What Will Climate Change do to Your Nest Egg?

My, my, my!  How our little world has changed!  Just two years ago, only one of fourteen Democratic and Republican presidential hopefuls denied the findings of climate science on global warming – and that was the “Law & Order” actor, Fred Thompson.  By contrast, last Tuesday’s elections showcased many states and districts in which climate denial – or a clouded mixture of skepticism and economic angst – was a virtual requirement.   Fickle folks, aren’t we?

But while American politicians and many voters may have closed their eyes the growing trove of climate research, the people they rely on for expert advice in every field – from city planning to national defense – have their eyes wide open.  One such group of experts has just warned us of a new threat – how climate change is threatening our retirement savings.

Here’s the story:  Millions of Americans put their nest eggs into stocks and bonds – or pension fund managers do it for them.  Every day in the U.S., about $300 billion in water and power utility bonds are bought and sold – bonds that financed municipal water and electricity projects.  The interest is often tax-free, so many of us like them.  But there’s a new report out that’s raising the question of whether some of those bonds will ever be repaid, because of looming water shortages.

Issued in mid-October, the report by Ceres and PricewaterhouseCoopers looked at utility bonds in cities where climate change has resulted in diminished water supply, and has concluded that some highly-rated bonds are riskier than anyone thought.  [Here’s the link:  http://www.ceres.org/Page.aspx?pid=1291]  What’s the problem?  Well, utilities need one thing that’s in increasingly short supply these days in many cities: fresh water.  The utility bonds get repaid from water and electric revenues, but with less water, there’s less revenue.  As water deliveries shrink, the bonds increasingly look like junk.

“Water is a linchpin of the U.S. economy,” says the report,”but its availability is being tested like never before. More extreme droughts, surging water demand, pollution, and climate change are growing risks that threaten water supplies in many parts of the United States. In some regions, water scarcity is already crimping economic production and sparking interstate legal battles. The stresses are especially severe in regions experiencing rapid population and economic growth, including the West, Southwest and Southeast.”

Among the more notable threats highlighted by the report are the following:

§      The City of Atlanta’s water supply could be cut by nearly 40 percent as early as 2012 due to prolonged drought, competition from other communities, and  the ruling of a federal judge allocating more scarce water to other localities;

§      Lake Mead, the vast reservoir for the Colorado River, is quickly approaching a first ever water shortage declaration that would reduce deliveries to fast-growing Arizona and Nevada;

§      Hoover Dam, which provides hydropower to major urban centers in California, Arizona, and Nevada, may stop generating electricity as soon as 2013 if water levels in Lake Mead don’t begin to recover;

§      More regular droughts and heat waves are likely to increase the operating costs of power generators in the Southeast, among them the Tennessee Valley Authority, which was forced to slash power generation for two weeks at three of its facilities in Alabama and Tennessee because of heightened water temperatures, costing the utility an estimated $10 million in lost power production.

“These trends have enormous implications for the thousands of public utilities—utilities managed by municipalities and counties—that supply water and electricity to households and businesses across the country,” said the report.

"Bathtub rings" on declining Lake Mead.

Water utilities generate revenue through the delivery of water to their commercial and residential customers. Electric utilities use water for hydropower production or to cool equipment in their coal or nuclear generating facilities. The power sector is enormously water-intensive and accounts for 41 percent of the nation’s freshwater withdrawals. The remarkable discovery in this report is that utility bond issuers don’t have to report the impact of climate change on their creditworthiness, unlike virtually all other issuers of stocks and bonds.  As an example, rating agencies have assigned Phoenix Water Authority bonds a AAA rating, despite the extreme vulnerability of the city’s water sources, and virtually certain future stress.  Investment managers snap these up for your pension fund, but when you retire, there may be no more water to generate the revenues to fund your pension.

What makes the experts think that climate change is cutting water supplies to cities like Phoenix?  It happens that the changing climate is actually increasing rainfall and runoff in some parts of the world, especially the polar regions and the southern oceans.  But the American West has recently experienced prolonged and ruinous droughts, and virtually every researcher and climate model is pointing to a still-dryer future. And that’s exacerbated by much faster spring runoff from the warming Rocky Mountains, where the winter’s snow melts much earlier than in the past.  That means less water overall, but more of it concentrated in early spring floods.

Here’s what the U.S. Climate Change Science Program – which coordinates the climate change research activities of all U.S. government agencies – had to say in 2008:

“Reliance on past conditions as the foundation for current and future (water) planning and practice will no longer be tenable as climate change and variability increasingly create condi­tions well outside of historical parameters and erode predictability.  The United States may experience … substantial decreases in annual runoff in the interior of the West.”

That’s our government speaking (under President George W. Bush, in case it matters).  But the UN’s 2007 global report says much the same thing:

“Climate change will constrain North America’s already over-allocated water resources, thereby increasing competition among agricultural, municipal industrial, and ecological uses…. Colorado River hydropower yields will be likely to decrease significantly, as will Great Lakes hydropower.”

The new Ceres/PwC report builds on the findings of the US and the UN, and applies them to investment risks borne by bondholders.  I found this map from the report to be extremely informative:  Looking forward 15 years, researchers point to key areas where people and cities will be in conflict over water resources due to severe shortages.  They include the cities of San Francisco, Los Angeles, San Diego, Phoenix, Las Vegas, Denver, Albuquerque, Houston, San Antonio (plus Atlanta in the east) and many more.

So, whatever the politicians say, let’s hope that that their retirement fund managers think that climate change is serious business.  And if you live in any of these great cities, this might be the time to begin planning on how to live with less water and less electricity.

Thanks for reading, and God bless you.

J. Elwood

Andover, NJ

Make A Difference!

We’re big coffee drinkers, and we use the traditional drip coffeemakers.  They use a lot of electricity for a short time to boil the water, and then more for a long time to keep the coffee carafe hot.  So we now turn the coffeemaker off as soon as the coffee’s brewed, and pour it into a thermal pitcher.   The coffee stays hot, and we use a fraction of the electricity we used to.  You can think of a half dozen common sense ideas in your own home that will do as much good as this.

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