risQ, Inc.

Aug 30, 2021

23 min read

US Carbon Transition Risk: The Highwire Act of Municipal Credit Impairment and Climate Justice

by risQ and DPC Data

  • Carbon is a massive financial liability for the U.S.: Using the Biden administration’s Social Cost of Carbon (SCC) of $51 per metric ton of CO2 applied to Scope 1 emissions in the contiguous US, there is ~$294B in annual carbon transition risk liability. In the electricity production sector alone, that liability still stands at ~$116B.
  • Areas with some of the worst physical climate risk contribute the most emissions: Texas and Florida, two states with outsized physical climate change risk, have the highest electricity production Scope 1 CO2 liabilities, with the former totaling $13.5B on its own, or 12% of the US total. Locally, Harris County, TX and Jefferson County, AL lead the way among counties. The former saw significant destructive climate events in recent years, while the latter is legendary in the municipal bond community for its debt-defaulting financial challenges.
  • Municipal debt issuing communities’ carbon transition risk swamps their pension liabilities: Across 334 debt-issuing counties across 5 states, 92% of counties with available pension data have larger total Scope 1 emission liabilities aggregated over all greenhouse gas sectors than pension liabilities — an issue that itself has led the list of municipal market concerns for years.
  • Communities vulnerable to carbon transition risk also have outsized employment risk and education gaps: A socioeconomic vulnerability analysis using all US census tracts shows that communities with the highest per capita electricity emissions are those with the highest levels of risk from an employment sector perspective, have significantly lower educational attainment levels and more health risks.
  • Black populations near power plants suffer from disproportionate health risks: Although the direct relationship between racial settlement patterns and carbon intensive electricity production is complex, education gaps and health risks (themselves being directly correlated to carbon intensity of electricity production) are significantly higher for communities of color.
  • Carbon transition and flood risks present a double-edged sword: For communities with non-zero electricity production, flood risk — which is demonstrably linked to negative outcomes for property value, mortgage delinquency and population loss — is positively correlated with per capita emissions. Communities with high flood risk and significant transition risk are particularly vulnerable to the double-edged climate sword.
  • Municipal debt stakeholders have a crucial role in catalyzing a just transition away from fossil fuels: The combination of federal, state, and local jurisdictions and fixed income investors can and should explicitly incorporate views and data on carbon emissions into risk management and ESG-related decisions. Communities that are currently heavily dependent on fossil fuel — and especially those that are vulnerable from employment, educational, racial, and municipal credit perspectives — can and should be proactively targeted by appropriate public and impact investing capabilities.

Carbon Transition Risk: A Local Problem for Local Economies

Carbon transition risk is becoming an increasingly important with respect to corporations (and the equities markets) as well as sovereign entities in terms of balancing carbon reduction goals with the impacts on their respective economies. In both cases, GDP and industry-based reporting and heuristics are easily applied. What has been harder to determine, until now, is carbon transition risk in the local economies that underpin the US municipal bond market. Just as for sovereigns, existing infrastructure, economics, and populations have carbon footprints via jobs, transportation options and building stock. Explicit or implicit pricing carbon could lead to 1) (for individual taxpayers) higher costs of living as well as loss of jobs and economic opportunity, and 2) (for corporate taxpayers) reduced demand for fossil fuel-based electricity produced and reduced revenues, higher taxes, and increased competition with the renewable energy sector.

There is a useful conceptual parallel to the notion of inflation for municipal obligors with high carbon transition liabilities — regardless of the level of ‘obligorship’ of those liabilities — wherein the cost of living, commercial operations, project financing, and so on increase within a municipality’s taxable boundaries enough to materially impair credit. Carbon-intensive municipal obligors will experience revenue- and cost-line impacts, resulting in inflation in the costs of living and operating for their constituents as a direct function of carbon transition mandates and/or as an indirect function of financial market and social pressures. The inflationary effects of a more stringent environmental regulatory regime are expected to have an impact on a number of sectors — commercial and residential real estate, transportation, electricity production, industrial and agriculture, to name a few large and substantial examples.

