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OPEC, Unconventional Oil and Climate Change

OPEC, Unconventional Oil and Climate Change

OPEC, Unconventional Oil and Climate Change – On the importance of the order of extraction by Benchekroun, Hassan, Gerard van der Meijden, and Cees Withagen. Published by the Journal of Environmental Economics and Management is a long-awaited reflection on what could be the most important topic of the century. The abstract and part of the introduction are republished below, and the whole text could be found in the original referred to document.

OPEC, Unconventional Oil and Climate Change-On the importance of the order of extraction

OPEC, Unconventional Oil and Climate Change

We show that OPEC’s market power contributes to climate change by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We examine the importance of this extraction sequence effect by calibrating and simulating a cartel-fringe model of the global oil market. While welfare net of climate damage under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost the entire welfare loss is due to the sequence effect of OPEC’s market power. In our benchmark calibration, the cost of the sequence effect amounts to 15 trillion US$, which corresponds to 97 percent of the welfare loss. Moreover, we find that an increase in non-OPEC oil reserves decreases global welfare. In a counterfactual world without non-OPEC oil, global welfare would be 13 trillion US$ higher, 10 trillion US$ of which is due to lower climate damages.


What is the impact of imperfect competition in the oil market on climate change? This question is relevant given the sizable carbon footprint of oil and the prominent size of OPEC. Oil is responsible for close to a quarter of anthropogenic carbon emissions (IEA, 2016)1 and, with OPEC producing 40 percent of global oil supply and owning 70 percent of world oil reserves (EIA, 2019b), it is not realistic to assume that OPEC is a price taker in the market of oil.

An old adage says that “the monopolist is the conservationist’s best friend” (e.g., Dasgupta and Heal, 1979, p. 329). Indeed, we know from non-renewable resource economics that market power typically leads to higher initial resource prices and slower resource depletion. However, in the case of oil, the consequences of imperfect competition for the Earth’s climate are more complex because different types of oil reserves with varying carbon contents are exploited. The reason is that imperfect competition does not only affect the speed, but also the order of extraction of different reserves of oil (cf. Benchekroun et al., 200920102019). Conventional OPEC oil is cheaper and its extraction is less carbon intensive than unconventional oil owned by relatively small oil producers (Malins et al., 2014Fischer and Salant, 2017OCI, 2019). Technically recoverable reserves and production of unconventional types of oil by non-OPEC countries have grown significantly over the last decade. The supply of oil sands from Canada has more than doubled, and shale oil production in the US has increased more than tenfold since 2007 (CAPP, 2017bEIA, 2019b). Current recoverable reserves of Canadian oil sands and of US shale oil amount to 165 and 78.2 billion barrels, respectively (CAPP, 2017aEIA, 2019c). In this paper, we take into account that when OPEC exercises market power it does not only slow down its rate of extraction—which tends to be good for the climate—but it also opens the door for earlier production by the fringe. As a result, OPEC’s relatively cheaper and cleaner oil is extracted later, while the fringe’s costlier and dirtier oil is extracted earlier. This ‘sequence effect’ leads to higher discounted extraction costs and climate damage.

This work is licensed under a Creative Commons Attribution 4.0 International License

Where America’s Used Vehicles Get Exported To

Where America’s Used Vehicles Get Exported To

Statista querying Where America’s Used Vehicles Get Exported To elaborates in its AUTOMOTIVE INDUSTRY, this article by Niall McCarthy, not only provides us with quite a clear answer that is illustrated as usual by a graph but with also some related explanations.
The US vehicles export to the world, according to a new report published by the UN Environment Programme (UNEP), which, based on an in-depth analysis of 146 countries revealed that in 2015, 14 million used light-duty vehicles find their way to most developing countries. The snag is that per this report, this fast-growing global vehicle fleet, air pollution and climate change and the lack of adequate standards has allowed richer countries to dump their old, polluting and unsafe vehicles into developing countries. As a consequence, African countries have the largest number of used cars, followed by countries in Eastern Europe (24%), Asia-Pacific (15%), the Middle East (12%) and Latin America (9%). The UAE, despite its recent diversification policies, takes the lion’s share of those Middle East’s 12% with the added situation as illustrated in the attached Youtube video here below.
Niall McCarthy
Niall McCarthy,
Data Journalist

