Just hours after his inauguration, President Joe Biden made good on his campaign promise to have the U.S. rejoin the Paris Climate Agreement. The president has already set ambitious environmental plans, including zeroing-out CO2 emissions in the U.S. power sector by 2035.
Still, the question remains: How does Biden plan on achieving these goals?
Lots of speculation has surrounded the U.S. ahead of the United Nations’ global climate summit, the 26th UN Climate Change Conference of the Parties (COP26). President Biden is expected to release an aggressive strategy for cutting greenhouse gas emissions.
The plan is anticipated to include a short-term target for greenhouse gas reductions, with some experts projecting Biden to commit to a 50% reduction in nationwide emissions by 2030. Advocates of this lofty goal argue such a strategy would be the bare minimum requirement for the U.S. to achieve its long term goal of net-zero emissions for the entire economy by 2050.
Much of Biden’s plan is contingent on Congress, as is now being seen. The president hopes to pass an expansive $3 trillion infrastructure bill that’d fund projects needed to accelerate the shift to cleaner forms of energy. Yet regardless of how effective the bill may or may not be, expansive legislation in any form is likely to face opposition.
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Senate Minority Leader Mitch McConnell has already expressed his concerns over the bill acting as a “Trojan horse” for tax increases. Other opponents argue that massive environmental reform will hamper economic recovery and place the U.S. at a disadvantage in international competition. Sen. John Barrasso, R-WY, has warned that Biden’s ambitions would, “set punishing targets for the United States, while our adversaries keep the status quo.”
To this point, Barrasso may not be wrong. U.S. rivals such as Russia and China have done next to nothing to reach meaningful emission targets since signing the Paris Agreement in 2015. With Democrats holding only a slim majority in both the House and Senate, It’s doubtful that the bill will pass both chambers in its full capacity — if at all.
Nevertheless, while public policy will be crucial for reaching long-term global emission goals, the private sector may be the necessary force for fighting climate change in the short term. Every day, new technologies are making a greener future possible. Carbon-negative processes, broad-spectrum solar panels, advanced Lithium-ion battery capabilities and 5G-based smart grids are all powerful tools that’ll define a future green economy.
As always, however, there’s a catch. It turns out that research and development for next generation technology isn’t free. To transform the technology of tomorrow into the reality of today, green tech industries are going to require funding, and lots of it.
Banks commit to cutting emissions
This is where the commercial finance industry steps in. Since the fall of 2020, major U.S. financial institutions including Bank of America, Citi, Goldman Sachs and Wells Fargo have all announced commitments to net-zero targets for their financial activities.
This shift is potentially a game changer. The financial sector is one of the most important facilitators of our economy. Need proof? Consider the fact that U.S. banking and asset-management corporations controlled over $51 trillion in assets by the end of 2018. Major financial players taking an active role in the climate solution could make all the difference.
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The shift in interests comes as a response both to government policy following the Paris Climate Agreement and the macroeconomic trends that have followed the pandemic. Leading financial firms have taken notice of the fragility of global supply chains and are worried extreme weather events will expose their assets to future risks. Together, these phenomena have drastically changed the way financial institutions value assets.
Financial leaders are no longer viewing sustainability as a compliance exercise but rather as an opportunity to seize significant upside in an ever evolving economy. As former head of the Bank of England Mark Carney puts it, “the transition to net zero is creating the greatest commercial opportunity of our age.”
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Government follows private sector climate push
While some major players in the financial industry are beginning to take it upon themselves to fight climate change, additional action by the federal government could serve to expedite this process. The U.S. financial system has always required publicly traded companies to disclose risks to their business. Such policy promotes transparency both for asset managers and the millions of everyday Americans who invest via the stock market.
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When it comes to risks posed by climate change, however, companies aren’t required to report. Instead, the option is voluntary, inevitably leading to companies withholding crucial information and releasing misinformed business prospects.
In recent weeks, the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the House Financial Services Committee held a hearing to discuss the “Climate Risk Disclosure Act of 2021.” If passed through both houses, the bill would require all publicly traded organizations to disclose climate-related risks in addition to their standard risk disclosure. Such a policy would amplify the attention asset managers and investors pay toward climate risk.
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Moreover, mandatory climate disclosures would incentivize companies to better analyze their exposures to climate risk and develop effective strategies for climate risk management.
Additional federal action could come in the form of carbon credits. Carbon credits are permits that allow companies to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of a mass equal to one ton of carbon dioxide. If a company doesn’t produce enough emissions to use up all of its credits, it’s allowed to sell its excess credits to another pollution emitting company, thus completing a process known as “cap and trade.”
In recent weeks, top finance trade groups have begun advocating for a national carbon credit system in the U.S. As Tim Andrews, president of the Institute of International Finance, explains “for markets to function, you’ve got to have a price on carbon.”
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A policy document released by the IIF, along with 10 other financial trade groups, argues that carbon-pricing can, “spur development of climate-related financial products, promote more transparent pricing of climate-related financial risks, and can inform and help scale key initiatives like voluntary carbon markets.”
While the Biden administration continues to aim big, private industry has also taken an active role in the fight against climate change.
If the United States is going to reach its ambitious carbon emission goals it is going to require effective coordination from both the public and private sector. The best policies will be ones that align sustainable development with pro-business solutions.
Ben McKay is a junior economics and political science double major. Contact Ben at firstname.lastname@example.org.
Disclaimer: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours. Madison Business Review editor James Faris is a long-term investor in the Financial Select Sector SPDR Fund (XLF), which is an exchange-traded fund covering the financial sector of the S&P 500. I wrote this article myself, and it expresses my own opinions. I’m not receiving compensation for it, and I have no business relationship with any company whose stock is mentioned in this article.