CERAWeek: CFTC chief says US financial system needs carbon price for “existential” risk

Highlighting climate change's financial sector impacts alongside a growing chorus of voices, the acting chairman of the US Commodity Futures Trading Commission (CFTC) Rostin Behnam said "climate change poses risks, existential in many cases," while participating on a CERAWeek by IHS Markit panel.

As a CFTC commissioner, Behnam led a 34-member committee that produced a September report on the policies needed to address climate-related risks to the US financial sector.

The committee's key recommendation was for the US Senate to ensure financial sector stability with a national carbon price.

"The committee unanimously agreed that a price on carbon is the best and quickest solution to address climate change in terms of bringing that externality into a cost that businesses and organizations will then work around … as an externality. It's simply going to be that in order to move capital towards better incentives, we need to price carbon," said Behnam.

The committee was made up of financial sector participants ranging from buy-side and sell-side firms to energy companies, agricultural companies, data providers, intermediaries, exchanges, academics, and environmental non-profits, said Behnam.

The committee's other recommendations concern the financial regulations that could be put in place now by regulators without Senate approval, said Behnam. These include requiring better financial disclosures around climate risk, creating a taxonomy for a common risk language, stress testing of institutions under different climate scenarios, collecting and using a whole range of data held by regulators and institutions, and building in protections for marginalized communities both domestically and internationally. The US' goals would have to be harmonized with those of other countries, he added.

Global carbon price

Carbon pricing and environmental regulations both have changed the energy system in Europe, where the carbon price offered under the EU Emissions Trading System (ETS) creates demand for low carbon services, such as those being rolled out by European energy companies.

Spanish major Repsol's 2019 net-zero declaration was the genesis of today's net-zero trend among integrated oil and gas companies. It is decarbonizing through two strategic "pillars": its renewable electrification in its hydropower and wind power business, and its activity in low-carbon liquid and gas fuels, such as advanced biofuels, Executive Managing Director of Energy Transition, Sustainability and Technology Luis Cabra told CERAWeek attendees.

Does the oil and gas major's plan to decarbonize require a carbon price? "The simple answer is yes, absolutely. These new technologies are more expensive today than the old ones that they will replace, and definitely we will need a carbon price," said Cabra.

A carbon price should be put in place worldwide to make the playing field equal, said Cabra. "I like the way that the Nobel Prize winner William Nordhaus described what would be an effective policy in order to tackle a systemic problem, like climate change, and he says something which is simple. The cost of decarbonizing should be equal for everyone. That means a carbon price. Ideally, a global carbon price," said Cabra. "We need to go to early adoption of measures as soon as possible, we need to start now, and increase the progressive stringency of the measures that are put in place."

Regional carbon prices could be the midway point on the path to a global carbon price. "The Paris Agreement is an attempt [at] global governance, but we are still far from having a global carbon price," said Cabra. "So we need to be pragmatic. My point here is that we should be ready to accept and to embrace something which is not a single global carbon price. And maybe we need to think that for a while we need to live under regional regulations, the United States, Europe, etc, then we need to think that maybe the regulation has to be sectoral, for example for the transport or the industrial sectors," he said.

"There are still a lot of things to do. And we are willing to cooperate, in this case in Europe with the European regulators, while moving into our global governance," said Cabra.

Carbon price offers simplicity

Cabra said that on the to-do list for regulators was putting certain principles into regulation, like technology neutrality. He advocated for leveling the playing field with import taxes like the EU's proposed carbon border adjustment tax so that a company in a country with a carbon price can compete with a company in a country without one.

He hinted that an increased carbon emissions focus offered a way to avoid the headache of duplicate regulations covering the emissions of the transport sector in Europe. "Let's look at the transportation [sector]. We have a regulation for cars that is based on tailpipe emissions, and then you get into trouble when you try to measure things just starting at the tailpipe," he said. "And you have also on the other side, some regulation for production fields. As well, you have an obligation to mix biofuels into the gasoline and diesel that you're selling. Sometimes these regulations are overlapping."

The energy industry would prefer that the upcoming revision of EU directives, with which the EU is targeting its net-zero emissions goals, focuses on making environmental regulations compatible with one another while cutting carbon dioxide emissions, said Cabra.

Posted 02 March 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit