How to Pay for Climate Change?

November 8, 2023

How to Pay for Climate Change?
by J. Paul Horne – Oct. 3, 2023

Thanks, David, for Thornton (“Tip”) Parker’s timely reminder (Cumberland Advisors commentary of Sept. 15, 2023) that we must better understand how the economy must change to deal with the rapidly rising cost of climate change. But despite disastrous fires, droughts, and floods, he notes that most citizens, and corporate interests “try to protect what seems to work for their comfort and benefit, while giving up as little as possible.” 

Moreover, many political leaders seek votes and campaign funding by denying climate change, supporting fossil fuels, and obfuscating the huge costs of climate mitigation. The reality is that we must all pay because, as Parker bluntly puts it: “Mother Nature owns the house, and we have to play by her rules.”

But how many Americans comprehend the magnitude of the cost climate change is imposing for the foreseeable future and how we will pay those costs? Some answers emerged over the past few weeks, as major international institutions presented their latest assessments of climate change, including the UN Climate Summit, the International Energy Agency’s (IEA) “Net Zero by 2050” report, the OECD’s Clean Energy Summit; the IMF’s new economic forecast incorporating climate factors; and the White House Climate Resilience Summit. 
These serve as preparation for COP 28, the UN’s annual climate meeting, scheduled in Dubai between Nov. 30 and Dec. 12, to assess progress in meeting climate mitigation goals: to limit global warming to 1.5 degrees Centigrade and to achieve net zero emissions (NZE) by 2050. These objectives were set at the 2015 Paris agreement which has been signed by 194 countries, including the U.S. and the EU.
Evidence of the rapid rise of climate costs was confirmed with the recent White House report that 23 separate billion-dollar climate disasters occurred in the first eight months of 2023, a record. The Office of Management and Budget (OMB) estimated weather-related disasters cost $165 billion in 2022 and its Long-Term Budget Outlook forecasts climate-related costs will rise dramatically. (See: Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2024 ( .)

The OMB outlook posits the U.S.’ underlying long-term GDP growth potential at 2.1% but could be significantly degraded by accelerating climate disasters. The climate trend expected by OMB could cost the federal budget $2 trillion annually and reduce U.S. GDP by 3%-to-10% percent by 2100. To limit such climate costs, the Biden administration notes the multi-billion-dollar investment by the Inflation Reduction Act and infrastructure legislation will help make the U.S. economy more climate resilient. (See: .)
The IEA warned in late September that coal, oil, and gas must be replaced by renewable energy sources far more rapidly than is happening. This follows its 2021 recommendation that the fossil fuel industry should halt exploration for new fossil fuel sources. The IEA now urges governments to reduce demand for oil from 100 million barrels per day to 77 mbd, and natural gas from 4.15 billion cubic meters to 3.4 bcm by 2030, very ambitious targets.

Comprehensive estimates of climate change costs were published by the IEA in its May 2021 report “Net Zero by 2050 – A Roadmap for the Global Energy Sector” (see: Net Zero by 2050 – A Roadmap for the Global Energy Sector ( ; and McKinsey & Company’s “The Net Zero Transition”, published in January 2022. (See: .) 
The IEA highlighted the immense investment required to shift global energy use away from fossil fuels enough to achieve NZE and temperature stabilization by 2050. Annual investment in the energy sector alone would have to rise from USD 2 trillion globally (the 2016-2020 average) to almost USD 5 trillion by 2030, easing to an annual USD 4.5 trillion by 2050. From 2.5% of global GDP in the base period, total capital spending on transitioning to non-fossil energy would have to rise to 4.5% of forecast GDP in 2030 before falling back to 2.5% by 2050, assuming the NZE and temperature targets were met.
McKinsey’s report, published in January 2022, on achieving NZE by 2050 considered the energy and land-use systems that produce 85% of global emissions and the energy situation in 69 countries. The 27-year transition to NZE would significantly impact demand, capital allocation, costs, and employment. Cautioning that its analysis was not a prediction but rather an “order of magnitude”, McKinsey’s conclusions are striking. 

