Taking Action to Address Climate-Related Fiscal Risk

By Candace Vahlsing, Associate Director for Climate, Energy, Environment, and Science, Office of Management and Budget & Danny Yagan, Chief Economist, Office of Management and Budget

The consequences of climate change are already causing profound impacts on communities across the country and in nearly every economic sector. In 2021 alone, Americans have faced historic floods, drought, extreme heat, wildfires, and hurricanes. By some estimates, property and infrastructure damages from disasters in 2021 have already surpassed $100 billion. People of color and low-income people are also most vulnerable to flooding and other climate change-related weather events, and less likely to have the funds to prepare for and recover from extreme weather. Looking to the future, we know that additional chronic impacts like temperature increases, sea level rise, and ocean acidification will continue to alter our physical environment—impacting communities and adding new stresses to Government resources and services.

That’s why, as part of a whole-of-Government approach to tackling the climate crisis, President Biden directed Federal agencies to better assess and mitigate climate risks in Federal oversight of the financial system, pensions, and Federal budgeting, lending and procurement programs. As part of this effort, the White House today released a government-wide strategy to measure, disclose, manage, and mitigate the systemic risk that climate change poses. This strategy reflects not only the magnitude and urgency of the climate crisis, but the need for better tools to confront it.

In support of these goals, the Office of Management and Budget (OMB) has been taking a number of steps to better integrate climate-related financial risk into the investments and core business practices of the Federal Government – from budget priorities, to procurement, to financial reporting and asset management, to how the Federal Government incorporates climate in estimates of fiscal health. Some recent actions include:

• Aligning Investment Priorities: In May, OMB released the President’s FY 2022 Budget, which proposed the largest long-term investment in our infrastructure and competitiveness in nearly a century and historic investments to mitigate the risks of the climate crisis and grow our economy.
• Factoring Climate into Procurement: The Federal Acquisition Regulatory Council, chaired by OMB, this week issued an Advanced Notice of Proposed Rulemaking to begin the process of amending the Federal Acquisition Regulation (FAR) to ensure the Federal supply chain minimizes the risks of climate change. This action is one of two FAR cases opened this May, which would substantially amend Federal procurement regulations to better disclose and mitigate the risks that climate change poses in Federal contracting.
• Modernizing Federal Programs for Adaptation and Resilience: Last week, OMB and the Council of Environmental Quality released climate adaptation and resilience plans that outline steps more than 20 Federal agencies are taking to ensure Federal facilities and operations adapt to and are increasingly resilient to climate impacts. Additionally, last month, OMB, the Council on Environmental Quality (CEQ), and the Federal Emergency Management Agency (FEMA) established a Flood Resilience Interagency Working Group to guide Federal implementation of the Federal Flood Risk Management Standard. This builds on actions taken to better prepare for and respond to the growing frequency, duration, and severity of extreme weather and climate-related disasters, like extreme heat, drought, hurricanes, floods, and wildland fire.
• Incorporating Climate into Federal Government Management: Earlier this year, OMB issued initial updates to budget and financial reporting guidelines, Circular A-11 and Circular A-136, directing Federal agencies to advance the goals of EO 14008 (Tackling the Climate Crises and Home and Abroad) and to better incorporate assessment and disclosure of climate change impacts. Additionally, OMB established a Climate-Related Financial Risk Task Force under the Federal Credit Policy Council to advance interagency analysis and opportunities for better integrating climate-related financial risk into Federal underwriting standards, loan terms and conditions, and asset management and servicing procedures.
• Partnering Internationally: Earlier this year, the United States joined the Coalition of Finance Ministers for Climate Action, which brings together fiscal and economic policymakers from over 60 countries. The United States – through the Department of the Treasury and OMB – is now co-chairing the Coalition’s activities for mainstreaming climate change mitigation and adaptation policies in micro-fiscal and other relevant policy, planning, budgeting, public investments, and public programs. 

Even as we take key steps to confront the climate crisis, we know that more work remains. At OMB, we are committed to strengthening our capabilities to incorporate the costs of climate change into assessments of financial risk and economic projections, including by collecting the data and developing the economic and budgetary tools required to undertake these risk assessments. Today, the White House announced that OMB will include in the President’s Fiscal Year 2023 Budget: 1) an assessment of the Federal Government’s climate risk exposure, and 2) a discussion of potential impacts on the long-term budget outlook.

From crop insurance for western farmers impacted by record drought, to flood insurance for households, climate change poses far-reaching risks to taxpayers. Too often, the impacts of climate change disproportionally fall on low-income and disadvantaged communities. We are committed to utilizing our OMB toolkit to tackle the climate crisis and decrease the fiscal risk that climate change presents, while creating good paying union jobs and ensuring benefits are directed to the communities that are often overlooked.

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