Why one rating agency calls climate change a growing credit factor

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DALLAS – As hurricane-stricken states on the Gulf of Mexico face prolonged recovery from this year’s massive storm damage and California douses the remnants of lethal wildfires, affected governments must also consider ways to protect their tax bases from the long-term threat of global warming, credit analysts say.

“S&P Global Ratings believes that what previously were viewed as the credit implications associated with transitory storms must now increasingly be viewed through the lens of climate change risk,” analysts wrote in an Oct. 17 report.

Long term, analysts will take note of property exposed to sea level rise, “which exacerbates coastal flooding and increases high tides, which can reduce the property tax base many public finance entities rely on,” the S&P team of analysts led by Kurt Forsgren wrote.

The 2017 Atlantic hurricane season was described by climate researchers as “hyperactive,” and September marked the highest month ever recorded for accumulated cyclone energy, which measures the combined strength and duration of tropical storms and hurricanes, according to the National Hurricane Center. This year saw the highest number of major hurricanes since 2005.

Hurricanes Harvey and Irma did the most damage to Louisiana, Florida, Puerto Rico and the U.S. Virgin Islands, but coastal areas also had to make costly preparations in the event the storms’ paths came their way. A satellite photo by NASA on Sept. 8 showed three hurricanes, Katia, Irma and Jose, headed toward the Caribbean and Gulf of Mexico.

S&P analysts also pointed out climate change's threats to credits far from shore.

“The higher average and extreme temperatures associated with climate change can have many effects: increase electricity loads in many regions; cause or contribute to droughts and desertification; affect crop production, soften pavement and make roadways more susceptible to wear and tear; make rail tracks buckle; and prevent aircraft from taking off under some conditions,” analysts wrote.

In the U.S., an estimated 87 million people live along the coast, nearly double the 47 million in 1960.

“The costs of mitigating and adapting to climate change could strain the debt metrics of entities responsible for financing the adaptation costs, potentially leading to downgrades,” the report said. “Alternatively, the potential rating impact of higher leverage might be neutral, if sufficiently offset by the quantifiable benefits of mitigating long-term risks associated with climate change such as long-term cost savings.”

In previous years, local governments and municipal enterprises in the New Orleans area and Galveston, Texas, were downgraded following hurricanes Katrina, Rita, and Ike, analysts noted.

“In these instances, the economic and financial damage from the hurricanes was long-lasting and severe enough to change our view of many issuers' medium-term growth prospects and ability to generate sufficient tax revenues before exhausting external liquidity, as well as their long-term viability at their pre-disaster rating levels,” analysts said.

After Hurricane Katrina in 2005, S&P downgraded the city to a junk-bond rating of B from BBB-plus after the city lost 22% of its taxable assessed value. Since then, the Crescent City has recovered with a strong rebound in tourism.

In Texas, an energy-producing state whose leaders have long resisted federal regulations on carbon output, S&P has negative outlooks on three cities and five special utility districts in the wake of Harvey.

“In our view, the area of focus post-Hurricane Harvey, perhaps not just for the Houston metropolitan statistical area, will most likely be on drainage and flood control infrastructure,” S&P said.

Kathleen Hartnett White, former chair of the Texas Commission on Environmental Quality, once called global warming a kind of “paganism” for “secular elites,” according to news reports published after President Trump last week nominated her to head the White House Council on Environmental Quality. The TCEQ is the regulatory agency for hundreds of municipal utility and levee control districts in the Texas coastal area.

“There’s a real dark side of the kind of paganism — the secular elites’ religion now being, evidently, global warming,” Harnett White told a conservative talk show.

Hartnett White once dismissed the idea that carbon dioxide is a pollutant, calling it "the gas of life on this planet."

Other opponents of federal regulatory measures on climate include EPA head Scott Pruitt, who defended the oil and gas industry as Oklahoma attorney general.

As attorney general, Pruitt who sued the EPA more than a dozen times, said he was not convinced that carbon dioxide pollution from burning fossil fuels like oil, gas and coal is the main cause of climate change.

Despite the Trump administration’s advocacy for coal, Texas utilities have announced that three Texas coal plants representing more than 4 gigawatts of capacity are being retired due to low energy prices. At the same time, more than 4 gigawatts of new wind power is expected to come online in Texas in the coming years, basically replacing the lost coal power.

Nationally, coal’s power production in the U.S. has fallen from 51% in 2008 to 31% in 2016, according to the U.S. Department of Energy.

“Planning for climate change and mitigating risks is one component to our credit analysis and our opinion regarding the adequacy of management's plan is one of many factors that determine ratings,” S&P said.

According to global insurer Swiss Re, the financial cost of natural disasters has increased and various studies have identified climate change as a key factor for that is the growth in exposure in high- risk affected areas.

“While the precise impact of climate change on extreme weather events is still uncertain, different studies are pointing toward an increase in the financial impact of these events,” the S&P report said.

“From a credit perspective, our assessment of natural disaster risks that can impair an issuer's ability to repay debt is indifferent as to its root cause,” analysts said. “This includes naturally occurring phenomena such as fires, earthquakes, tsunamis, and (to a lesser extent) climate-related events such as hurricanes, tornadoes, severe thunderstorms, or snowstorms.”

The report gave high marks to state and local governments in California for climate-change preparation, even after wildfires north of San Francisco took dozens of lives and destroyed whole communities.

“The State of California leads these endeavors and has undertaken extensive efforts to understand how climate change affects all core functions of government, including energy, land use, emergency management, public health, transportation, water, and agriculture,” analysts said.

Among the governments that are increasingly focusing on flooding and king tides are Virginia Beach, Norfolk, Va., and Miami Beach.

“The tiny towns of Isle de Jean Charles, La., and Newtok, Alaska, are already preparing to abandon their waterfront locations and move to higher ground,” the report noted.

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