Robert Litterman, a member of our Advisory Board, testified before the Senate Budget Committee February 16 hoping to “help shed some light on the under-appreciated fact that climate change is not just an environmental problem, it is an economic and financial one as well.”
Bob is one of the giants in the field of risk management. An economist by training, he spent 23 years with Goldman Sachs, where he was a partner and head of the risk department. He then co-founded Kepos Capital, again specializing in risk management.
In 2020, Bob chaired the Commodities Futures Trading Commission’s (CFTC) climate-related Market Risk Subcommittee, which published a unanimous and widely cited report, “Managing Climate Risk in the U.S. Financial System.” As he told the Senate Budget Committee, “[W]e came to the unambiguous conclusion that climate change poses several important risks to the American economy.” The report stated: “Climate change is expected to affect multiple sectors, geographies, and assets in the United States, sometimes simultaneously and within a relatively short timeframe…”
Bob also cited a 2016 report by Freddie Mac, which, he testified, “estimated that the economic losses from sea level rise are ‘likely to be greater in total than those experienced in the housing crisis and Great Recession.’ And that was in 2016. Projections for sea level rise have only gotten more dire since then,” he said, “as scientists have learned more about the vulnerabilities of the Greenland ice sheet and several massive West Antarctic glaciers.” Bob was able to get a close look at the threat during a 2022 trip to Greenland with two of our co-founders (Bill Eacho and George Frampton) and two fellow members of our Advisory Board (John Englander and Julia Neshiewat). Bob is also on the boards of the Climate Leadership Council, the Niskanen Center, and other organizations.
“The physical risks of climate change,” Bob testified, “are those that stem from the disruptions it causes via rising seas, more severe storms and floods, more frequent droughts, more intense heat waves, and more destructive wildfires. Property is destroyed. Supply chains are disrupted. Crops wither. Labor productivity declines.
“The transition risks of climate change are those that stem from changes in policy, technology, and/or consumer preferences. As lower-carbon technologies become cheaper, demand for fossil fuels will decline. As more and more consumers demand sustainable products, demand for fossil fuels will decline. And as governments around the world take steps to decarbonize their economies, demand for fossil fuels will decline.
“This process can lead to stranded assets in carbon intensive sectors. If investors have not managed this risk, it may cascade through the economy. Central banks have estimated the losses in the energy sector at up to $4 trillion in the energy sector, and up to $20 trillion in the broader economy.”
Pointing to the increasing frequency of extreme weather events, Bob testified, “100-year floods may happen every 5 or 10 years today because of the changing climate.” He stated, “Losses from billion-dollar extreme weather events totaled $165 billion last year and while it varies from year to year, it is clearly growing rapidly over time.”
Citing the agricultural sector as one example of the economic risks, Bob said, “[W]e found that climate change is likely to significantly reduce crop yields, decrease labor productivity, degrade soil and water quality, increase the range and virulence of pests, and disrupt supply chains.”
Some Americans think of climate change as a threat only to the planet, overlooking the impact on people’s health. To counter that view, Bob testified: “Climate change will also likely inflict large costs on human health, and by extension, significantly reduce labor productivity in certain sectors. Estimates of the annual monetized damages from premature deaths due to extreme heat in 2090 range from $60 to $140 billion. Lost labor hours could reach six percent in parts of Florida and Texas.”
Near the end of his statement, Bob said, “While the subject of this hearing is the economic risks and costs associated with climate change, I would be remiss if I did not mention one last thing. All of the research and analysis on this subject agrees that the sooner we act to reduce emissions, the fewer costs and risks we incur. In addition, it appears that transitioning to a low-carbon economy will actually result in substantial economic growth.”
In our view, the most effective step our nation could take to speed that transition is to put an honest price on carbon emissions, via a carbon fee.