The 2008 Financial Engineer of the Year, Robert Litterman, Ph.D., proposed a solution to the world’s ongoing climate crisis at the Thomas J. Dodd Research Center on Thursday.
After a 23-year-long career at leading investment banking firm Goldman Sachs, Litterman now serves as a vice chair on the World Wildlife Fund Board of Directors. Last week, he was invited to speak at the University of Connecticut’s Konover Auditorium as part of the Edwin Way Teale Lecture Series, “Nature and the Environment.”
Litterman’s contribution to the series, titled “We are not pricing climate risk: A Wall Street perspective,” blended his professional experience in research and risk management with the imminent threats of climate change.
Litterman first explained that the job of a financial risk manager is not to minimize potential dangers to a corporation’s profitability, but to measure them monetarily. He recalled that one of his regular jobs on Wall Street was to predict how much money the company would lose given a worst case scenario, but, as he then pointed out, the most devastating effects of climate change are more difficult to measure.
“When talking about climate change … there is no worst case scenario,” Litterman said.
Litterman believes the solution to the world’s climate crisis is to set a price on the emission of carbon into the atmosphere, and, by doing so, discourage businesses from further relying on the burning of fossil fuels.
The Carbon Pricing Leadership Coalition, comprised of 34 national governments and more than 160 private sector organizations, describes carbon pricing as putting a price on CO2 and creating financial incentives for reducing emissions to hold emitters responsible for the serious effects of adding greenhouse gases to the atmosphere. Such effects include global warming and air pollution.
“We are at a dead end, and this is the way out,” Litterman said.
To explain the world’s urgent need for carbon pricing in this ‘dead end,’ Litterman cited the United Nations’ Intergovernmental Panel on Climate Change’s special report from October 2018.
After the 21st Conference of the Parties and the adoption of the Paris Agreement in December 2015, the Intergovernmental Panel on Climate Change (IPCC) was invited to write a special report on the projected effects of a 1.5 and 2.0 C rise of the global temperature above pre-industrial levels.
The IPCC’s special report found that global temperatures had already increased by 1.0 C above pre-industrial levels, and that the world could expect to reach an increase of 1.5 C by the year 2040.
One major difference between 1.5 and 2.0 C rises is the effect on coral reefs. With the greenhouse effect of carbon emissions and no strict disincentive for the burning of fossil fuels in place, the IPCC reported with high confidence that 1.5 C of global warming would cause the loss of at least 70% of coral reefs, and 2 C would bring the loss of more than 99% of coral reefs.
According to Litterman’s projections, had the world began pricing carbon emissions in the 1980s, global temperature increases would have peaked this year at around 0.7 C. He claims that if carbon pricing were to be enacted immediately, the world would experience a maximum increase of global temperatures in the year 2080 at close to 1.8 C.
Litterman’s projections also showed that if the world waits until the year 2030 for carbon pricing to take effect, the globe will warm by more than 2.0 C and the loss of more than 99% of coral reefs will be inevitable.
“To me, losing greater than 99% of coral reefs is an absolute catastrophe that’s just one dimension of this experiment that we’re doing on our planet, and we’re just six or eight years away from that being inevitable. That’s why it is a climate emergency. That’s not hyperbole, that’s where we’re at,” Litterman said.
Existing carbon emission prices are “much too low,” according to Litterman. He explained that the average cost of carbon emissions set by carbon pricing systems is about $2 per ton, but that the average does not accurately represent carbon pricing incentives worldwide because it “ignores all of the much greater incentives to subsidize the production and consumption of fossil fuels.”
“If you aggregate all of those incentives, in both directions, it’s about $-5 per ton,” Litterman said, proposing prices 20 times greater than this average for the U.S.
Litterman sits on the Climate Leadership Council Board of Directors that sponsors the Carbon Dividends Plan to start pricing carbon emissions at $40 per ton. According to the council, if implemented in 2021 and increased by 5% yearly, the plan would cut American carbon emissions in half by the year 2035
The Carbon Dividends Plan is supported by both Republicans and Democrats along with “virtually all of the Nobel Laureates [and] over 3,000 economists,” and would return revenue to the American public. According to the Climate Leadership Council, “a family of four will receive approximately $2,000 in carbon dividend payments in the first year.”
Though Litterman expressed the inadequacy of existing costs of carbon emissions, calling the United States “the heart of the problem today,” and the severity of the world’s position, he shared some hope for the future.
“This is clearly a global problem,” Litterman said. “And the world is ready to move forward.”
The U.S. Senate is making progress with its bipartisan Climate Solutions Caucus, made up of six Democrats, six Republicans and “at least a dozen more in the senate who are very supportive.”
Even companies like BP, the more than a century old energy company, are committing to more sustainable futures simply because they think it’s the right thing to do.
“I would say that there is a lot of movement going on. I’m very optimistic that we will get a carbon tax very soon,” Litterman said.
Litterman reported that, globally, Europe is already pricing carbon emissions, and, after experimenting regionally with carbon pricing, China is working on bringing their system to a national level. In addition to the Carbon Dividends Plan, Litterman said the U.S., alongside Europe, is considering the implementation of a board of carbon adjustment which would prevent domestic industries from moving abroad by taxing imports from countries with no carbon pricing system.
Litterman hopes that boards of carbon adjustment in the U.S., Europe and China would pressure outside trading partners to adopt similar carbon pricing systems, ultimately “harmonizing the incentive to reduce emissions.”
Professor Robert C. Bird called UConn a “fertile ground” for Litterman’s ideas, and said that the “movement to stop climate change is fortunate to have [him] as an ally.”
Conner Caridad is a campus correspondent for The Daily Campus. He can be reached via email at email@example.com.