Moody's Talks - Inside Economics - Coffee, COP26, and Climate Change

Episode Date: November 12, 2021

Emilie Mazzacurati, Global Head of Moody's Climate Solutions, joins Mark, Ryan, and Cris to discuss the global economic impact of climate change, the potential effects of a carbon tax on the economy, and the climate risk policies in President Biden's Build Back Better plan.Full episode transcript here. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined today by my two colleagues, my trusted colleagues, Ryan Sweet. Ryan is the head of real-time economics. Ryan, good to see you. How are you? I'm doing well. Are you ever not doing well, Ryan?

I mean, that's like your standard. I'm fine. You're good. Everything's great. Everything's great. I mean, my two youngest kids are home today. Why? School's closed.

What? Unexpectedly or? They have like a teacher in service day. These things pop up from time to time. And then we're scrambling with two screaming little children. Right, right. Well, you know, you're made for that stuff, Ryan. Yeah, I know.

And I got Chris, Chris DeReedy's deputy chief economist. Hi, Chris. Hi, Mark. How are you? What happened to your red shirt? Your Ferrari shirt. I'm mixing it up, you know. I can't really, is that like a pullover?

What are you? wearing today like a green it's uh you know it's got this uh hood here oh i oh he's a hoodie he's got a hoodie there you go uh very good uh and how was your week chris oh so far so good well i guess it's almost over here so yeah it's almost almost over hey i was in uh washington again this week and i'll have to report that i spend a day there uh traffic is back to normal i can't tell a difference really between no you know remember i was there i don't know back in July or something, in July. And it felt really quiet, dead to me.

Ghost town, yeah. Not this time, it was happening. And last night, I went to get my haircut. I had like three hairs on my head. So I got the three hairs cut. So I get my hair cut in Westchester. That's where our offices here out in suburban Philly. And I'll have to traffic was horrendous.

It was horrendous at 5.30. Do they saw that street close down for all the restaurants? No, is that? Maybe that was what's going on. Let's back up. Oh, yeah, no, that was open. That was, yeah, no, that was the main through fair was open. Yeah.

So, I just feels like things are coming back to life. Yeah. Mobility's up, right? In our back to normal index. Mobility's up. And we have a guest today, Emily, Meza Karate. Emily, good to see you. How are you?

Hi, Mark. I am good, thanks. How are you? I'm always good. I'm always good as you can tell. So, Emily, you're speaking to us from Paris. I am, so it's very much the end of the day here. Week is almost over.

So that picture I see behind you, that's just a screen. That's not real life then. I always have my Berkeley, California background with me, yes. I was going to say that looks like California. The sun is always shining behind me. I was going to say that does not look like Paris on November 12th. The 2021. Yeah.

It's probably getting pretty dark. Fuggy and cold. Yeah. Well, Emily, we're very happy to have you here on Inside Economics talking about climate change. That's going to be the big topic for today's discussion. Good timing, right? Cop 26. Didn't that end today?

I believe. You can say that it's supposed to end in a couple of hours, the negotiations. Typically they run late. But yeah, I was just in Glasgow. So maybe we can talk about that. Oh, great. You were there. Okay.

So we're going to come back to you and really dive into that, really try to get a sense of what came out of that confab. But it's good to have you. Tell us about yourself, Emily. You join Moody's when Moody's bought 427, your company, a Berkeley-based company. Oh, by the way, I do want to tell everyone because I want to speak a little French. I want you to tell me what you think of this. You got a master's from a political science from, here you go, ready?

Institute etude Politique to Paris. How about that? Is that good? Beautiful. That was awesome. I can't do that again, but, you know, and then you got a master's of public policy at UC Berkeley, which is a great place to get a degree in public policy. That is a wonderful university.

Did you ever have Christy Romer? She's, did you ever have her as a course? Economist. She was CEO, Chair, under Obama. Council of Economic Advisors. Did you have her? No. What about Robert Reich?

He's in Ringeville. Yes. You had Robert Rahr? Oh, you did? It overlapped with Robert Wright. Yeah. And what do you think of Dr. Reich? We're going to get to know your politics right away right now.

We can nail you. Arts on the table. I read in the cabin to the cabinet. Is that the name of his book? The summer before I went to, I flew to the U.S. and ended up making my life here. And love that book. And I enjoyed the class, too.

It was very much about politics. The rest of the program was very analytical economics and statistics, which was great and what I was coming forward. But I did enjoy the political angle of what Robert Brake was bringing. Yeah, he's a really good guy. I run across him once a year or so. And it's just always a pleasure to listen to him. He's very, very articulate, certainly on issues of income and wealth and a quality.

I mean, that's really, he's very good on that. Well, that's great. And I'm, you know, I have a link to UC Berkeley. I'm on the board of advisors for the Turner Real Estate Center. So they have a really good set of researchers on, you know, California and real estate, obviously, you know, key. No issue there whatsoever. So I'm on, I'm on the advisory board there, which lets me link into Berkeley. It wasn't able to go out to Berkeley this year for that.

So, but anyway, it's great to have you. So tell us your backstory, Emily. Tell us about 427, how you started that. Oh, and I should ask, what does 427 mean anyway? I mean, I'm sure there's a meaning to that. There is a meaning. So I'm going to backtrack even more before 427. Did my master's public policy in Berkeley and fell in love with cap and trade while I was doing my master's

because why not, right? So cap and trade is using markets to reduce carbon emissions by letting the market set the price of where is it most efficient to reduce carbon emissions. And I worked on carbon markets, climate policy, for a number of years after that, for a company that was specialized on forecasting supply and demand for carbon trading instruments.

So in Europe, in parts of the US, there were carbon markets. And I was helping translate policy, regulatory, and political developments into signals for the markets. Was the cap and trade bill going to pass? And what might it look like? What was going to be the price on that market? What did that then mean for oil and gas sector utilities? Which was good fun for a while until the cap and trade bill in Congress went to hell. That was back in 2010.

