disruptions. Furthermore, the California legislature’s recent two-thirds majority vote to extend the cap-and-trade program through 2030 provides long-term regulatory certainty. Both the May and August auctions were completely sold out suggesting that the extension has succeeded in stabilizing demand.

These results are a welcome reminder that the cap-and-trade program is working in concert with other policies to accomplish the primary objective of reducing emissions, and that we’re doing it cheaply is an added bonus. Early reductions at a low cost can lead to sustained or even improved ambition as California implements its world-leading climate targets.

As California closes its fifth year of cap and trade, it should be with a sense of accomplishment and optimism for the future of the state’s emissions.

Posted in California, Cap and Trade, Cap and Trade Watch, Economics / Comments are closed

How and why farmers in the Catskills protect New York City’s drinking water

By / Bio / Published: November 7, 2017

At a recent EDF board meeting, Geoffrey Heal talked about the economic values that ecosystem services provide for our economic well-being. His presentation included a number of case studies, including the New York City Department of Environmental Protection’s financial support for farmers in the Catskills to farm in ways that protect the city’s water quality. The key to the business model: farmers benefit by getting financial support from the City of New York, and the city avoids having to go through a costly filtration system to physically remove impurities or contaminants in a series of filters. The city water supply does undergo UV decontamination.

Last week, the staff of EDF’s Office of the Chief Economist decided to see for ourselves how this works in practice. We visited with Gibson Durnford, the East of the Hudson Agricultural Coordinator of the Watershed Agricultural Council, based in Yorktown Heights, New York. A non-profit organization led by local farmers, it started in 1993 to lead and administer the program.

Incentives for farmers and the City are aligned

Gibson explained that customers in New York City consume 1 billion gallons of water a day, which is supplied from the West and East Hudson systems. There is one and a half years of water in storage (550 billion gallons).

If farmers did not protect the Delaware and Catskill water sheds, the City would have to make a an estimated capital investment of $8-10 billion in water filtration plants and spend an additional $100 million annually to operate them. Phosphate is a particular problem, and the city would also have to deal with sediment running off the farms into the water supply system.

For farmers, payments for eco-services compensate and empower private landowners to be surface-water stewards of New York City’s drinking water. Whole farm management plans are agreed with farmers, incorporating best management practices that both support sustainable farming and protect water quality; concentrated manure sources like slurry pits or storage piles are a greater concern than waste in the fields. If fields are well-vegetated with grass, the plants will take up nutrients; the vegetation slows water flow and also makes the soil more porous and increases absorption.

Farmers are provided with investment funds for purposes which include drainage, roading, manure pads, and sward management; conservation easements are purchased (a percentage of market value) which simultaneously lets the farmer retain ownership of the land, releases capital for the owner while ensuring that the land remains available for farming and forestry; the forest program helps farmers with erosion control, sustainable harvesting, and planting on the banks of tributaries.

Conservation in action at an Alpaca farm
We visited Leda Bloomberg and Steve Cole’s Faraway Farm, where they raise Alpaca sheep for their wool. The Watershed Agricultural Council supported the installation of a manure pad, and of a rocky channel along the roadway had drains it to collect the water running off the field and divert it away for infiltration into the soil. Leda and Steve indicated that they had benefited greatly from the advice and support of the Watershed Council. The council is “on the side of the farmers” and is proactive in finding new and better ways to conserve and better their well-being.

The economist Ronald Coase won the Nobel Prize, in part for theorizing (without evidence) that those who pollute could negotiate a solution with those who would benefit from pollution reduction. We were honored and delighted to see his theory being acted upon to such great positive effect for both farmers upstate and the water consumers in New York City. As we left, we had only one question: Doesn’t such a great idea deserve to be replicated?

Posted in Economics / Comments are closed

Trump Administration misleads Americans about the cost of climate pollution

By / Bio / Published: October 25, 2017

This blog post originally appeared on Climate 411.

The Trump Administration is attempting to justify the rollback of crucial environmental and health protections by vastly undervaluing the costs of climate change.

The latest safeguards under attack are the Clean Power Plan, the nation’s first-ever limits on carbon pollution from existing power plants, and the Bureau of Land Management’s vital standards to reduce wasted natural gas from oil and gas facilities on public and tribal lands. They would have health, environmental, and economic benefits worth an estimated billions of dollars annually. But you wouldn’t know it from reading the Administration’s recently revised documents – because of a series of deceptive accounting tricks, including efforts aimed at obscuring the benefits of reducing carbon pollution.