In parallel, there is also a social impact to consider in any given carbon transition in the US. The local populations around carbon intensive US locations will bear the brunt of any significant transition but they also would bear the costs of not transitioning. Municipal bond issuers — one hopes — would have an intrinsic responsibility to serve their constituents throughout the local carbon transition journey, but also understand the imperative to take this journey.

With that construct, carbon transition risk becomes both a credit and social impact consideration that the municipal bond ecosystem must navigate, and here we analyze both components to provide that very picture.

Electricity Emissions as a Liability: Data and Approach

While we have Scope 1 emissions data for all these sectors mapped to municipal bond obligors, the electricity production (EP) sector is inherently and, in many ways, most directly impacted by federal, state, and local actions aimed at reducing and taxing emissions. To leverage this data, risQ partnered with DPC DATA, a leading provider of compliance solutions and credit data for the municipal market, to identify county obligors that have high levels of exposure and vulnerability to the transition away from carbon intensive EP. Exposure is defined as the level of CO2 emissions attributable to the EP sector, while vulnerability is defined as a municipality’s ability — given its financial, socioeconomic, and physical climate risk profile — to withstand the emerging risks posed by potential carbon policy as well as related social, political and financial pressures. Scope 1 emissions data (annually averaged over 2010–2015), sourced from the Vulcan Project 3.0, a NASA-sponsored effort that estimates bottom-up CO2 emissions from multiple sources of fossil fuel combustion, was merged to risQ’s 100x100-meter grid covering the coterminous US. (Vulcan 3.0 does not estimate greenhouse gas emissions from sources besides CO2 (e.g., methane) and does not estimate the ~10% of US emissions that come from agricultural activity.) This allows for estimation of total and per capita Scope 1 CO2 emissions comprehensively for issuers, covering ~98% of all ~$3.9T municipal debt at a security level. County-level financial data was sourced by DPC DATA from the financial disclosure documents of all debt-issuing county obligors within the five states selected for this analysis.

Texas and Florida: Carbon Transition Risk to go with their Physical Climate Risk

We look at total CO2 ‘liabilities’ for each debt issuing county, and denominate CO2 liabilities in terms of each county’s total assets, general fund revenues, and assessed value according to the most recent year’s data sourced by DPC DATA. The state which has the highest number of debt-issuing counties (95) — Texas — is also the state with the highest total Scope 1 EP emissions, with ~266 million tCO2 emitted annually on average during the period 2010–2015, more than double the second highest emitting state of Florida, which recorded 119 million tCO2. Of the 334 county obligors, 202 have non-zero EP CO2 emissions. Figure 1 tabulates total and EP-only emissions statistics at a state level both in total and per capita terms.

While state-level analysis is all well and fine, it’s critical to drill down to a local level to make it applicable to the larger municipal bond issuing universe and to the impacts on specific communities. To make this more digestible, a five-state sample of New York, New Jersey, Ohio, Mississippi, and Texas was used. These five have a relatively high percentage of counties that are municipal debt issuers — New Jersey, 21/21 (100.00%); New York, 53/62 (85.48%); Ohio, 70/88 (79.55%); Mississippi, 59/82 (71.95%); Texas, 95/254 (37.40%). Factors related to location (geographic, climate risk exposure, etc.), political landscape, and economic diversity are also considered in the selection of these five states. The states collectively represent ~19% of the total Scope 1 EP sector emissions and their counties ranked on average in the 63rd percentile, nationally, for emissions in the EP sector. For illustrative purposes, we also included Jefferson County AL, given the fact that the county is home to the largest greenhouse gas emitting power plant in the United States (James H. Miller Jr. Electric Generating Plant). It is also well known for its landmark municipal bankruptcy a decade ago, which was partially driven by poor ESG practices. The very presence of a carbon intensive electric utility as a major local taxpayer should raise both credit and ESG concerns.