29 October 2020

The export of millions of used motor vehicles to developing countries is proving a major contributor to air pollution. The finding comes from a recently released United Nations Environment Programme report which states that 14 million light duty vehicles (cars, SUVs and minibuses) were exported to low and middle-income countries between 2015 and 2018. 40 percent of that total ended up in Africa. The European Union accounted for 54 percent of all used vehicle exports during the above period, followed by Japan’s 27 percent and the United States’ 18 percent. The vast majority of developing countries importing these vehicles have no environmental requirements or regulations governing their safety.

That has resulted in imported used vehicles providng a major contribution to air pollution and climate emissions in their markets. Poignantly, the analysis also states that most developing markets are importing vehicles today that would not be allowed to circulate on the exporting country’s road network. Some governments are attempting to implement change, however, and a group of West African countries are set to introduce minimum requirements for used vehicles from 2021. That is set to primarily involve the use of cleaner fuels as well as a maximum age for any second-hand vehicle imported.

Despite accounting for a lower share of total used vehicle exports than the EU and Japan, the U.S. still shipped 2.6 million overseas between 2015 and 2018 with a collective value of $24.5 million. So where are America’s old cars ending up? In 2018, at least, the UAE was the top importing nation, bringing in 129,489 vehicles surplus to U.S. requirements. Despite the UAE being a wealthy nation at the top of the list, there are several low or middle-income countries within the top-10. Nigeria imported the second-highest number of used vehicles from the U.S. in 2018 with more than 82,000 while Georgia came third with nearly 60,000. Cambodia is among the top export markets with 31,167 used vehicles while the Dominican Republic also imported around 27,000.

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Where America's Used Vehicles Get Exported To
Plastic dumped in Mediterranean Sea to double in 20 years

Plastic dumped in Mediterranean Sea to double in 20 years

The amount of plastic dumped in Mediterranean Sea to double in 20 years as per PHYS.ORG citing a report of the International Union for the Conservation of Nature. A year ago and according to a study by the French Institute for Sea Research and Exploration, the Mediterranean Sea is the most polluted Euro-MENA sea where plastic has become so integral to all peoples‘ lives.

27 October 2020

Plastic dumped in Mediterranean Sea to double in 20 years
More than one million tonnes of plastic have already accumulated in the Mediterranean Sea, the report estimates

Nearly 230,000 tonnes of plastic is dumped into the Mediterranean Sea every year, a figure which could more than double by 2040 unless “ambitious” steps are taken, the International Union for the Conservation of Nature said Tuesday.

Egypt, Italy and Turkey are the countries that release the most plastic into the sea, mainly due to large coastal populations and huge amounts of “mismanaged waste,” an IUCN report found.

But on a per capita basis Montenegro, Albania, Bosnia and Herzegovina and North Macedonia have the highest levels of plastic waste leakage into the Mediterranean.

The report, called “Mare Plasticum: The Mediterranean”, estimates that over one million tonnes of plastic have already accumulated in the Mediterranean Sea.

“An estimated 229,000 tonnes of plastic –- equivalent to over 500 shipping containers –- are leaking into the Mediterranean Sea every year,” said the report, blaming “mismanaged waste” for 94 percent of the total plastic leakage.

Under a “business as usual” scenario, this figure will reach 500,000 tonnes per year by 2040, which is why “ambitious interventions beyond current commitments will be required to reduce the flow of plastic into the sea”.

Minna Epps, the director of the IUCN’s marine programme, warned that “plastic pollution can cause long-term damage to terrestrial and marine ecosystems and biodiversity.”

