Climate Change is a Central Concern for Australia’s Financial Stability

This post examines the loss and damage that climate change is expected to have on Australia between now and 2050. Assessments of climate change loss and damage are a key aspect of the Paris Agreement’s ongoing UNFCCC-sponsored Global Stocktake, an effort to assess the ability of the Paris Agreement to meet its goals. Loss and damage are a term the UNFCCC uses to refer to the consequences of climate change that go beyond what people can adapt to on their own or when options exist but a community does not have the resources to access them.

A range of evidence-based reports, including those from the Climate Council and MSSI, have been produced documenting the expected loss and damage climate change is expected to afflict Australia by 2050. One particular concern is the impact of climate change on the Australian economy, which currently depends on exporting fossil fuel emissions which generate 20% of Australia’s export earnings. One report, by the Australian Climate Council, entitled ‘Compound Costs: How Climate Change is Damaging Australia’s Economy’, found that climate change is expected to negatively affect the Australian economy at a scale that matches few other forces. Indeed, in 2019, the Reserve Bank of Australia, the Australian Prudential Regulation Authority, and the Australian Securities and Investment Commission all named climate change risks as a central concern for Australia’s financial stability.

A variety of modeling demonstrates that widespread property and infrastructure damage is expected to occur by 2050 due to climate change. Some of this is due to increased natural disasters, which can be extremely costly. For example, the 2009 heatwave was estimated to cost $800 million, and the 2020 bushfires are estimated to have cost between $4.4 billion to over $100 billion. Flood risks and coastal inundation are also major threats. These risks and other damage inflicted by extreme weather are expected to result in a loss of $571 billion in value by 2030. Projected out to 2100 – presuming emissions continue at the current rate – sea level rise will lead to more than $226 billion in damage to commercial, industrial, road, rail, and residential assets.

Climate change will also generate loss and damage to agricultural yields and commodity prices. For example, the Bureau of Meteorology projects that rainfall volumes will be 56% higher by 2050. Reduced agricultural (and labor) productivity caused by climate change may cost over $211 billion of accumulated loss of wealth by 2050 ($4 trillion by 2100). In particular, the Murray Darling agricultural region, which accounts for 50% of Australia’s irrigated agricultural output by value (about $7.2 billion/year) is expected to halve by 2050.

Climate change will do more than just impact the Australian economy. A report by the Australian Academy of Science demonstrated the multiplicity of negative impacts communities will experience. Homeowners may be unable to obtain insurance, while vulnerable populations will experience increased physiological heat stress. Reduced access to water will likely lead to the depopulation of rural communities, while the increased spread of climate-sensitive infectious diseases may affect major population areas.

The impact on biodiversity is similarly severe. One academic report using choice modeling found that participants expected over $240 billion in damages from biodiversity loss in Australia by 2050. Beyond this, the loss of iconic natural wonders such as the Great Barrier Reef, which has lost over 50% of its hard coral cover within the last five years, may devastate biodiversity as well as tourism opportunities. Government modeling demonstrates that changes resulting from climate change are expected to result in increased and more frequent marine heatwaves, rising sea levels, heavier and more intense rainfall, higher-intensity storms, increased heatwaves, and a longer fire season.

In total, it is estimated that the cost to Australia of not meeting the Paris Accord target could be 1.19 trillion dollars. Specifically, by 2050, the estimated full costs of potential damages from climate change – if we continue at the current emissions patterns – to Australia is $762 billion by 2050.

There have been some moves towards helping people and communities adapt to the impacts of climate change. Although Australia has become well known around the world for lagging on actions to address climate action, local governments, diverse communities, and some State governments are actively considering climate change adaptation and resilience. For example, the ’Preparing Australia Program’, provides a $600 million investment from the Commonwealth for enhancing resilience to natural hazards such as bushfires, floods, and tropical cyclones. Similarly, the ‘Future Drought Fund’ provides $100 million/year to farmers to build drought resilience. Some states and territories have already implemented projects related to water security, such as Western Australia’s collaboration with the Water Corporation to build two desalination plans alongside wastewater recycling, stormwater reuse, and demand reduction measures. At the local government level, the City of Sydney, for example, has developed a long-term climate change adaptation strategy, including actions such as increasing tree canopy cover, conserving urban biodiversity, and reducing water demand.

However, while these projects signal a readiness to consider adaptation needs, Australia’s response to climate change remains reactive. Many experts have criticized the Commonwealth’s response to the NSW 2022 floods, arguing that the lack of transformative climate action has sentenced vulnerable communities to untold suffering and devastating financial ruin. Given this situation, Australia is likely to require significant resources to manage climate change-related loss and damage. For example, it has been estimated that around $17 billion each year will be required for rebuilding after natural disasters alone.

Although it remains unclear who will provide the financial resources required to alleviate climate loss and damage, many researchers have highlighted the benefit of taking advantage of opportunity costs for addressing climate change. Indeed, many experts have called for a reset, where authorities prioritize proactive investment in climate resilience. The sums demonstrate their potential to build climate resilience while minimizing climate impacts on the economy. For example, IMF data indicates that the annual $29 billion cost of taxpayer (government) subsidies to Australian energy producers would more than pay for emissions reduction costs. Similarly, another report calculated the national effective emissions reduction cost at $35.5 billion from 2019 to 2030 (0.14% of cumulative GDP).

As has been amply demonstrated around the world, the damage of inaction is far greater than the costs of emissions reduction.

This Post was submitted by Climate Scorecard Australia Country Manager Robyn Gulliver


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