Climate change presents intensifying physical risks across the Nation. In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risks to workers, firms, and communities. Both physical and transition risks will have consequences for the economy, society, and overall well-being. The Biden-Harris Administration is committed to sound financial and fiscal management, which requires integrating these physical and transition risks into all areas of decision-making. In particular, Section 6a of President Biden’s Executive Order 14030 on Climate-Related Financial Risk directs the Office of Management and Budget (OMB), Department of the Treasury, and the Council of Economic Advisers (CEA), among other agencies, to “identify the primary sources of Federal climate-related financial risk exposure and develop methodologies to quantify climate risk within the economic assumptions and long-term projections of the President’s Budget.”
A Memorandum from CEA, OMB, and Treasury, who are jointly responsible for producing the economic assumptions that underly the President’s Budget, provides guidance on how the CEA, OMB, and Treasury should coordinate with agencies to support the quantification, assessment, and management of economic and financial climate risks. The following enhancements could improve the Federal Government’s macroeconomic modeling tools for climate risk-management applications:
- Include nonprice policies,
- Account for transitional dynamics and frictions,
- Account for interaction between physical and transition risks,
- Account for effects on particular income groups, subnational units, and subsectors of the economy,
- Account for extreme event risks, and
- Include short- and intermediate-term timescales and greater spatial granularity.
This Memorandum is the latest in a series of steps that the Biden-Harris Administration has taken to achieve the President’s directive in Executive Order 14030 to quantify climate risk. Previous steps include:
- Creation of an Interagency Technical Working Group (ITWG). Since 2021, the CEA and OMB have led an ITWG that brings together expertise from a range of agencies, reflecting the “whole of government” effort necessary to account for climate risks.
- Inclusion of physical climate damages in the Long-Term Budget Outlook (LTBO). For the past two Budgets, OMB has included an assessment of how the physical damages from climate change could affect long-term projections (FY2023 LTBO; FY24 LTBO).
- Conduct assessments of climate-related financial risks to Federal agencies and programs. Additionally, for the past two Budgets, OMB has published an Analytical Perspectives (AP) chapter of the Budget that describes OMB’s and other agencies’ ongoing efforts to assess the physical climate risk exposure of Federal agencies and programs, and is incorporating this information in the Budget formulation. (FY2023 AP Chapter; FY2024 AP Chapter)
- Development of methodologies to quantify climate risk in the economic assumptions. Twice a year, the CEA, OMB, and Treasury release their assessment of where the economy is headed. These economic assumptions are fed into the Budget process, grounding the Biden-Harris Administration’s revenue and expenditures in an official set of assumptions about economic conditions over the next 10 years. The CEA and OMB have produced a series of white papers that lay out how the Federal government can incorporate the physical damages from climate change and the macroeconomic implications of the clean energy transition into its economic assumptions (2022 White Paper; 2023 White Paper).
These efforts are part of a broader strategy to develop a community of practice around climate-energy-macroeconomic modeling. In order to encourage collaboration and the exchange of ideas, the CEA, OMB, and Treasury have organized and participated in a number of events with academic and private sector stakeholders in the United States and around the world:
- The CEA initiated a roundtable at the National Academy of Sciences on Macroeconomics and Climate-related Risks and Opportunities. Workshops in June and November of 2023 included panels of senior climate scientists, energy system experts, and macroeconomists.
- Given the importance of the private forecasting community, in February 2023, the CEA and OMB held a convening of leading private sector macroeconomic forecasters.
- Through Treasury, the United States is a member of the Coalition of Finance Ministers for Climate Action and co-chairs a workstream with Denmark on mainstreaming climate change in economic policies.
- During the April 2023 multilateral Spring Meetings of the World Bank and IMF, Treasury, the CEA, and OMB co-hosted with the Danish Ministry of Finance a two-day workshop that brought together economists from national governments, the IMF, World Bank, and academia.
The CEA, OMB, and Treasury will continue their development of a community of practice around climate-energy-macroeconomic modeling as well their work implementing Executive Order 14030 on Climate-Related Financial Risk. The Biden-Harris Administration is keenly aware of the need to reimagine the intersection of climate and economic modeling to support near-term decision-making on mitigation and adaptation policy.