This is how climate change could destabilise Australia’s financial system

Hazelwood Power Station in Victoria. Hamish Blair/Getty Images

Australia’s financial system, already vulnerable to climate change, could be further destabilised by secondary effects such as a slump in demand for carbon-intensive exports as the world gradually drops it reliance on fossil fuels.

The latest analysis, a discussion paper from the Climate Institute, says the impact could also be exacerbated by lack of policy clarity and reliance on global capital markets.

The paper, Australia’s Financial System and Climate Risk, considers which risks could be relevant to the Australian economy.

“We know that climate change is already affecting our economy, and that some companies and financial institutions are already waking up to the implications for their own businesses,” says John Connor, CEO of the Climate Institute.

“Yet many others are still forging ahead as though climate change, and the economic changes needed to deal with it, will have no impact at all on their plans.”

Energy company AGL is April announced it will help cut greenhouse gases by never building another coal-fired power station.

In Australia, there has been no official examination of how climate change might affect the financial system.

An 0.9°C observed increase in average temperatures in Australia since 1910 has already been directly linked to increasingly frequent and intense heat waves and is likely linked to changing rainfall patterns.

This exposes insurance companies to increased risk and also impacts agriculture. Australia’s banks also are exposed through their business loans.

The past two years have seen unexpected shifts in many markets, including a slump in the value of coal company shares, declining demand from China for Australian resources including iron ore and cheaper solar panels.

The G20 group of countries in April this year asked the Financial Stability Board to review how the financial sector can take account of climate elated issues. The board was formed to monitor and address vulnerabilities in the global financial system.

“More than 190 countries have committed to keeping warming to less than 2 degrees,” said Connor. “With major economies like the US and China putting forward initial long-term emissions reduction targets and accelerating climate action ahead of the Paris climate talks at the end of this year, the direction of travel is clear. Nations and mainstream economic institutions and organisations now recognise that the global economy must be zero carbon before the end of this century.”

Financial authorities at a national level in many countries, such as the Bank of England, are taking steps towards determining how they should guard against climate risk in their respective jurisdictions.

“The sub-prime bubble which led to the global financial crisis may offer insights, but there is no precedent for climate change in financial history which we can draw upon,” says Connor.

“However we do know climate impacts are already costing us, and those costs will continue to grow. These are complex issues; it will take time and effort to work through them. This is why it’s essential to begin looking at them now.”

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