Capital spending on physical assets for energy and land-use systems in the transition to NZE by 2050 would total about $275 trillion, or an average $9.2 trillion per year, $3.5 trillion more than today’s investment rate. This would “be equivalent, in 2020, to half of global corporate profits, one-quarter of total tax revenues and 7% of household spending.” Moreover, the increased spending would be front-loaded from 6.8% of GDP today to 8.8% of GDP between 2026 and 2030. The unit cost of NZE electricity production could be 20% higher globally in 2050 than today but significantly higher during the transition period. Employment would be significantly impacted with an estimated 200 million jobs created in new sectors and 185 million lost in the fossil fuel and related sectors. No estimate was made of the transition from the old to the new jobs.
Noteworthy, however, is that neither the IEA nor McKinsey attempted to quantify the costs of damage caused by weather-related disasters occurring ever more frequently and in intensity, nor of the cost of the massive transfer of homes, offices, factories, and infrastructure to higher ground. In May 2023, however, Deloitte published a survey of top insurance companies which showed they are facing significantly increased risks in their climate–related investment and underwriting decisions. The survey emphasized that more insurers should enhance decarbonization strategies, as well as innovate in their climate insurance and management of climate risk. 
The U.S. property and casualty insurance industry suffered losses of $5 billion in 2021, which ballooned to losses of $26.5 billion in 2022. The industry reported 23 confirmed climate-related disasters with losses exceeding $1 billion each in the U.S. as of August 8, 2023, with losses almost certain to exceed those of 2022. Between 1980 and 2021, the U.S. experienced an average of seven-to-eight natural disasters annually, but in 2022 alone, there were 15 with losses from each exceeding $1 billion. Deloitte reported the cumulative cost of weather disasters over the last five years totaled $788.4 billion
The IEA, IMF and McKinsey also emphasized that governments must rapidly reduce their direct and indirect support for the fossil fuel industry, as well as related sectors such as transportation and construction if NZE is to be achieved. The IEA estimates global subsidies for fossil fuels totaled $1 trillion in 2022, even as oil and gas companies reported a record $4 trillion in income. The IMF estimated total global subsidies, direct and indirect, to fossil fuels and associated sectors at $5.4 trillion annually. Yale University’s School of Environment reported in October 2021 that fossil fuels received $5.9 trillion globally in 2020, similar in magnitude to the IMF estimate. (See:  Fossil Fuels Received $5.9 Trillion In Subsidies in 2020, Report Finds – Yale E360 .) The Senate Budget Committee reported in May 2023 that U.S. subsidies, direct and indirect, to the fossil fuel industry totaled $20 billion annually – a figure that seems low in comparison with the IEA and IMF estimates.  (See:’s%20not%20just%20the%20US,to%20the%20fossil%20fuel%20industry. )

Coping With Climate Change Costs
To cope with the climate crisis, “Tip” Parker suggested the U.S. “create” dollars that are “the critical, leadership tools” needed. But he thinks this may be difficult because U.S. dollars are “scarce resources” and because more deficit spending would exacerbate inflation which climate change already generates.
He proposes that “the only fair and democratic approach is for the country to organize itself as a single, comprehensive climate change risk pool that is backed by the government’s ability to create dollars as they are needed.” While vague, this suggests a massive extension of FEMA’s flood insurance that is currently delivered by some 50 private insurance companies.

Parker’s suggestion, while not elaborated on, may reflect several misunderstandings. The first is that the U.S. fiscal deficit today results primarily from over-spending. In my view, the U.S. fiscal deficit results from numerous fundamentals: a propensity to reduce taxation, over-consumption, inadequate saving, and investment, and all in an economy whose potential real GDP growth is less than 2%. 
The U.S.’ total tax burden (including Social Security) is the lowest of advanced economies. The OECD reports the U.S. tax-to-GDP ratio of 26.6% in 2021, ranked 32nd out of the 38 OECD member countries, ahead of Costa Rica, Turkey, Chile, Ireland, Columbia, and Mexico. The OECD average was 34.1% and most truly advanced countries were above 35%. (See: .) Increasing the progressivity of individual and corporate taxation and improving tax collection efficiency would sharply reduce the U.S. deficit and its inflationary impact. 

