A call for urgent action on climate change, and a warning that extreme weather and a disorderly transition to cleaner energy risk “first-order economic effects”, has come from the Reserve Bank of Australia (RBA).
A deputy governor of Australia’s central bank issued a stark warning that climate change posed risks to financial stability, noting that warming needed to be thought of by policymakers and business as a trend and not a cyclical event.
Reserve Bank deputy governor Guy Debelle declared the biggest shift for policymakers to grapple with was that climate change was not temporary, but a trend.
“What if droughts are more frequent, or cyclones happen more often?” Mr Debelle said.
“The supply shock is no longer temporary, but close to permanent. That situation is more challenging to assess and respond to.”
His comments came as the debate over coal and energy fractured the conservative Liberal-National government of the Prime Minister, Scott Morrison.
Mr Debelle warned a forum hosted by the Centre for Policy Development that climate change created risks for Australia’s financial stability in a number of different ways.
“For example, insurers may face large, unanticipated payouts because of climate change-related property damage and business losses,” he said.
“In some cases businesses and households could lose access to insurance.
“Companies that generate significant pollution might face reputational damage or legal liability from their activities, and changes to regulation could cause previously valuable assets to become uneconomic.
“All of these consequences could precipitate sharp adjustments in asset prices, which would have consequences for financial stability.”
Mr Debelle noted Australia had traditionally come at the climate change debate largely through the prism of its impact on agriculture.
However, he said the changing climate created “significant risks and opportunities for a broader part of the economy than agriculture, though the impact on agriculture continues to be significant”.
“Droughts have generally been regarded, at least economically, as cyclical events that recur every so often. In contrast, climate change is a trend change.
“The impact of a trend is ongoing, whereas a cycle is temporary.”
He said there was a need to reassess the frequency of climate change events, and “our assumptions about the severity and longevity of the climatic events”.
He said the insurance industry had already recognised the frequency and severity of tropical cyclones and hurricanes in the northern hemisphere had changed, and this reassessment had prompted the sector to reprice how they insure and reinsure against such events.
“We need to think about how the economy is currently adapting and how it will adapt both to the trend change in climate and the transition required to contain climate change,” Mr Debelle said.
He said the transition path to a less carbon-intensive world was “clearly quite different depending on whether it is managed as a gradual process or is abrupt”.
“The trend changes aren’t likely to be smooth.
“There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend.”
Mr Debelle noted the United Nations’ Intergovernmental Panel on Climate Change (IPCC) had provided “strong evidence” that another half degree of warming was likely in the next 10 to 30 years.
He said work from the Bureau of Meteorology (BoM) and the CSIRO pointed to an increase in the frequency of extreme weather events, and noted “extreme events may well have a disproportionately large physical impact”.
“Combined with the increased volatility, this increases the likelihood of nonlinear impacts on the economy.”
Mr Debelle said assessed through that lens, climate change-induced shocks to the economy would be “close to permanent” if droughts were more frequent and cyclones happened more often.
“That situation is more challenging to assess and respond to.”
He said the impacts of climate change on the economy were mixed both domestically and in terms of export earnings.
The deputy governor pointed to the huge transition under way in Australia’s energy sector where the levelised cost of generating electricity had declined in the case of wind and solar “to the point where they are now cost-effective sources of generation”.
He said the RBA was paying close attention to developments in the energy market, “given the importance of the cost of electricity in inflation both directly to households and indirectly as a significant input to businesses”.
Mr Debelle noted there was a move in China to transition to cleaner energy sources. In the short run this had benefitted Australian coal exports, because the product was higher quality.
However, as China transitioned away from coal, “natural gas is expected to account for a larger share of its energy mix and Australia is well placed to help meet this increase in demand”.
“More generally, Australia is also benefitting from the increased demand for battery inputs, especially lithium, and other metals that are used intensively in renewable generation.”
