A carbon price is widely considered the most economically efficient way to incentivize decarbonization. Large U.S. business trade groups such as the Business Roundtable and the Chamber of Commerce have stated they favor carbon pricing with the former explicitly supporting a carbon price, and the latter issuing a more general statement that it “supports a market-based approach.” Besides economists and the business community, top trade associations in the financial sector have also recently endorsed a carbon price.
Last Thursday, top trade associations in the financial sector called for carbon pricing in the United States. The Institute of International Finance (IIF) released a document with ten other top financial trade groups outlining principles they have developed for the United States to transition to a low-carbon economy. One of the principles listed is “price carbon and leverage the power of markets.” American Bankers Association, Financial Services Forum, and Investment Company Institute are among the trade associations that called for U.S. carbon pricing.
According to the published policy document, these top financial trade groups “support the use of market-based mechanisms,” and that “carbon pricing can also 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.”
Last December, another major trade group in the financial sector, the Global Financial Markets Association (GFMA), also called for carbon pricing. The research report was developed jointly by GFMA and the Boston Consulting Group and advised by member firms, including JPMorgan Chase, Morgan Stanley, Bank of America, and Barclays. The first recommendation outlined in the report is that “governments establish legally enforceable, comprehensive, and sufficiently high levels of GHG-emissions pricing (“carbon pricing”) mechanisms such as a GHG tax or trading schemes.” A lack of carbon pricing, based on the report, is “adversely impacting the business case for investments that are required to accelerate the transition to a low-carbon economy.”
The GFMA-BCG report cited from the U.S. Commodity Futures Trading Commission (CFTC) report Managing Climate Risk in the U.S. Financial System, which analyzes the climate risks imposed on the U.S. financial system and the critical importance of a carbon price for mitigating those risks. According to the CFTC report, “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions.”
Not only the top trade groups but also large investors in the financial sector recognize the importance of accounting for climate risks in financial products and services. A new survey by the finance company MSCI shows that 31 percent of the surveyed large investors with over $200 billion of assets believe that climate risks are top trends impacting investments over the next three to five years.
It is heartening that an increasing number of top financial institutions and trade groups support an economy-wide carbon price and are working towards mitigating climate risks. The fact that economists, the business community, and the financial sector have called for carbon pricing shows that it needs to be given serious consideration as policymakers design an overdue national climate policy.