Hurricanes Harvey, Irma, and Maria so far have caused damages totaling in the hundreds of billions of dollars. The fires in Northern California’s wine country have, so far, racked up a $3 billion tab. And for good measure, let’s mention the more than a dozen other hurricanes this past year, as well as the countless wildfires across multiple states. I get no pleasure from recounting these disasters, but they are the result of climate change, and climate change preparedness is now a factor when calculating the credit rating of state and local governments.
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One of the largest credit rating agencies in the country, according to NPR, is telling cities and states that their credit rating could be downgraded depending on how prepared they are for the effects of climate change.
An excerpt from its website says:
“In a new report, Moody’s Investor Services Inc. explains how it assesses the credit risks to a city or state that’s being impacted by climate change—whether that impact be a short-term ‘climate shock’ like a wildfire, hurricane or drought, or a longer-term ‘incremental climate trend’ like rising sea levels or increased temperatures.
Also taken into consideration: ‘[communities] preparedness for such shocks and their activities in respect of adapting to climate trends,’ the report says.
‘If you have a place that simply throws up its hands in the face of changes to climate trends, then we have to sort of evaluate it on an ongoing basis to see how that abdication of response actually translates to changes in its credit profile,’ says Michael Wertz, a Moody’s vice president.
Ratings from agencies such Moody’s help determine interest rates on bonds for cities and states. The lower the rating, the greater the risk of default. That means cities or states with a low rating can expect to pay higher interest rates on bonds.
‘This puts a direct economic incentive [for communities] to take protective measures against climate change,’ says Rachel Cleetus, the lead economist and climate policy manager at the Union of Concerned Scientists.
Moody’s is the first of the country’s big three credit rating agencies to publicly outline how it weighs climate change risks into its credit rating assessments. And it’s just the latest ‘market-based signal,’ Cleetus says, ‘that what seemed like a far-off distant future gets collapsed into the present and that people have to start making decisions now based on what is already baked in reality for many of these places.’
In its report, Moody’s breaks the U.S. into seven ‘climate regions,’ based off of geography, regional economies and expected risks.
In the Midwest, ‘impacts on agriculture are forecast to be among the most significant economic effects of climate change,’ the report says.
The Southwest is projected to become more vulnerable to extreme heat, drought, rising sea levels and wildfires.
Rising sea levels and their effect on coastal infrastructure is the biggest forecast impact on the Northeast.”
Being prepared would mean having the proper infrastructure in place to handle the impacts from wildfires, hurricanes, droughts, and rising sea levels.
When faced with this new kind of economic reality, cities and states may no longer be able to “kick the can down the road” when it comes to investing in community projects. Politicians can find it hard to support projects when the upside is expected to come so far into the future. But if playing the waiting game has a short-term financial consequence, they may think twice.
In light of Moody’s report, what investments do you think cities and states should make to insulate them from a climate change-related credit rating downgrade?