President Biden’s Executive Order 14030 on Climate-Related Financial Risk called for the Government to assess, disclose, and mitigate the financial risks posed by climate change to federal agencies and the nation more broadly.
Section 6 directed the Office of Management and Budget (OMB), the Department of the Treasury, the Council of Economic Advisers (CEA), and others to develop methods to quantify risks posed by climate change to the federal fiscal outlook, to improve the accounting of climate-related federal expenditure, and reduce long-term risk exposure through the formulation of the President’s Budget and oversight. It also emphasized the importance of accounting for physical risks and transition risks and opportunities.
Key Messages
- In 2021, the CEA and OMB established an interagency technical working group (ITWG) to further develop the United States’ analytical capabilities on climate-energy-macroeconomic issues by leveraging the Federal Government’s climate and energy-systems modeling as well as macroeconomic modeling performed by the CEA, OMB, and Treasury.
- A 2024 white paper presents a methodological framework for integrating climate risk into a macroeconomic forecast, organized as a playbook. The supply-side identity of GDP underpins the framework as it forms the foundation of the Budget’s economic assumptions and can also be used to systematically aggregate across bottom-up estimates or decompose top-down estimates over a range of macroeconomically-relevant variables. The white paper also considers a range of existing modeling techniques and discusses their relative strengths and weaknesses in different contexts.
- A chapter in the FY2024 President’s Budget outlined three core data requirements for any physical climate risk assessment methodology: (1) exposure modeling, (2) downscaled climate data at appropriate spatial and temporal scales for the programs under consideration, and (3) program- or sector-specific damage functions (physical and economic) to express modeled physical changes as financial estimates.
- The FY2024 President’s Budget described three ways to assess financial risk due to physical climate impacts on federal programs and assets: (1) comprehensively modeling physical damages and expenditure, (2) modeling expenditure directly from climate variables, and (3) modeling expenditure as a proportion of economic damages.
- The use of distinct methodologies for macroeconomic and programmatic risks and for understanding which government capacities are most sensitive to particular risks is important because climate-related risks do not have uniform geographic effects.
Opportunities to improve climate-energy-macroeconomic modeling include accounting for distributional effects, extreme weather risks, regional demographic and socioeconomic changes pertinent to climate risk management, physical risks and transition risks and opportunities already reflected in the data, and relationships between climate information at high spatial and temporal resolutions and macroeconomic outcomes. Opportunities to improve climate-budgetary modeling include developing a common framework for assessing exposure to climaterelated financial risks, establishing a framework for quantifying mission and operations risks to federal agencies, and identifying further climate data and information resources.
Note that Executive Order 14030 on Climate-Related Financial Risk has been revoked under the Trump-Vance Administration via Executive Order 14154 on Unleashing American Energy.