Ex-Goldman risk chief Litterman: “Carbon pricing is the only brake we have”

Remarks come in interview with the Minneapolis Fed

Carbon pricing is the only brake we have to stop climate change, according to leading economist Robert Litterman, the former Head of Risk Management at Goldman Sachs.

He was speaking in a wide-ranging interview with the Minneapolis Fed, where he worked earlier in his career, in its publication ‘The Region’.

“The winners are mostly not represented at the table. They are the future generations”

While his views on carbon pricing are well-known – he addressed the topic at RI Americas in 2018 – it’s unusual that his stance is covered in such detail by one of the Federal Reserve Banks (see RI’s series on the Fed and climate change here and here).

Litterman, a former advisor to Singapore’s Government Investment Corporation (GIC), is the founding partner of Kepos Capital and chairs the Risk Committee of environmental campaign group WWF. He is known for co-developing the Black-Litterman Global Asset Allocation Model, a mathematical model for institutional investment portfolio allocation.

He is quoted as saying by ‘The Region’: “We don’t have 10 years to spare. We don’t have three years. This should have been done long ago. Carbon pricing is the only brake we have, and we’ve got to slam on it immediately.”

He continued: “If we estimate a carbon price of about $120 per ton, that translates to $1 plus per gallon of gasoline. But there are many cheap ways to produce energy—solar and wind, for example.“At $120 per ton of emissions, there is going to be a rapid decarbonization of the economy. People will continue to drive their cars, but the transition to electric vehicles will be that much faster.

“As an economist, I see this a little bit like gravity. If gravity is pulling you down, it’s going to be hard to move against it.”

He acknowledges the political problems of carbon pricing: that there are winners and losers.

“The winners are mostly not represented at the table. They are the future generations: my grandchildren and their grandchildren and their grandchildren’s grandchildren, none of whom are here voting today. They’re the ones who are going to be made better off by this policy.”

But Litterman doesn’t share the pessimism about climate action that many people feel because of the political situation in Washington. He says he is “actually much more optimistic because of changes by the oil industry, the biggest industry at risk from appropriate addressing of climate change”. He cited the recent statement by the heads of major oil companies supporting carbon pricing.

“And not just the CEOs but their shareholders were represented. So you have management and owners promising to work toward this.”

Despite “pockets of resistance” like the American Petroleum Institute who “haven’t yet got the memo”, the membership of the Climate Leadership Council on whose board he sits ranges from ExxonMobil and Shell to the Nature Conservancy and the WWF, he points out.

“We know what we have to do. We have to price emissions; we have to change incentives. We’ve got a coalition of players. So I’m more optimistic than most.”