RBA warns of ‘abrupt, disorderly’ effects of climate change

“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.”

He said both the physical impact of climate change and the transition to a low carbon economy were “likely to have first-order economic effects”.

His comments come less than three weeks after Geoff Summerhayes, head of insurance at the Australian Prudential Regulation Authority, delivered a speech in London warning of the financial costs of climate change. They also come as climate change becomes a major issue in the upcoming federal election.

In his London speech, Mr Summerhayes called for more work to be done gathering data on the possible effects of climate change, and for increased financial disclosure of the climate change-related risks facing banks, insurers and financial services companies.

Dr Debelle said he “strongly endorse[d]” APRA’s position. “We have seen progress on this front in recent years, but there is more to be done. Financial stability will be better served by an orderly transition rather than an abrupt disorderly one,” he said.

He said more work needed to be done on the macroeconomic effects of climate change, as well as their effects on individual businesses.

“For businesses and financial markets, that challenge is understanding the climate modelling and conducting the scenario analysis to determine the potential impact on their business and investments.”

Monetary policy, renewables, China

Dr Debelle said climate change posed an unusual quandary for central bankers. Unlike the cyclical or one-off shocks monetary policy usually faces – he used the example of the acute shortage in bananas after Cyclone Yasi in 2011– climate change was a permanent shift.

“The recent [Intergovernmental Panel on Climate Change] report documents that climate change is a trend rather than cyclical, which makes the assessment much more complicated.

“What if droughts are more frequent, or cyclones happen more often? The supply shock is no longer temporary but close to permanent. That situation is more challenging to assess and respond to.”

He said monetary policy was “always having to analyse and assess” the wide range of forces that impact the economy. “But few of these forces have the scale, persistence and systemic risk of climate change,” he said.

He said the transition to a low carbon economy would be good for some parts of the economy, such as the renewable energy sector, but he said “it may not be possible for the winners to compensate the losers in a way that leaves no-one worse off”.

He said China’s climate change policy would continue to have a profound effect on the Australian economy.

“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 demand. More generally, Australia is also benefiting from the increased demand for battery inputs (especially lithium) and other metals that are used intensively in renewable generation,” he said.

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