The Trump Administration has used discredited methods to eviscerate the social cost of carbon — an estimate of the costs that carbon pollution inflicts on the public, represented as the dollar value of the total damages from emitting one ton of carbon dioxide into the earth’s atmosphere.

The social cost of carbon is a tool that helps ensure that policymakers consider the health, environmental and economic benefits of avoiding extreme weather, rising temperatures and intensifying smog when they make decisions that affect climate pollution.

Climate change harms businesses, families, governments and taxpayers through rising health care costs, destruction of property, increased food prices and more — so it’s common sense that we should properly account for the value of avoiding these harmful outcomes. But the Trump Administration has systematically undermined and attacked the well-established science of climate change – including the social cost of carbon, which has had a target on its back for a while now.

The most up-to-date estimates of the social costs of carbon were developed by an Interagency Working Group (IWG) of experts from a dozen federal agencies. They were developed through a transparent and rigorous process based on the latest peer-reviewed science and economics, and with input from the public and the National Academy of Sciences.

But in March, President Trump cast aside the results of this thorough and consultative process. He issued an executive order aimed at discrediting the IWG estimates, withdrawing them as government policy, and directing federal agencies to pick their own metric.

The executive order leaves federal agencies to fend for themselves without specific guidance, opens the door to extensive legal challenges, and effectively sets up agencies to cook the books to serve the Administration’s goals.

That’s exactly what EPA Administrator Scott Pruitt and Department of the Interior Secretary Ryan Zinke just did – releasing benefit-cost analyses that massively undervalue the costs of carbon pollution, radically reducing the estimates by up to 97 percent.

The Trump Administration would have us believe that the costs of carbon pollution are near zero. The Administration’s new estimates are only a couple dollars per ton of carbon dioxide – about as much as a cup of coffee or a bus ticket.

Sadly, communities around the country are already seeing just how wrong that is. From longer wildfire seasons to more intense hurricanes, the American public is already bearing the enormous costs of climate change.

Even the IWG estimates – roughly $50 per ton of carbon dioxide based on year 2020 emissions – are almost certainly a conservative lower bound since they do not yet reflect many different types of climate impacts.

A closer look at the Administration’s deceptive math 

There are two major flaws in the Administration’s drastically reduced estimates, both of which fly in the face of established science and economic principles in service of obscuring the very real benefits of climate action.

First, the reduced estimates ignore that carbon emissions are a global pollutant, so they omit important categories of climate change impacts on the United States.

Second, they shortchange the harm to our children and future generations from climate change.

The so-called “domestic-only” estimate

Since the impacts of carbon pollution are felt globally regardless of where the emissions come from, leading researchers and the IWG have appropriately focused on accounting for that full global impact.

In contrast, the Administration’s revised estimates claim to consider “domestic-only” impacts to the United States. But that title is a misnomer – the Administration’s flawed approach ignores important categories of impacts that affect the American public. Climate impacts beyond our borders have costly repercussions for U.S. citizens in the form of changing global migration patterns, economic and political destabilization, and other “spillover” effects.

The National Academy of Sciences specifically rejected the approach the Administration is taking in a report released earlier this year, concluding that:

[C]limate damages to the United States cannot be accurately characterized without accounting for consequences outside U.S. borders.

Economist Richard Newell – president of the think tank Resources for the Future, which is leading an effort to implement the Nation Academy of Sciences’ recommendations to update the social cost of carbon estimates – has criticized the Administration’s approach, saying that considering only direct domestic impacts is:

[U]nnecessarily constrained and unwise for addressing inherently global pollutants like greenhouse gases.

The use of a “domestic-only” number also harms Americans because it undervalues the cost of climate pollution and encourages other countries to similarly undervalue – and over-emit – this pollution.

More than half a dozen leading experts argue:

[The] United States benefits tremendously if other countries set policy based on global rather than local effects.

They also point out that the use of a global estimate can encourage reciprocal climate action elsewhere. For instance, the Canadian government incorporated the U.S. IWG value in its own policy analysis.

Undervaluing the impacts on children and future generations

The Administration’s estimates also use a sharply lower value for the benefits that today’s carbon reductions provide to children and future generations. Again, this is in direct conflict with the weight of expert opinion that supports valuing these impacts even more than we did before the Trump Administration.

The Administration’s estimates “discount” future impacts at 7 percent – a rate significantly higher than the 3 percent central rate of the IWG, and one that is wholly unsupported by the economics literature when it comes to the long-lived intergenerational effects of carbon pollution.

A growing consensus among leading economists supports lower or declining discount rates, as does the Council of Economic Advisors.