April 24th, if you want to know when exactly that happened. And about the same, right, still hurting from it. And around the same time, the company that I worked for was acquired and I decided it was time to move on, both from the company that I worked with, but what I was working on. Because clearly the U.S. was not committed to climate policy. And again, we're talking 11 years ago. and there was a lot of science that was starting to come out around the fact that we had a lot of physical impacts that we were going to experience regardless, that climate change was locked in to a certain extent because we had already put so much emissions in the atmosphere. And so that was the impetus to create for 27.

I wanted to work on adaptation and the physical climate risk and help businesses, investors, corporates, understand what the science was saying and what data was available for them to embed into decisions and risk management. And so long story short, the name for 27 is a reference to California's greenhouse gas emission reduction targets for 2020, so it's 427 million tons of carbon dioxide, which California was going to more than

meet, be well below in terms of emissions, except for the wildfires which put our emissions through the roof again. So physical risk caught up with transition risk. So that was the transition going from doing political policy analysis to helping translate science for my clients who I knew well and I knew what data they needed, but much more focused on physical risk. So you started 427 in the, what, about a decade ago then? In 2012, yes. 2012, okay.

The aha moment, yeah, the aha moment was actually being in New York right after, right before Hurricane Sunday and then seeing the aftermath of the Hurricane Cindy and seeing the New York Stock Exchange closed for three days and saying, those people are so smart and they have so much money. How could they not know that there was going to happen? Something's missing here, right? You're mistaken that they're actually correlated things. I was wondering where you were going with that for a minute.

Yeah. Well, that's interesting. And then you sold 427 to Moody's when. Is it now two years ago or so? Yeah, 2019. So then there was a lot of hard work and people giving us weird looks. Why do you think I should care about climate data? And then the world started caring about climate data and including strong interest from Moody's,

both from the credit ratings agency part and these analytics. And so sold and then have been working on really integrating climate across everything. that we do over the best couple of years now. Right. As you said, you're now running all of, you're the global head of climate risk solutions for the entire Moody's organization. And there's a lot of moving parts here

that are all evolving very quickly and you're managing that evolution. Lots of moving parts, especially with the recent acquisition of RMS, the cat modeling farm, which is adding a ton of, capabilities and really sophisticated models on extreme weather events and the financial and economic impacts of those events. So a lot of fun work ahead. Yeah, it's great to have you.

This is obviously very important for the initiative for Moody's, but obviously this is going to be key to driving lots of things going forward. Can I ask before we move on about your name, Maza Karate? Is that a French name? That is not a French name. My grandfather was Italian. Ah, okay. Chris knew that. Did you know that, Chris?

Yeah, for sure, for sure. So how would you say Mazzikaradhi? Am I saying it right? What I love is when people ask me in the U.S. how to say Mazzaccarati in French. There's no good answer to that. In Italian, it would be Mazzaccarati. Oh, I like that.

Yeah. How do you answer that when they say, how do I say it in French? I say the French can't say it either. All right. That's funny. I don't know. Exactly. They don't know.

All right. Very good. Well, so good to have you. Well, before you said you laid out a lot of things that we want to dive into more deeply in just a few minutes. But as per tradition on inside economics, we start with the economic data and statistics or any statistics. I know you might have some climate statistics. you might want to play this game with. We have a game here where we state a statistic

and let the other folks try to figure that statistic out. I'll have to say I'm probably the best at this game, Emily. No, only kidding. See, Ryan's very quiet. He's very humble. He's second best. I'm maybe. No, I think Ryan is the top dog here.

Yeah, for sure. Yeah. All right, well, given that he's the top dog, Hey Ryan, what's your statistic of the week? Well, we have to go with something inflation related because that's top of mind. Okay. I'm going to go with, that's a hint. 51%.

51%. That's not like energy. Oh, let's go ahead. No, go ahead. Do you have a guess already? I was thinking you're a few years, energy, some gasoline. No? Nope.

Go ahead, Mark. Because you're saying that, Chris, because energy prices saw the biggest increase. Everything rose. Fulition rose across the board, but most for gasoline energy prices. So you thought maybe that was 51%. And Ryan, that's not the answer. No, think outside the CPI report. It's tied to inflation.

Oh, okay. 51% highest on record. Okay. Does this go back to the NFIB survey, the small business survey? Survey? See, marks? Okay. National Federation Independent Business.

Is that the percent of respondents that are raising prices? Very close. Plan to raise prices. So that's a cowbell. That was impressive. I think that's a cowbell right. No, wait. He didn't say yes.

He just kind of shaking his head. You're right. Well, come on. You know, we need some excitement. Cal bell. Come on. Cowbell. Come on.

Yeah, no. Impressive. There you go. We have a cowbell. We have a cowbell. Emily, only when I get it right, though, Emily, not these other guys. Only when I get it right. That's that's okay.

All right. So you're saying in the National Federation of Independent Business, small business survey, monthly survey, 51% of respondents said that they plan to raise prices and you're saying that is the highest on record? Yeah. The next highest was back in 2008 when we had that big spike in oil prices. But other than that, this thing is by far. in a way the highest on record. And the survey goes back to the early 1980s.

Early 1980s, so in that high inflationary period. Exactly. Right. Well, let me ask you this, Ryan. What do you make of the CPI? You know, give us a sense of the, well, you know, that was a good number, but the marquee statistic last week was the release of the consumer price inflation

for the United States for October. And it tells us about that. and how you interpret what the report is saying? So why I picked the 51% is that it actually does a pretty good job in leading. It's a good leading indicator for poor inflation. And it suggests that we haven't peaked on a year-over-year basis. You know, we'll likely peak 6% early next year. But the October CPI, like you mentioned before, everything rose.

I mean, it was across the board. It wasn't just we talked about before, like the reopening components, lodging away from home, rental car prices, sporting events, things like that, that more likely a one-time event, it's starting to broaden out. I mean, it's really across the board that you're starting to see inflationary pressure. So if you strip out, use, new car prices,

the reopening effect, energy, the CPI was still up 0.4% month over month, which is an acceleration from what we saw for the last few months. Okay, so let me ask you this. And Chris, I'm going to ask you the same question. What's behind this surge in inflation? Fundamentally, what's going on here?