“Marine animals can get entangled or swallow plastic waste, and ultimately end up dying from exhaustion and starvation,” he added.

Over 50,000 tonnes of plastic leakage into the Mediterranean could be avoided each year if waste management was improved in the top 100 contributing cities alone, the report said.

A ban on plastic bags in the Mediterranean Sea basin region would further reduce plastic leakage into the sea by another 50,000 tonnes per year.

“Governments, private sectorresearch institutions and other industries and consumers need to work collaboratively to redesign processes and supply chains, invest in innovation and adopt sustainable consumption patterns and improved waste management practices to close the plastic tap,” said Antonio Troya, head of the IUCN Centre for Mediterranean Cooperation which is based in Malaga, southern Spain.

Explore furtherMediterranean could become a ‘sea of plastic’: WWF

Choice – the Courageous Outrageous

Choice – the Courageous Outrageous

Michael Dwyer‘s Choice – the Courageous Outrageous Posted on , is about the difficult times that await us, humans in the future.

The human race is moving into very difficult times. We all know it but how to deal with the future is the question. We know climate change has started and it will increase in intensity. Australians remember the fear, pain and loss when 18 million hectares burnt in the summer of 2019 – 20. The west coast of the USA and Siberia are also suffering the same catastrophes. Bangladesh, China, India and states in Africa have suffered record flooding. The world temperature is rising. From an all-time high of 54.4°C in the USA’s Death Valley to an Antarctic temperature of 20°C recorded in January 2020, to the June temperature of 38°C inside the Arctic circle. We have the warmest temperatures now for the last 12,000 years.

Something needs to be done.

David Attenborough agrees. He said we have a manmade disaster on a global scale. When enough polar ice has melted, the fresh water added to the sea water will halt the ocean circulation streams. Then weather patterns will be lost as the fundamental rhythms supporting humanity disappear.

We can choose. We could do nothing and let Nature decide our future but Nature can be cruel indeed. Alternately we can make the transition to the future as painless as it is possible to make it. We can choose to accept the trajectory this planet is heading in; I didn’t say fix it, I said accept it. The dramatic changes happening will get worse so we either change the way we live and prepare for a new world or do nothing and let it annihilate every one of us.

Choice – the Courageous Outrageous
Figure1  Bushfires as a result of increasingly hot weather cause loss of biodiversity and decrease in our food supply

As the effects of climate change get worse, more land will become uninhabitable through drought, flood, fire and destructive storms. Desperate people will become refugees because to remain in their old countries means death, war or slow starvation. It has always been so, people have always moved to where the living is easier and the climate for growing food is good. Climate change refugees are already increasing. We, in our privileged first world rich countries will contend with uninvited refugees coming to live in our local neighbourhoods.

We have a number of issues we may choose to address. The first of these is a rising world consumer population. How many people are aware that a yearly increase of 2 percent means a mathematrical doubling of any population in a mere 35 years? Australia’s increase in 2019 was 1.2% (this means Australia’s Population will double in about 60 years.). World population is increasing annually by 1.1% per year (it will also double in about 60 years). And South Australia has a consumer population increase of .8% (doubling in about 90 years) contrary to so many who have been convinced that the state’s population is falling. This planet can’t handle today’s consumer population. And yet we are headed to double it in such a short time!

So many of us, particularly politicians and real estate developers, cheer the rising consumer population because it means jobs and wealth. But increasing consumption increases greenhouse gases which is changing the climate. Climate change is the big issue now. It’s not about who has a job and who can afford yet more consumer stuff, it’s about whether we can continue to live on this planet. If we choose to address climate change cleverly, there must be no increase or better still, a quick worldwide decline in the consumer population. I am assuming we still have the time to enact a fall in the consumer population growth but we may not have that luxury.

Let’s go back to the choice. Do we leave it to nature to make the calls or do we use our intellects to soften the blow? Instead of addressing the rising population we can address consumerism directly. (It is not the number of people that builds the climate change disaster, it is the greenhouse gases produced by the numbers TIMES the individual personal greenhouse gas productions of each of us). Consumerism requires an ever increasing input of raw materials; water, food, arable land, coal, oil and mined metals and minerals. And somewhere to dump the rubbish like the greenhouse gases. As David Attenborough and a thousand scientists say, we should choose to accept the reality that we are destroying this planet. And there is no planet B to migrate to.

Choice – the Courageous Outrageous
Figure2  Damage to Planet A. Economic growth requires increasing resource consumption

The 2020 Federal Government has put its hope in having a carbon neutral future by championing five technologies; clean hydrogen, energy storage, carbon capture and storage and soil carbon. With these it intends to maintain business as usual. In TV’s ‘Fight for Planet A’, Craig Reucassel suggests a more believable approach. We are able to live much more energy-frugal lives and avoid some greenhouse gas production. In one example in ‘Fight for Planet A’, he particularly notes that cows and sheep produce methane and do as much greenhouse gas damage as half our transport system. Like the Morrison Government, he argues we can still have our cake and eat it too, we can live as we are but be frugal about it. Both he and the Morrison government are wrong. We can’t have our cake and eat it too. We will eventually lose the cake and a lot more besides, if we make a half-hearted attempt to live exactly as we do now but with minor tweaks.

Choice – the Courageous Outrageous
Figure3  Recycling is not enough. At best it suggests to the public something needs to be done

Choice. The first step is to convince the public of the gravity of the situation. Mass advertising will inform and persuade both the public and business leaders of the need for the radical changes to be implemented. Jobs and businesses will be lost in the re-adjustment of our culture and way of living and life will get difficult. Wealth and opulence will be gone forever but though we may live materially poorer lives, with care we can be happy living more meaningful lives with a real sustainable future ahead of us. We can plan what the next two thousand years might be like.

Choice – the Courageous Outrageous
Figure4  Our culture must change. The financial profit goal and growth philosophy is no longer fit for purpose

If we accept the reality of a fundamentally changed future there are so many ways to proceed. I mention two physically and technically possible approaches.

Rationing of greenhouse gases at the consumer level is a good approach. This brings it home to the individual, not government and not the businesses. Rationing at the consumer level will unleash the power, innovation and creativity of every individual.

Income tax and other taxes as well as the Goods and Services Tax (GST) will be abandoned. They will be replaced by a system of Greenhouse gas rationing. The total number of greenhouse gas tokens issued per year to a person will be defined according to a ten year decreasing budget which will address the problem.

All consumers are issued with some greenhouse gas tokens reflecting the amount of greenhouse gas production tolerated that year. These tokens are used on all transactions and are passed from business to business like the GST currently operating. The number annually issued will decrease in order to match the ongoing greenhouse gas budget.

No greenhouse gases can be produced without the correct number of tokens. For example, when oil is sold to a business at the oil well, that business must pay tokens (and money) to the product producer. Those tokens are then passed back by the oil driller to the greenhouse gas token ‘bank’ and will be totalled against the year’s greenhouse gas allocation.

Those who are frugal with their greenhouse gas tokens will have enough tokens to sell to those who are desperate for more. When a person or business runs out of greenhouse gas tokens, more may be purchased from the central body though the price will always be higher than the publicly traded greenhouse gas token price. Businesses can borrow from the central token body however, the borrowing will still be matched to future overall token issuing i.e. greenhouse gas future production.

This approach will ensure greenhouse gas production falls to zero and further, then proceeds to remove existing greenhouse gases from the atmosphere such that the climate stabilises.

To illustrate the effect of these climate change responses upon the consumer, a taxi driver will pay greenhouse gas tokens via his bank card as well as fuel at the bowser and will charge the token cost to the person who needs a taxi ride via bank card. The persuasion to avoid greenhouse gases are clear, the taxi must run on little or no fossil fuels and the consumer will avoid the use of taxis as much as possible.

