There has been a lot of recent speculation in the media about the economic costs of each party’s climate policies. But so far, there has been little talk of the costs of inaction.
The Climate Council’s most recent report Compound Costs highlights the tip of the iceberg of some of the direct costs going forward that would result from the Government’s current approach to climate change. These costs are enormous. It is abundantly clear that a credible climate policy is needed to reduce the economic risks posed by climate change.
Compound Costs shows that, on current trends, the property market could lose $571 billion in value by 2030 due to increased risks from climate change and extreme weather, and that this cost could rise to $770 billion by 2100. The report also highlights that annual average risk costs (or self-insurance costs) would rise to $91 billion in 2050 and $117 billion in 2100 in the absence of adaptation measures and rapid abatement of greenhouse gas emissions.
The impacts of climate change on properties are expected to be clustered, and highly uneven. Properties in low-lying areas contribute disproportionately to the expected value losses in the future. Flooding and coastal inundation drive most of the value losses, with flood risk rising progressively and coastal inundation emerging as a major threat around 2050. 1 in 15 properties (6.6% of properties) are expected to be impacted by 2100. These properties are expected to have self-insurance costs that are 1% or more of the property value per year by 2100 (e.g. a property worth $500,000 would have self-insurance costs of $5000 or more per year).
Some of the major hazards that are expected to worsen due to climate change – such as coastal inundation and erosion – are currently not covered in general insurance policies. This means that some of the increased damage costs would be borne solely by home owners, or government, as the insurer of last resort. The rest of these risk costs (for hazards that are covered) would be captured by insurance premiums, which would need to rise to reflect the increased risk exposure of properties.
The property impacts analysis was based on the largest assessment of extreme weather and climate change risks for Australia’s 15 million properties undertaken to date (including both residential and commercial properties). The assessment included six climate-influenced hazards: bushfires, flooding, windstorms, coastal inundation, heatwaves and soil subsidence (which can occur from drought and can affect building foundations). It also factored in the influence of climate change on these hazards going forward. The assessment is highly conservative, as it assumed that the total number of properties will remain stable into the future. In reality, projections indicate that the number of buildings in Australia will increase substantially, and if these are built in exposed areas, this could drastically increase the potential damages and costs.
The impacts of climate change on agricultural and labour productivity would also be significant if emissions were to continue at high levels. Reduced agriculture and labour productivity due to climate change would cumulatively cost the economy $19 billion by 2030 and $4 trillion by 2100. These damages only factor in the effects of rising temperatures, shifting rainfall patterns and sea level rise on agriculture, and the impacts of heat stress and a few other health impacts on labour productivity. They exclude the effects of increasingly frequent and severe extreme weather, which we know could impose substantial additional costs (in fact, Deloitte have estimated that extreme weather events already cost Australia $18 billion per year).
The report also found that the Murray-Darling Basin could be severely affected. The Murray-Darling Basin currently accounts for around 50% of the value of Australia’s irrigated agricultural output. If emissions were to continue at high levels, climate change would halve the irrigated agricultural output of the Murray-Darling Basin by 2050. Western Australia’s wheat belt would also be hit hard in such a scenario, with wheat yields projected to fall by 41-49% by 2090.
Although the report focuses on the costs of the physical risks of climate change, there are also many economic risks that would arise if the inevitable transition to a decarbonised economy isn’t driven by clear, credible and purposeful policies. For example, failing to set strong targets for renewable energy and emissions reductions, or underwriting or subsidising new fossil fuel generation, increases the risks of sharp market corrections and stranded assets in the near future – which could have much more severe flow-on economic and financial ramifications. Both the physical and transition risks posed by climate change have led Australia’s financial regulators to acknowledge that climate change is a central concern for economic and financial stability. Influential legal opinion has also found that company directors who do not properly manage climate risks could be held liable for breaching their legal duty of due care and diligence. Disclosure of climate-related risks is likely to become mandatory in the future.
There are also opportunity costs associated with not getting on the front foot of the transition to decarbonise the Australian economy, such as less jobs in the renewable energy industry, and missed opportunities to value-add to commodities that are central to the global clean energy revolution that is already underway. For example, Australia has some of the largest reserves of lithium in the world (as well as abundant renewable energy resources). There is potential to value-add to our lithium assets by building a domestic battery manufacturing industry, and there is potential to build an export industry around renewable-generated hydrogen.
The government’s lack of climate change action is the defining leadership failure of the past decade. We have not tackled climate change, the consequences are with us, and we must work very quickly to prevent catastrophic consequences. Given the lack of a stable and enduring climate policy over the past decade we now have to redouble our efforts to decarbonise the economy, whilst simultaneously increasing our resilience to extreme weather events, which will get worse over the coming decades. Investments in resilience will be essential to reduce or prevent losses, and protect the lives of Australians. Investments with long planning horizons need to be built to withstand the increasing risks of climate change, as well as to facilitate the transition to a decarbonised economy.
Compound Costs found that the cumulative costs of unmitigated climate change would reach into the trillions by 2100, and this costing only factored in a small number of climate change-influenced damages on a small number of sectors. Notably, it did not factor in costs such as loss of human lives or loss of species and biodiversity, which cannot be adequately captured through an economic lens. We know that a credible climate policy would not cost anywhere near this figure. In fact, according to a study published by CSIRO and AEMO the levellised cost of renewables is now cheaper than coal – even when backed by battery storage – so with a well-planned mix of renewables, and investment in transmission and storage, it would actually save us money over time to decarbonise the electricity sector.
The best way to reduce and manage both the physical and transition risks from climate change is to adopt a credible climate policy. This means setting out a clear strategy and plan to reach net zero emissions by 2050 or preferably much earlier, and investing in adaptation and resilience.
Dr Annika Dean, Senior Researcher, The Climate Council