Demand. Demand is just really strong across the board. It's like a release of pennant demand for consumer services, goods. It's all really... Disagree. Totally. Totally disagree. Yeah.

See what Chris says. I mean, demand... I'd say the opposite. Lack of supply. Lack of supply. It's not demand. Chris, what do you say? I don't want to listen to the law.

Ryan anymore. Lack of supply, for sure. Yeah, demand is bad. Certainly, if demand was still low, you wouldn't have it. But right now, why we're seeing the surges is the supply side for certain, for certain, right? Energy, all the good, supply chain effects, ports, everything is backed up. So you're still buying into the cost push inflation? It's shortages.

I mean, I can't buy a car. There's 75,000 cars on a dealer a lot because they can't produce cars. because of a ship shortage because Malaysian shipplants shut down because of Delta. I mean, you're right. Demand, you know, if demand was weak, you wouldn't see inflation. And demand for goods in particular has been strong. For services, it's still below pre-pandemic levels by orders of magnitude. So, you know, and the other thing I point out is demand growth really slowed because of Delta.

You know, GDP growth, obviously that's. more than just demand, but a big part of its demand, consumption, that was much weaker in the third quarter because of Delta. No? I mean, are I convincing you? No, not all. I think it's most like a combination. I think there's some supply issues still going on that's contributing to it.

But if you look, maybe you can explain to me how supply chain issues are causing supporting mission prices to go up 8% month over a month. I'll tell you, here's how I would answer that question. The answer to that question is the Delta wave of the pandemic. Because the Delta wave of the pandemic did significant damage to global supply chains and to the labor markets. So on the supply chain side, because Delta was particularly hard on Asia, Southeast Asia, where all the supply chains begin. And so that's why we see shortages for vehicles and furniture and, you name the product. And it's demand destruction.

They can't sell because there's no supply in shortages and higher prices. And then, of course, it scrambled the labor market. More people got sick, couldn't go to work, took care of sick people, fearful of getting sick. So you had all these open positions, particularly in the industry you just articulate, recreational activities, leisure and hospitality, personal services. So that's where you're seeing the wage growth. That's where the wage growth has been strongest because people just haven't. been going back to work because of the delta wave.

And the businesses in those industries are passing that along to consumers. So in my mind, the fundamental reason for the acceleration and inflation, you know, to the degree that we've observed is the delta wave. It's a supply shock. It nailed demand. You know, it hurt demand. And it's caused inflationary pressures to develop. A very classic kind of supply shock.

I was on board with that whole argument for the last several months, but now in October, you're starting to see signs that it's not just supply. It's also demand pool. No. Look at owner's equivalent rent. I mean, rents. Oh, rent, rent growth. That's supply and demand, but actually more supply than demand, but we can go back to

what else? I mean, other than rent growth. Because I agree, rent growth is going to accelerate. No, I mean, everything's going to start to decelerate. Yeah. Because, I mean, the pandemic didn't repeal the law of demand. I mean, demand is going to start to weaken in response to these higher prices. So is your argument inventory build on the part of businesses?

Is that the demand you're citing, that the extra or the accelerated demand is folks wanting to? Inventories are really, really lean. Like, you can't get a car, right? But also, if you look at container traffic going through the port of Long Beach, it's significantly higher than it was in 2019. So that's, you know, that's not necessarily a supply issue. They just can't process at the amount of demand there is for these containers. Look, that's a supply issue.

Look, look, look, here, all, you know, it's like looking at the stars and trying to come up with the unified theory of what's going on with the stars. And the best explanation, and maybe it's wrong, I don't know, but it's the best explanation for what's going on here is the, the delta wave. It scrambled supply change. It scrambled labor markets. It's also affected the composition of demand, which is also important, right? Because it jacked up the demand for stuff, vehicles and furniture and everything I got on my back deck out here and nailed a demand for services. A total demand, total consumer spending, that's still not even quite back

to where you would have thought it would be if there was no pandemic. Overall demand. Right. Overall demand. So the composition is, but it's about the delta wave. But this is really important, right? Because this will, this gives you a sense of where inflation is headed. If you buy into my theory of inflation, my, you know, looking into the star's theory of inflation, that says, okay, the delta wave is now fading, assuming the pandemic continues to fade, then the worst of the inflationary pressures are at hand. You know, maybe it lasts another month or two, I don't know, because it takes a while to unscramble things. But by early next year, we should see definitive signs of inflation moderating. If that, my theory is right.

I agree with you. Yeah, I agree with you. Oh, you do? Yeah. I think we just disagree. I think I'm, I would argue that you're starting to see more demand pool inflation. But it's temporary. It's, you know, people aren't going to, it's through, there's a lot of pen up demand for restaurants and going to sporting events. You know, that, we'll get through that. We'll work through that pretty corporate. Yeah. Emily, you want to settle this? No, but I'll throw in the statistics if you want to try to get it. Yeah, yeah, yeah, yeah, far away, yeah. Are you changing subjects on us, though? I am changing subject. I'm getting a little closer to my heart. Not that I don't care about it. Okay, but okay, can I ask before you, before we go to the, if you're going to change subjects?

Because it might be, because I'm guessing you're going to go to climate change, right, on your, statistic? That's a wild guess, but you're, yes, you're sorry. Okay. So why you wait because that's a good segue into our conversation around climate issues and we let's just finish this conversation around uh around uh well inflation in the statistics so i'm going to turn to chris next chris all right do you have an inflation statistic yes okay far is it support my view or ryan's view uh it supports uh it actually supports emily's you know oh okay all right it's got a it's got a It's got a climate change factor in it. Oh, it does.

Okay, far. Go ahead. Go ahead. Far away. So Ryan's complained that I make these too easy. So this one I dug into the bowels. So you get what you ask for, Ryan. 2.1 and 5.6%.

All right. Year over year or month or month? Both. One is month over month. One is here per year. 2.1. Is tied to climate change? Well, I'm going to tie it to climate change.

It's an inflation. So those are two inflation. Energy prices. Yeah, it's got a... No, not energy. Not energy. The PPI or CPI? CPI.

