Justin Guay is director for global climate strategy at the Sunrise Project.
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On the heels of a historic election that saw Joe Biden use climate as the single biggest motivator to turn out the youth vote in record numbers, expectations for action are high. But with the fate of the Senate's partisan makeup still up in the air, what can President-elect Biden do to advance his climate mandate if an obstructionist Senate stands in his way?
As it turns out, one of the most powerful pieces of climate change legislation the Biden administration will need has already been passed: the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This legislation, known for creating the Consumer Financial Protection Bureau and other public safeguards against financial wrongdoing, also empowers key agencies including the Treasury Department, the Federal Reserve and the Securities and Exchange Commission to limit systemic risks to financial stability.
The largest systemic risk of them all, climate change, is driven by reckless investments in fossil fuels, exactly the kind of speculative activities Dodd-Frank was designed to bring to a halt in order to prevent a repeat of the 2008 financial crisis. That means Dodd-Frank gives the Biden administration the power to inhibit or prohibit investments in fossil fuels — a power that could be critical for achieving his pledge of delivering a carbon-free power sector by 2035.
Taken to its logical conclusion, the law could give the administration authority to increase capital requirements for banks loaning money to fossil fuel projects, or even to institute “credit guidance” policies such as those imposed during World War II to direct industrial policy. That could play a major role in redirecting climate-unfriendly investments such as the estimated $100 billion in new natural-gas plants being planned by utilities across the U.S., which if built could make Biden’s carbon-free goal impossible.
But the struggle to provide a Biden administration with the political space to wield this kind of power has only just begun. Industry is lining up on one side, with the climate community on the other. It’s a battle that few would have predicted even just several months ago, but it's already rapidly heating up.
Climate change poses a grave risk to the financial system
To understand why a Biden administration can implement Dodd-Frank authority on ”day one,” it’s important to review how far the world has come in recognizing the systemic financial risk posed by climate change. It was just a few short years ago that Mark Carney, then head of the Bank of England, gave a now-famous speech on climate-induced Minsky moments — sudden and drastic market collapses brought on by speculative activity — as he advocated for greater action on climate change. His argument was clear: Unless we act on the threat climate change posed to the stability of the financial system, we are in serious trouble.
For investors, one of the greatest risks is losing money on coal, oil and gas infrastructure that is forced into early retirement due to the inevitable policy response to climate change and a resulting clean energy transition (referred to as “transition risk”). However, even absent a concerted climate policy, the U.S. has seen a wave of bankruptcies across the oil and gas industry, and the continued secular decline of the coal industry despite desperate attempts to reverse its fortunes.
Other systemic risks loom for insurance, mortgage and other key financial markets from the extreme weather events driven by climate change, according to a September analysis from the Trump-appointed financial regulators at the Commodity Futures Trading Commission.
Graham Steele, the director of the Corporations and Society Initiative at Stanford, argued in a January report that a mounting body of evidence clearly establishes the authority for a Biden administration to use Dodd-Frank’s authority to act to mitigate climate risk.
“That climate is a systemic risk is no longer a question,” Steele said in an email. “We have mounting evidence, a growing consensus among financial regulators around the world already taking action, and the legislative authority to act.”
The kindling on which the next crisis will burn
Despite this evidence, important entities tasked with maintaining financial stability and managing these risks have largely abdicated this responsibility during the Trump administration.
A glaring example is the Federal Reserve’s decision to prop up financially vulnerable fossil fuel companies using the billions of dollars appropriated by Congress to backstop emergency bond-buying programs meant to avert a global economic recession amid the COVID-19 pandemic. Independent analysis from Influence Map showed that the bonds the Fed was buying were actually overweight on fossil fuel companies — the same generators of systemic risk that Carney was so concerned about.
“The Fed's interventions in the bond market sent a problematic signal,” Alexis Goldstein, senior policy analyst at Americans for Financial Reform, said in an email. Of the Fed’s portfolio of corporate bonds, nearly 20 percent, or about $25 billion, are from energy and utility companies, “including many dirty energy firms driving climate change and exacerbating environmental racism.”
Even now, with the impacts worst of the feared recession seemingly averted, Federal Reserve loans to oil and gas companies from certain programs continue to increase, including the Main Street Lending Program with total fossil fuel exposure now upward of half a billion dollars. Rather than dousing the sparks of the next financial crisis, the Fed has been fanning the flames.
