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Unpriced risk undermined the global economy during the financial crisis of 2008. Today, researchers say unpriced physical climate risk will lead to rapid declines in property values — and point out that this is already happening in some Florida markets. They often compare what’s happening now to the run-up to 2008. If the analogy holds, we will likely see disruption in other related financial structures. In particular, as the physical reality of climate change begins to have an effect on the attractiveness of bonds in risky areas, the ability of local governments to raise money to adapt to rapidly changing climate conditions may be undercut.
But comparing the effect of the 2008 unpriced risk on the municipal bond market with the potential effects of physical climate risk shows the suffering will likely be much greater this time. Today, there’s a direct, rather than indirect, connection between risk and public finance markets.
The solution? Last week, Tom Doe, CEO and founder of Municipal Market Analytics, said cities should act now to raise as much money as possible for adaptation before the municipal bond market starts pricing in physical climate risk. It’s only going to get more expensive later, in his view.
During the 2008 collapse, issuers of municipal bonds suffered. According to the final report on the crisis, New York State was stuck making suddenly skyrocketing interest payments to investors — the rate went from about 3.5% to more than 14% — on $4 billion of its debt. The Port Authority of New York and New Jersey’s interest rate went from 4.3% to 20% in a single week. Investors who had bought municipal bonds in auctions suffered too, because the pool of new buyers dried up very quickly in early 2008.
Since then, the muni market has bounced back in a big way, with professional investment managers urging tax-avoidant retail investors to buy individual bonds through separately managed accounts rather than through a mutual bond fund or an exchange-traded fund. Most people think $500 billion in bond issues is likely in 2025, and the group of buyers has a seemingly unending appetite for what they perceive to be safe and highly liquid investments — essentially the equivalent of money market accounts that promise federal tax-free interest payments.
But the risks now posed by physical climate change to municipal bond issuers and investors are different and likely greater than they were in 2008. The last time around, the municipal bond market suffered because of a domino effect — the insurance companies the issuers were using were exposed to mortgage risk.
According to the Financial Crisis Inquiry Report, so-called “monoline” insurers (writing policies for single financial structures rather than a broad array of products) had gotten into the mortgage-backed securities business, issuing a boatload of guarantees covering more than $250 billion of these structured products. The CEO of one of these monoline businesses, Alan Roseman of ACA, said, “We never expected losses. ... We were providing hedges on market volatility to institutional counterparties.” In other words, ACA believed its risk was limited because it wasn’t directly investing in the underlying assets — that its risk was limited to ups and downs in the market value of the mortgage-backed securities. But when the value of huge numbers of mortgage-backed securities plunged as the credit rating agencies woke up and repriced the risk of the subprime mortgages buried within them, ACA and other insurers were faced with stunning losses.
Those same insurers (MBIA, ACA, Ambac) were then substantially downgraded. And they hadn’t been insuring only mortgage-backed securities — they were also insuring municipal bonds and “auction rate securities” based on those bonds, structures that allowed local governments to borrow money at variable interest rates. When the insurance companies froze up because of the sudden repricing of mortgage-backed securities and their guarantees became worthless, the auction markets froze, as well. As a result, issuers of muni bonds (and investors in them) suffered.
In other words, in 2008, it was risk in a different financial arena — mortgage-backed securities guaranteed by insurance companies — that slopped over and caused problems for municipal bonds. By contrast, when it comes to physical climate change today, the municipal bond market is directly exposed to the central risk: Will the communities that effectively guarantee these bonds continue to be viable? Will these communities be insurable? Will community property values and thus property taxes suddenly decline?
Not only that, the 2008 risk was different because it could be eventually unwound. Property markets could get going again, as they have in spades. This time, deterioration of the underlying asset — the communities themselves — will likely be irreversible. Chronic flooding will not cease on any human-relevant time scale.
Issuers are not being penalized — yet — for the physical climate risk facing their communities, according to Tom Doe’s conversation with Will Compernolle on the latter’s Simply Put podcast last week. “This risk is not being priced in,” Doe said. “There’s no evidence of that right now. And in addition, the rating agencies have not reflected [physical risk] in their letter scoring of credit risk … so there is not a ratings penalty right now. There’s not a pricing penalty.”
Doe’s suggestion is that local governments may want to get out there and raise as much money as they can for adaptation. “State and local governments who are in harm’s way that need to do this can go to the market right now, and investors are not penalizing them. The market is not. So this is essentially cheap money if they issue [bonds] for these projects today,” Doe said.
