Climate change poses risk to Australia's financial stability, warns RBA deputy governor

Guy Debelle urges policymakers and business to address global warming as a trend rather than a temporary weather cycle

A deputy governor of Australia’s central bank has issued a stark warning that climate change poses risks to financial stability, noting that warming needs to be thought of by policymakers and business as a trend and not a cyclical event.

As a debate over coal and energy fractures the Morrison government, Guy Debelle warned a forum hosted by the Centre for Policy Development on Tuesday 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.”

Debelle noted Australia had traditionally come at the climate change debate largely through the prism of its impact on agriculture, but 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”.

He said policymakers and businesses needed to “think in terms of trend rather than cycles in the weather”.

“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,” 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.”

Debelle noted the United Nations’ Intergovernmental Panel on Climate Change 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 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”.

“There is also a greater possibility of compound events, where two or more climatic events combine to produce an outcome that is worse than the effect of one of them occurring individually,” Debelle said.

“Combined with the increased volatility, this increases the likelihood of nonlinear impacts on the economy.”

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”.

But he said the massive shift in the direction of rooftop solar had consequences for the cost of electricity transmission and also the efficacy of current infrastructure. 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”.

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.

But as China transitions 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”.

He said Australia had prospects as an exporter of materials used in the production of renewable energy, including lithium, which is necessary for the batteries used in storage.