As Richard Newell of Resources for the Future points out:

Practically speaking, the use of such a high discount rate means that the effects of our actions on future generations are largely unaccounted for in the new analysis.

In other words, the Administration’s estimates reveal just how little they value protecting American children and generations to come.

The social cost of carbon has profound influence on our policy process and embodies the very real costs of climate change that communities around the country are already feeling.

The Administration’s distortion of these values is illustrative of a frequent strategy of theirs – twisting the facts to validate their desired outcome, and in the process sowing doubt around the overwhelming scientific consensus on climate change.

Unfortunately, while the math the Administration is using is warped, the costs of climate change are still very real – and the American public is footing the bill.

Posted in Clean Power Plan, Economics, Social Cost of Carbon / Comments are closed

Why rolling back common-sense rules puts taxpayers on the hook for future disasters

By / Bio / Twitter profile / Published: September 28, 2017

This post was co-authored with Beia Spiller

Since 2000, major flood and hurricane disasters have cost the nation $499.5 billion – that’s more than double what floods cost us from 1980 to 1999 – and doesn’t even reflect damages from Hurricanes Harvey, Irma, or Maria. You’d think that at a time when our nation faces greater threats from extreme weather, reducing the economic and social costs of flood disasters would be a top priority.

Instead, President Trump rescinded a requirement that federal agencies take future flood risks into greater consideration for federal projects in or affecting floodplains, setting us up for future fiscal disaster. Given the number and size of this year’s hurricanes, and the devastation they have wrought to millions of Americans, it’s clear that we aren’t doing enough to reduce the costs of these disasters. Yet, President Trump’s action, if uncorrected, will increase the costs to our country. Instead of rolling back common-sense rules meant to protect taxpayers, Congress and the administration should be ensuring that our federal investments can better withstand the impacts of flooding.

Where and how we build helps us better cope with disasters and saves money

The two best ways to minimize flood damage losses are: building outside of floodplains and building structures capable of coping with flooding. Federal agencies should be held accountable for implementing these proven best practices.

According to the Department of Homeland Security (DHS), benefits of implementing stronger building codes for natural hazards include savings from lowered insurance rates, increased property values, and reduced losses during floods. When building codes offer enhanced protection against the threats of flood-related disasters, communities recover faster and reduce the fiscal pressure on governments responding to damages.

Furthermore, designing for resiliency can be cost-effective. According to one study evaluating the effectiveness of flood building codes, constructing new buildings to withstand floods by increasing their elevation usually costs less than 1% of the total building cost for each foot they are raised. And, given the risks of flooding over time, these investments were found to pay for themselves in as little as one or two years for those areas with the highest risk of flooding. It’s noteworthy that buildings constructed after Andrew, following the more rigorous codes, withstood Irma.

In light of this, it is ironic that the most hurricane-prone state in the country could retreat from its renowned building code system given that Florida Governor Rick Scott signed into law changes to state’s system that had been adopted after Hurricane Andrew. The changes include reducing inspections and the frequency of code updates, and allowing for fewer votes from the state’s Building Commission to make further code revisions. The latter is seen by many as an opportunity for the Commission, which is dominated by contractors and construction firms, to further weaken the codes that have been seen as some of the best in the country.

From 1978-2016, FEMA paid out more than $59 trillion (in 2016 dollars) for losses associated with significant floods, with 76% of those payments occurring after 2004. Importantly, the average paid loss increased by almost 2.5 times since 1978 (even after accounting for inflation). These moves toward lowered building codes and standards will only ensure more and more costly FEMA payouts, with taxpayers footing the bill. In the long run, these actions are ultimately at odds with administrations preaching fiscal conservatism.

Investing now to save in the future

Instead of taking such unnecessary risks, cities and states should adopt more stringent risk-informed building codes and zoning, so we can start building now for a more reliable, sustainable and resilient infrastructure. Similarly, the administration should enhance flood resilience standards for federal investments, including those made as part of disaster recovery, to reduce the costs of flooding today and in the future. Doing so will improve long-term protection of human health and welfare. If we build smarter now, communities, taxpayers and nature will reap rewards in the future.