One of the critical assumptions established when calculating each municipal obligor’s CO2 liability is the social cost of carbon (SCC). The interim figure proposed by the Biden administration is $51 for every metric ton of CO2 (tCO2), which equates to the Obama-era number adjusted for inflation. Figure 2 shows key statistics for a subset of counties. Harris County TX ranks #1 in aggregate emissions with ~67 million tCO2 annually. Applying the SCC figure of $51/tCO2, Harris County’s tCO2 liability equates to $3.4 billion annually. Harris County TX also ranked #1 in total emissions attributable to the EP sector, with 21 million tCO2 equating to a liability of just over $1 billion. Titus, Rusk, Fort Bend, Bexar, and Robertson Counties in Texas ranked 4–8 in tCO2 liability, highlighting the fact that counties in Texas generally have the highest aggregate exposure to tCO2 liability originating in the electricity production sector.

Figure 1: State-level population and emissions figures for all contiguous US states plus the District of Columbia, with focal states highlighted.
Figure 2: Rankings (top) and values of absolute tCO2 liability $ figures (bottom) for selected counties across the 5-state group, as well as tCO2 liabilities denominated in terms of each county’s assets, revenues, and assessed values, according to each county’s most recent year of reported data.

For counties in our five selected states with non-zero Scope 1 EP emissions, here are some numbers that certainly put localized carbon liabilities in context:

● ~13% of counties (23/178) for which we have total assets data show EP-based transition liabilities exceeding total assets

● ~20% of counties (33/169) for which we have total liabilities data show EP-based transition liabilities exceeding total liabilities.

● ~30% of counties (53/178) for which we have annual revenues data show EP-based transition liabilities exceeding annual revenues.

● ~38% of counties (51/134) for which we have direct debt data show EP-based transition liabilities exceeding direct debt.

● ~43% of counties (52/122) for which we have pension liabilities data show EP-based transition liabilities exceeding pension liabilities.

If we expand this beyond Scope 1 EP emissions to also include transportation, industry, and residential & commercial categories, the carbon liabilities of local economies, their infrastructure and their populations become even more stark:

● ~19% of counties (57/308) for which we have total assets data show total Scope 1 transition liabilities exceeding total assets

● ~37% of counties (106/286) for which we have total liabilities data show total Scope 1 transition liabilities exceeding total liabilities.

● ~70% of counties (214/308) for which we have annual revenues data show total Scope 1 transition liabilities exceeding annual revenues.

● ~74% of counties (171/231) for which we have direct debt data show total Scope 1 transition liabilities exceeding direct debt.

● ~92% of counties (200/217) for which we have pension liabilities data show total Scope 1 transition liabilities exceeding pension liabilities.

Figure 3: Population-weighted dot plot of counties in the 5-state group (+ Jefferson County AL); EP tCO2 liability is provided on the y-axis, and total county assets on the x-axis. Counties in the top left represent those that are most vulnerable.

Figure 3 shows the relationship between EP tCO2 liabilities and total county assets across all 5 focal states. While Harris County TX ranks #1 across the 5 states in total emissions attributable to the electricity production sector, it ranks just #78 when those emissions are denominated in terms of total assets (6.8% of total assets) and #83 when denominated in terms of assessed value (0.2% of assessed value). Across the counties for which DPC DATA has total asset values ($), Adams County OH ranked #10 in annual EP emissions, but #1 in terms of tCO2 liability / total assets = 2,819%. Denominating CO2 liability in terms of total assessed value rearranges the rankings substantially. Across the counties for which DPC DATA has total assessed values ($), Gallia County OH ranks #1 with 79.8% tCO2 liability / Total Assets.

The Appendix dives deeper into 4 exemplary counties with significant Scope 1 EP footprints to illustrate differences in the challenges communities with varying physical climate risk and socioeconomic profiles will face.

