Essay by Eric Worrall
There was a time when bankers would have been embarrassed to publish a graph as absurdly unrealistic as the product at the top of this page.
Climate Change Risk in the Financial System
Head of Domestic Markets
Credit Law Conference ‘Managing Financial Services Risks in an Age of Uncertainty’
Sydney – 24 August 2022
Climate change is a significant issue with broad-ranging implications for the economy, the financial system and society more broadly. Average temperatures in Australia have risen 1.4 degrees since 1910, and climate scientists tell us that with current policies average temperatures will rise around 2.7 degrees above pre-industrial levels by 2100. The frequency of extreme weather events has increased, with more days having excessive rainfall and high fire danger (Graph 1). We have seen how climate change is already affecting people’s lives in Australia and around the world, and it will keep doing so. The climate will continue to warm, with associated changes in the overall climate system over the next 20–30 years, largely irrespective of our emissions trajectory. But our actions over coming years will obviously affect the ongoing path of climate change.
Transition risk will almost certainly involve changes to the structure of the economy. An important aspect of transition risk is its strong international dimension. It is not only changes in domestic policy, preferences and technology that are relevant for the Australian economy – given the importance of international trade of goods, services and capital, global changes are also significant. For example, policy decisions or preference changes in other countries regarding their use of coal will affect Australia’s coal exports, which is a scenario the Bank has considered for its impact on the economy (Graph 2).
The RBA speech transcript contains a similar graph for overall greenhouse gas emissions (graph 5).
Back in the real world, Europe is restarting coal plants, while claiming its all temporary, Japan just started a new coal plant, China is building coal as fast as they can, and even deep green Australia is paying capacity subsidies to coal to prevent operators from closing their plants.
I do expect a steep imminent downturn in coal and gas exports, along with all other economic activity. Europe and Britain are about to experience a deep recession, thanks to the energy policy lunacy of their politicians, the Chinese economy is in free fall, with bank runs and a collapsing real estate Ponzi scheme engulfing at least a third of their economy, New Zealand has embraced green purity to such an extent they seem to be banning all forms of economic activity, and the USA is run by people who don’t understand economics or business.
If everyone copied New Zealand’s climate policies, global economic activity could fall off a cliff and return to medieval levels for a sustained period. But New Zealand seems to be a special case. Even Europe hasn’t embraced New Zealand levels of climate purity, they are as busy restarting coal plants as almost everyone else.
When the global economy bounces back from the coming recession, I think we can safely predict it is not going to be powered by solar panels, regardless of what public statements the world’s governments have made about their energy policy intentions.