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Blog Post | October 14, 2020

How Biden's Treasury Department Could Fight Climate Change

2020 Election/TransitionClimateFinancial Regulation
How Biden's Treasury Department Could Fight Climate Change

For decades, environmental issues were widely considered the sole domain of the Environmental Protection Agency. But as the scope and scale of the climate crisis has become increasingly clear, there has been a growing recognition that climate policy touches practically every other issue, including the nation’s financial system.

The fossil fuel industry depends on financial institutions to survive. And banks, for their part, pull in big profits from underwriting climate disaster. That’s why, if Joe Biden wins in November, his pick for Treasury Secretary must be an aggressive advocate for climate action. The Treasury Department has untapped capacity to push financial institutions and insurance companies to take the risks of the climate crisis seriously. While his legislative proposals elicit proper close scrutiny, his choice of Treasury Secretary is arguably among Biden’s most important climate policy decisions. 

We’re already suffering the consequences of the country’s inertia on climate change. Environmental disasters exacerbated by climate change in the U.S. have led to over a trillion dollars in financial losses since 1980. The fossil fuel industry has seen over 240 bankruptcies since 2015, and the pandemic has only strengthened this downward trend. Under Trump, the Treasury Department and the Federal Reserve have helped to underwrite this downward spiral by continuing to finance troubled oil and gas companies instead of investing in the green energy and infrastructure required to prevent worsening climate disasters.

This is to be expected from a President who is barely willing to acknowledge climate change’s existence. But if Biden wins in November, we should expect much better. A Biden Treasury Department must take aggressive action to prevent and mitigate where possible, and otherwise prepare for the effects of climate change or else face a massive economic collapse on top of environmental disasters. Fortunately, Treasury has a number of tools at its disposal to ensure our economy remains stable in the face of a worsening climate crisis and an inevitable transition to green energy.

Biden’s Treasury Pick Must Use All The Tools In the Toolbox

As soon as he enters office, Biden should reinstate Obama-era efforts to combat climate change, including re-establishing the Treasury’s Office of Environment and Energy, which Trump disbanded, and recommitting to withholding financial support from global investments in new coal plants.

But a Biden Treasury can and must do much more to combat climate change than occurred under the tepid “leadership” of Tim Geithner and Jack Lew. First and foremost, a Biden Treasury Department should use its research capacity to assess the risk of climate change on the economy and financial markets. Treasury’s Financial Stability Oversight Council (FSOC), established by the 2010 Dodd-Frank financial overhaul law to monitor our nation’s economic stability, can perform a thorough analysis of the economic effects of both the physical damage caused by environmental disasters and financial losses resulting from a transition away from fossil fuels. Financial regulators, including the Office of the Comptroller of Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC) and the Federal Reserve, can then use this analysis to justify running stress tests to ensure financial institutions can endure losses associated with environmental disaster. 

FSOC can also coordinate with financial regulators to implement regulation that ensures financial institutions and insurance companies are integrating climate risk analysis in their investment portfolios. This could include a number of measures, such as requiring companies to submit detailed public disclosures on their exposure to climate risks and their investments in the fossil fuel industry and conduct regular stress tests and, and increasing capital requirements. If it deems fossil fuel investments to be risky, FSOC can even give approval to the Fed to require financial institutions to divest completely from these assets, or urge the SEC to require credit rating agencies to integrate climate risk into their enforcement standards, according to a report published by The Great Democracy Initiative.

As the leading shareholder of the World Bank and a leader in other global financial institutions, Biden’s Treasury Department should take a clear stance against fossil fuel investment on the international stage. This should include taking strong positions on emissions standards and spearheading efforts to invest in green energy development.

And of course the Treasury Secretary will help lead the administration’s development of a plan to end the deep recession. We need a Treasury Secretary who overcomes the Bill Clinton and early Obama era Democratic technocrat’s fixation on budget deficits that Brainard peers and colleagues like Robert Rubin and Tim Geithner exhibited. Austerity and the investments needed for a successful Biden Green New Deal are inherently incompatible. 

These measures and more will require a Treasury Secretary who is committed to embracing climate action as a key part of their goals in office. A few names have been floated as potential Biden picks, including progressives like former member of the Federal Reserve Board of Governors Sarah Bloom Raskin and Senator Elizabeth Warren, who have both made it clear that they would use all the tools available to a Treasury Secretary to combat climate change. 