All industries will be examined for their greenhouse gas production. Cutting down trees and clearing land is responsible for greenhouse gas production and is to be measured. Beef and lamb are also huge sources of greenhouse gases. Therefore they will attract a greenhouse gas token cost to be paid by the consumer. As the animal leaves the farm, the greenhouse gas token cost will be levied and passed onto the wholesaler at the abattoir. The transport greenhouse gas token cost and the abattoir token cost will also be added. Clearly, the industry will shrink.

Overseas goods will be much more expensive when compared to locally made goods because they need more transport. The entertainment industry will become much more local and it will often be within walking distance. As will sports. Education will go largely online enhanced with local gatherings of students for tutorials.

Governments too pay the greenhouse gas bank for its greenhouse gas tokens. One obvious candidate for government is carbon sequestration. A new natural technique is worthy of investment. Greenhouse gases can be sequestered using the seaweed kelp, because it lives on CO² and grows at a prodigious two feet per day absorbing huge amounts of CO². Trees on land are not as good because they can be cut or burnt thus releasing the CO².

Figure5  Government can develop kelp farms moored over seawater which is kilometres deep.

The facility will have two functions, foremost, kelp grows absorbing CO². When dead the kelp sinks to the ocean floor away from oxygen and remains there safely for hundreds of thousands of years. additionally the kelp farm will be a source of seafood and edible seagrasses.

Our whole economy is geared to the building industry and economic growth but this effort will no longer make sense. Jobs everywhere will disappear. But new jobs will arise when the mechanised harvesters and industrial food production systems go, huge amounts of physical labour will be necessary to plant, grow and distribute food. Crops too will change to avoid the new greenhouse gas cost of fertilisers, chemical sprays and energy.

Is such a change in the fundamentals of our culture possible? We have Nature to thank for showing us it is certainly possible by bringing us the coronavirus pandemic. This crisis proved we are capable of killing fundamental sacred cows of our culture. True happiness does not come from bank balances and ever higher levels of consumption. Happiness comes from relationships and meaningful lives. The ‘impossible’ shutting down of the world economy was carried out because the corona virus threat was big enough. Now we have an even greater threat.

There will be happy spinoffs to the painful adjustments. People will become much more healthy and lose weight as happened in Cuba when they lost their oil supply in 1990. We eat far too much red meat for our health and red meat will become a rarity. Plus food will become cleaner when the chemicals and flavour enhancers in our diet are no longer necessary in the locally grown food. People of this future will ride bicycles or walk as a normal part of their lives. The pace of life will be less frantic and people will be more relaxed.

Figure6   Riding and walking will be a natural part of everyone’s day-to-day life

Some transport will be necessary and will run on solar batteries but there is still a greenhouse cost to all manufacturing to be priced in. The internet however must remain with its support infrastructure. This will ensure the innovation, ideas and information on the how and why of the culture change disseminates to everyone.

Are we prepared for a future such as this? The change will shock us. Visiting a relative in another town will be nearly as difficult an operation as it was two hundred years ago. Large cities will become either difficult or deadly to live in so people will move back to the neglected small towns.

We must aim for harmony to help with the ‘catastrophic’ experience of the changing times. Climate change refugees in their millions must be looked after and settled well in their new lands. Otherwise there will be bloodshed as mistakes are made and resources become short. New local cultures with respect for every individual must be encouraged. War, aggressive and exploitive philosophies, like those espoused by trumpists, must be guarded against.

There will be problems and difficulties whether we choose to do nothing or choose to be pro-active. But we have the knowledge now to make life much easier than it was two hundred years ago before the use of fossil fuels. Though there are many questions and details to be worked out, life may well become more enjoyable than today because it will be more meaningful.

