Rubin: Speech at the Climate Leadership Conference

On February 24, 2015, former U.S. Treasury Secretary and Risky Business Committee Member Robert Rubin spoke at the Climate Leadership Conference in Washington DC on the economics of climate change and the cost of inaction. His full remarks are below.

I’m here today because I believe, as all of you do, that climate change is the existential threat of our age, poised over time to severely or even catastrophically affect life on earth as we know it. The scientific community has long been all but unanimous in its agreement that global warming poses an urgent threat. But as to public opinion, it seems to me, there’s a disconnect. On the one hand, according to a widely-discussed poll released last month by the New York Times and Stanford University, an overwhelming majority of Americans support government action to curb climate change. On the other hand, too many Americans have yet to internalize the magnitude of the threat or its urgency, and they still view global warming as a future problem, one that can be deferred as we tackle what are seen as more immediate threats.

But you and I know that climate change must be addressed now. Damage resulting from climate change will increasingly affect almost every aspect of American life: water supplies, public health, agricultural production, coastal regions, fiscal conditions, and in these and so many other ways, our economy. The longer we wait, the greater the challenge we’ll face and the more costly the response will be. Simply put, the cost of inaction is massively greater than the cost of action. That’s why it’s imperative that we act now rather than defer action to some later date.

Each of us, I would guess, has come to our deep concern about climate change in a different way. I am going to proceed in my remarks by sharing with you a few experiences that shaped how I came to view this as the defining issue of our era. My goal is not to highlight my personal odyssey, but to demonstrate the pressing need for engagement on climate change from the public, the business community, and most important, from governments, both in the United States and globally.

I first became aware of global warming when I served as President Clinton’s economic adviser in the White House, before going to the Treasury Department. After a meeting in the Oval Office, Vice President Gore asked me to walk down the narrow, low-ceilinged hall to his West Wing office, and he said something I’ll never forget. This was more than 20 years ago, and Gore was already convinced that man-made global warming was a real and dangerous phenomenon. The science, however, was less advanced then and more uncertain. Gore said that we couldn’t afford to take the risk that he was wrong, because if he were right, and we failed to act until the evidence was inconvertible, it would be too late to stop catastrophic climate change effects.

Gore’s insight about the cost of caution in the face of uncertainty remains powerfully relevant today. For example, there are those who favor putting off a strong climate change response in the hopes that technology will someday develop to physically remove greenhouse gases from the atmosphere. I have as much faith in the power of innovation as anyone, but we cannot risk our economic future – and environment – on a possible silver bullet.

In the years after Vice President Gore spoke to me in the West Wing, I did what most people seem to do when they first recognize that climate change is a real risk. I put the issue on my intellectual back-burner and went about my business. My epiphany came about four years ago when Tom Steyer, a friend whom I spoke to frequently about business and finance, started hammering on me about the urgency of responding to climate change. I grew sufficiently concerned to ask serious scientists I knew about what they thought, and to do some reading, and I soon became deeply alarmed.

And that leads me to the second experience I want to share with you. About a year ago, Tom came to my office and described a project that he, Hank Paulson and Mike Bloomberg were founding, called “Risky Business,” and asked me to be part of it. Their idea was to do rigorous research to estimate the risks of climate change to various sectors of the economy and regions of the country. The studies were to be peer reviewed to provide validation of objectivity and rigor. This seemed to me a powerful idea, and I signed on. By quantifying the risks of climate change rather than doing a cost/benefit analysis of specific policy proposals, the project would create a framework that demonstrated the severe risks of inaction without getting sidetracked by the political and substantive issues around possible responses. The point was that if the risk case could be persuasively made, then the threshold question of whether to address climate change could be set to rest, and the debate could turn to responses and cost/benefit.

One conclusion I took away from the Risky Business project is that the base case – that is to say, the most likely case – for U.S. climate impacts involve severe effects over time on many sectors and many regions. But, while these are serious or severe effects, the really frightening danger is the tail risks. By that I mean the lower probability events that, if they occurred, could be vast multiples more severe than the base case. And my impression, at least, is that those lower probability events may well have significant probabilities of happening; that is to say, in more technical language, these are fat tails, not thin tails.

If Hank Paulson were here, he would add one more point that the study didn’t make. Hank says that if you look back at earlier projections of climate change effects, a lot seems to be happening more rapidly than had been expected. He likes to say that when it comes to climate change, “doing nothing is radical risk taking,” which is the point Al Gore made to me twenty years before.

