ZEUS: Notes from Pompeii as a carbon price becomes real

This is a special posting from Callaway Climate Insights to analyze the CFTC's seminal report today on carbon pricing and climate change.

(David Callaway is founder and Editor-in-Chief of Callaway Climate Insights. He is the former president of the World Editors Forum, Editor-in-Chief of USA Today and MarketWatch, and CEO of TheStreet Inc.)

SAN FRANCISCO (Callaway Climate Insights) — Is it bad if the sun doesn’t come up?

That’s the question millions of San Francisco Bay Area residents asked Wednesday morning after they awoke to a burnt, orange haze in place of their morning, casting the entire area in darkness and layering ash across the land. Kind of like Pompeii just before the big one, or as one television reporter quipped, like his childhood memory of the day Mount St. Helens blew in Washington State 40 years ago. Is this how the dinosaurs felt?

The weirdness of climate’s impact these past two weeks grew weirder still as financial regulators released a seminal document on the impact on financial markets of climate change. Something unexpected from the Trump Administration. Yet at 196 pages, extremely thorough and a blueprint for getting the U.S. back into a position of leadership on the global climate stage.

At its heart is a demand that carbon carry a price, something markets have demanded for years but has been unachievable by sustainable market leaders and international governments. The Commodity Futures Trading Commission, which regulates commodities trading in the U.S. and sponsored the report, laid the delay squarely on “political inertia” and lack of adequate risk disclosure by companies.

It said, as you might expect from a futures trading organization, that a robust derivatives market tied to extensive new disclosure rules and stress testing could direct new capital to climate initiatives. It envisioned new derivatives products involving weather, ESG (environmental, social, governance), renewable energy, and electricity.

It said the current green financial markets are too small for institutional investors and carry the stigma of “greenwashing,” or exaggerated marketing claims to raise money but which are not tied to real climate initiatives. Mostly, it said there is still a lack of real financial incentives for the big players to make climate change a priority.

Now, for those who might think that on top of global plague, wildfires, flooding and storms, adding a massive surge in derivatives trading might not be the smartest thing — well, you’d be a student of history. Derivatives trading got us into huge trouble both in the market crash of 1987 and in the great financial crisis of 2008.

But Bob Litterman, a former global risk manager at Goldman Sachs and the executive at Kepos Capital in New York, which put together the report, has put his finger on what may be the fastest way to get to the goal of a carbon price.

While some, including governments, might think just taxing carbon is the easy answer, that does nothing to create the incentives to generate the massive money flows required to combat this emergency. Most derivatives traders I know could slap a price on it in 15 minutes, given the right information.

“If we knew today what it would cost to pull carbon dioxide out of the atmosphere at industrial scale in the not too distant future, the present value of that cost would give us a good sense of an upper bound on where we should price carbon today,” the report said (Page 25).

We still are far from having that information, however. Corporate disclosures of climate risk, including from insurers and pension funds, remain inadequate on a global scale, and will require emergency financial regulation to bring us up to speed.

Most media coverage of the report this morning focused on how weird it was coming out of an administration run by a president who doesn’t believe in climate change. Or what it means for Joe Biden in the election. More importantly, it shows that leaders of financial markets — which Trump does understand — are finally trying to claim a seat at this climate emergency table, with arguments that bypass politics.

A carbon price and global carbon offset market should become an immediate priority of central banks and financial centers around the world, with support from the United Nations and all the governments tied to the Paris Agreement. The U.S., as the largest financial market in the world, needs to lead the effort, whether or not we are in Paris.

The report, as it is a political report, does give a firm nod to the “transition” risk for the big energy players and fossil fuel companies. It must be accounted for. But creating the incentives for these players to change their models and become leaders in the new era brings massive funding with it that we just won’t get from divestment strategies or bankruptcies. They have to also be at the table.

As I write this, it is approaching high noon in the Bay Area. Still a Halloween darkness. I think of the folks of Pompeii after the first blow off of Mount Vesuvius blocked the sun. What must they have thought? History tells us most stuck around to find out.

We don’t have to. We have a chance to work our way out of this. Wednesday’s CFTC report, if nothing else, is a decent guidepost for the financial markets to work rapidly toward a broad solution, stemming from a singular goal of pricing carbon. I think as we look back a few years out, it will have become much more.

Covid-19 is invisible. Climate change is not. Weird times, indeed. But I’m encouraged by today’s significant step. Because as the great Hunter S. Thompson wrote, “it never got weird enough for me.”