Michael Dwyer
Qatar organizes International Hydrogen Energy workshop

Qatar organizes International Hydrogen Energy workshop

Hamad Bin Khalifa University (HBKU) of Qatar organizes International Hydrogen Energy workshop as reported by Gulf Times of Qatar as an attempt to not only inform on the country’s hydrogen energy opportunities but also to promote discussions regarding the nation’s strategy of its energy transition.

The picture above is of the Qatar Foundation Headquarters in Doha.

October 10, 2020

Qatar organizes International Hydrogen Energy workshop

Qatar Environment and Energy Research Institute (QEERI) at Hamad Bin Khalifa University (HBKU) organized an international workshop entitled The Hydrogen Energy Opportunity for Qatar.

The two-day event sought to inform stakeholders on the countrys hydrogen energy opportunities, promote discussions regarding a national strategy, and facilitate international collaboration in the areas of policy, business and research, and saw the participation of over 50 delegates from eight countries including Qatar, Japan, Australia, the United States, United Kingdom, Germany, France, and Switzerland.

Organized in line with QEERIs mandate to support Qatar in tackling its grand challenges related to energy, water and the environment, the workshop brought together leading international experts and national stakeholders from the public, private, academic and industry sectors. The Hydrogen Energy Opportunity for Qatar also reflected the unprecedented attention currently being paid to hydrogen energy as well as global efforts to harness its full potential.

The Principal Economist at QEERI and chair of the workshop Dr. Marcello Contestabile, explained: “There is a growing international consensus that hydrogen has a key role to play in a deeply decarbonized energy system. Conversely, there is also a need for large investments and international cooperation to ensure that hydrogen technology is scaled up and rolled out, and for markets to be created for the end product.

“Qatar is already playing a global role in the energy transition as a major supplier of the cleanest fossil fuel and is taking assertive steps to reduce the greenhouse gas footprint of the LNG it delivers through methane management and CCS. Hydrogen will allow the country to take this further and continue to profit from its endowment of natural gas in a low carbon world. To make the most of it, however, a joint approach at the national and international level is required.” he said.

He added: “The timeliness of the event is demonstrated by the very strong and enthusiastic response we received from international experts and national stakeholders alike. We provided a forum for the necessary conversations to begin and look forward to continuing to play our part supporting the development of a hydrogen ecosystem in Qatar.”

The Energy Technology Analyst in Hydrogen and Alternative Fuels at the International Energy Agency (IEA) Dr. Jose M Bermudez, said: “Hydrogen could play a key role in the energy transition, especially in hard to abate sectors where direct electrification will be challenging and sustainable biomass availability will not be able to meet energy demands. However, this will require to significantly expand hydrogen use and, at the same time, switch hydrogen production to low-carbon routes. This is not an easy endeavour and will require a lot of collaboration and coordination at all levels and, especially, at international level.”

He added: “The first step that countries should take is to develop their national hydrogen strategies that take into due consideration the evolution of the international landscape. Platforms like this workshop, bringing together local and international stakeholders, are ideal to stimulate the conversations and knowledge sharing that is required to develop strategies that will shape the role of hydrogen in a future clean energy system”

Highlighting the importance of such conversations among stakeholders, Dr. Marc Vermeersch said: “It is absolutely imperative that we combine forces and work collectively to achieve the targets set forth by the Qatar National Vision 2030. The Hydrogen Energy Opportunity for Qatar workshop provided a platform not just for knowledge sharing and learning global best practices, but also to discuss how each of us can contribute towards building a robust and efficient strategy for Qatar.”

QEERI is committed to assisting Qatar to diversify its energy mix, and focuses on sustainability research, development and innovation across its various centers including the Energy Center, Water Center, Environment and Sustainability Center, Corrosion Center and its Earth Sciences Program.

Climate Change as Systemic Risk

Climate Change as Systemic Risk

The CLS Blue  Sky Blog (COLUMBIA LAW SCHOOL’S BLOG) published on , this article titled ‘Climate Change as Systemic Risk’ written bBarnali Choudhury, professor of law at University College London.

