The global coronavirus pandemic has taught us all about the impacts of catastrophic tail risks.
As 2020 comes to an end and we look towards recovery we must shift our focus to preventing the next big risk: unchecked climate change.
The challenges of reaching agreement on collective policy action to mitigate climate change in Australia are well-known. Because there have been few short-term economic reasons to worry about climate risk, progress has been slow, adaptation marginal and frustrations high.
At the core of Australia’s failure to take meaningful action on climate change is the assumption that economies can simply grow forever even as emissions (and therefore global warming) remain unconstrained. Until now this has been the benchmark of economic analysis and the basis for assessing efforts to reduce climate change, but the science tells us it is not true.
Changing our assumptions
Climate change has always been an issue of economics. When it comes to a warming world, markets fail, and fail seriously, to understand the risks. The economic status quo has therefore made climate change virtually impossible to solve.
But while economics has been the problem, it can also be part of the solution.
Analysis by Deloitte Access Economics shows failing to prevent climate change will cause significant damage to the Australian economy. In this analysis, climate change is not just a scenario, it is in the baseline assumption.
Delivering a strong recovery from the COVID-19 recession requires an understanding of this exposed economic baseline and the need to build climate resilience.
A new choice: Australia’s climate for growth,
shows that unchecked climate change will cost Australia some $3.4 trillion in lost GDP in just 50 years’ time, with 880,000 fewer jobs by 2070. These losses start from today, and they equal the losses from the economic impacts of COVID-19 by the early 2050s.
In contrast, creating a climate for growth through a new recovery pathway could create some $680 billion in GDP and create 250,000 jobs a year by 2070 – and the gains kick in as the transition occurs.
The pandemic has created eye-watering budget deficits as debt has been employed to cushion the economy. Australia’s net federal debt has ballooned to nearly $1 trillion, while every state government budget has fallen into massive deficit. We need to make sure this debt is used to prevent the economy from running headfirst into another economic wall in just a few years’ time.
A new framework
Adopting a new economic framework that delivers a clear transition pathway gives us the ability to invest in the things that will address the damage at least cost – be it a price on emissions, technology, changes in behaviour or all of the above.
Business is quickly awakening to the risks of climate change and the world’s response to it. As we mitigate the economic effects of the pandemic, we must also think of resilient investments for recovery that make the economy robust to the climate risks already looming large.
This recovery is the time to put emissions in structural decline and mitigate the worst effects of a changing climate, while realising the upside for Australia’s future growth.
On the issue of solving climate change, Australia has the most to lose and the most to gain. The Global Financial Crisis saw global emissions jump as the economy recovered; the Australian economy cannot afford to let this happen again.
The economy will be recovering from a baseline that was already disrupted and exposed to risk. Business and governments around Australia should take a long, hard look at the exposure of their now disrupted balance sheets and consider what failure to deliver climate resilience will mean for the future.