Josh Younger on the Soaring Cost of Climate Change and Understanding the SLR

Episode Summary

Executive Summary: The episode explores how climate policy can be framed through markets, especially discount rates and real yields. Guest Josh Younger argues that long-term real rates—now often negative—raise the present value of future climate damages, boosting the social cost of carbon and strengthening the case for action. The second half shifts to Treasury market volatility, concluding recent moves are mostly fundamental repricing rather than dysfunction.

Main Topics: Climate change as a market-pricing problem (Priority: 5/5): The hosts and Josh Younger discuss why climate risk is often framed scientifically or morally, but is also deeply tied to market concepts like pricing, discounting, and opportunity cost. Integrated assessment models and the social cost of carbon (Priority: 5/5): Younger explains how climate science, economics, and mortality assumptions are combined in integrated assessment models to estimate the social cost of carbon and guide policy decisions. Discount rates, real yields, and secular stagnation (Priority: 5/5): A central argument is that lower and now negative long-term real rates materially increase the present value of future climate damages, making inaction more expensive than in the past. Market versus normative approaches to climate policy (Priority: 4/5): The conversation contrasts market-based discount rates with normative, prescriptive approaches that account for inequality, intergenerational equity, and extinction risk. Treasury market volatility and price discovery (Priority: 4/5): The discussion turns to recent Treasury moves, with Younger arguing the volatility reflects a repricing of expectations—mainly inflation expectations—not market breakdown. Treasury market microstructure and the SLR debate (Priority: 4/5): Younger explains how interdealer liquidity, high-frequency participation, and supplementary leverage ratio rules affect market functioning and why current conditions are less alarming than past episodes.

Key Arguments: Climate change is both a moral issue and a market issue because policy ultimately requires estimating costs, benefits, and the appropriate discount rate. Integrated assessment models are the standard framework for combining climate projections with economic impacts to derive the social cost of carbon. Markets are poor at pricing 50- to 100-year risks because they are dominated by current-generation time preferences, so they tend to capture policy response more than the climate shock itself. Long-term real interest rates have fallen enough that the old argument—markets discount future damages too heavily—has partly flipped; in some horizons, markets now imply negative real rates, which increases the present value of climate damage. Secular stagnation and structurally lower growth expectations mean the cost of waiting on climate action is higher now than it was a decade ago. The recent rise in Treasury yields is mostly driven by inflation expectations and improved growth outlook, not by a collapse in market functioning. Treasury volatility becomes a Fed concern only when price discovery breaks down or intermediation capacity fails, not merely because yields rise. SLR-related constraints matter because they shape dealers’ internal balance-sheet allocation and can amplify market stress even if the rule is not formally binding at the institution level.

Data Points: Stock Movers report length: five minutes or less - Promotional segment at the beginning of the transcript. Climate projections horizon: 50, 100, 200 years - Younger describes the time spans used in climate modeling. Social cost framework: 1 metric ton of carbon dioxide - The social cost of carbon is described as the incremental damage from one metric ton of CO2. Early-2000s benchmark: 2007 - The Stern report is referenced as a major climate-economics benchmark. Real rate cited around Stern era: about 3% over 30 years - Used to illustrate how higher historical discount rates sharply lowered the present value of damages. Mean economist survey discount rate: around 1% - Younger references normative discount-rate surveys. Long-horizon real rate: negative 1% or similar - He says 30- to 50-year real rates are still negative after adjusting for inflation expectations. Social cost of carbon increase: 6-7x over the past 10 years - Younger says market-implied expectations and secular stagnation have greatly raised the estimated social cost. High-frequency order share: 80-85% - Share of Treasury interdealer orders reacting very quickly in normal conditions. Stress-period high-frequency share: 40% - High-frequency share drops sharply during severe stress episodes in Treasury markets. Recent stress-period high-frequency share: 65-70% - During the latest volatility, participation fell only modestly, implying healthy market plumbing. Milliseconds feature: 8 milliseconds - Observed peak in order timing, corresponding to email latency between New York and Chicago. Treasury move cited: 20 basis points - Younger references a recent Treasury move of roughly 20 bps as notable but not alarming. SLR capital thresholds: 5% holding company, 6% bank operating company - Described as the leverage ratios banks must hold under the supplementary leverage ratio framework. Federal Reserve policy date: March 31 expiration - The SLR carve-outs were set to expire at the end of March 2021 in the transcript timeframe. Vaccine efficacy: 95% - Used to explain the improved post-COVID growth and inflation outlook that moved Treasury yields. Vaccination pace: 2 million shots a day - Illustrates the faster-than-expected recovery in the public-health outlook. Biden vaccination target: 100 million shots in 100 days - Referenced as a goal that was ultimately achieved faster than expected.

Pivotal Quotes: "climate change is the most important and obvious example of a real market failure" — Josh Younger: Explaining why long-term climate risks are poorly handled by standard capital markets. "the social cost of carbon is the single most important number in their climate change agenda" — Josh Younger: Describing the Biden administration's emphasis on this metric for policy design. "the recent bout of volatility wasn't nearly as bad as we'd seen in some previous instances" — Tracy Alloway / Josh Younger discussion: Summarizing the view that recent Treasury moves were less concerning than past market dysfunction.

Implications: If long-term real rates stay low or negative, climate inaction becomes more expensive in present-value terms, strengthening the policy case for immediate spending and carbon pricing. For markets, recent Treasury volatility looks like repricing, not breakdown.