And it is the price for... You're talking about the change in the price for some good or service. Right, Chris? Yes. You're not allowed to take a drink in the middle of your question, so... Okay. All right. Lisa.

And you were drinking Wawa coffee. I was a hint, by the way. Sorry, go ahead. Oh, that was a hint. How are you? Oh, that's why you do a good drink. Okay. Coffee prices?

Coffee. Yeah. Yes, roasted coffee. Up 2.1% in one month. He picked that because he's complaining that, you know, his costs are going up. Yeah, okay. Yeah. Inflation's personal.

That's one. So, yeah, that's part of it. But the reasons why coffee prices have gone up are twofold. One is supply chain effects, right? The other is climate change related. Brazil had a terrible season of a drought and a flood. Yeah. Or drought and frost.

And so they've cut production. Then Vietnam, who's the second biggest producer of coffee, has supply chain issues. Right. So you got everything. Yeah, that's a good one. So coffee prices were up 2.1% October over September, and they were up 5.6. Something over the year? 5.6, yeah.

And it's going to get worse, actually, because those are the consumer prices. But the producer prices, the commodity price is up 100%. It just accelerated today, actually. We're up substantially. And that's just the trend because coffee is one of those crops that are very much a threat from changing precipitation and weather patterns and pest and drought and you name it, right? Exactly, exactly. Right, right.

It's all related. It is. Did they still you're punching my? No, no. That was all good. I can see you gave that some thought. That was a really good one. On my way to Wawa, yeah.

Okay, I've got another inflation, the CPI inflation one. This one's, you know, this might be a little hard, so feel free to quiz me. 3.1%, and it's two different statistics that are 3.1%. And now that I just said that, I forgot what one of the statistics are. Hold on my second. Oh, okay, now I remember. Go ahead. I know one of the, I know a 3.1%.

I don't know if it's yours, but that's, oh, really? Okay, go ahead. Owner's equivalent rent. Was that three point one percent? Three point one year over a year. Oh, okay. So there's three, three point. Oh, and this is an importance, going back to Ryan's point. Ryan, was I too hard on you?

No, you're never too hard, we're good. You're still my plan? Yeah, okay. All right. Okay, so let's go back to rent growth in the acceleration there. Did you want to, Chris, talk about that? What's going on with rent growth? So rent growth also, oh, what, 2.7% year for a year, right?

So both were a 0.4% month. I'm sorry, 3.1 was what then? 3.1 was owner's equivalent rent. Oh, I see. Rents are 2.7. So. Owners equivalent is rent of homes. the equivalent, how this, the BLS, Bureau of Labor Statistics measures, the cost of owning a home

is through the implicit rent that the homeowner would pay. And that's called Homeowner's equivalent rent. And that was up 3.1% per year over year. And if you rent your home, that was up 2.7%. Right. rent to a tenant. That's 2.7. That's right. So, I mean, pretty close to each other.

Both were up 0.4% in the month, though, right? So that's a healthy gain that's accelerating. Those months, those year over years are still, though, not at the level that we had prior to the pandemic, right? So you see things increasing here, and they will continue to increase in terms of the rate of change, but because prices have been going up, but it hasn't fully caught up. So I see this certainly as a tailwind going forward. Yeah. And on this, I would argue, it's always demand and supply when it comes to price. But when we're talking about rank growth.

Did you want to say that again? It's always demand. Yeah. I just want to point that out. I did say that. I did say that. I mean, we wouldn't have these price increases if demand was weak. That's for sure.

Yeah. But even on the rent growth, I would consider that to be more supply-side issue than a demand-side issue. That supply of new housing, both for rent and for sale, has been very constrained post-financial crisis for more than a decade since the housing bust. We just have not been putting up enough homes to meet even the weak demand that existed early on in the period after the financial crisis. And so vacancy rates have continued to decline. And I think vacancy rates across the housing stock for rent and for sale together is pretty

close to an old-time low. And I consider that a supply-sit issue. Would you, Chris? Yeah, certainly. certainly right and demand factors in there too riots yeah absolutely yeah and it may be because there's only so much housing you can consume right so it is a supply issue yeah yeah i there's a demand component in the sense that uh with the pandemic with the pandemic winding down i think you've seen households form right a lot of people double millennials doubled up when the pandemic was raging

they or they went back to their parents home and now they're striking out and they rent whatever generally as opposed to buy. So you have seen some pickup in demand, but it's bumping up against very, very, you know, limited supply and you get these rent increases and price increases. Okay. So you had another 3.1? I do.

I've got two more, actually. I've got two more. They're difficult, they're difficult, but they're, I think, instructive. I pick them for, you know, reasons of instruction. You've got it, Ryan? You got one? I think I got one.

Oh, what's that? Rental car prices. They were up 3.1%. No, my, these are, that's a good one though, but I, no, no, this, I'll give you, so going back to what Chris said a little bit ago about, you know, we're just getting catching back up to, you know, inflation's pre-pandemic. So there was a period, you know, a year ago when prices were getting cut or inflation was very low. So it's to some degree what economists call a base effect is influencing these numbers, right? So is that as a hint? What do you think 3.1% is.

Oh, is it the change in the CPI from two years ago? Exactly. Core CPI. Consumer price inflation, X food and energy, which economists focus on because that's the best predictor of future inflation. That is up 3.1% on an annualized basis over the past two years. October. So take October this year, the bad number, compared to October of 2019, calculate the average annual growth and it's 3.1%. Right. And in my mind, still high.

Yeah, still high. But in my mind, that's reality. That's where inflation actually is. Sure. Sure. Right. I don't know. Ryan, would you agree with that? Yeah, I would agree with that. Okay. So 3.1, in target CPI inflation, you know, where the Fed wants it, I'd say is as high as 2.5%. Right? Correct. So we're 60.6 percentage points, 60 basis points off. Even in this hair on fire, you know, inflation's high, I'd say 3.1. So that's my with 3.3. I'll give you. I'll give you. there's one more 3.1. You'll never get this. Should I tell you what it is? Just gives a hint. No, here, I'll give you a hint. I'll give you a hint.

