Former Treasury Chief Sees Accounting in the Price of Emission: Dumb Question

How’s climate change a risk to me? This simple question has gone unanswered for too long.

Robert Rubin knows a thing or two about economic risk. As Treasury Secretary to President Clinton, Rubin advocated for balanced budgets through a combination of tax increases and spending cuts -- Rubinomics for short. While at Treasury he helped formulate the administration's responses to financial crises in Mexico, Russia and East Asia. The administration's personnel and policies have drawn increased scrutiny in recent years as Wall Street tries to make sense of the 2008 crisis.

This week Rubin joined the risk committee of a new research effort, called Risky Business , which will estimate potential U.S. economic costs from current and projected impacts of global warming. Founded as a way to frame climate risk for businesses and investors, it was started by billionaire investor and climate campaigner Tom Steyer, former Treasury Secretary Hank Paulson and former New York Mayor Michael Bloomberg, the founder and majority owner of Bloomberg LP.

Rubin, Steyer and I spoke at the Investor Summit on Climate Risk , held Wednesday at the United Nations.

Dumb Question: It seems to me that cutting carbon emissions is like saving for retirement; the earlier you start, the better off you’ll be. If that’s true, does it mean that the Clinton administration had more responsibility than the George W. Bush administration to stop climate change? And if that’s true, what does it imply for the administration of, like, James Madison?

RR: It would be hard for me to comment on the Madison administration, because I don't know the history that well.

President Clinton and, of course, Vice President Gore were very focused on this. That was a long time ago, and the question was, what can you do? I do know both of them were very focused on it. It would be hard to say that they had responsibility for global climate change.

The science has moved along. There's pretty close to universal agreement in the serious science community. In the political community there's a lot of controversy….

DQ: Wait! Why would there be controversy in the political community if there’s no controversy in the science community? That doesn’t seem totally rational.

RR: It’s a question of connecting [science] with what people are experiencing now. That's what Risky Business is about -- providing a framework for people to think about ramifications of this over time, and making all of it real in the political system and in the financial system. That's an immense, immense challenge.

DQ: How do you do that?

RR: The key to this is really the political system. If you had accounting rules that result in the externalities [ie the costs of greenhouse gas emissions] being captured in financial statements, then obviously people would react.

It’s not a carbon price issue, it’s an accounting issue: ‘I run a business. I emit. I don't pay the price for the emissions. I produce the good. I sell it. I don't care about the emissions because it's not my cost. It's society’s cost.’ That's an externality.

[Once] you have accounting standards that require you to reflect that cost in your reported earnings, then it becomes something that every analyst is going to look at and evaluate in your stock.

DQ: Are the SEC’s rules strong enough?

RR: If the SEC adopted a materiality standard that required the reporting of externalities and stranded assets , that would make a difference. But you're a long way from that.

Even if you had those requirements, you've got to have some way of measuring this. If you say to a company, ‘You've got to measure the externality,' but you don't have some methodology for measuring it, you've asked them to do something they can't do.

Tom Steyer: You have to figure out how to take this huge messy story and put it into lines that people can [both] understand, measure and be evaluated. And then they'll respond like SOB's.

RR: If the voters actually are using this, if the ratings agencies say, ‘Okay, here's one of our metrics,’ the companies are going to respond —

TS: But the status quo has huge power, too; if you're successful you don't want to change.

RR: Oh, yeah! But you can be forced to change.

TS: You have to be!

RR: But if the SEC, Tom, included this in materiality, and if the ratings agencies included this in how you're being rated, you can have all the status quo you want…

TS: Until the policy changes, it's in the equation but it's not in the heart of the equation.

RR: Until the policy changes, it'll be out there. It'll be intellectually interesting — maybe — but I don't think it's going to affect behavior very much.

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