The Reserve Bank has warned climate change is likely to cause economic shocks and threaten Australia's financial stability unless businesses take immediate stock of the risks.
The central bank became the latest Australian regulator to tell business that they must analyse their investments on Tuesday, as the Coalition grapples with an internal battle over taxpayer-funded coal fired power and energy policy.
In a speech to the Centre for Policy Development in Sydney, the Reserve's deputy governor Guy Debelle said challenges for financial stability may arise from both physical and transition risks of climate change.
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| Dr Guy Debelle, deputy governor, Reserve Bank of Australia. Credit: Jessica Hromas |
"The supply shock is no longer temporary but close to permanent. That situation is more challenging to assess and respond to."
Financial stability could be put at risk if businesses remained unaware of unanticipated insurance payouts, pollution driven reputational damage, legal liability and regulation changes that could cause valuable assets to become uneconomic.
"All of these consequences could precipitate sharp adjustments in asset prices, which would have consequences for financial stability," he said.
He said the current drought across large swathes of the eastern states has already reduced farm output by around 6 per cent and total economic growth by about 0.15 per cent
"We need to think in terms of trend rather than cycles in the weather. Droughts have generally been regarded as cyclical events that recur every so often. In contrast, climate change is a trend change."
That has an impact on monetary policy, Dr Debelle said, citing the temporary shock of banana prices surging after Cyclone Yasi in 2011, which in turn boosted inflation by 0.7 percentage points.
But he said future events may not be so one off, with repeated climate events and the transition of the economy likely to have a longer term impact.
"We need to be aware that decisions taken now by businesses and government may have a sizeable influence on that transition path," he said.
Dr Debelle said the transition posed challenges and opportunities.
Industries especially exposed to the consequences of changes in the climate will face lower costs if there is an early and orderly transition, some will bear greater costs from the transition to a lower carbon economy, while others such as the renewables sector, may benefit.
"There has been a marked pick-up in investment spending on renewable energy in recent years," he said.
"It has been big enough to have a noticeable impact at the macro-economic level and affect aggregate output and hence the monetary policy calculus."
In comments that are likely to be used against some pro-coal Nationals MPs urging the Coalition to build a taxpayer-funded power station, the deputy governor said the renewable sector was a good example where price signals have caused significant behavioural change.
"There has been a rapid decline in the cost of renewable energy sources," he said.
Dr Debelle said the cost of generating electricity has declined in the case of wind and solar to the point where they are now cost-effective sources of generation. He added that storage and transmission remained relevant costs.
Despite coal being one of Australia's top exports, Dr Debelle said opportunities remained 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 demand," he said.
He endorsed comments by Australian Prudential Regulation Authority executive Geoff Summerhayes in London in January, which warned tackling climate change had become a "financial necessity".
In the speech to the UN's sustainable insurance forum, Mr Summerhayes lashed government inaction, arguing the summer's extreme weather, severe drought and floods were all fuelled by climate change, but Australia still lacked the political consensus needed to respond to the threat.
Links
- Climate Change and the Economy | Speeches | RBA
- Climate change costs will have knock-on effect on interest rates, Reserve Bank warns
- RBA deputy warns climate change a threat to Australian economy (audio)
- RBA warns of 'abrupt, disorderly' effects of climate change
- Climate change poses risk to Australia's financial stability, warns RBA
- Coal baron and LNP donor blasts RBA for sounding alarm on climate
- Fossil fuel 'special interests' putting Australian economy at risk, warns Stiglitz
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