It comes from the Cleveland Fed. Ryan might get this. Oh, the median, or trim? Oh, you got it. Median. The median inflation rate. So this is kind of cool. Cleveland Fed has a website.

They publish different measures of inflation. That's one of the things Cleveland focuses on its inflation. You towed up all the goods and services. look at across all the products and services, and there's a, I don't know how many of the track, Ryan. Do you know, the BLS? How many do they release?

Not off the time. It's a lot. It's a lot. A lot. Yeah. Then they calculate the growth in prices over the past year, and they look at the price of the product or services that's in the middle of that distribution, the median.

And the median CPI increase is 3.1. 3.1%. which also gives me confidence that, you know, we're, you know, we're going to go back in here pretty quickly. So if you were in Powell's shoes, would you start raising interest rates sooner? Absolutely not. You know, what I would do, what I would do. No, no, no, because you got to, you got to, this is a supply shock that has not affected

inflation expectations. Therefore, I should be focused on the growth aspect of the supply shock. I should be thinking about how do I get this economy back to full point. If inflation expectations started to rise, I'm with you. You know, here's one thing I'll say, though, in that regard, I could be wrong. I could be wrong. But I'm with you. And if I'm wrong, to guard against that possibility, I would start, if I were him, guiding

the market to their expectations for rate increase sooner than the markets has been expecting now. So right now the market, or at least before the CPI report, the market was expecting two 25 basis point increases in the federal funds rate. beginning sometime this time next year. Is that the same, Ryan? Do you know? No, it's up to three now.

It's up to three. So that's exactly what I would do. You know, and I would ratify that if I were him. I say, yeah, it sounds about right to me. Maybe even four, you know, kind of bring it forward, you know, a little bit. That's what I would. You can't pull the trigger too soon. Well, do you agree with that?

Yeah, I was saying I was shocked because you have a tendency to lean a little bit more hawkish. Oh, I do? Yeah. Don't you agree, Chris? over the years. Yeah. Yeah, yeah. Yeah, you've been a little bit more harder.

Relative to you guys, you guys are flaming doves. Flaming doves. Flaming doves. We got our title. Oh, we got our title. Now we've got to find, Emily, we'll fill you in on what that means a little later. But we have to come up with a pithy title, Flaming Doves. That's a good one.

All right. Okay, we got to move on. Emily, what's your statistic? All right. it is 7%. 7%. And it's related to climate change. Is this something like you know recently?

I'm going to guess. I'm going to guess. Get the cowbell out, Ryan. There's no way you're getting this one. On the first shot. 7% of the world's population is at a high risk of some type of physical event. You're way below, way. We have like 30% of the population at

risk of flood. So no, no, no, I'm going to, I'm going to guide you a little closer. It's more related to energy. It's an economic statistic. Okay, 7% of electricity production comes from wind. No? That, I wish I had that number. I love my finger. All right. She's thinking, That could be right, but that's not what I'm thinking. Is this growth rate? May I may not be right. Is there a growth rate? It's, no, it's a percent of a, it's a more of a stable thing.

But look on the dark side is my hint here. Look on the dark side. Oh, my goodness. I can feel that Emily goes dark very quickly. Ryan, you got any ideas here? Any clues? Can you give us another clue without giving it away, Emily? Or are we...

Sure. Should we say awful? No, no. Okay. Is it a global? A regional statistic? It's global. It's a global statistic and it has to do with subsidies.

Okay. I almost gave it away, but not completely. Oh, subsidies. Is that really, is that the total fiscal subsidy provided by governments for climate risk mitigation? No. I wish. Yeah. It's for fuel.

Oh, Chris, got it. Yeah. So that's the global total fossil fuel subsidies per the IMF for 2020. So that's $5.9 trillion globally. And in the U.S., I believe, the number is $20 billion a year. So we're behind China, Saudi Arabia, and Iran in terms of how much money we put into fossil fuels. But it's just like, you know, how much do we want to shoot ourselves? in the foot when it comes to climate change.

7% of what of GDP or 7% of? Yeah. Yeah, of global GDP. That is an amazing statistic. Yeah. Wow. And is that, is it going down or do you know? Is it changed?

Not in a meaningful fashion, certainly not in the US. Probably going up, if anything. So if your next question is, how are we doing with the climate negotiation that Cup. Yeah, that would be my next question. Let's move into the big topic. How are we doing? Well, think about it, right? So there's so much at stake for the fossil fuel industry, not just the subsidies, but also their ability to function and sell. There are more, there are more representatives from the fossil fuel industry than government at COP right now. Now, granted, those representatives from the fossil fuel industry are not in the room drafting the language

from the final agreement themselves. But that gives you a flavor for what's going on. So the negotiations are making progress we're expecting at time of recording. They're supposed to finish up in about an hour and a half. I don't think that's going to happen. They usually stop the clock, as we say, and run long over the weekend. They're supposed to agree on how we're going to reach the Paris Agreement target, so how we're going to reduce emissions enough that we can keep global.

warming to well below 2 degree is the Paris language, preferably to 1.5 Celsius degrees. So that's the global temperature increase. And there is something about reducing fossil fuel and reducing subsidies. But I'm not sure it's going to be quite as biting as we need to really reduce emissions. You said you were there. You attended COP26? I, you know, side show, not part of the negotiations, but there's a lot of people who get together around the negotiation on the fringes, the off festival if you want. Lots of conferences where we talk about the future of the world, how the financial markets are integrating climate risk and what are the big topics.

So it's also big events for people who care about climate, even if we're not in the room arguing over where the comma should go in that sentence. So let me ask, coming out of that, do you feel more hopeful or not regarding the world's commitment to addressing this issue? Oh, that's always a hard question. I'm hopeful with some of the improvements and momentum that's been created around this specific year's cop. So Mark Carney, former chair of the Bank of England and of the FSB, has been pushing financial markets a lot to get banks and investors and corporations to take commitments to reduce their emissions to what we call net zero. So it's take them down as far as you can.

