Key points
- Climate changepresents a range ofrisks and impacts that are expected tonegatively impact oureconomy. These include property loss and damage, infrastructure and service costs and risks to financial stability.
- Australia’sproperty and agricultural sectors will likelyface some of the most significant challenges fromclimate change.Thisincludes the Murray–Darling Basin, which is one of Australia’s largest agricultural regions and covers a large area of NSW.
- Banks, investors, asset managers andgovernmentsaredeveloping and implementingapproaches tomanageclimaterisksand incorporate environmental, social and governance issues intobusiness and investment decisions. This practice isknown as‘sustainablefinance’,andworkstowards amoresustainable future economy.
- TheNSW2040 economic blueprintoutlines a pathfor ‘a sustainable environment with reliable and affordable energy’. Other key NSW governmentdocuments include theNet Zero Plan Stage 1: 2020-2030and theElectricity Infrastructure Roadmap
The economy in Australia and NSW
Australia has astrong economy,withkey exports includingmineral resources, agriculture, tourism and education.Australia is home tojust0.3% of the world’s population, but accounts for 1.6%of the global economy. Our gross domestic product is about $2 trillion dollars.
NSW is the largest state economy in Australia.In2019–2020 it was valued at more than $600 billion, and accounts for about 30% of Australia’s economic output.
The health of the NSW economy is strongly linked to the environment, and the natural resources and ecosystem services it provides.
NSW hasa diverse export range based ongoods includingagriculturalproduce such as beef, and natural resources,such ascoal, copperandaluminium.Service exportsaccount for around 40% of NSW exports, and includetourism and education.
Overthe past 30 years, NSW hasbeen movingfrom an economybased onnon-renewable resources and agriculture,to a morediverse, service-driven economythat includes:
- financial services
- professional, scientific and technical services
- property services
- information media and telecommunications
- health
- education.
This diversification supports NSW’s strong economy andgrowth, andhelpsusprepare for the negativeeffects of climate change.
Howthe economy isaffected by climate change
Climate will continue to have ahuge effect on our economythrough potential reductions in our productivity and increases to infrastructure and service costs.By 2061, it is projectedthatbetween 700,000 and 2.7 millionmoredays of work will be lost every yearbecauseclimate changewillcausemore frequent and intense heatwaves.
Modelling suggests thatAustralia’sproperty and agricultural sectors will besome ofthe hardest hit by climate changein the future.
Decreased agricultural and foodproduction
Extreme events like droughts, heatwaves, cyclones and floods have a negative impact on agriculture and food production. By 2050,extreme events related toclimate changeareprojected to halve the agricultural output of the irrigated areas of the Murray–Darling Basin. The Basincovers much of NSW andcurrently accounts for 50% of Australia’s irrigated agricultural output by value.
Already,severe droughts have reducedAustralia’sgross domestic product by about 1%.By 2061, it is projected that climate change impacts on pastoral and growing conditions could lead toannualaverageproductionlossesofbetween $750 million and $1.5 billion.
A decline in commodity production could also seethesecommodities become very expensive. This wouldhave flow-on affects to other areas of the economy which may result in increased inflation and financialinstability.
Property loss and damage
Climate changeis projected to cause more severe weather events and rising sea levels. This will increase the risk of natural disasters such as bushfire, severe storms, floods, coastal erosion and inundation of low-lying coastal areas. These events impact both private and public property through direct damages andreduced property values.This affects the financial situation of individuals and the economy of the state.
By 2030, climate change and extreme weather are expectedtoreduce the value of the Australian property market byaround $571 billion. If greenhouse gas emissions remain high, the market will continue to lose value after 2030.
Sea level risecanaffectproperties throughcoastal erosion andmore frequent or permanent inundation of low-lying and coastal areas.By 2061, it is estimated that between 39,000 and 46,000 properties will be exposed to coastal erosion or flooding. This is expected to increase the annual costs of property damage and loss of land tobetween $850 million and $1.3 billion. By2100, even morecommercial, industrial, road, rail, and residential assets will be at risk from sea level risearound Australia.
Other extreme weather events such asbushfirescause direct property loss and damages. The 2019–2020 bushfiresdestroyed nearly 2,500 homes in NSWalone. The total cost ofthe bushfire season is estimated tobeover $100 billion. This includes direct property loss and damage, and indirect costs such as relief and recovery operations and costs associated with social and environmental damages.
Infrastructureand servicecosts
Essentialservicessuch as electricity,waterand health serviceswill be under increased pressure with climate change.
Theremay beanincreaseinelectricity demand as homes andbusinessuse air-conditioning to stay cool as temperatures increase.Thisincrease in demand, as well as extreme temperatures themselves, increase the riskof failureof energy services– for example,heatwaves in 2017 caused power failures across NSW, Queensland and South Australia.
Increased temperatures and more variable rainfall will impact water supplies in both regional and urban areas. Reduced water availability will result in stronger water restrictions.
Health services are likely to come under pressure, asheatwaves and other health effects of climate change increase.These services will need to growand adaptto cope with demand.
Financial stability risks
Australia’sfinancial institutions and systemarevulnerable to risks from climate change. Although our financial systems are currently stable, climate change is forcing people to consider these future risks.