Posted in Uncategorized / Comments are closed

How climate policy can mitigate extreme weather’s economic toll

By / Published: September 25, 2017

 

This post was co-authored with Maureen Lackner

In the wake of hurricanes Harvey and Irma, Americans are coming together to support communities as they recover from the physical, emotional and economic toll after lives, possessions and livelihoods were washed away. Reestablishing daily routines, including work, school and regular commerce will take time, and for many, life may not return to what was once considered normal. But as we begin rebuilding what can be replaced, it is necessary to first gauge the scale and cost of the damage. It is also time to face the possibility that devastating weather events like Harvey and Irma may become the new normal

Harvey and Irma are among the most expensive hurricanes in U.S. history

Harvey and Irma have brought front and center the high costs of extreme weather-related disasters. While the damage is still being assessed, Harvey’s could cost as much as $200 billion, making it the most expensive natural disaster in U.S. history, surpassing Hurricane Katrina ($194 billion in 2017 USD). Estimates of Hurricane Irma’s economic damage are less certain, but the storm will likely also be among the most expensive weather-related disasters in the United States. (And we can’t forget that before reaching Florida, Irma caused damage to many Caribbean islands, which in some cases exceeded their GDP.)

While hurricanes tend to be the most dramatic, other types of severe weather also cause billions of dollars in economic damages. During the first half of 2017 alone, nine weather events including hailstorms, flooding, and tornados racked up $16 billion in damages across several states.

Climate change elevates the risk of severe weather events, and that comes at a cost

Climate change doesn’t cause hurricanes, but sea level rise and warmer temperatures make storms more destructive. Storm surges along the Texas coast where Hurricane Harvey hit are now about 7 inches higher than storm surges a few decades ago as a result of sea level rise, which can make a big difference in flooding. In addition, evaporation intensifies with warmer temperatures, which results in more moisture in the atmosphere and therefore higher rainfall amounts and flooding when storms make landfall. Warmer ocean temperatures also fuel hurricanes, making them more powerful. Hurricane Irma was a classic example of just how powerful a storm can get from increased ocean temperatures.

It is also possible that severe weather-related events overall are becoming more frequent. One recent EDF analysis shows that U.S. counties experienced, on average, a fourfold increase in the frequency of disaster level hurricanes, storms, and floods between 1997 and 2016 than in the 20 years prior. In the Southeast, this increase is even more pronounced; on average, its states experienced close to four-and-a-half times more disaster declarations over the same time period.

In the coming decades, risk of climate change-influenced severe weather will differ from region to region, but one thing is clear: if left unmitigated, the effects of climate change could come at serious economic costs, not just to those who lose homes and livelihoods, but to their insurance companies or to taxpayers. Other aspects of the economy could experience significant pain as well.

In the Southeast alone, higher sea levels resulting in higher storm surges could increase the average annualized cost of storms along the Eastern seaboard and Gulf Coast by $2-3.5 billion by 2030. In some areas, like Texas, where sea levels are rising faster than the global average, these increases even higher. Research published in Science suggests that even if storms themselves do not become more severe, direct annual economic damage could rise by 0.6 to 1.3% of state gross domestic product (GDP) for South Carolina, Louisiana, and Florida under median estimates of mean sea level rise. This translates into billions of dollars in additional economic damage every year for each of these states.

Hurricanes and severe storms pose serious risks to U.S. energy infrastructure

During Hurricane Katrina, the extent of the damages suffered by Entergy New Orleans forced the utility into bankruptcy. Hurricane Irma caused power outages in Florida that left over six million people without power.

Beyond these local impacts, these events can cause damage nationwide. Texas is home to about 30% of domestic oil and gas refining capacity, half of which was disrupted by Hurricane Harvey. This shut down 16% of the nation’s total refining capacity, spiked the average national gasoline price approximately 37 cents per gallon, and forced crude exports to drop from 749,000 to 153,000 barrels per day in the week after Harvey. As of September 10, 2017, more than two weeks after Hurricane Harvey made landfall, five Gulf Coast refineries remained closed, representing 11% of total Gulf Coast refining capacity and 5.8% of U.S. refining capacity.

The Trump administration should focus on adaptation and mitigation

In the short term, the Trump administration should maintain existing programs designed to enhance U.S. energy security and disaster response. For starters, the administration should stop dismantling EPA programs expressly designed to help communities respond to damage from storms.

In the long term, we need to build climate resilient communities and infrastructure, through efforts like wetland restoration and smart development. President Trump would also do well to listen to Miami’s Republican Mayor Tomás Regalado, and rethink his approach to climate policy. Instead of rolling back smart policies and regulations, or simply ignoring the impacts of climate change, we need to stop compounding the problem and mitigate the effects of a warmer climate through policy that sets aggressive emissions reduction targets. Such strategies will do much more than just protect our economy’s bottom line—it will help ensure the safety, security, and well-being of millions of Americans.

Posted in Climate science, Politics / Comments are closed