And for the things that you really can't obey it, you're allowed to buy offsets or to make up for those emissions otherwise. And there's been a big take-up in the market, dozens of the largest banks and investors on the market, tons of corporations, including Moody's as a corporation, our employer, committing to reduce emissions to zero, essentially by 2040, 2050, depending on who you took to. So that's really impressive. And that has given me hope in a way that I hadn't had in a long time, to be frank. But what I still find concerning is I'm not sure we're seeing the same level of commitments from governments to really reorient their policy and economic systems, including subsidies and all the other things that governments can do to reduce emissions. So there's still a lot of politics and a lot of protecting economic interests, short-term economic interest over long-term welfare of the world. Okay. So is that really a big deal, though, going back to financial institutions going to net zero? I mean, it's not like financial institutions produce a lot of CO2. So, I mean, I know for each company, it takes effort and energy and you have to be focused on accomplishing that. So I'm not diminishing that accomplishment. But in the grand scheme of things, that can't be that important, really. Is it?

Well, that's a great question. So that's what's interesting about those commitments is this isn't about whether a bank is going to be able to change their light bulbs and buy only renewable electricity because I'm with you. I don't care. I mean, I care a little bit, but no, that's not what the stakes are. It's about whether their portfolios are aligned with the Paris commitments with those net zero targets. And so what this means is that every bank and every investor becomes the cop. They become, are chasing their clients, their lenders, their investing corporations to help them or incentivize them or scare them into actually taking and delivering on those net zero targets.

So are you saying, just so I make sure I have this right, you're saying that I'm a bank, I'm lending to all these different companies and households, and I'm looking at their carbon footprint, and I'm changing my pricing and my underwriting decisions so that my lending to these institutions will result in net zero. If I look at my portfolio, that it's driving that the carbon emissions to net zero for that portfolio. Is that what you're saying? That is exactly right. And we're not completely there yet in terms of banks changing their performance.

pricing policy, or where we're starting to see those signals where banks or investors might just pass on a real estate deal, for example, where they feel that the building is so carbon intensive. There's no way it's going to get net zero. And they're really trying to focus their assets on doing that transition. And so there's a sort of an easy and not so great approach, which is ditching everything that's carbon-intensive. And that's not great because not everyone on the market thinks about net zero and carbon emissions. So that just means you're going to have a two-tiered market with a number of institutions holding all the dirty business and then the global institutions looking good, holding only green and clean businesses.

the better approach is for them to work with their clients and help them, including with financing, help them transition and reduce their emissions. That's an interesting idea. It just doesn't feel like it's going to work, right? Because financial institutions are motivated, like all businesses, by returns, and they're going to lend to where they get the highest return. their returns, their own returns for their own balance sheet. So what's the mechanism, the incentive, the economic rationale for them to actually do this other than, you know, getting browbeaten

by, you know, Carney or, you know, some other, you know, government agency? Yeah. So, you know, peer pressure regulation, customer expectations not to be understated. You know, survival of the species comes to mind as one of the drivers. And I know it doesn't usually factor in economic decisions. But we've actually come to the point where some of the largest banks are making it a policy because they will tell you, you know, what's the point of climate stress testing my portfolio for a four-degree world? We just won't function. So it's also a way to manage their own risk because right now it's a voluntary commitment that they're taking,

but there is an expectation that at some point, probably too late and therefore probably too fast, governments will take action and then it will become required. And if they have to do it fast, it's going to be really brutal and create a lot of stress on the economy. Interesting. So you're saying they're going to prepare for the possibility that they have to actually, they're required by their own regulators or central banks to price for CO2, the CO2, the carbon footprint of their clients or their customers of their borrowers. And if they're if they're not

preparing for that now, then they will get wrong footed. They'll have a problem down the road. Right. And also if you believe that we need to address climate change, then at some point, we need to transition away from fossil fuel. And for those who haven't, it's they're going to be left holding the bag. But Emily, you know. So there's self-interest there. Yeah, but you told your statistic was 7% that 7% of GDP, global GDP, goes to subsidizing fossil fuels, and that has not changed appreciably. That's, you know, why in the world do we think that governments are then going to turn around and tell their banking and financial institutions, you've got a price for CO2 emissions

for carbon footprints? I mean, does that sound realistic? Do you think that's, do you believe, do you buy into that? Do you really think that's going to happen? But that's why I have mixed feelings. I mean, again, we go back to survival of the species, right? We've got to do something. and yeah, it's going to cost money.

But the stakes are so big that it is actually worth it. Do I believe that the governments that are in the room right now making decisions that they have to deal with and implement are going to do everything that needs to be done? That's, you know, we're humans and valuable. And no, they might not get to it. And then to your earlier question, is this going to turn into a giant greenwashing party

where everybody says they're going to make those commitments? and they're like, yeah, we'll worry about it in 2049 for the 2050 target. So, you know, this is where my job comes in as a provider of data market intelligence. And so trying to provide transparency, trying to help with accountability with banks, investors, governments, understand what companies are doing. But at the end of the day, everybody needs to do their keys. And it goes against short-term economic self-interest. So that's the challenge.

I'm an economist, right? I have a hard time getting my mind that that's going to work. I mean, I hear you. But let me ask you this. Why, if we're going to, as an economist, feels like to me, the most straightforward way to address climate change is just price carbon. Just, you know, you did cap and trade, but why not just a carbon tax? I mean, that's kind of easy, right?

That's really easy to implement. We know how to do it. It generates a boatload of revenue. it's going to affect CO2 emissions. We could take that revenue, give it back to individuals, particularly low-income households, because I understand it will be regressive kind of tax. I mean, low-income households will suffer more because they consume more of their consumption goes to energy-intensive kinds of spending.

But if we're going to expend all this political energy on something like getting the financial institutions to price for CO2 emissions. emissions. Why wouldn't we just go to the most obvious thing and pass carbon taxes? I am entirely with you. Spent five years of my life writing reports about the intricacies of the politics and the market dynamics of cap and trade. And yes, please, give me a tax. It's so much easier. The politics are not so good in the US. So cap and trade was, you know, in economic terms, it's supposed to be even better than a tax because then you have the perfect marginal cost of reducing emissions and the market sorts itself out and you get Brazil to stop burning the forest and that allows

others to continue doing certain things. In practice, it's a mess and we still didn't get it through progress. So back to square one, can we please have a tax? Well, let me say a question. I know Canada, there's examples around the world, but Canada is the one that comes to my mind. They have a carbon tax, right? And how is that, do you have any sense of how that's working, if that's been successful in getting CO2 emissions down? Or do I have that wrong?