We’ll return to the credit implications of carbon liability to municipal bond issuers. Before we do that, the localized social impact should also be considered. After all, what is a municipal bond issuer unless it best serves the needs of the local population?

Socioeconomic Vulnerability & Electricity Production

risQ’s Social Impact Score (SIS) data is composed of 7 subscores that measure employment, education, health, racial composition, affluence, poverty, and housing cost-to-income characteristics across the entire US, all built on top of dozens of underlying census and CDC variables leveraging approaches like those found in research peer-reviewed literature. The SIS data has been designed to help ESG investors and stakeholders of the municipal finance and real estate markets understand and quantify vulnerability and resource needs of communities and issuers at any spatial scale. Here, census tract-level SIS data is analyzed against all census tracts with non-zero Scope 1 electricity production emissions.

The most obvious and intuitive social implications of EP emissions are with respect to health, and the data supports that the localized populations indeed have outsized health challenges. Figure 4 shows that the Health Obstacle Score, a 0–100 score that increases as the population living in a tract is more often without health insurance and faces higher levels of underlying health conditions including obesity, high cholesterol, and asthma, among others, is also correlated with higher per capita EP emissions (Spearman rank correlation = 0.21). The same data also shows that the communities with higher Health Obstacle Scores are higher percentage Black residents on average (Spearman rank correlation = 0.32). Mitigation of emissions will only serve these populations well from a health perspective.

Figure 4: Using all census tracts (N=9,380) with non-zero electricity production emissions, per capita emissions are log-transformed and then grouped into 5 bins with a simple univariate k-means clustering algorithm. Distributions of risQ’s Health Obstacle Score are shown for each emissions bin. Each point is a census tract, colored by percentage of population that is white alone and sized by population density.

Of course, there will also be economic challenges to navigate for the same local populations. Figure 5 shows that the At-Risk Employment Sector Score, a 0–100 score that increases as the population living in a tract is more heavily weighted toward mining, oil & gas, utilities, construction, agriculture, and service sectors, is most strongly correlated with per capita emissions (Spearman rank correlation = 0.27). This relationship is also intuitive and obvious, and it has clear risk implications for especially the communities with the highest scores. When carbon intensive electricity plants are decommissioned without employment transition programs, plans, and funding in place, those communities will suffer the most. Related to this employment transition, Figure 6 shows that the Low Educational Attainment Score, a 0–100 score that increases as the population living in a tract has a higher concentration of population that has little or no college education and lower high school and GED diploma rates, is also correlated with per capita emissions (Spearman rank correlation = 0.21). Many tracts with the lowest scores and highest electricity emissions tend to have higher percentage non-white populations. Low education levels will compound vulnerability in the employment transition challenge, where many communities disproportionately of color may be most likely to face more hurdles when plants decommission. Increasing percentage of Black, Latino, and Native American populations are modestly but significantly correlated with increasing Low Educational Attainment Score (Spearman rank correlations of 0.15, 0.11, and 0.13, respectively).

Figure 5: The same is shown as Figure 4 but for the At-Risk Employment Score.
Figure 6: The same is shown as Figure 4 but for the Low Educational Attainment Score.

Finally, there is an additional interaction term between climate risk and social impact to be considered which also highlights the critical transition that must be managed for these EP-proximate populations. Our Flood risQ Score measures risk coming from inland and non-hurricane coastal flood on a 0–5 scale, where every 1-point increase translates to an approximate doubling in financial risk. We have shown previously that the Flood risQ Score correlates with negative property value growth, mortgage delinquency, and reduced population growth outcomes. Figure 7 shows that on average, for tracts with non-zero Scope 1 EP emissions, the Flood risQ Score is positively correlated with per capita tCO2 (Spearman rank correlation = 0.15). This is intuitive given that water was a key site-selection criteria for power generation, as it is needed for cooling towers as well as for ease of access to fossil fuel shipping channels. In many of these locations, we also know that FEMA SFHA flood zones underrepresent total flood risk and underserve minority communities. There is already significant carbon transition risk in these locations, but as climate change increases flooding frequency and severity, these areas will face climate transition and either investment in resilience or managed retreat. Ironically, just as Florida and Texas have high EP Scope 1 emissions and are ground zero for climate risk in the US, local communities with both high EP carbon footprints are inadvertently — at least for them — fueling their own future flood risk via the resulting climate change.

