Tag Archives: Climate change

Budgetary Effects of Ageing and Climate Policies in Switzerland

A report by the Federal Finance Administration anticipates lower net revenues for all levels of government.

… demographic-related expenditure will increase from 17.2% of gross domestic product (GDP) to 19.8% of GDP by 2060. If no reforms are made, public debt would rise from the current 27% to 48% of GDP. The need for reform is particularly pronounced at federal (including social security) and cantonal level. While AHV expenditure in particular poses a challenge for the Confederation, especially after the adoption of the popular initiative for a 13th AHV pension payment, cantonal finances are coming under greater pressure, particularly in terms of healthcare expenditure.

… the path to net zero will primarily place a financial burden on the federal government and the social security funds. This is because climate protection measures dampen economic growth and thus also the growth in public receipts. The electrification of the transport sector will also lead to a loss of revenue from mineral oil tax and the performance-related heavy vehicle charge (LSVA). However, the study assumes that these can be offset by replacement levies. Greater use of subsidies in the climate policy will further increase the pressure on public finances. In 2060, depending on the policy scenario, the general government debt ratio would be 8% to 11% higher than without climate protection measures. Although no robust international or Swiss estimates are yet available, scientists agree that the costs of climate change for public finances will be significantly higher than the costs of climate protection measures.

SNB Annual Report

The SNB has published its annual report. Some highlights from the summary:

Climate risks and adjustments to climate policy can trigger or amplify market fluctuations and influence the attractiveness of investments. From an investment perspective, such risks are essentially no different from other financial risks. The SNB manages the risks to its investments by means of its diversification strategy. …

A prerequisite for illiquid assets to be used as collateral in obtaining liquidity assistance is that a valid and enforceable security interest in favour of the SNB can be established on these assets. Otherwise, should the loan not be repaid, the SNB would be unable to realise the collateral. A decisive factor for the usability of assets is that the banks have made the necessary preparations. …

The crisis at Credit Suisse highlighted weaknesses in the regulatory framework. Banks’ resilience and their resolvability in a crisis should therefore be strengthened. At the same time, the current ‘too big to fail’ (TBTF) regulations should be reviewed to ensure that they take adequate account of the systemic importance of individual banks. In particular, the SNB recognises a need for action in the areas of early intervention, capital and liquidity requirements, and resolution planning. It is participating at both national and international level in the ongoing debate about regulatory adjustments.

In 2023, the SNB presented its ‘Liquidity against Mortgage Collateral’ (LAMC) initiative to the public. Banks of all sizes can find themselves in a situation where they need significant amounts of liquidity quickly despite having precautions in place that comply with regulations. The aim of the LAMC initiative is to ensure that, should the need arise, the SNB will in future be able to provide liquidity against mortgage collateral to all banks in Switzerland that have made the requisite preparations. This possibility was already available to systemically important banks. Preparatory work for this initiative started in 2019. …

Employees from the BIS and the SNB continued their research activities at the BIS Innovation Hub Swiss Centre. Work focused on technologies for tokenising assets and on the analysis of large volumes of data. …

At the invitation of the Indian G20 presidency, Switzerland again participated in the Finance Track in 2023. In this forum, the SNB emphasised the importance of pursuing a monetary policy geared towards price stability and contributed its analyses of central bank digital currency and payment systems. …

The SNB introduced a new current account survey in order to better record the global production of multinational enterprises whose production and trade processes are distributed across various countries in Switzerland’s balance of payments statistics.

Mortality Externalities of CO2-Emissions

In the Quarterly Journal of Economics (137, 4), a group of authors estimates that

the mean global increase in mortality risk due to climate change, accounting for adaptation benefits and costs, is valued at roughly 3.2% of global GDP in 2100 under a high-emissions scenario. Notably, today’s cold locations are projected to benefit, while today’s poor and hot locations have large projected damages. Finally, our central estimates indicate that the release of an additional ton of CO2 today will cause mortality-related damages of $36.6 under a high-emissions scenario, with an interquartile range accounting for both econometric and climate uncertainty of [−$7.8, $73.0].

Carbon Accounting

Carbon flow, stock and budget according to the recent Geneva Report on Climate and Debt:

  • Annual global CO2 emissions from fossil fuel and industry: 40 gigatonnes.
  • Cumulative historical emissions since 1850: 2400 gigatonnes. They are responsible for a temperature rise of 1 degree Celsius.
  • Remaining carbon budget given 1.5 degree Celsius temperature rise cap: 300 gigatonnes.

Steven Koonin’s “Unsettled”

Goodreads rating: 4.39.

