Coffee, COP26, and Climate Change

Episode Summary

Executive Summary: The episode centers on the October inflation surge and a deep dive into climate risk with guest Emily Mezzacurati, Moody’s head of climate risk solutions. The hosts debate whether inflation is mainly demand- or supply-driven, then shift to COP26, fossil-fuel subsidies, net-zero finance, carbon pricing, and how Moody’s is building climate assumptions and physical-risk models into forecasting, with floods emerging as the most significant risk.

Main Topics: October inflation: supply shock vs. demand pull: Ryan, Chris, and Mark debate what is driving the broad inflation acceleration, with Mark emphasizing the Delta wave’s effect on supply chains and labor, while Ryan argues demand is now playing a larger role. Small business pricing intentions as an inflation signal: The group uses NFIB survey data to interpret inflation persistence, noting record price-raising intentions among small businesses as a forward-looking indicator. Emily Mezzacurati’s background and 427/Moody’s climate platform: Emily explains how her work moved from cap-and-trade and carbon markets into physical climate risk, eventually leading to the founding of 427 and its acquisition by Moody’s. COP26, fossil-fuel subsidies, and climate policy realism: The discussion covers the Glasgow COP26 negotiations, the scale of fossil-fuel subsidies, the influence of the fossil-fuel industry, and skepticism about governments moving fast enough. Net zero, financial institutions, and climate alignment: Emily argues banks and investors matter because they can pressure clients and align portfolios with net-zero targets, effectively turning finance into a transmission mechanism for decarbonization. Climate assumptions in economic forecasting: The hosts ask what temperature-rise path should be used in Moody’s baseline. Emily and Chris discuss scenario ranges and the challenge of choosing a central climate assumption for economic and physical-risk modeling. Physical risk, especially flooding, and adaptation spending: Flooding is identified as the largest and hardest-to-model physical climate risk. The Build Back Better bill’s resilience and adaptation provisions are discussed as a positive step.

Key Arguments: Inflation is being driven primarily by pandemic-related supply disruptions—especially the Delta wave’s effects on global supply chains, labor availability, and the mix of demand—rather than purely by strong aggregate demand. The NFIB small-business price plans survey is a useful leading indicator, and record-high pricing intentions suggest inflation has not yet peaked on a year-over-year basis. Climate risk analysis shifted from transition risk (policy and markets) to physical risk because climate impacts were already locked in and would affect businesses regardless of policy progress. Fossil-fuel subsidies remain enormous and politically difficult to unwind, which weakens confidence that governments will implement the scale of policy change needed. Net-zero commitments by banks and investors can matter materially because they influence lending, underwriting, and capital allocation across their portfolios, not just internal operations. A straightforward carbon tax would be economically efficient, but political barriers make it hard to implement in the U.S.; cap-and-trade has also suffered from rule changes and low prices. For Moody’s baseline climate assumption, business-as-usual appears closer to about 2.7°C warming, though stronger policy and net-zero pledges could move the world closer to ~1.8°C-1.9°C. Flooding is the most important physical climate risk because of its scale, complexity, and widespread exposure across regions such as Asia-Pacific and the U.S. East Coast.

Data Points: NFIB respondents planning to raise prices: 51% - Ryan’s statistic; highest on record in the NFIB small-business survey, used as a leading indicator for inflation. CPI excluding used/new cars, reopening effects, and energy: 0.4% m/m - Ryan noted core pressure remained elevated even after stripping out major volatile and reopening-related components. Coffee prices (consumer): 2.1% m/m; 5.6% y/y - Chris highlighted coffee as an example where climate shocks and supply-chain issues are raising prices. Core CPI over two years: 3.1% annualized - Chris’s statistic comparing October 2021 to October 2019, meant to show inflation remains elevated beyond base effects. Median CPI (Cleveland Fed): 3.1% y/y - Chris used the Cleveland Fed’s median CPI to show broad-based inflation pressure. Owner’s equivalent rent: 3.1% y/y; 0.4% m/m - Discussed as an important contributor to persistent housing inflation. Rent of primary residence: 2.7% y/y; 0.4% m/m - Used to show housing inflation is accelerating but still below pre-pandemic levels. Fossil-fuel subsidy burden: 7% of global GDP - Emily’s statistic illustrating the scale of global support for fossil fuels. Climate-warming baseline forecast: 2.7°C - Emily’s business-as-usual estimate for end-of-century warming. Alternative climate scenarios with strong action: 1.8°C–1.9°C - Emily’s estimate of where net-zero commitments could move the world. NGFS no-policy-action scenario: 3.2°C by 2100 - Chris referenced the Network for Greening the Financial System scenario set. Build Back Better resilience/adaptation funding: $47 billion - Emily singled out this portion as especially valuable for preparing for physical climate impacts. Population exposed to flooding: 30% globally - Emily cited flood exposure as one of the most widespread physical risks.

Pivotal Quotes: "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." — Mark Zandi: Mark’s core explanation for why inflation accelerated in October. "It's about whether their portfolios are aligned with the Paris commitments, with those net zero targets." — Emily Mezzucari: Emily explaining why bank and investor net-zero pledges can have real market effects. "Business as usual looks bad in terms of physical risk." — Emily Mezzucari: Emily summarizing why climate adaptation and risk modeling are essential even under optimistic policy assumptions.

Implications: Inflation may ease as pandemic disruptions fade, but climate risk is becoming a core economic variable. Financial firms, policymakers, and forecasters will need explicit climate assumptions, especially around floods, adaptation, and the transition to net zero.