Last I checked, so last I checked, there was sort of a carbon tax in Alberta. The Canadian government strikes me as, you know, like Australia, like the US, one of those countries that's been just flip-flopping from one election to the next. Yes, we're serious about climate change. No, we really don't believe in it, don't care. Let's pour more subsidies into oil and gas.

So would you see any discernible effects, not necessarily? The problem with cap and trade is that governments meddle with the rules so much that the price stays very low, and so that defeats the purpose. Let me ask you quite another question. This is more parochial because we're in economics. We produce lots of scenarios, lots of forecasts. And one of the things that we're trying to do is define the climate risk assumptions that go into our baseline worldview. So we say, here's what we think the economy is going to do across all the different

countries of the world, different regions of the world. we have all kinds of assumptions around monetary policy, fiscal policy, the pandemic. Obviously, Chris does a lot of work. We're trying to understand the epidemiology of the pandemic and what that means, you know, vaccines. So we've got a lot of assumptions. But so far, historically, we've had implicitly climate risk assumptions, but not explicit ones.

So we are making it clear what are the underlying climate risk assumptions that we're using in our worldview, in our forecasts. And one of the key assumptions that we've been debating is around where, and again, this is the baseline. So this is the most likely scenario. And there's a distribution of possible outcomes pretty wide here, but in the middle of the distribution, what is the temperature rise going to be? And as you pointed out, under the Paris Accord back, I guess it was six years ago, there was a commitment to get to limit the temperature increase to 1.5 degrees Celsius. and if we did that, then we kind of dodged the most significant bullets here around climate risk. Right now, our thinking is, well, 1.5 seems like not a baseline kind of forecast.

So we're thinking somewhere between 2 to 2.5 degrees Celsius increase, which, you know, if that's the case, we're going to see some significant problems related to climate risk. Do you have a view on that? I mean, can you help us out here? What do you think? If you were in our shoes thinking about this. And by the way, this is important for our forecast because to get to whatever degree, because this affects, you know, property loss and chronic physical risk and, you know,

affects a lot of different things that are key to the economic outlook. Productivity. Yeah. So forth and so on. So what do you, if you were in our shoes, how would you think about this? What would your assumption be? Yeah, so I have a view and I have data too. Oh, great.

Okay, it's perfect. I believe right now we're on track, business as usual, at best, towards 2.7, which is really high. And even that is the median because when you look at the full range, we don't know exactly, right? So we're still learning the science of how greenhouse gas drive different impacts around the world and how quickly we are warming. we're actually warming than we thought because we're melting the ice sheet, where there's all kinds of things that are reinforcing the warming. So 2.7, 3.1, that's the business as usual baseline that probably should be factoring in. And that comes with a lot of impacts in terms of physical risk.

Some of those are easier to model than others, right? So you're looking at, and I know your teams do that very well, but looking at impacts on real estate prices from sea level rise, looking at impacts on productivity and agricultural output from chronic changing temperature. And some of these other impacts are harder to forecast because when you look at extreme weather events, we know that we're going to get more hurricanes and that they're, well, we know we're going to get hurricanes that are more intense, not necessarily more of them. We don't know when.

we don't know where they're going to hit, we don't know how big they're going to are, so that's harder to forecast. And then there's all the secondary impacts that we're not even looking at right now in terms of water stress. How is that going to affect the California and the Texas economy? Is California going to continue to produce as much agricultural products? What does that mean for local real estate markets when all the water dries off and we stop producing food and ag and, beverage, also a big industry. Data centers need a lot of water.

What happens when you get more migration? Crypto-producers, right? They need a lot of electricity, right? Chris knows this. Chris is a very avid crypto miner and trader. Only green crypto, though. Only green. His carbon footprint is really, you know, Emily, you want to get the world's carbon

footprint down. You've got to focus on Chris. Just focus on him. Get a call from Monday, Chris. No, but you get the picture, right? Business as usual looks bad in terms of physical ways. Well, when you say business as usual, that means no change in policy, no change in technology. Is that business as usual for you?

Yeah, that means continuing what we do the way we do it pretty much. And then you add the scenarios where we actually get our act together soon or we get our act together late. And when it's late, then we need to do a lot more faster. And that's where all held recluse in terms of the impact. the economic impact. So there is an economic benefit to making those decisions, even if they have those short-term costs on carbon,

because you're avoiding a lot of impact and economic cost long-term. And that goes back to what Mark Carney coined that expression, the tragedy of the horizon, right? We know climate change is coming, but it's out of the economic and financial horizon, and therefore it's easier to make decisions today that make money, and even if they don't, they don't want to drive. rest of long-term issue.

Yeah. Yeah. Okay. So, but your baseline for assumption can't be one point, excuse me, 2.7 to 3.1 degrees Celsius because you've got to be assuming, I think, some policy response, some technological advance. I mean, you know, people are focused on how do I mitigate CO2 in the environment? And there's all kinds of new technologies that are being worked on and got to assume that something is going to have some impact. here. So if you or us, would you, would you settle on 2731 or would something lower than that?

You know, 27 is reasonable given what we see. If you want to be a little more optimistic and you look at all the net zero commitments that have been taken recently, I think we're at 1.9 or 1.8. So that's a lot better. That's still a lot of physical impacts. But certainly gets us closer to the to the 1.5 target. Okay. Chris, So where is your sense of this, Christoridis? I mean, because I know you've been thinking about this in terms of the underlying assumptions. Have you come to any kind of view on this issue? Well, my view is that it's complicated.

A lot of numbers get thrown around. And even, you know, there's a lot that forecast of what happens under current policies. There's quite a range, right? 2.7, there's 3.1, 3.2.2. We've been using the NGFS, that's the network for greening of the financial system scenarios. These were published last June, basically doing a weighted average of those various forecasts. So under that set of scenarios, the no policy action is actually assuming 3.2 percent, or 3.2 degrees Celsius increased by the end of 2100. And the other scenarios basically get to 1.7, 1.8.

