Valuing the Cost of Climate Change Risk

From wildfires to hurricanes and unprecedented droughts and floods, farmers experience first hadn’t the financial risks that comes with climate change. A new financial study is hoping to spark change.

The Commodity Futures Trading Commission releases a climate report with recommendations to better govern the market. One expert says that the ag commodity markets should create new ways to value, price, and manage climate risks.

According to CFTC’s Rostin Behnnam, “It’s about preparedness, it’s about residency, it’s about building in policies early and investing in strong rules and regulations early, both from a regulator standpoint and a private market participant standpoint, so that we don’t have to face these events, these extreme events in the future, and so we don’t have to rely on the backstop of the government through fiscal or monetary policy to get us through difficult times.”

A 2019 study by USDA’s Economic Research Service found that the cost of federal crop insurance could increase by 3 to 37 percent, deepening on how quickly emissions rise.

The report calls for setting a carbon price as an incentive to reduce emissions.

“We’ve got to price carbon appropriately, that’s not something the financial markets can do on their own, that’s something that is going to require legislation, and I was very pleased the subcommittee was not afraid to make this recommendation,” Bob Litterman, the climate risk Committee Chair, states.

Senator Sheldon Whitehouse is ready to help move climate price legislation: “One of the good things about this report is that it puts a lot of industries on notice that this is going to get worse and requires their risk calculations... that is going to effect their calculus on how to behave politically.”

He says that the issues affects all industries. “Whether you are the ag sector, technology sector, coastal economy, Wall Street, finance, insurance industry, this will hit you in the middle of the business plan. This is not any longer just a public relations, customer relations, investor relations issue, it’s a business strategy survival issue now.”

The Committee Chair say that better data analysis is needed to measure and manage climate-related financial risks. “The question is how do you analyze it, how do you make it meaningful, and make appropriate decisions,” Litterman adds.

While estimates vary, there is a general consensus that rising temperatures can reduce average crop yields and production, meaning climate risk in financial markets could continue growing in importance.

University of California, Davis is reexamine methane’s role in climate change.