“Double-whammy” does not do justice to the extent of the total climate burden placed on vulnerable communities. What are the collective implications to consider for those in the municipal bond debt and/or ESG ecosystems?

Figure 7: The same is shown as Figure 4 but for the Flood risQ Score.

Insights for US Fixed Income Participants

What are the potential implications of a municipal obligor’s exposure to the fossil-fuel industry and federal- and state-level carbon transition mandates? County governments are not directly obligated to drive carbon neutrality efforts within their boundaries — in fact, in the vast majority of cases, counties will not be developing or implementing carbon transition plans themselves. However, the tax-base within carbon intensive counties will be impacted, regardless of the levels at which government transition policy directives are sent and received. Federal- and state-level policies and social pressure could flow through to county credit in myriad forms:

● Reduced demand for fossil fuel-based electricity and increased competition with renewables-based energy producers, potentially leading to reduced revenues and market share erosion for large power company taxpayers. This would flow through to materially reduced county tax revenues and assessed values at the generation locations.

● Second derivative impacts on carbon-intensive electricity production counties include job loss, slowing economic activity, and migratory outflows as jobs and taxpayers leave counties. Depending on the level of localized distribution of electricity from fossil fuel generation assets, there is also the potential for higher electricity costs from emissions mitigation or cap-and-trade to flow through to the cost lines of the local economy and population, neither of which will be beneficial to long-term growth for the municipality.

● Potential credit positive includes capital inflows from federal- and state-levels directed towards investments in renewable energy plants and infrastructure that could stimulate economic activity.

Looking at historical precedent for carbon transition and environmental regulatory exposure impacting municipal credit:

● Campbell County WY: A 2019 Brookings Institute study linked the collapse of the coal industry to the inability of coal-dependent communities to service debt obligations. Campbell County WY was one cited example, wherein the County’s assessed value dropped from $6.2 billion in the 2015–2016 fiscal year down to $4.19 billion for the 2017–2018 fiscal year, driven primarily by falling coal revenues.

● State of Illinois: Residents of Illinois have historically benefited from the State’s relatively cheap electricity — in 2019, the average price for electricity in Illinois was 9.56 cents/kWh, approximately 9.3% below the national average. Pending state climate legislation is aimed at closing all coal plants in the state by 2035 and natural-gas plants by 2045, a policy that is expected to hike rates on consumers and businesses in the State. Some estimates have placed the initial hit via electricity cost increase on businesses and municipalities was going to be around $700 million annually.

● Jefferson County AL: In the early 2000s, Jefferson started issuing debt to finance improvements to its sewer system to comply with an order from the Environmental Protection Agency (EPA). The EPA had accused Jefferson of dumping raw sewage into nearby rivers and mandated that the County expand and repair its sewer system. As a result of corrupt governance and the 2008 financial crisis, Jefferson failed to service these debt obligations and ultimately filed for Chapter 9 bankruptcy. At the time, it was the largest municipal bankruptcy in US history, totaling more than $4 billion (Detroit’s bankruptcy broke that record in 2013, with a value estimated at $18–20 billion). Poor environmental standards still persist in Jefferson, which is home to the largest greenhouse gas emitting power plant in the United States, the James H. Miller Jr. Electric Generating Plant, and was recently given a grade of ‘F’ by the American Lung Association for its ozone levels. The owner of the Miller plant — Alabama Power — is responsible for ~6.5% of the county’s total assessed value according to Jefferson’s most recent financial disclosure.