The book offers

  • a brief tour of the physics behind climate change and the role played by human activity;
  • a skeptical discussion of climate models;
  • some stronger, some weaker examples of distorted reports, by scientists and the media, regarding causal links between human activity, climate change, and extreme weather events, sea level change, or production (opponents claim that these examples are cherry-picked; Koonin retorts that scientific reports should be correct);
  • a plausible prediction of national adaption policies rather than international cooperation to strongly reduce emissions.

For some critical reviews (some not compelling) of the book, see Wikipedia.

Climate Change and Cheap Clean Energy

John Cochrane on the role of cheap clean energy which by itself will not reduce CO2 in the long run:

The standard vision in policy discussions assumes infinite substitutability. As soon as the cost of clean energy is lower than the cost of carbon-emitting energy, everyone substitutes completely to the latter and the oil and coal stay in the ground. … But as long as the elasticity of substitution is finite … then the carbon comes out of the ground. As you use less and less, the remaining uses become more and more valuable, so it’s worth it, privately and to society, to keep using it although at lower scale.

So I learn from this that a key focus for R&D is not so much on lowering the cost of alternatives, but increasing their substitutability for fossil fuels. Just because the cost of solar cells is plummeting does us little good. We need to increase their substitutability.

Climate Change and Financial Stability

John Cochrane on climate change and financial stability:

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it—just as a decade’s worth of stress testers never considered the possibility of a pandemic.

Green Returns

In the NBER working paper “Dissecting Green Returns,” Lubos Pastor, Robert Stambaugh, and Lucian Taylor argue that excess returns on green assets during recent years are unlikely to predict expected excess returns. At least that’s what theory suggests:

… green assets have lower expected returns than brown, due to investors’ tastes for green assets, yet green assets can have higher realized returns while agents’ tastes shift unexpectedly in the green direction. … green tastes can shift in two ways. First, investors’ preference for green assets can increase, directly driving up green asset prices. Second, consumers’ demands for green products can strengthen—for example, due to environmental regulations—driving up green firms’ profits and thus their stock prices.

In the data

… green stocks significantly outperformed brown stocks in recent years. … green stocks would not have outperformed brown without strengthened climate concerns. …

The bulk of the positive relation between green stock returns and climate-concern shocks evidently occurs with multi-week lags.

Expected returns on stocks are hard to identify, in contrast with expected bond returns. That’s why the authors analyze bond prices and yields:

The inverse relation between a bond’s realized return and the change in its yield to maturity is well understood, and the yield provides direct information about expected return, especially for buy-and-hold investors.

The case of German “twin” bonds illustrates this inverse relation in the context of climate concerns. Since 2020, the German government has issued green bonds, along with virtually identical non-green twins. The green bonds trade at lower yields, indicating lower expected returns compared to non-green bonds. The yield spread between the green and non-green twins, known as the “greenium,” reflects investors’ willingness to accept a lower return in exchange for holding assets more aligned with their environmental values. Since issuance, the 10-year greenium experienced roughly a three-fold widening, presumably due to growing climate concerns. As a result, the green bond outperformed its non-green twin by a significant margin over the same period. However, this outperformance does not imply green outperformance going forward. Rather the opposite is clearly true, given the now wider greenium.

Economic Aspects of the Energy Transition

In an NBER working paper, Geoffrey Heal discusses some aspects of the energy transition to come.

On infrastructure investments:

the likely net investment required to go carbon-free is now as little as $0.179 trillion

renewable power from wind and solar PV plants is now less expensive than power from gas, coal or nuclear plants … If it were not for the intermittency of renewables, we would save money by converting to clean power.

the social benefits from stopping the CO2 emissions from coal and gas in power generation in the U.S. amount to $200bn annually, roughly an order of magnitude greater than the costs. Furthermore, these benefits will continue for ever, whereas the costs are fully paid by 2050. … As greenhouse gases are a global public bad, many of these benefits will accrue to countries other than the U.S.

Carbon taxes only delay the extraction of fossil fuels except for those fuels whose marginal extraction cost is sufficiently high such that extraction cost plus tax exceeds the cost of alternative energy sources:

the Pigouvian and Hotelling frameworks lead to rather different conclusions when it comes to thinking about the effectiveness of a carbon tax. Pigou emphasizes the impact of a tax on substitution between commodities, in this case between energy sources. Hotelling on the other hand emphasizes the impact of a tax on an exhaustible resource on the time-path of consumption of that resource.

[in the Hotelling setting] the tax either has no effect at all on the cumulative consumption of the fossil fuel, or it drives it out of the market completely.

If we want to reduce cumulative oil consumption by for example 30%, then we need a tax of about $500 per ton of CO2: if we wanted to reduce oil consumption by two thirds we would need a tax of over $600 per ton CO2.