My involvement with the Risky Business project crystallized my sense of urgency. Unfortunately, as I’ve said, that sense of urgency is still almost entirely lacking in the public arena, except among a small number of people who have really immersed themselves in this issue. And that brings me to the final experience I want to share with you. Not long ago, I met with a friend of mine who graduated at the top of his class from one of the nation’s leading business schools and is now a successful private equity fund manager. When I mentioned climate change, he acknowledged its importance, but said there are other issues that are more pressing and that we could wait to deal with climate change for thirty years or so. I explained that the buildup of greenhouse gases is cumulative and irreversible, because the decay rate of CO 2 in the atmosphere is hundreds of years, so that what we do every day will affect us, and the planet, for centuries to come. But I don’t think I made a convert. And this points to a fundamental problem. I speak at conferences and on panels quite a bit, and I frequently raise climate change as the existential issue of our age. My guess is that most people in those audiences acknowledge its reality, but the questions after my remarks almost never concern climate change. There is an awareness of the challenge climate change poses, but no internalized sense of urgency.

A lot of people have ideas about how best to create that sense of urgency. Even among those of us involved in Risky Business, there’s a diversity of views, with some favoring political action and others focused on increasing awareness in particular sectors, like agriculture and real estate. My own view is that a major step would be to treat climate risk like other financial and economic risks, so as to put it squarely in the focus of the investment managers, policymakers, and companies, for whom it’s now a backburner issue.

Last summer, I wrote an Op-Ed for the Outlook Section of The Washington Post, in which I argued that what we measure has an enormous effect on the decisions we make. In this context, I proposed several reforms, for budget analysts, for investors, for companies, and for the government, that would reform measurement to reflect climate change and thereby better inform decision-making, and hopefully more people to internalize a sense of urgency.

First, I believe that gross domestic product – the standard measure of national economic health – is inadequate and misleading because it fails to account for significant externalities, such as those emanating from greenhouse gas emissions. A parallel statement of GDP that reflects climate change externalities could better inform decision-making by policymakers and lead to better decisions. Bad data leads to bad policy.

Second, investors should demand that companies disclose the potential costs of the carbon they emit that they might someday be required to absorb, the assets that could be stranded because of future climate change regulations, and the effects that climate change could have on a company’s business—for example, a hotel chain with ocean-side resorts, or a utility with power plants vulnerable to extreme heat impacts. They would enable investors to make more fully informed decisions, and that might in turn affect corporate decision-making.

Third, future fiscal spending to deal with climate change is likely to be enormous and should be included in the federal government’s fiscal projections, at the least as a standard alternative forecast. The federal government often provides emergency aid when crises occur – for example, Super-storm Sandy or major health crises. And, crises of many sorts are likely to occur with increasing frequency due to climate change.

To cover the costs of dealing with these crises, we will have to increase the deficit; raise taxes; or significantly cut spending on defense, our social safety net, and public investment including infrastructure, education and basic research. Which means, that whatever your public policy views may be, you should care about the costs of coping with climate-related damage. By forcing policymakers to recognize likely future expenditures — and the trade-offs they’ll require— we may increase political support for policy changes now.

President Obama recently signed an executive order requiring federally-funded construction projects to take into account the flood risks linked to global warming. And, rather than base the flood risk estimates on historical data, contractors have been told to estimate based on the best available climate science. I think this is a sensible, economically pragmatic proposal, and the private sector should follow the White House’s lead and account for climate risks in decision-making.

Providing better information about the true costs of climate change can contribute importantly to catalyzing response to the risks. But it’s only one step. The ultimate policy requisite is pricing carbon. And, broadly speaking, that could take the form of either a cap-and-trade regime or some kind of carbon tax. A tax could be made revenue-neutral and distributionally-neutral by progressively returning the proceeds to taxpayers, though there will still be winners and losers. We should also repeal subsidies for mature energy sources to level the playing field for newer, non-carbon sources of energy, such as wind and solar power, and consider incentives to speed our transformation to a post-carbon economy. Lastly, we need to greatly increase public investment in basic and applied research, and in pilot programs, that address climate change mitigation and adaptation.

The United States alone, of course, cannot adequately address global climate change. But our actions can help spur global response. As we all know, the Chinese are concerned about climate change and are intensely focused on environmental issues more generally. The recent agreement forged by President Obama and Chinese President Xi is a major breakthrough, and it might not have occurred without the actions of the Obama Administration preceding it. Hopefully this agreement will provide momentum to spur similar accords with the world’s major economies.

The politics of climate change are obviously extremely difficult. Both as to those politics, and as to engaging the private sector, all of us can make a difference. The people in this room have internalized the risks we face, and you are in a position in our economy, our political system and our society to influence others. Businesses cannot only get their own house in order on climate, but business leaders are often opinion leaders in their communities and with the media and with elected officials. The key is to assemble the convinced, and then work together to persuade the unconvinced. That’s why meetings like the Climate Leadership Conference are so important. I am grateful for the opportunity to speak to you today, and I thank you for listening.

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