Over-consumption and inadequate saving also contribute to the underlying U.S. fiscal imbalance. Personal consumption expenditure represented 68% of GDP in the first half of 2023, compared with 50%-to-55% in other advanced economies. As a result, the U.S. household saving rate is around 4%, compared with the long-term average of 8.8%. A chronic U.S. current account payments deficit (trade and services) must be financed by capital inflows from foreign investors who deem the U.S. a haven.
The Federal Reserve can “create dollars” with its independent monetary policy, swelling its balance sheet, as it did during the 2007-09 financial crisis and again during the Covid pandemic. But as we are seeing, the Fed must also use its control of money and credit to quickly reduce the supply of dollars and credit to control inflation. But whether the Fed could create enough dollars during a decades-long climate crisis to finance the costs of coping with weather disasters is not at all clear.

Dollars can also be “created” by deficit spending authorized by Congress. But if increased deficit spending regularly exceeds potential GDP growth and productivity, as it has been, such deficit spending is inflationary and hence counterproductive. But today’s bitterly divided legislative branch seems incapable of even approving a budget, not to mention reducing the deficit by cutting spending or raising taxes or, preferably, a sensible combination of the two. 
Given the magnitude of rapidly rising climate-related costs and the huge increase in investment required to achieve NZE and to stabilize global temperatures, the U.S. faces a major fiscal challenge. It is clear we must start a painful process of massive reallocation of resources away from consumption and toward more saving, investment, and increased taxation, aiming to rapidly achieve NZE and to stabilize global temperatures.


This post was originally Featured on the Cumberland Advisors Commentary page. 

3 responses to “How to Pay for Climate Change?”

  1. Avatar Bob Bunting says:

    Oct. 19, 2023

    Hi David,

    I am catching up on emails now that I am back from Europe…. I read the guest words from Paul. Overall, I thought it was good but, in my view, it really missed the forward-looking aspect. One thing we know is we cannot project tomorrow on a linear extrapolation on what is going on now.

    The conclusion certainly would not be mine.

    He said,

    ‘Given the magnitude of rapidly rising climate-related costs and the huge increase in investment required to achieve NZE and to stabilize global temperatures, the U.S. faces a major fiscal challenge. It is clear we must start a painful process of massive reallocation of resources away from consumption and toward more saving, investment, and increased taxation, aiming to rapidly achieve NZE and to stabilize global temperatures.’

    Throwing more government printed money at the problem will not get us where we need to be. The top-down approach since the mid-1980s has been off point, hugely expensive with marginal results. Yes, lots of investment is needed but the real return is twofold not one. a real boom that will certainly occur as entrepreneurs and investors together with good US policies and strategic investments, will create to solve the problem. It is a virtuous investment circle not a cost. It’s the Climate Economy that will generate the wealth to make it happen. It’s not a ledger and it’s not linear.

    Truly, I don’t understand the focus on Federal US Government solving a problem that will be mainly solved from the ground up with some policy and strategic investment from above. The commentary in Paul’s piece, in my view, is from someone with an apparent one sector top-down approach.

    If that is the continued approach after 50 years of dismal results, we will not get there. It’s time to let innovation and the lure of lucre thrive. The US enterprise system with some good Federal leadership can get the job done.

    It seems knowledge is advancing on a log scale… now it’s about shortening the red tape in the adaptation process while getting proper rewards for those who do so. The political BS is just blocking a dirt road not paving it.

