Why the RBA spoke up on climate change

Debelle, a PhD economist who studied at the prestigious Massachusetts Institute of Technology, started from the premise that regardless of what is causing global warming, climate change is a force to be reckoned with and is having a first-order macroeconomic impact.

He said climate change posed a “systemic risk” to the economy.

“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,” he said at an event hosted by the Centre for Policy Development.

Deep economic impact

There are three main reasons why the bank now ranks climate change alongside other factors that impact on the economy in the short and long term.

The countryside around Mudgee in NSW shows the effects of drought. Janie Barrett

First, climate change is influencing the power investment mix and electricity prices, including for increasingly popular renewable energy.

The boom in renewable energy investments over the past two years is not only impacting energy prices in the economy; it’s also shifting the overall business capital expenditure numbers.

Second, the increased frequency and severity of extreme weather events are affecting industries across the economy, such as agriculture.

Third, in years to come damage to attractions such as the Great Barrier Reef may hurt tourism, one of Australia’s largest exports earning $37 billion a year.

Debelle’s underlying message was the earlier policymakers and business take action against climate change, the lower the economic costs.

The slower and later action occurs, the sharper the economic correction and the more it is irreversible.

“Financial stability will be better served by an orderly transition rather than an abrupt disorderly one,” he said.

‘Families have paid a heavy price’

At the RBA’s Martin Place in Sydney, two members of the nine-person RBA board have deep interest in climate and energy policy.

Wendy Craik is the chair of the government’s Climate Change Authority.

Catherine Tanna is chief executive of Energy Australia.

Tanna has experienced the political mismanagement of energy policy over the last decade that has created investment uncertainty and cause under-investment in power generation that has contributed to a huge spike in electricity prices for households and business.

“For the past decade energy policy in Australia has been mired in a climate war,” Tanna said in a November speech.

“There’s no national framework and families have paid a heavy price.”

Debelle’s message backs up a similar clarion call from Bank of England governor Mark Carney, who warned last year of the “catastrophic impact” climate change could have for the financial system unless companies do more to disclose their vulnerabilities.

‘We need to think about how the economy is currently adapting’

Prudential and securities regulators, including the Australian Prudential Regulation Authority and Australian Securities and Investments Commission, have been publicly warning listed companies they must improve their market disclosures to account for their potential exposures and business risks from climate change.

Insurers have been global leaders. Resources giant BHP is disclosing the emissions inventory in its value chain.

Global funds management giants BlackRock and Vanguard are backing voluntary-climate change reporting standards for public companies.

Debelle said economists must do a better job of mapping the climate change modelling into macroeconomic models.

“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 was not flagging any change to the RBA’s traditional inflation-targeting monetary policy framework.

Yet in a world where extreme weather events such as drought are more common it will be harder for the RBA to use its traditional “look through” impact on the economy and prices if any climate-induced supply shock is permanent.

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