Former Treasury Secretary Rubin says U.S. underestimates the cost of climate risks

By Benjamin Hulac | 02/25/2015 08:11 AM EST

Robert Rubin, a former U.S. Treasury secretary in the Clinton administration, said yesterday that climate change is particularly pernicious because it affects so many distinct economic sectors, from budgetary planning and labor relations to agriculture production.

Robert Rubin, a former U.S. Treasury secretary in the Clinton administration, said yesterday that climate change is particularly pernicious because it affects so many distinct economic sectors, from budgetary planning and labor relations to agriculture production.

"I believe, as all of you do, that climate change is the existential threat of our time," Rubin said, addressing the Climate Leadership Conference in Arlington, Va. "The scientific community has long been unanimous."

Yet on Capitol Hill, and across American households, climate discussions reflect a sharply partisan and divided landscape.


Congressional Republicans have lambasted the proposed emission cuts from U.S. EPA’s Clean Power Plan as a "war on coal." Democrats have come under fire for proposing solutions that some think are too expensive.

Meanwhile, a January poll by The New York Times, Stanford University and Resources for the Future found two-thirds of Americans were more likely to back a presidential candidate who pledged to combat climate change, though almost half (47 percent) of Republicans said policies to rein in emissions would hurt the economy.

However, the economic costs related to climate change have become a common talking point among many economists, financial leaders and government departments that make billion-dollar decisions regularly.

Both Lawrence Summers, who led the Treasury Department from 1999 to 2001, and former Treasury Secretary Henry Paulson — a Republican nominated to the post by President George W. Bush — have publicly called for putting a price on greenhouse gas emissions.

Conservative thinkers, too, such as Gary Becker and Greg Mankiw, who advised George W. Bush and later Republican presidential candidate Mitt Romney, have endorsed carbon fees.

In June 2012, under Secretary Timothy Geithner’s watch, the Treasury Department released a climate change adaptation plan, and the department’s current secretary, Jacob Lew, said at the Brookings Institution in September that delaying climate action would increase the cost of future climate policies by about 40 percent with each passing decade.

"The longer we wait, the greater the cost," Rubin added. "It seems to me that most Americans have yet to internalize the magnitude or urgency of this problem."

Shifting climate to the front burner

It is often said that economics varies from other intellectual analysis, since it cannot be practiced in a vacuum — economic situations cannot be replicated and the risks vary from one economy to the next.

However, failing to scrutinize and plan for the risks climate change presents — even the "tail risks," which describe the edges farthest from the center of a bell curve and denote the catastrophic events least likely to occur — would be irresponsible, Rubin said.

Rubin, who spent decades working in financial and investment banking roles before his tenure at Treasury, is part of the Risky Business Project, an organization focused on examining climate change through a business-minded lens and quantifying the risks rising greenhouse emissions pose to private enterprise in particular. The project — founded by Paulson, former New York City Mayor Michael Bloomberg and Tom Steyer, a former hedge fund manager turned environmental advocate — will release a new report at the end of the month focused on California, said Kate Gordon, the organization’s director.

"The really frightening issue, in my view, were the low-odds cases," said Rubin, referencing the worst-possible climate scenario according to the data generated from Risky Business Project reports. "I came to the conclusion that these probabilities weren’t really that low."

He first learned about global warming on a walk through the West Wing with former Vice President Al Gore, who, Rubin recounted, argued that policymakers and government leaders could not afford to underestimate the costs of climate change. Despite his talk with Gore, Rubin said, climate change faded from his thoughts as it has for most of the public. "I put the issue on my back burner and went about my business," he said.

Then, four years ago, Tom Steyer, a former hedge fund manager and founder of the NextGen Climate political action committee, rattled him on the issue. "I soon became deeply alarmed," Rubin said.

An ‘inadequate and misleading’ way to measure GDP?

The federal government should repeal subsidies of established energy companies and financially support non-fossil-fuel energy industries, and should revisit how it assesses gross domestic product, the standard benchmark used to measure a nation’s economic health, he said.

GDP in its current form, according to Rubin, is "inadequate and misleading" because it omits negative externalities — phenomena that occur when market forces, like consumer demand and government regulation, make a good or service less expensive to the buyer than the cost incurred by society.

Investors and savers alike should have a clearer view into the companies in which they have put their money, Rubin told the audience. Public companies should be required to disclose their "stranded asset" risks — losses that could happen if an oil company, for example, cannot reach its petroleum reserves for any reason — as well as any risks due to climate change and government regulation, he said.

Climate change should be treated as any other business liability, Rubin said, adding that allowing limited and opaque information from the private sector about the total costs of climate change triggers poor economic choices.

"The reality is that bad data leads to bad decisions," he said.

Since 1933, the Securities and Exchange Commission has required companies that issue securities to disclose "material information" — facts about the firm that could affect firms’ stocks — to the public.

In February 2010, SEC issued guidance to public companies "on certain existing disclosure rules that may require a company to disclose the impact that business or legal developments related to climate change may have on its business."

The guidance covers "a company’s risk factors, business description, legal proceedings, and management discussion and analysis," according to a statement from the agency.

Asked what role central banks and governments’ other financial regulators should play in addressing climate change, Rubin cited the SEC law from the 1930s.

"Well, I think climate change risk is material information," he said. "I think it would be highly useful for the regulators to do that."

Central banks make long-term projections and risk assessments, Rubin noted, saying "it would be interesting if they tried to apply themselves" to climate change. "That would be a logical thing to do," he said.

Soon the Risky Business Project, Gordon said, will make a push for firms to disclose their climate risks.

"Doing nothing is radical risk-taking," Rubin added, quoting a favorite phrase of Paulson’s.