According to the new governor of the Reserve Bank, Michele Bullock, global warming will bring challenges for institution and economy with “acute” problems, including an increased level of uncertainty regarding the manner in which the climate will change and the effects that this shift would have on the economy and the financial system.
During her Sir Leslie Melville lecture at the Australian National University on Tuesday – after a brief disruption from protesters – Bullock discussed how the Reserve Bank of Australia (RBA) was preparing for a warming world and the increased risk of extreme weather events. Bullock is currently the deputy governor of the RBA and will be elevated to the top post on 18 September.
Although monetary officials were accustomed to coping with challenges and supply shocks, such as the Covid virus or Russia’s war on Ukraine, the possibility of interruptions that lasted over an extended period of time presented new concerns. On the other hand, there were also a number of unknowns regarding technological advancements and the rate at which climatic, economic, and social systems could adjust.
According to Bullock, “climate change and the actions taken in response will have broad-ranging challenges for the economy, the financial system, and society at large,” with these implications including the possibility of an impact on price stability, employment, and the stability of the financial system.
She stated that the timing of the effects as well as the degree of the challenges are unknown, and that the effects might be severe and irreversible if tipping points are reached.
The comments made by Bullock are an echo of some of the worries that were addressed in the intergenerational report that was presented by the federal government last Thursday. That assessment indicated that climate change posed “profound” hazards. Threats included a decline in food yields and more expensive natural disasters, as well as billions of dollars in lost productivity due to unsafe working conditions caused by high temperatures.
They also follow previous work done by bank officials and experts investigating not only the physical threats posed by a more unpredictable climate, but also the financial disruptions and possibilities that may arise as the globe transitions away from fossil fuels and toward renewables and other low-carbon businesses.
When asked about her goals when she takes over as governor from Philip Lowe, Bullock stated that lowering inflation would be at the top of her list of priorities. She stated that although inflation is decreasing and our projections show that it will continue to do so, it is still at an unacceptable level and challenges can arise.
During the question and answer session, Governor Bullock stated, “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,”
Concerning environmental issues, she made the following statement: “[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.”
“The impacts of climate change are significantly different in different regions,” said Bullock. “An impact may be mild for the entire population, but severe for a particular community.”
According to her, even while there will be costs associated with making adjustments brought on by steps done to lower emissions, there will also be opportunities. “In point of fact, even though there is deal of uncertainty around this topic, there is widespread consensus that a timely and orderly transition will be the strategy that will result in the lowest overall costs in the long run.”
The manner in which coal-fired power facilities will be removed from the grid in the future decades was one of the aspects involving “much uncertainty.”
According to Bullock, “this could put upward pressure on energy prices if coal plant closures are not matched by renewables supply and storage,” which is a phrase that means “if renewables supply and storage are not available.”
“In recent years, some plants have brought forward their planned closure dates,” she said. “[T]hese are the plants that have the most to lose.” “When we look to the future, it’s possible that closing coal plants will be put off for longer in order to guarantee that there will be enough power output to satisfy demand.
“However, this comes with other risks, such as the possibility that aging infrastructure could make coal plants more susceptible to outages,” Bullock warned. “Furthermore, slower closures of coal plants would require more rapid reductions in emissions in other sectors in order to meet national emissions targets.”
The staff at the RBA conducted an analysis in which climate hazard data was used to evaluate the predicted increase in insurance costs owing to climate-related damage, such as more frequent flooding and more devastating cyclones. This research found that lower house prices were the result of the expected increase in insurance costs. According to what she claimed, this research indicated that approximately 7.5% of houses were located in postcodes that might witness a decrease in property prices of at least 5% due to climate change by the year 2050.
Bullock pointed out that they were “early exploratory exercises that covered only some aspects of climate risk” and acknowledged that they had limitations. “Firms and policymakers will need new and detailed data to capture the varied effects of climate change across geographic locations and economic environments,” she added. “These data will need to be collected as soon as possible.” “There is a need for improved reporting of climate risks.”
In terms of the activities that the bank will take on its own, the RBA has committed to achieving a net-zero emissions level by the year 2030. She stated, “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.” “We are also considering what financial disclosures we can make related to sustainability and the climate.”