Why climate change has everything to do with economics

This month it was reported the Prime Minister had suggested climate change was unlikely to be discussed at the G20 leaders' summit because the summit had an economic focus. And apparently Mr Abbott was seeking to draw together a coalition of like-minded leaders to sustain this view.

As detailed in The Economics of Climate Change, CEDA's latest report, to suggest climate change is not economic focused is mistaken. Climate change has everything to do with economics and has moved far beyond being simply an environmental issue.

There is no doubt Australia's economy will be seriously damaged if we don't keep in step with major world economies' response to climate change and take appropriate steps to reduce the impact of extreme weather related events.

Australia's economy will be critically exposed on two fronts if we do not ensure an appropriate response to climate change - both environmental and economic.

The first area that leaves our economy exposed relates to the consequences of increasing extreme weather events and the economic and social impact that these events have on Australia's production capacity.

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.

Such events in Australia have had a direct impact on the hip pocket of most Australians from taxes used to fund drought relief packages to the Queensland flood recovery levy implemented in 2011.

While most Australians are happy to help others in need during or following these events, if there are options to reduce impacts before they happen then we should be looking at them now.

What Australia requires is a framework for assessing climate risks and considering possible actions that may lower them. These will inevitably be geographically specific.

A good example of where adaptive action could have made a significant difference is Roma, Queensland. Roma has endured several significant floods in recent years. 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.

This is but one example, and given that statistics show that the number of catastrophic weather events is increasing and the economic losses associated with these events are also trending up, the sooner we have a national approach the better.

In addition, besides the social impacts and cost of replacing or repairing damaged homes, the impacts for industry can be huge and have significant flow-on effects for our economy through electricity prices for example, where we've seen coal mines impacted by flood and fire in recent years.

The first step in managing these risks should be the introduction of a national risk register by the Federal Government. This should include strategies to manage risks of adverse climate events both in the public and private sector as part of its direct action policy response.
The second area that potentially leaves our economy exposed because of the impacts of climate change, relates to capital investment in Australian industries. Applying climate-related risk assessments when considering investment and financing decisions is an emerging trend globally.

Concerns about environmental and economic risks associated with carbon intensive investments have already directly influenced the strategies of major international lending institutions such as Deutsche Bank and the Norwegian Sovereign Wealth Fund. In addition global brands such as Apple and Nike have all factored in climate change to forward planning.

To assume that international responses to climate change will not impact on Australian businesses is naïve at best.

Australia is reliant on international capital to fund major projects and changes in policy are likely to mean changes to international capital flow and investment decision making. This would then have consequences for nationally significant industries in Australia, such as in the resources sector, and associated asset values.

Australia needs to ensure it keeps in step with international developments on this front, both by business and governments, and has the options available to move to less carbon intensive industries and energy sources to ensure we remain globally competitive.

That means investing in research and development to drive technological breakthroughs and having in place regulatory regimes for all energy sources, including nuclear, so that options can be taken up swiftly as technological breakthroughs occur.

These might well be undertaken under 'direct action policy' if it was appropriately funded and targeted. However, alone it is still unlikely to be enough to keep us in step with other economies, such as the two biggest - China and the US - who are both pursuing emissions reduction plans and are vitally important to our economy.

In fact we appear one of the only countries trying to wind back its legislative approach to climate change. Perhaps it's not too late for a rethink on an emissions trading scheme.

Australia cannot avert climate change in isolation but it has both a responsibility as a developed nation and an economic imperative to respond with the rest of the world. A prudent government and industry more generally would be wise to recognise this and the opportunities if we get our response right.

CEDA's report, The Economics of Climate Change, was launched in Melbourne on Wednesday, 18 June with keynote speaker Professor Ross Garnaut AO.