When our buttoned-down economic guardians at the Reserve Bank describe something as a "serious challenge" and a "systemic risk" it’s time to pay attention.
Those are just some of the strident terms it chose to use this year about the threat of climate change.
Amid the fractious national debate over climate policy in 2019 the Reserve made two striking interventions.
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| Reserve Bank deputy governor, Dr Guy Debelle. Credit:Nine |
The tone was measured but the message was pointed: climate change will have a deep economic impact and the earlier policymakers and business take action to address the challenge, the lower the economic costs.
Debelle said few forces now at work in the economy "have the scale, persistence and systemic risk of climate change".
He explained how the effects of global warming would amount to an economic double whammy.
Three Australian fire chiefs claim Australia's worsening bushfire seasons are linked to climate change and have called for strong leadership to tackle the problem.
Both the physical impact of climate change, such as more frequent extreme weather events, and the transition to a low-carbon economy through new regulations or price mechanisms were "likely to have first-order economic effects".
"There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend," Debelle said.
It showed climate change will now factor in the way the Reserve manages its core responsibilities, which includes setting interest rates and overseeing Australia’s financial stability.
"We are trying to learn and benefit as much as possible from the expertise of others to understand and contribute to the discussion around the serious challenge of climate change," said Debelle.
The Reserve Bank’s second strike came in October when it included a special section on risks posed by climate change in its half-yearly review of financial stability.
"Climate change is exposing financial institutions and the financial system more broadly to risks that will rise over time, if not addressed," it said.
Those risks are notoriously difficult for businesses to assess because of their long-term nature and complexity. The possibility that governments will change climate-related policies in future adds to the uncertainty.
The October report said the crucial insurance sector is most directly exposed to the physical impacts of climate change. It pointed out that insurance claims for natural disasters in the current decade have been more than double those in the previous decade, after adjusting for inflation, and that is "likely to grow over time".
The Reserve warned that climate change will expose more assets owned by households and businesses to increased physical risk "such as property located in bushfire-prone or coastal areas".
But the challenge of accurately pricing that risk will create an economy-wide dilemma.
"If insurers under-price these risks, it could threaten their viability in the event of extreme weather events resulting in very large losses," the report said.
"On the other hand, over-pricing would impede the risk pooling function provided by insurance and unduly limit economic activity."
The report even canvassed the possibility that businesses and households could lose access to insurance altogether in some cases.
"Even if correctly priced, more of these risks may become uninsurable, forcing households, businesses or governments to bear this risk," it said.
A number of other economic analysts think climate change will eventually render many properties too expensive to insure, although the shift could play out over some decades.
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| Home and businesses were heavily affected in Bilpin during fires in December. Credit: Nick Moir |
"There are frightening projections about increased frequency of natural disasters and it seems likely that many properties will become prohibitively expensive to insure, or insurance won’t be offered," said report’s author, Mark Ogge.
A host of perverse economic incentives for property holders would result, says Ogge. It may even require an expensive "managed retreat" from some inhabited areas.
Ogge argues a National Climate Disaster Fund should be established to reduce the cost burden on households and taxpayers of natural disaster response and recovery.
But the Insurance Council of Australia says claims that parts of Australia will inevitably become uninsurable or unaffordable due to climate change "fail to recognise that mitigation and adaptation can prevent some of the worst impacts of extreme weather".
A statement on climate change and insurance issued by the council a few weeks after RBA’s Financial Stability Review said no area of Australia should be uninsurable provided "governments invest appropriately in permanent mitigation and resilience measures to protect communities from known and projected risks, including the impact of climate change."
Links
- Climate change poses risk to Australia's financial stability, warns RBA deputy governor
- Climate Change and the Economy
- Big Money Starts To Dump Stocks That Pose Climate Risks
- Businesses That Ignore Climate Change Could Face 'Kodak Moment', Warns APRA
- Climate Change Poses A Clear Financial Risk To Australia
- Why Climate Change Risks Are 'Material' For Big Finance
- APRA Demands Banks, Insurers Act On Climate Risk
- The RBA Has Sounded The Climate Change Alarm. Time To Sit Up And Take Notice
- Most global investors recognise financial risk of climate change, report finds
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