Climate Change as Systemic Risk
Barnali Choudhury

Governments have tended to treat climate change as primarily an issue of environmental policy. Recent climate change-related events, ranging from hurricanes to forest fires to floods, and their devastating effects on the global economy, however, are gradually alerting regulators and governments to the risks of climate change to financial stability. This has spurred action in several countries, as well as globally, to address climate change as a financial risk. Nevertheless, the U.S. has been notably absent from these efforts despite being the home to several large financial markets.

Covid-19 has also highlighted the perils of ignoring seemingly non-financial risks. Perhaps this is the reason U.S. regulatory, and other, bodies are suddenly paying attention. In late September, the Commodity Futures Trading Commission became the first U.S. regulatory body to link climate change to financial stability. Its report concluded that “climate change [can] pose systemic risks to the U.S. financial system.” Months before, the Senate Democrats’ Special Committee on the Climate Crisis report reached a similar conclusion.

Despite the lack of wide-scale acknowledgement in the U.S., there is little doubt that climate change poses risks to financial stability and is poised to cause a shock to the economic system. The shock could arise from either a physical risk, such as a series of severe hurricanes or forest fires, or a transition risk, most likely in the form of policy changes to carbon emissions once global warming crosses a certain threshold. That shock could then impair the flow of capital, for instance, by stranding carbon-intensive assets, which could eventually threaten financial stability.

Yet the antidote has primarily been to recommend – but not mandate – climate change disclosure. Global initiatives such as the G20-appointed Task Force on Climate-related Financial Disclosures and the central banks-created Network for Greening the Financial System, for example, advocate for non-mandatory enhanced climate change disclosure for both financial institutions and corporations. BlackRock CEO Larry Fink has similarly touted the importance of improved climate change disclosure.

Disclosure certainly has many benefits. It enables companies to make early assessments of climate change financial risks, plan how to mitigate such risks, and make considering them routine. It also enables financial institutions and investors to price climate-related risks, allowing for a more efficient allocation of capital. However, studies have shown that compliance with climate change disclosure is weak, that some companies are using it to obscure poor climate change performance, and that it may not be providing adequate market discipline. Disclosure is therefore useful only as a complement to regulations that combat climate change.

What is needed are efforts to ensure economic stability while decoupling economic growth from greenhouse gas emissions. This could be achieved, for example, by introducing climate-change stress tests, which would gauge whether firms are able to withstand “the stress” caused by climate-change events. Based on these tests, firms could then develop a strategy for adapting to climate change. Notably, the Federal Reserve already has the authority to create climate-change stress tests under the Dodd Frank Act. All that remains is the will to do so.

A second possibility would be to work towards reducing financial institutions’ investments in fossil fuels. The four largest American banks have financed the fossil-fuel industry with over $811 billion in the last three years and earned the label of “de facto enablers of global warming”.

Still, efforts to reduce fossil fuel investments must proceed cautiously due to the size of those investments and the possibility that a sudden reduction could provoke a systemic crisis. One prudent approach would be to limit the amount of fossil fuel investments financial institutions can hold, with the aim of gradually decreasing that limit. A more cautious approach could involve limiting only new investments in fossil fuels. A third, even more cautious approach, would be to set targets for limiting fossil fuel investments and then allow firms to voluntarily reduce their investments while reporting their progress in achieving the targets through their management discussion and analysis reporting obligations. Regardless of the specific approach, Morgan Stanley and Barclays, both of which have committed to reaching net-zero financed emissions by 2050, recently underscored the feasibility of limiting fossil fuel investments.

Covid-19 has reminded us that we ignore issues that have solutions at our peril. It also provides a glimpse of the economic devastation that failing to prepare for climate change could cause. Post-pandemic, we can choose one of two paths to recovery: a return to business as normal or an approach that incorporates issues of climate change into economic measures.

This post is based on the author’s recent paper, “Climate Change as Systemic Risk,” that is here.