All that said, the US municipal market has a clear role and responsibility to play in catalyzing the transition away from fossil fuels. The latest UN report is dire and the most urgent yet, calling for action now. Debt investors have the leverage to pressure issuers/utilities and the capital and apparatus to fund the transition away from fossil fuels. In the bigger (more abstract) picture, investors should also have the self-interest to do so — more fossil fuel burning equates to practically permanent increases in property and GDP losses from physical climate risk. risQ’s recent work makes the difference between financial losses from wildfires and flooding under more and less carbon intensive near term futures clear — our current carbon intensive trajectory is expected to lead to ~+8% property losses from wildfire and ~+19% from inland flooding by 2050 compared to today, to name just a couple of the many physical risks that will continue to worsen as we continue with business as usual.

The on-going saga in Illinois reveals the political and economic complexity in actually doing so on a practical level: utility operators and labor unions pushed back on a state-backed clean energy package that included early bond repayment to decommission the two plants. Ratepayer-backed bond refinancing is one potential avenue to accelerating the retirement of fossil fuel intensive power plants in a way that can be structured to be equitable to ratepayers and can generate transition funding for workers with jobs at risk from decommissioning. One recent successful case study can be found for the 2018 retirement of the Pleasant Prairie plant in Wisconsin.

US municipal market investors, especially those with ESG, Social Impact or Responsible Investing mandates and genuine strategies, can advocate for state-level legislation to accelerate the transition to clean energy that is equitable to people facing employment risk and those whose property values might suffer. State and federal investment should be weighted toward those often historically marginalized communities that both will be impacted by the economic implications of carbon transition and are comprised of populations least capable of doing so due to limited individual and collective financial and infrastructural resources; the Justice40 initiative holds significant promise in this regard. A focus on investment in the relevant school districts will enhance the local populations forward-facing employment. Investment in flood resilience projects will help shore up potential losses in property value. Ensuring health care is available via hospital systems serving these locations, many of which are municipal bond issuers. These are all tangible approaches that federal, state, and local authorities as well as fixed income and social conscious investors can catalyze and contribute to.

Appendix

The Social Cost of Carbon

The SCC concept was originally conceived of during the Reagan administration (and later ratified in 2010), with the purpose of translating the future harm inflicted by the release of one additional ton of carbon dioxide into a present monetary value. The thesis is that if we can assign a dollar value to the social and economic costs reduced by mitigating each ton of CO2 emissions, policymakers are better able to determine the amount that should be invested in CO2 mitigation. The official SCC hovered between $1-to-$7-per-tCO2 under the Trump administration. The Biden Administration recently restored the Obama-era calculation of $51/tCO2, a step that will make it easier for federal agencies to approve aggressive actions to confront climate change. According to DC-based consultancy Resources for the Future, the SCC is calculated in four key steps: “1) predict future emissions based on population, economic growth, and other factors, 2) model future climate responses, such as temperature increase and sea level rise, 3) assess the economic impact that these climatic changes will have on agriculture, health, energy use, and other aspects of the economy, 4) convert future damages into their present-day value and add them up to determine total damages”. Since the uniform calculation of SCC was officially established in 2010, federal agencies have used the figure to better understand the possible impacts of over 100 proposed federal actions to decrease greenhouse gas pollution — everything from automobile emissions standards, to caps on toxic pollutants emitted from power plants, as well as renewable energy investment decisions.

County-Level Case Studies

Below we dig deeper into 4 illustrative county examples in an effort to provide a qualitative assessment to supplement the quantitative findings of our analysis. We focus on Nassau County NY, Gallia County OH, Titus County TX, and Attala County MS. Provided for each area are the risQ Scores (0–5 physical climate risk metric) and Social Impact Scores (0–100 socioeconomic conditions metric).

