“The risk for climate change is exploding.”

“The risk for climate change is exploding.” So says Robert Litterman in this interview. Litterman, most notably associated with global asset allocation modelling also served as an economist at the Fed in the 1980’s. His crucial insight: “We’re not pricing climate risk because of the expected outcome…There is tremendous uncertainty about the future.” Thus carbon pricing models should start with much higher prices to better ensure the probability of avoiding the worst-case scenario. Political realities are a major stumbling block to broader adoption of higher carbon pricing but Litterman is optimistic. He is on the Board of the Climate Leadership Council which earlier this year called for a carbon fee with proceeds distributed back to ordinary citizens. (See my note of Jan. 17). He thinks this plan makes sense and is enthused by the broad coalition of interests including major corporations and NGO’s like the WWF. Despite this, he notes the need for a much greater sense of urgency: “We don’t have 10 years to spare…This should have been done long ago. Carbon pricing is the only brake we have, and we’ve got to slam on it immediately.”

Federal Reserve Bank of Minneapolis:
Robert Litterman interview: Climate change, the financial crisis, and other high-risk problems