Insurance premiums are likely to increaseas a result ofclimate change, due totheincreasingriskof natural disasters. This includes crop insurance, property insurance, and health and life insurance. Some properties may not be insurable if they are inareas at risk of climate impacts, such asbushfire,floodingorsea levelrise.Having non-insurable propertieswould force property owners to bear the riskor build elsewhere.
Banks and other lenders can befinanciallyexposedif the collateral they are lending against decreasesin value due to climate change.
Natural disasters can also have wider impacts on the economy, through disruption to businesses, impacts on tourism(both in the immediate aftermath of disasters as well as in the longer term)and in impacts on the physical and mental health of people in the community.
Health and wellbeing
Climate change affects our health andwellbeing. This affects livelihoods and productivity. For example, heatwaves and natural disasters result in loss of life and injuries that may affect people’s ability to work and contribute to society. Events such as drought affect mental health. These all affect the economy.
In addition, impacts on health and wellbeing can increase demandforhealthcare services, which in turn can increaseheathcarecosts.
Howeconomiesare adapting toclimatechange
Across the world there is increasing awareness of the need totransition our economies to manage the unavoidableimpactsof climate changeandreducethe risks of futureclimate change. Many countries are also considering ways totake advantage of the opportunities that this transitionoffers.Australia’s – and NSW’s – economy is linked to other countries, especially our trading partners.
‘Sustainable finance’is being adopted to help economies adapt to climate change. Sustainable financerefers to financial activities that aim to ensure better environmental outcomes. It includes consideration of environmental, social andgovernance factors when making financial decisions.
International
TheUnited Nations Framework Convention on Climate Changesupports the global response to climate change. The convention is made up of around 197 parties from across the world, that regularly come together through events known as Conference of the Parties. At the 2015 Conference of Parties, the historicParis Climate Agreementwas signedby world leaders to commit to tackling climate change.Part of the agreement includes working tomake finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
Some actions already being taken by governments and institutionsto help the economy adapt to climate changeinclude:
- theUnited Nations Sustainable Development Goalswhich includes goals to promote sustainable economicgrowth
- theTask Force on Climate-Related Financial Disclosures,which aims to improve and increase reporting of climate-related financial information, and provides recommendationsto manage the economy for future with climatechange
- theUnited Nations Environment Programme Finance Initiativewhich works with banks, insurers, investors and supporting institutions to support a sustainable financialsector
- theNetwork for Greening the Financial System (NGFS)whichis a global network of 83 central banks and financial supervisors, focused on scalingupsustainable financeand recommendingroles of central banks in mitigating climate change.
Australia
Several national organisations, industry bodiesandinitiatives are paving the way for a sustainable economy that is resilient to climate change risks.A resilient economy will depend on collaboration between governance and agencies.
TheAustralian Sustainable Finance Initiative (ASFI)helps to shape an Australian economy that prioritises wellbeing, social equity and environmental protection. Theinitiativeunderpinsfinancial system resilience and stability.ASFI has released aroadmapto protecting Australia’s economy from climate change.
TheAustralian GovernmentProductivity Commissionadviseson microeconomic policy, regulation and a range of other social and environmental issues.The 2013 inquiry report,Barriers to Effective Climate Change Adaptation, highlighted the need for governments to consider climate change in risk management practices, and ensure flexible approaches topolicy-makingto manage the risks of climate change.
TheAustralian Prudential Regulation Authority’sPrudential Practice Guide– DraftCPG 229 Climate Change Financial Risksis designed to assist APRA-regulated entities (such as banks, insurers and superannuation trustees) inmanaging the financial risks of climate change.
NSW
The NSW Government has developed policies and resources to help state and local governments better consider climate change risks in their planning and decision-making.Key policies and strategies to help NSW manage the impacts of climate change on its economy include:
- the NSW Government’sNet Zero Plan Stage 1: 2020–2030,whichis the foundation for NSW’s action onclimate change and its goal to reach net zero emissions by 2050
- theNSW Climate Change Policy Framework,whichoutlines the long-term objectives to achieve net-zero emissions by 2050 and to make NSW more resilient to a changing climate
- theClimate Risk Ready NSW Guide,which is the key source of informationand guidance for NSW state government agencies to prepare for climatechange
- NSWTreasury’s NSW2040EconomicBlueprint,whichidentifies challenges and risks to our economy, including from climate change, andhighlights opportunities for the NSW Government to grow and improve theeconomy
- NSW Government’sElectricity Infrastructure Roadmap, which details the plan to transition NSW’s electricity sector to renewable energy over the next 20 years
- NSW Treasury’sGuidance on how to reflect the effects of climate-related matters in financial statements, which provides guidance on how NSW public sector entities should consider the effects of climate-rated matters when preparing financialstatements
- NSW Treasury’sRisk management toolkit, which supports NSW public sector agencies to develop effective and integrated risk management frameworks and processes, to better manage risks including those posed by climate change.
Related Information
About the NSW economy – NSW Treasury
An indicative assessment of 4key areas of climate risk for the 2021 NSW Intergenerational Report – NSW Treasury
NSW state of the environment – economic activity and the environment- NSW Environmental Protection Authority
2021 NSW Intergenerational Report: Treasury Technical Research Papers – NSW Treasury