Charles Rex Arbogast/AP Photo
Oil tank train cars sit idle, April 21, 2020, in East Chicago, Indiana. On Monday, the price of crude oil dropped into the negative digits, further depressing an industry in need of a bailout.
Experts have been warning for years about the risks of a growing carbon bubble that, should it pop, would result in stranded assets and job losses across the fossil fuel industry. On Monday, those predictions took a few steps closer to reality. An industry that has been in decline for a decade, for reasons that predate COVID-19, saw the price to purchase a barrel of crude oil drop into negative territory for the first time in history.
In this moment, our climate and economic crises are converging. Although the Federal Reserve has largely disclaimed any role in combating climate change, the oil and gas industry is reportedly now lobbying our nation’s central bank for access to subsidized loans. The Fed has a singular opportunity to be on the right side of history by preventing a climate bailout for the fossil fuel industry, and protecting the economy and our people from climate shocks as we recover from COVID-19.
The Fed has responded to the economic disruptions caused by the COVID-19 pandemic by unleashing “QE infinity,” pumping hundreds of billions of dollars into various financial markets. While it has provided support across a range of business sectors, the central bank should not throw a lifeline to the now-cratering fossil fuel industry. The Federal Reserve has the discretion to limit its lending programs if certain recipients are too risky. The operable provision of law that the Fed is using allows it to lend against collateral that it deems satisfactory, from the perspectives of sound risk management and taxpayer protection. The Fed is also prohibited from supporting companies that are insolvent or likely to become insolvent. Given its discretion, some of the lending constraints that the central bank imposes on itself are actually political, as opposed to legal or financial. In this context, the Fed has a strong justification for using this power to prevent its programs from being a backdoor Big Oil bailout.
Financing climate change isn’t merely socially objectionable. By any objective measure, the energy industry is a sketchy bet.
Financing climate change isn’t merely socially objectionable. By any objective measure, the energy industry is a sketchy bet, as we’re now seeing. Energy companies derive significant funding from products like leveraged loans and collateralized loan obligations, as well as other low-rated debt, financial assets that have been declining in value and experiencing defaults going back to last fall. The financial risks being created by climate change are likely to grow into distress on a scale that threatens the entire financial system and the broader economy, resulting in further public bailouts. Preventing the fossil fuel industry from exacerbating risks to the financial system is an issue that falls squarely under the Fed’s ambit. By continuing to subsidize the fossil fuel industry today, the Fed would be setting itself up to become the “climate rescuers of last resort” tomorrow.
The Fed should also transition the Wall Street banks that it oversees out of fossil fuels. For years, banks have ignored warnings about the financial and climate risks of fossil fuels and continued to finance the dirtiest industries fueling climate change—to the tune of hundreds of billions of dollars. Now that the fossil fuel industry is facing a breaking point, and Wall Street’s bad bets are coming home to roost, a few big banks are reportedly considering controlling and operating some of the fossil fuel companies that they bankrolled, using a law that allows banks to own and operate commercial businesses.
The law that repealed the Depression-era Glass-Steagall Act gives banks the right to seize a borrower’s assets and hold them for as long as a decade. Wall Street has used this law to earn short-term profits from some of the most environmentally destructive businesses around: oil and gas rigs, refineries, pipelines and tanker ships, as well as coal-fired power plants and coal mines. What could possibly go wrong? A lot, as it turns out.
The first danger of this arrangement is that banks could use their nonfinancial business to help them manipulate markets and profit by either increasing costs for everyday folks or trading off of their market positions. JPMorgan paid a $410 million fine in 2013 for using its energy-trading business to manipulate energy markets, raising Americans’ electricity rates. With a track record like this, would you trust them not to do it again?
The next potentially catastrophic danger is financial. One bank executive has said that physical commodities are “a dangerous business to be in even if you are expert,” while another CEO reportedly said several years ago that the potential consequences of storing and transporting oil are “a risk we just can’t take.” This is to say nothing of the fact that funding the fossil fuel industry further exacerbates a climate crisis that is likely to have systemic consequences for the financial system, the economy, and most importantly, our communities.
If the Federal Reserve is going to allow banks to own oil and gas assets, they should be required to retire them, not further exacerbate our climate crisis.
While these dangers are substantial, the Federal Reserve can limit the terms under which banks own nonfinancial businesses. If it is going to allow them to own oil and gas assets, they should be required to retire them, not further exacerbate our climate crisis. The Fed can also finish rules that it proposed in 2016 to limit banks’ ability to own and run nonfinancial businesses and increase protections against the risks that they create. Even better, Congress can take away some of the authorities that banks use to own oil, gas, and other climate-destroying businesses—previous Federal Reserve leadership asked for this change, and Congress should oblige.
The coronavirus crisis provides a hinge point where the Fed can act responsibly simply by refusing to intervene and rescue financial companies’ fossil fuel assets. Other financial regulators, like the CFTC, have already handed out gifts to Wall Street banks to bail them out of their bad climate bets. Members of Congress are pushing bank regulators to roll back protections against risky oil and gas lending. And the Trump administration is talking about preventing banks from “discriminating” against fossil fuel companies. The Fed should demonstrate its often-guarded independence by resisting the pressure to go along, and instead use its broad authorities to address the deleterious role that Wall Street is playing in financing a future climate crisis.
There’s more that can be done to transform our financial system to meet this urgent climate moment. The Fed could directly finance clean energy through green bond purchases. It could buy out and retire old, declining fossil fuel assets. If it won’t, Congress could do both by establishing a new, public National Investment Authority to invest public money in scaling up the green economy.
Now is the time for a just and orderly transition away from a fossil fuel–driven economy. Instead of placing short-term profits ahead of prudent risk management and planetary stability, our financial system should support our people as we all recover from the impacts of the COVID-19 pandemic. As one climate activist puts it: “Particularly at this moment, banks should be using their balance sheets to support small businesses and workers, not trying to spin a profit by propping up a dying industry that’s the leading cause of climate change.”