Right. So the way I've been thinking of it, I kind of flip the coin and say either we're going to go down the path of no change, right? Or we're going to do something, some mix of policy and technology. I don't know what that mix looks like. So I settle on 50-50 between, you know, we don't do anything and we do something. And that gets you at a 2.5 degrees Celsius. So that's how I've been thinking about it. But it's a very naive type of view. Yeah. Hey, Emily, so we're working on this right now. Would you mind if we kind of connect with you on this and just get your perspective once we nail this one? Yeah, of course. You should see the email chain between Chris I and Garav Gangoulis are economists in Europe and Chris Lafacchus and Brisson. It's like I can't keep track of the email debate about this. Yeah, no, please, please, happy to join in. Hey, a couple quick questions, kind of lightning round because I know we're running out of time.

on 427, now part of Moody's. So 427, the name has been retired, part of Moody's. But you're still doing the same kind of scoring of different types of physical risks. You know, everything from flooding to sea level rise to whatever, tornadoes. Also other non-climate related, right, like earthquakes and that kind of thing, I believe. Of all the different risks that you're scoring, which is the hardest to score? to get a grip on. Oh, that's a great question.

Yeah. So I thought you were going to ask what's the most important one. Well, okay. That's a good. That's even better question. And they're kind of related, right? Yeah. So what risk is our friends at RMS calls them floods,

sloughs silovarize. So fluvial, pluvial, coastal floods. So floods from rivers spilling out. floods from too much rain, floods from the oceans rising and storm surges in particular during hurricanes. It's the biggest risk. It's also where you need the most sophistication in really digging deep to understand the dynamics of how water is going to move and when and how long it's going to stay.

And that's also where we have the greatest exposure globally mentioned earlier, right? 30% of the population globally has exposure to flood. You've got entire regions in Asia Pacific. You've got East Coast in the U.S. that's super exposed. And also a lot of uncertainty because sea level rise is happening faster than we'd like in many ways. And it's also one of those risks where even if we fix, you know, even if we go to 1.5, 1.8, there's a number of processes that are in play that we may not be able to stop. And so syllable-wise, we might just need to live with.

And that's going to redefine the coastlines over many decades and centuries, but it's really going to change the maps and where we live, where humanity lives on the planet. Right. Well, one last question. Build back better. This is the piece of legislation that's in Congress now being debated. And it includes a sizable amount of money for. different climate risk related policies, you know, everything from more subsidy for electric

vehicles to solar panels and a bunch of different stuff. What do you think? What's your sense of that? Any perspective on the bill back better? I mean, is it something, if you were a senator in the U.S. Congress, would you vote for it? Well, that's an easy one. Yes. I'm big on investment in infrastructure. One of the most interesting things that I've seen in that bill is the $47 billion going to resilience and adaptation investments. So this is not about EVs or reducing emissions. This is really about preparing ourselves for the impacts, again, civil rise and storms and wildfires that we're seeing already across the U.S. And then I think a lot of the – there's a lot more in the spending bill that's going to come in terms of carbon emissions. So we need to see what happens with that one.

Hey, Chris and Ryan, any questions for Emily while you have her? I mean, anything that I missed that you're dying to ask? Any pushback? Is anything she said? I was hoping she was going to end on a positive note. We usually try to end on an upbeat note. Yeah, can we be upbeat, Emily? Come on.

Just try it. Please, give us a bone. Sorry, that's not part of my job description. No, I think we can do it. You said it earlier, Mark, right? There's commitment from the market. There's technology. We can't just rely on a silver bullet, but there is technology improvements.

Okay, good news. We can make water out of thin air. Isn't that a cool technology? That is cool. You can have water panels, like solar panels, and you get the humidity and you create water in the middle of the desert. Yeah. Okay. Well, that was kind of thin.

but okay, we'll go with it. Hey, but, you know, I tend to be optimistic about this kind of thing because I've seen big problems, you know, as you can tell them, I've been around a while, and we've had our share of problems leading up to climate risk. And, you know, when push comes to shove, we somehow, some way, I can't quite figure it out, we come together and we solve the problem. And I suspect that's going to be the case here, that we don't know what tech technological changes are dead ahead of us.

But technology tends to bail us out. But particularly when we're going to put our mind to it. So I'm, you know, I think it's prudent to be cautious and think about the downside because that gets you moving on trying to solve these problems. But at the end of the day, I think we're going to figure out a way around this. I wish we would tax carbon, though, because if we did that and really light a fire under people to, you know, figure out. It would make technology a lot more attractive.

So, yeah, let's invest in technologies. Yes, let's do it. We can do this. Well, we'll think, I'm sorry, Ryan, did you, was there anything you wanted to ask, Emily? No? Okay. But I was asking for something positive. Oh, yeah, that's right.

Yep. Emily, Chris, anything you wanted to ask, Emily? Well, just on the last note, my question was, are we better off actually investing in technology, putting those dollars that we're pledging to research and all sorts of pledges around carbon targets, are the society better off just taking that and plowing it into more research and development, right? Are we trying to work with current solutions that maybe are far less efficient than something new? I think usually there's a mix of both. And I don't think it's in either all right. We need to use what we have because we need reductions now and we need to invest because we

need to do more in the future. So there's both. Very diplomatic, thank you. Yeah, very nicely. Very nicely done. No, I need it. I'm not trying to make people happy. That was a very Derides response. That's why I liked it. I like that. Yeah. Well, you guys might have noticed I didn't advertise my Twitter handle this time, but I'm going to do it now at Mark Zandi. I'm on Twitter. Emily, are you on Twitter? Yes, at Imat Zachorati. I am definitely going to follow you. I need to follow you, so I'm going to do it. But only if you follow me, Emily.

Of course, Mark. You're my first. You're my next. You're on Twitter. That's so funny. All right. Well, thanks so much for joining us. It was a really very informative conversation.

A little depressing, but, you know, that's the nature of the beast here. So, but thank you again. And with that, we're going to call this a podcast. See you next week.