A new report from the White House Council of Economic Advisors focuses on the challenges to the US Economy due to climate change and the likelihood that the federal government will be required to dramatically modify its spending priorities to avoid amplifying the problem going forward. The report suggests that climate change has upended the concept of risk in many areas of the US economy and that the federal government may be contributing to future costs by incentivizing the wrong behaviors in areas as far reaching as farm subsidies, flood insurance, firefighting, mortgage insurance and so on. In one example, the report cites evidence that private mortgage lenders are offloading loans with a high exposure of climate risk to federally back Fannie Mae and Freddie Mac.
The report warns that home buyers and corporate investors appear to be underestimating climate related risks in their markets in ways that could lead to instability in financial markets down the road. The recommendations in the report, some of which are already in the early stages of implementation, include providing better transparency about climate risk and encouraging financial markets to more accurately price that risk. It also calls on the Federal government to exert more pressure at the state level to be more careful about where and how people are allowed to build homes, businesses, and infrastructure projects. While many of these changes will take years to implement, the impact on financial markets could be material.