April 4, 2017
What Financial Markets Can Teach Us About Managing Climate Risks
The Trump Administration is moving to reduce the way the federal government values future climate damages, but financial markets tell us this is a risky strategy.
By Michael Greenstonevia The New York Times Upshot
Say an investor had only two options of what to put money in: gold or stocks. Gold has an average annual rate of return of 3 percent, while the stock market delivers a healthier 5 percent. Which should the investor choose? Seems simple, right? Take the higher payout.
But annual averages can be deceiving. In fact, these two have very different risk profiles over time. Stocks tend to pay off steadily in good times when the economy is growing and we are relatively flush, but to decline in bad times. Gold might pay off next to nothing for years at a time and present real opportunity costs, but it delivers handsomely during unexpected economic crises.
Investing in gold is a type of insurance policy against tough times. Financial markets are revealing that investors are willing to accept a lower average return for that insurance, precisely because it helps to manage risk.
Last week, President Trump signed an executive order about climate change that runs counter to this insight from financial markets. The headlines rightly highlighted the dismantling of climate policies like the Clean Power Plan. But buried in the details is an administrative tweak to the most important climate measurement in the federal government’s climate toolbox: the social cost of carbon...