Global heating will present the Reserve Bank with “acute” challenges, including heightened uncertainty around how the climate will change and the resulting impacts on the economy and financial system, the incoming governor, Michele Bullock, has said.
Bullock, now deputy RBA governor before her elevation to the top post on 18 September, used her Sir Leslie Melville lecture at the Australian National University on Tuesday – after a brief disruption from protesters – to detail how the central bank was preparing for a warming world and the increased risk of extreme weather events.
While monetary policymakers were familiar with dealing with supply shocks – such as Covid or Russia’s war on Ukraine – the potential for prolonged disruptions posed new challenges. On the other hand, there were also uncertainties about technology and the speed with which climate, economic and social systems could adapt.
“Climate change and the actions taken in response will have broad-ranging implications for the economy, the financial system and society at large,” Bullock said, including affecting price stability, employment and stability of the financial system.
“The timing and intensity of effects are uncertain, and these could be severe and irreversible if tipping points are reached,” she said.
Bullock’s comments echo some of the issues raised in the federal government’s intergenerational report released last Thursday that found climate change posed “profound” risks. Threats ranged from billions of dollars in lost productivity as high temperatures inhibit safe work to decreased crop yields and more costly disasters.
They also follow recent work by bank officials and researchers into the physical risks from a more chaotic climate but also the financial disruption and opportunities as the world shifts away from fossil fuels into renewables and other low-carbon industries.
Asked about her priorities when she takes over from Philip Lowe as governor, Bullock said bringing down inflation would top the list. Inflation “is coming down and we’re forecasting it to continue to come down, but it’s still too high”, she said.
“All I can say is that we may have to raise interest rates again, but we’re watching the data very carefully, and we’ll be taking decisions for the time being until next year at least month by month,” Bullock said during the question and answer session.
On climate matters, she said “[u]nemployment could be persistently higher if people are unable or unwilling to leave a region that has suffered from extreme weather and related job losses.”
“Climate impacts vary significantly across regions – an impact may be small in aggregate, but extreme for a local community,” Bullock said.
While actions taken to reduce emissions may present adjustment costs, but they will also present opportunities, she said. “Indeed, while there is much uncertainty in this area, there is general agreement that a timely and orderly transition will be the less costly approach in the long run.”
Among the areas of “much uncertainty” was how coal-fired power plants exited the grid in coming decades.
“This could put upward pressure on energy prices if coal plant closures are not matched by renewables supply and storage,” Bullock said.
“In recent years, some plants have brought forward their planned closure dates,” she said. “Looking forward, coal plant closures may be delayed to ensure electricity generation is sufficient to meet demand.
“But this comes with other risks – for example, coal plants may be more prone to outages as the infrastructure ages,” Bullock said. “Furthermore, slower coal plant closures would require more rapid reductions in emissions in other sectors to meet national emissions targets.”
In analysis conducted by RBA staff, climate hazard data was used to measure the expected increase in insurance costs due to climate-related damage – such as more frequent flooding and more damaging cyclones – which translated into housing price falls. This work found about 7.5% of properties were in postcodes that could see property prices decline by 5% or more due to climate change by 2050, she said.
RBA's 'early exploratory' assessment of residential risks has about 7.5% of properties are in postcodes that could see property prices decline by 5% or more due to climate change by 2050. pic.twitter.com/fY6RcVCy7c
— @phannam@mastodon.green (@p_hannam) August 29, 2023
Bullock noted these were “early exploratory exercises that covered only some aspects of climate risk” and had limitations. “Firms and policymakers will need new and detailed data, capturing the varying effects of climate change across geographic locations and economic environments,” she said. “Better reporting of climate risks will help.”
As for the bank’s own actions, the RBA has set itself a target to reduce emissions to net zero by 2030. “We are also considering what sustainability and climate-related financial disclosures we can make, starting with operational emissions reporting in the 2022/23 annual report,” she said.