The Biden administration’s finance policy will be climate policy
Biden’s electoral victory has driven a rapid shift in the Federal Reserve’s public profile on climate risk. Just days after Joe Biden was declared president-elect, the Fed formally highlighted climate as a threat to financial stability and announced it will join the NGFS, a network of 75 central banks pledging to incorporate climate-change risk into their financial analysis.
That same week, a lead candidate for Treasury Secretary, Janet Yellen, told Bloomberg New Energy Finance that “we need public policy oriented to make a difference on climate change,” indicating that acknowledging climate risk is viewed as a prerequisite for those seeking key financial regulator positions in the Biden administration.
Whether it's Janet Yellen or other leading climate-friendly candidates such as Sarah Bloom Raskin, the former Fed governor and deputy Treasury secretary early to criticize the Fed’s fossil fuels bond buying, the Biden administration’s choice for Treasury Secretary will have an arsenal of powerful tools courtesy of Dodd-Frank, David Arkush, managing director of Public Citizen's Climate Program, said in an email.
“Dodd-Frank gives financial regulators awesome power to ensure financial stability — 'awesome' in the biblical sense,” he said. “The regulators are loath to use their power, and sometimes their hesitance is appropriate. But if the threats involved in the climate crisis aren't enough to justify acting, then it's hard to imagine what is.”
To self-regulate or not? That is the question
One major choice the Biden administration will face early on may be guided by its confidence in the prospect that enhanced climate risk disclosure, and the informed reaction of investors to those disclosures, will in itself be a sufficient step to combat the financial risks posed by climate change.
Leading financial institutions are supportive of that approach to regulation. Much as the Fed changed course at the news of Biden’s electoral victory, so too have leading CEOs like Blackrock’s Larry Fink, who now publicly backs mandatory disclosure rules.
The favored corporate approach is to embrace Task Force for Climate Disclosure standards, which nearly every public company on earth now supports, according to Bloomberg. This approach is predicated on the notion that more high-quality information created by the disclosure of climate risks will lead the market to make better investment decisions while avoiding burdensome regulations.
But whether disclosure alone will drive a decisive shift from fossil fuel investment is increasingly in doubt. According to a survey by HSBC, only 10 percent of investors view climate-risk disclosures as material information. The nearly $2 trillion channeled into speculative fossil fuel investments by leading banks just since the Paris Agreement was signed indicates they’re not using the information already widely available in the marketplace to shift their investments.
How far a Biden administration will go beyond basic steps like disclosure of risks is an open, and increasingly politically important, question. The climate community is already gearing up for a fight. Groups lunch as Evergreen Action, run by former Inslee and Warren campaign staffers, call Dodd-Frank one of the most important tools available for Biden to act on his climate pledges.
Climate advocates buoyed by a fight over Federal Reserve bond-buying programs have been joined by members of Congress demanding the Federal Reserve end its own fossil fuel purchases, not simply disclose them. Fights like these have raised the general understanding of the fact that, as Bill McKibben has put it, money is the oxygen on which the fire of global warming burns.
The first fight: Personnel is policy
Some of the first fights may well focus on appointments to key financial regulatory agencies including Treasury, the Federal Reserve and the Securities and Exchange Commission. Stop the Money Pipeline, the national coalition of over 130 groups that McKibben helped create, has issued a set of climate principles any would-be financial regulator must comply with to gain its support.
While the pressure to act on climate is just now growing, broader pressure to regulate Wall Street is already working. The progressive wing of the Democratic party is praising Biden’s picks for his financial regulation transition team, while the financial industry is predicting a regulatory crackdown. Recent regulatory fights over climate-friendly investing rules in Europe indicate that climate advocates should expect fierce opposition from the financial sector, which means they’ll need strong regulators on the beat.
Biden has promised that he’ll name his Treasury Secretary before Thanksgiving, and that “all elements of the Democratic party” will support his choice. Speculation leans toward Yellen, pointing out that her calls on climate action stretch back to 1997. But this decision is just the first of many that could well shape the trajectory of the most consequential climate administrations in history and presage its willingness to use the “awesome powers” of Dodd-Frank to drive its agenda and the clean energy transition.
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