Electricity pricing:

The marginal social cost of power from renewable sources is close to zero, as wind, solar and hydro all have essentially zero operating costs. So we would need much lower power prices to provide the correct incentives to use clean power rather than fossil fuels.

The classic response to this conundrum has been to recommend two-part tariffs, with a fixed charge or connection or membership charge recovering the fixed costs and a usage tariff covering the variable costs.

Nordhaus on Climate Change

In his Nobel lecture (reprinted in the June issue of the American Economic Review), William Nordhaus concludes that we should focus on four goals:

First, people around the world need to understand and accept … Those who understand the issue must speak up and debate contrarians who spread false and tendentious reasoning. …

Second, nations must establish policies that raise the price of CO2 and other greenhouse-gas emissions. …

Moreover, we need to ensure that actions are global and not just national or local. … The best hope for effective coordination is a climate club, which is a coalition of nations that commit to strong steps to reduce emissions along with mechanisms to penalize countries who do not participate. …

Finally, … [d]eveloping economical low-carbon technologies will lower the cost of achieving our climate goals. Moreover, if other policies fail, low-carbon technologies are the last refuge—short of the salvage therapy of geoengineering—for achieving our climate goals or limiting the damage.

Climate Risk, Credit Risk, and ECB Collateral

In a CEP Discussion Note, Pierre Monnin argues that financial markets mis-price climate related credit risk. If this were corrected some securities held by the ECB would loose their investment grade credit rating.

Assessing climate risks requires methodologies based on forward-looking scenarios, on complex cause-and-effect linkages and on data that has not been observed in the past. Such models are at their infancy, but already offer meaningful insights. This note provides an overview of key components that such models are built on and illustrates them with examples of the analytics that are already available. It also applies one of the available methodologies to assess transition risk to the corporate bond holdings of the European Central Bank.

Climate Science Special Report (and Tax Policy)

From About this Report:

[T]he U.S. Global Change Research Program (USGCRP) oversaw the production of this stand-alone report of the state of science relating to climate change and its physical impacts. …

The USGCRP is made up of 13 Federal departments and agencies that carry out research and support the Nation’s response to global change. The USGCRP is overseen by the Subcommittee on Global Change Research (SGCR) of the National Science and Technology Council’s Committee on Environment, Natural Resources, and Sustainability (CENRS), which in turn is overseen by the White House Office of Science and Technology Policy (OSTP). The agencies within USGCRP are the Department of Agriculture, the Department of Commerce (NOAA), the Department of Defense, the Department of Energy, the Department of Health and Human Services, the Department of the Interior, the Department of State, the Department of Transportation, the Environmental Protection Agency, the National Aeronautics and Space Administration, the National Science Foundation, the Smithsonian Institution, and the U.S. Agency for International Development.

From the Executive Summary:

… it is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming since the mid-20th century. For the warming over the last century, there is no convincing alternative explanation supported by the extent of the observational evidence. …

The magnitude of climate change beyond the next few decades will depend primarily on the amount of greenhouse gases (especially carbon dioxide) emitted globally. Without major reductions in emissions, the increase in annual average global temperature relative to preindustrial times could reach 9°F (5°C) or more by the end of this century. With significant reductions in emissions, the increase in annual average global temperature could be limited to 3.6°F (2°C) or less.

In the New York Times, Lisa Friedman and Glenn Thrush write that the report contradicts positions of the Trump administration on climate change.

While there were pockets of resistance to the report in the Trump administration, according to climate scientists involved in drafting the report, there was little appetite for a knockdown fight over climate change among Mr. Trump’s top advisers …

The White House put out a statement Friday that seemed to undercut the high level of confidence of the report’s findings. …

Responsibility for approving the report fell to Gary D. Cohn, director of the National Economic Council, who generally believes in the validity of climate science and thought the issue would have been a distraction from the tax push, according to an administration official with knowledge of the situation.

MIT vs Trump, Contd.

In an open letter, MIT President Rafael Reif writes (from the opening paragraph):

Yesterday, the White House took the position that the Paris climate agreement – a landmark effort to combat global warming by reducing greenhouse gas emissions – was a bad deal for America. Other nations have made clear that the deal is not open to renegotiation. And unfortunately, there is no negotiating with the scientific facts.

In March, Reif questioned planned federal spending cuts. And in January, he condemned Trump’s immigration restrictions.

Effects of Climate Change for Switzerland

In the NZZ, Christian Speicher summarizes expected consequences of climate change for Switzerland by 2050–2060.

  • Mean temperatures exceed the 1980–2009 average by 1.6–2.9 degrees Celsius.
  • The temperature increase is more pronounced in Summer than in Winter. But ski resorts below 2000m are no longer competitive.
  • Less precipitation in Summer, maybe more in Winter.
  • More extreme weather events.
  • Increased need for water storage and conservation.