New York: Nassau County

Located immediately east of New York City, Nassau together with Suffolk County comprise the Long Island region. As the wealthiest county in New York, Nassau has some of the highest median property taxes, collected at an average of 1.79% of the county’s assessed value. Despite the County’s historically robust tax base, in 2000 Nassau was granted a massive bailout of $105 million by the New York State legislature in order to prevent it from going into bankruptcy. In 2021, the County is seeking a repurposed bailout in the form of a $3.3 billion budget proposal approved by NIFA to refinance the $473 million of existing debt over 15 years and also restructuring its own bonds. The County’s annual electricity production driven tCO2 liability / assessed value ratio of 22% could compound the fiduciary risks posed by the County’s already low general fund and cash balance that has earned the county a moderate rating of A2 from Moody’s for its general obligation bonds. KeySpan Gas East is responsible for 2.9% of the county’s total taxable assessed value — its parent corporation National Grid is the largest natural gas distributor in the northeast US, and the owner of the E.F. Barrett Generation Station, which in 2020 was responsible for directly emitting ~885,000 tCO2 equating to a CO2 liability of ~$45M. As of June 4 of this year, Moody’s downgraded KeySpan Gas East to Baa1 from its previous A3 rating due to the utility’s “higher business risk…given [its] ambitious decarbonization agenda and modest funding for energy transition projects”.

The county also has a Flood risQ Score of 3.7 out of 5.0, putting it at the higher end of US flood risk. Median household income and median monthly housing costs both rank 100th percentile nationally — making the county’s Housing Unaffordability Score, which increases as income is higher relative to housing costs, of 84 out of 100. So, although the county is affluent, both physical and carbon transition climate risks pose eventual threats to property values.

Ohio: Gallia County

Between 2016–2019, Gallia County had a population of ~30,000, an average of $800 million in assessed value, and a debt-to-income ratio ranging from 17–23%. Per capita income in the County is relatively low, with the average resident bringing in ~$22,000 annually according to the American Community Survey — approximately 70% of workers earn less than $3,333 a month and 21% of the population lives below the poverty line. Gallia County has a large swath of residents employed in the utility sector. Gallia ranks 8th highest nationally in terms of percentage of jobs and annual wages within the power sector — accounting for 5% of jobs and 13% of wages in the county. Two of the County’s top five employers operate coal-fired power plants: the Ohio Valley Electric Corp’s Kyger Creek Plant and Lightstone Generation’s Gavin Power Plant. In 2002, American Electric Power, the owner of Gavin plant at the time, bought out homes in the neighboring town of Cheshire after residents made their case that a sulfuric-acid mist from the plant was causing health problems including headaches, sore throats, and eye-irritation. Gallia County is impoverished and heavily reliant on the fossil fuel industry (6% of jobs in the Utilities sector, ranking 95th percentile nationally) and so by extension, highly exposed to carbon transition risk if emissions are taxed in a way that makes electricity generation from fossil fuel-based power plants less economically viable. Gavin Power Plant is the 6th highest CO2 emitting plant in the US according to 2019 EPA reporting data, and at the same time is responsible for 18.6% of the county’s assessed value. As global economies consider policy mechanisms for reducing greenhouse gas emissions, one wonders what will happen to Gallia County’s financial standing if its major tax contributor is forced into an economy with a carbon tax. Applying a cost of $51 per ton of CO2, Gallia’s electricity production sector liability amounts to $618 million, ranking 9th highest amongst the 334 sample counties.

The county’s Flood risQ Score is high at 4.2 and stands at the 98th percentile nationally for inland flood driven GDP impairment risk. In addition, ~21% (92nd percentile nationally) of the county’s population is below the poverty line, and the At-Risk Employment Sector score is 97 of 100 given that it ranks highest in the nation in terms of percent employment in the utilities sector. Gallia County is clearly one of the most financially and socially vulnerable places in the US to both physical climate risk and carbon transition risk.