Lael Brainard’s Less-Than-Inspiring Track Record on Climate Raises Questions

Also in the running is Lael Brainard, who has been one of the more influential, if under the radar, names in Democratic policy-making circles for the past two or so decades. The former Massachusetts Institute of Technology professor has served the past two Democratic Presidents, and played a key role in the development and implementation of trade deals that were widely panned by labor and environmental groups. Trade policy is climate policy, and Brainard’s trade policy is bad climate policy.

Currently a member of the Federal Reserve’s Board of Governors, Brainard has been touted as a savvy pick for Treasury Secretary in a potential Biden administration. Some columnists describe her as a consensus choice that would alienate neither the Wall Street elite nor the progressive base of the Democratic Party. 

In her role at the Fed, Brainard has pushed for sensible monetary policy that weighs unemployment rates at a similar level as inflation targets. Additionally, she has adopted a lonely position advocating for the continuation of strict regulatory measures that were introduced in the wake of the Great Recession. Brainard has also argued in favor of strengthening the Community Reinvestment Act, which is of great importance to low and middle-income neighborhoods. Her willingness to go to the mat on these issues has earned her genuine praise from progressives. Nor have these fights always just been symbolic; thanks to her, the Federal Reserve refused to sign on to the OCC’s initiative to “modernize” (read: gut) the CRA. 

Her energy on these fronts, however, makes her relative quiet on climate-related issues all the more conspicuous. Last year Brainard gave a speech outlining the impacts of climate change on monetary policy, financial stability, and community reinvestment. But when it came time to put words into action, she has come up woefully short.

The COVID-19 pandemic’s economic fallout has left the Fed as the arbiter at the center of practically every aspect of our economy, including the fossil fuel industry. When it chose to prop up that sector, Brainard went along with the wishes of Federal Reserve Chairman Jerome Powell. In fact, Brainard voted in favor of allowing the Fed’s Main Street Lending Program (MSLP) to expand its lending criteria in a way that would enable more loans to fossil fuel companies, prompting criticism from environmentalists, lawmakers, and policy experts

Brainard also supported expanding the Fed’s Secondary Market Corporate Credit Facility (SMCCF). Administered by BlackRock, the giant Wall Street asset manager, the Fed’s SMCCF has purchased the debt of fossil fuel companies invested in some of the most notorious pipelines, including the Dakota Access Pipeline. Since the Fed’s bailout, oil and gas companies have borrowed $100 billion from the bond market, according to a new report published by Friends of the Earth, Bailout Watch, and Public Citizen. The report also found that the Fed has purchased debt from 19 oil and gas companies, 12 of which have received downgrades on their securities from major credit rating agencies. 

These decisions not only buoyed an industry that is contributing to the destruction of our environment, but it also exposes taxpayers to massive financial losses. If Brainard was being true to her words in her 2019 speech, she would have used her vote to dissent in 2020. 

Although Brainard’s vote would not have effectively blocked these measures as she would have been in the minority, it would have been a critical first step in acknowledging that the Fed is heading in the wrong direction. This was a golden opportunity to highlight the Fed’s stunning apathy about the climate crisis. But it was one that Brainard missed.

And keep in mind that Powell, a Republican turned Obama appointee known for cultivating support in both parties, faces potential re-appointment in 2022. Angry dissents highlighting how he has accelerated the climate crisis should make re-appointment under a President Biden unacceptable. An energetic Brainard could likely compel some softening of Powell’s dangerous approach. 

If Biden wins in November, he will have no time to spare to shift our trajectory away from climate disaster. As the clock ticks, we simply cannot afford to have lukewarm leaders in climate-relevant positions who view a speech a year as a proportionate response to the crisis. Installing forward thinking, dynamic, and aggressive advocates for climate action must be a priority. And Lael Brainard’s opportunity to prove she is such a crusader is dwindling.

Pete Sikora is a Senior Advisor at New York Communities for Change.

Jeff Hauser is the Executive Director of the Revolving Door Project.

Miranda Litwak & Timi Iwayemi are researchers at the Revolving Door Project.

2020 Election/TransitionClimateFinancial Regulation

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