Preparing for climate change makes economic sense

While the politics of climate change still remains a contentious issue in Australia, with the axing of the carbon tax by the Abbott government, there still remains a significant business risk associated with climate change that cannot be ignored.

The repeal of the carbon tax has been seen by many as a backwards step in terms of sensible economic and environmental policy. According to Dr Paul Burke, Research Fellow Crawford School of Public Policy, “The carbon price was doing its job: reducing emissions and contributing to government revenue. It was one of the best taxes the government had on its books,” he said.

But many feared Australia was going alone with its fight against climate change and it could jeopardise the Australian economy. Others now argue that Australia is one of the only countries scaling back its political action on climate change.

Australia not alone

UN negotiations are underway to develop a new international climate change agreement that will cover all countries. The objective of the COP21 in Paris in 2015 is to achieve a legally binding and universal agreement on climate, from all the nations of the world.

The majority of the world’s major cities have disclosed that climate change presents a physical risk to the businesses operating in their cities, according to the Protecting our Capital report, written by not-for-profit organisation CDP, AECOM and the C40 Cities Climate Leadership Group.

In the report, 207 cities around the world including Johannesburg, London, Melbourne, New York, São Paulo, Sydney, Tokyo and Wellington disclosed their climate change strategies and actions through CDP this year. Three-quarters of these cities disclose that extreme weather and other effects of climate change threaten the stability of their local economies, with damage to property and capital assets, transport and infrastructure destruction, and citizen wellbeing being among the most commonly reported risks.

“Melbourne and Sydney experience extreme temperatures during summers that put strains on essential infrastructure, such as electricity and transport networks,” noted Ben Smith, Associate Director - Sustainability at AECOM. “Both the City of Melbourne and the City of Sydney are facilitating action on climate change because they recognise that future climate impacts on businesses will depend on measures taken by business, councils and state governments working in collaboration to manage these risks.”

Kerem Yilmaz, C40 head of research, added, “The need to understand and act upon climate risk is a growing priority. That’s why these cities are taking steps right now to help create more climate-resilient communities, economies and infrastructure.”

The CDP report also noted that last year a record number of financial institutions asked the companies they invest in to disclose their climate emissions, risks and actions.

Economics of climate change

CEDA (the Committee for Economic Development of Australia) also recently released a report titled ‘The Economics of Climate Change’. According to the report, if Australia does not respond to climate change with a scientific, evidence-based, appropriately funded policy, the economic consequences may be devastating.

CEDA Chief Executive Professor the Hon Stephen Martin said climate change is both an environmental and an economic issue and that “Australia’s economy will be critically exposed on two significant economic fronts if we do not ensure an appropriate response to climate change”.

The first consequence is the economic and social impacts of increasing extreme weather events. The second relates to capital flows and investment in Australia.

“The first area that leaves our economy exposed if we don’t take action relates to the consequences of increasing extreme weather events and the economic and social impact that these events have on Australia’s production capacity,” he said.

“We only have to look at the news in recent years, both at home and abroad, to see the devastation of these events - Cyclone Yasi, Black Saturday, the Queensland Floods, Hurricane Sandy, Hurricane Katrina and the repeated UK floods.

“Where these events have occurred in Australia they have had a direct impact on industry and on the hip pocket of most Australians, from taxes used to fund drought relief packages to the Queensland flood recovery levy implemented in 2011.”

Professor Martin made reference to the town of Roma, Queensland, which has endured several significant floods in recent years. He noted, “If a levee to protect the town had been built in 2005, it would have cost $20 million. However, since 2008 $100 million has been paid out in insurance claims and since 2005 a repair bill of over $500 million has been incurred by the public and private sectors.

“Statistics show that the number of catastrophic weather events is increasing and the economic losses associated with these events are also trending up, which is why we need a national approach to address these risks,” he added.

“What Australia requires is a framework for assessing climate risks and considering possible actions that may lower those risks.”

The second area where Australia stands exposed economically to the effects of climate change relates to the availability of capital to fund its infrastructure and other critical needs.

“Australia is reliant on foreign capital to fund major projects, and new developments in international climate change policy are likely to impact international capital flow and investment decision-making,” Professor Martin said.

 “Applying climate-related risk assessments when considering investment and financing decisions is an emerging trend globally. This trend is likely to have consequences for nationally significant industries in Australia, such as the resources sector, and associated asset values.”

There are global concerns about investing in carbon-intensive industries and this has already influenced the decisions of some major international banks. For example, in recent news Deutsche Bank announced that it would not invest in the coal port terminal expansion proposed at Abbot Point in North Queensland.

“Australian businesses and governments need to ensure they keep in step with international developments and have the options available to move to less carbon-intensive industries and energy sources if we are to remain globally competitive,” Professor Martin said.

“We must invest in research and development to drive technological breakthroughs and have in place regulatory regimes for all energy sources, including nuclear, so that options can be taken up swiftly as technological breakthroughs occur.”

In July, the Clean Energy Council released a report that included a comprehensive overview of Australia’s renewable energy and energy-efficiency sectors. The report found that renewable energy’s share of the Australia’s power generation rose to over 14% in the 2013 calendar year. According to Clean Energy Council Chief Executive David Green, “Last year saw another year of steady growth for solar power and wind energy in Australia, despite sustained uncertainty about the key policy settings for the sector.”

Investment in large-scale renewables has reportedly slowed in 2014 as a result of uncertainty surrounding the renewable energy target (RET) review and the possible axing of the CEFC and ARENA under the carbon tax repeal. The industry still awaits the results of the RET review, but both ARENA and CEFC have now been saved (although ARENA’s budget has been cut). While we are yet to see if Abbott’s Direct Action plan can provide a suitable alternative to the carbon tax, the economic reality is that a green economy (where profits are maximised and environment risk is minimised) should remain ‘business as usual’ despite the politics.