Texas: Titus County

Before the discovery of oil, Titus County depended exclusively on agriculture. Beginning in the late 19th century, the county transitioned from staple crop agriculture to cash crops. The value of the county’s farms dropped from almost $12.8 million in 1920 to a little over $5.5 million in 1930, and losses were exacerbated by the Great Depression. The discovery of oil in 1936 provided a needed economic reprieve to the county’s stagnating economy. The oil industry blossomed and inflated the number of manufacturing jobs. Two smaller refineries closed which were unable to compete with the large refinery at Mount Pleasant. As the drilling slowed and manufacturing opportunities dried up, the population declined and so did tax revenue. Texas’ clean energy portfolio continues to expand and dominate the US’ wind energy production; however, Titus County has yet to take strides towards a clean energy future. The County’s annual EP tCO2 liability is ~42% of the County’s total assessed value, and is home to the J. Robert Welsh Power Plant, the 97th highest CO2 emitting facility in the US (out of ~ 3,100) according to the EPA GHG Reporting Program. Southwestern Electric Power Company (SWEPCO), the plant’s owner, is the county’s top taxpayer, comprising 9.22% of Titus’ assessed value as of the most recent year of reporting in 2019. SWEPCO boasts its renewable energy portfolio, but so far these initiatives have failed to advance in Texas. In compliance with the EPA’s Mercury and Air Toxics Standards (MATS) rule, SWEPCO invested $411 million to install additional environmental controls in 2016. SWEPCO also plans to halt coal operations at the Welsh Power Plant by 2028 in response to two recently revised internal environmental regulations.

By 2030, risQ’s drought model projects that Titus County is expected to experience mild to severe drought conditions ~38–51% of the time (85th percentile nationally), compared to ~30% in the past few decades. The county is also broadly socioeconomically vulnerable, with a Social Impact Score of 81, a Health Obstacle Score of 78, an At-Risk Employment Sector Risk Score of 94 and a ~42% Latino population. In total, Titus County is another distinct example of one that is acutely vulnerable to both physical climate and carbon transition risks.

Mississippi: Attala County

Attala County’s economy has been historically dependent on the agricultural industry, which remained the key driver for the County’s economy well into the 20th century. Population began to decline in the 1960s despite burgeoning forestry and manufacturing industries — from 1960 to 2017, the county’s population fell by 12%. As of 2017, 23% of the population lived below the poverty line, ranking in the 84th percentile nationally. Entergy Attala Plant, located in Sallis MS, began operations in 2001 — the parent company Entergy Mississippi comprises 19.03% of the county’s assessed value, as of 2016. The County’s annual EP CO2 liability is more than a quarter of its total assessed value, at ~27%. Entergy is instituting more renewable generation projects, but none in Attala as of yet. Neither the County nor the State of Mississippi have made substantial progress on mitigating climate change, transitioning to clean energy, or reducing greenhouse gas emissions. The county’s transition to renewable energy is limited to the opening of Sustainable Energy Technologies — in 2019, the Mississippi Public Service Commission created a framework for how the State’s leading energy companies (Entergy Mississippi and Mississippi Power) acquire energy in the future. The Commission is pushing for an all-source process in which renewables can be considered when a utility expands its capacity; however, the state still has a long way to go, as nearly 75% of electricity produced comes from natural gas and only 3% of Mississippi’s utility-scale power generation came from renewables.

By 2030, risQ’s drought model projects that Attala County is expected to experience mild to severe drought conditions ~34–44% of the time, compared to ~30% in the recent past. The county has a Social Impact Score of 92 of 100, an At-Risk Employment Sector Score of 95 of 100, a Health Obstacle Score of 92, and a population that is ~43% Black (60th percentile in Mississippi, 93rd percentile nationally).

We quantify climate risk, carbon transition risk and social impact for US Fixed Income, covering the full municipal bond and MBS universes

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