That’s one way of looking at the situation. Public money for adaptation is cheap, there’s a lot of it potentially available, and it is much less expensive to raise that money now than it will be once the credit rating agencies and the investors start pricing in physical risk and demanding higher interest payments in exchange for the use of their cash.
It’s a race against time: Eventually, as in 2008, the mispriced risk will be correctly assessed. This time, unlike the last crisis, the harm to the underlying assets will be permanent.
A version of this article originally appeared in the author’s newsletter, Moving Day, and has been repurposed for Heatmap.
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The Loan Programs Office is good for more than just nuclear funding.
That China has a whip hand over the rare earths mining and refining industry is one of the few things Washington can agree on.
That’s why Alex Jacquez, who worked on industrial policy for Joe Biden’s National Economic Council, found it “astounding”when he read in the Washington Post this week that the White House was trying to figure out on the fly what to do about China restricting exports of rare earth metals in response to President Trump’s massive tariffs on the country’s imports.
Rare earth metals have a wide variety of applications, including for magnets in medical technology, defense, and energy productssuch as wind turbines and electric motors.
Jacquez told me there has been “years of work, including by the first Trump administration, that has pointed to this exact case as the worst-case scenario that could happen in an escalation with China.” It stands to reason, then, that experienced policymakers in the Trump administration might have been mindful of forestalling this when developing their tariff plan. But apparently not.
“The lines of attack here are numerous,” Jacquez said. “The fact that the National Economic Council and others are apparently just thinking about this for the first time is pretty shocking.”
And that’s not the only thing the Trump administration is doing that could hamper American access to rare earths and critical minerals.
Though China still effectively controls the global pipeline for most critical minerals (a broader category that includes rare earths as well as more commonly known metals and minerals such as lithium and cobalt), the U.S. has been at work for at least the past five years developing its own domestic supply chain. Much of that work has fallen to the Department of Energy, whose Loan Programs Office has funded mining and processing facilities, and whose Office of Manufacturing and Energy Supply Chains hasfunded and overseen demonstration projects for rare earths and critical minerals mining and refining.
The LPO is in line for dramatic cuts, as Heatmap has reported. So, too, are other departments working on rare earths, including the Office of Manufacturing and Energy Supply Chains. In its zeal to slash the federal government, the Trump administration may have to start from scratch in its efforts to build up a rare earths supply chain.
The Department of Energy did not reply to a request for comment.
This vulnerability to China has been well known in Washington for years, including by the first Trump administration.
“Our dependence on one country, the People's Republic of China (China), for multiple critical minerals is particularly concerning,” then-President Trump said in a 2020 executive order declaring a “national emergency” to deal with “our Nation's undue reliance on critical minerals.” At around the same time, the Loan Programs Office issued guidance “stating a preference for projects related to critical mineral” for applicants for the office’s funding, noting that “80 percent of its rare earth elements directly from China.” Using the Defense Production Act, the Trump administration also issued a grant to the company operating America's sole rare earth mine, MP Materials, to help fund a processing facility at the site of its California mine.
The Biden administration’s work on rare earths and critical minerals was almost entirely consistent with its predecessor’s, just at a greater scale and more focused on energy. About a month after taking office, President Bidenissued an executive order calling for, among other things, a Defense Department report “identifying risks in the supply chain for critical minerals and other identified strategic materials, including rare earth elements.”
Then as part of the Inflation Reduction Act in 2022, the Biden administration increased funding for LPO, which supported a number of critical minerals projects. It also funneled more money into MP Materials — including a $35 million contract from the Department of Defense in 2022 for the California project. In 2024, it awarded the company a competitive tax credit worth $58.5 million to help finance construction of its neodymium-iron-boron magnet factory in Texas. That facilitybegan commercial operation earlier this year.
The finished magnets will be bought by General Motors for its electric vehicles. But even operating at full capacity, it won’t be able to do much to replace China’s production. The MP Metals facility is projected to produce 1,000 tons of the magnets per year.China produced 138,000 tons of NdFeB magnets in 2018.
The Trump administration is not averse to direct financial support for mining and minerals projects, but they seem to want to do it a different way. Secretary of the Interior Doug Burgum has proposed using a sovereign wealth fund to invest in critical mineral mines. There is one big problem with that plan, however: the U.S. doesn’t have one (for the moment, at least).