    Best Wishes,

    Bob Bunting

  2. Avatar Paul Horne says:

    October 21, 2023

    Thanks, David, for sending Bob Bunting’s comments on my piece on climate change challenges. As for projecting the future, that’s what we all do for a living or, in my case, a continuing passion for macroeconomic and market trends. I note that most of the reports and analyses that I cited look at NZE over the next decades, typically to 2050. Nobody can be confident that these are accurate or simply “straight lining” from current events. But the institutions cited have plenty of research resources and credibility.

    I agree with Bob about the investment opportunities dealing with climate change will generate. I think of the construction industry which will benefit from the “move to higher ground”, residential, commercial or infrastructure. And this will be in addition to the dramatic shortage of affordable housing in the U.S. Construction ETFs, like ITB and XHB have shown very good, if volatile, performance.

    Energy technology is and will be a major winner, despite a rear-guard battle by the fossil fuel industry. We see this already with the shift by the transportation industry to hybrid and EV vehicles and the battery technology underpinning both. Vanguard’s energy ETF, symbol VDE, has done very well over the years. On the other hand, investment in renewable energy ETFs, like ICLN, have been under-whelming.

    Government policy can be extremely helpful in guiding and persuading investors and consumers. The legislation and regulations guiding pollution and energy efficiency in our transportation sector have already been influential in improving fuel efficiency in vehicles. On the other hand, the huge subsidies to the fossil fuel industry, including a too-low rate of taxation on gasoline, are examples of government intervention that should be phased out. (The EU’s average tax on gasoline is 60% vs. our 15%, based on a total of $0.48 of federal and state taxes per gallon.)

    Innovation and love of lucre are well respected by someone like me whose career was spent dealing with institution investment managers. I am not a partisan of government-do-all. But those responsible for fiscal policy can and should send critical signals and offer incentives to the private sector.

    The magnitude of climate change challenges is such that government/legislators and the private sector must cooperate on marshalling the enormous resources that will be required for public and private investment.

    In addition to climate change, we have an ageing population, inadequate labor force growth, anemic growth of total factor productivity, and, as a result, non-inflationary GDP growth potential over the medium term of less than 2%. Because of excess private consumption (about 65%-to-67% of GDP) and inadequate national saving (household, corporate and public), we depend on capital inflows from abroad to finance our domestic and external (current account) deficits. All this will be aggravated by the additional costs and investment required to deal with climate change.

    Given today’s enormous public deficit and accumulating public debt, and the rising cost of servicing that debt, it is clear we’ve got to control spending and increase tax revenues, preferably on a progressive basis. (The SPX companies pay an effective 12%-to-13% tax rate.) I’m generally considered a crank when I point out that total U.S. taxation (federal, state, municipal and Social Security) is the lowest of all the developed countries (26%-to-27% of GDP vs 34% for the OECD average – see: ).

    Sorry to say, my uncomfortable conclusion is that dealing with “Mother Nature” is going to require some painful adjustments in our approach to fiscal policy, and our comportment as private citizens.


  3. Avatar John Taglibue says:

    Thanks for this, Paul.. I often say that regarding climate change we’re still in the talking and advertising phase.. Advertising, to see big oil companies telling me in ads how much they’re doing to save the planet..

    You’re not a crank when you point out that total U.S. taxation is the lowest of all the developed countries (26%-to-27% of GDP vs 34% for the OECD average.. and that’s the average.!. In some developed countries – Scandinavia – it’s in the low fifties.. ) In those countries, you pay taxes and you get public services.. Medical care, education, a workable infrastructure.. In the U.S. these days you pay few taxes, and pay for everything out of pocket.. For-profit medicine, colleges and universities that cost $70,000 a semester, no infrastructure… Who needs high-speed rail? If you’ve got enough money, you have a private helicopter..

    And then this: Because of excess private consumption (about 65%-to-67% of GDP) and inadequate national saving (household, corporate and public), we depend on capital inflows from abroad to finance our domestic and external (current account) deficits. All this will be aggravated by the additional costs and investment required to deal with climate change.

    So when does the implosion come?

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