“LPO can invest in mining projects now,” Jacquez told me. “Cutting 60% of their staff and the experts who work on this is not going to give certainty to the business community if they’re looking to invest in a mine that needs some government backstop.”
And while the fate of the Inflation Reduction Act remains very much in doubt, the subsidies it provided for electric vehicles, solar, and wind, along with domestic content requirements have been a major source of demand for critical minerals mining and refining projects in the United States.
“It’s not something we’re going to solve overnight,” Jacquez said. “But in the midst of a maximalist trade with China, it is something we will have to deal with on an overnight basis, unless and until there’s some kind of de-escalation or agreement.”
A conversation with VDE Americas CEO Brian Grenko.
This week’s Q&A is about hail. Last week, we explained how and why hail storm damage in Texas may have helped galvanize opposition to renewable energy there. So I decided to reach out to Brian Grenko, CEO of renewables engineering advisory firm VDE Americas, to talk about how developers can make sure their projects are not only resistant to hail but also prevent that sort of pushback.
The following conversation has been lightly edited for clarity.
Hiya Brian. So why’d you get into the hail issue?
Obviously solar panels are made with glass that can allow the sunlight to come through. People have to remember that when you install a project, you’re financing it for 35 to 40 years. While the odds of you getting significant hail in California or Arizona are low, it happens a lot throughout the country. And if you think about some of these large projects, they may be in the middle of nowhere, but they are taking hundreds if not thousands of acres of land in some cases. So the chances of them encountering large hail over that lifespan is pretty significant.
We partnered with one of the country’s foremost experts on hail and developed a really interesting technology that can digest radar data and tell folks if they’re developing a project what the [likelihood] will be if there’s significant hail.
Solar panels can withstand one-inch hail – a golfball size – but once you get over two inches, that’s when hail starts breaking solar panels. So it’s important to understand, first and foremost, if you’re developing a project, you need to know the frequency of those events. Once you know that, you need to start thinking about how to design a system to mitigate that risk.
The government agencies that look over land use, how do they handle this particular issue? Are there regulations in place to deal with hail risk?
The regulatory aspects still to consider are about land use. There are authorities with jurisdiction at the federal, state, and local level. Usually, it starts with the local level and with a use permit – a conditional use permit. The developer goes in front of the township or the city or the county, whoever has jurisdiction of wherever the property is going to go. That’s where it gets political.
To answer your question about hail, I don’t know if any of the [authority having jurisdictions] really care about hail. There are folks out there that don’t like solar because it’s an eyesore. I respect that – I don’t agree with that, per se, but I understand and appreciate it. There’s folks with an agenda that just don’t want solar.
So okay, how can developers approach hail risk in a way that makes communities more comfortable?
The bad news is that solar panels use a lot of glass. They take up a lot of land. If you have hail dropping from the sky, that’s a risk.
The good news is that you can design a system to be resilient to that. Even in places like Texas, where you get large hail, preparing can mean the difference between a project that is destroyed and a project that isn’t. We did a case study about a project in the East Texas area called Fighting Jays that had catastrophic damage. We’re very familiar with the area, we work with a lot of clients, and we found three other projects within a five-mile radius that all had minimal damage. That simple decision [to be ready for when storms hit] can make the complete difference.
And more of the week’s big fights around renewable energy.
1. Long Island, New York – We saw the face of the resistance to the war on renewable energy in the Big Apple this week, as protestors rallied in support of offshore wind for a change.
2. Elsewhere on Long Island – The city of Glen Cove is on the verge of being the next New York City-area community with a battery storage ban, discussing this week whether to ban BESS for at least one year amid fire fears.
3. Garrett County, Maryland – Fight readers tell me they’d like to hear a piece of good news for once, so here’s this: A 300-megawatt solar project proposed by REV Solar in rural Maryland appears to be moving forward without a hitch.
4. Stark County, Ohio – The Ohio Public Siting Board rejected Samsung C&T’s Stark Solar project, citing “consistent opposition to the project from each of the local government entities and their impacted constituents.”
5. Ingham County, Michigan – GOP lawmakers in the Michigan State Capitol are advancing legislation to undo the state’s permitting primacy law, which allows developers to evade municipalities that deny projects on unreasonable grounds. It’s unlikely the legislation will become law.
6. Churchill County, Nevada – Commissioners have upheld the special use permit for the Redwood Materials battery storage project we told you about last week.