Wednesday, July 9, 2014

Ignoring climate change will cost the economy

Sometimes I fear Australia has decided to go backwards just as the rest of the world has decided to go forwards. Take climate change. If the repeal of the carbon tax gets through the Senate this week there will probably be celebrations in the boardrooms of all the business groups that lobbied so hard for its removal.

But if they imagine the lifting of this supposedly great burden on them and the economy will mean it's back to business as usual, they'll soon find out differently.

They may have rolled back the economic cost of doing something about climate change, but now they'll face the increasing cost of not doing something about it. As Martijn Wilder, an environmental lawyer with the Baker & McKenzie law firm, finds in a new report for the Committee for Economic Development of Australia, we're going to be hit from all sides.

There are the costly physical effects of climate change we've already started experiencing, there are the consequences for us of measures our trading partners are starting to take to limit their emissions, there's the growing reluctance of foreign institutions to fund new coalmines and power stations and there's the threat to our fossil fuel industries from ever-cheaper renewable energy.

In case anyone's forgotten, Wilder reminds us that the physical effects of climate change include a rise in the sea level, acidification of the ocean, change in rainfall patterns and an increase in the frequency of natural disasters, including droughts. Extreme weather may lead to more bushfires, while heavy rainfall and cyclones may lead to flooding.

Do you think all that generates no costs to business, no disruption to the economy? Take the Queensland floods in 2011, Wilder says. They not only hit insurance company earnings, they also halted production at various coalmines. This forced up world coal prices, with adverse effects for industries reliant on coal.

Since we've always had cyclones and floods, no one can say climate change caused this particular disaster. But the scientists tell us events such as these will become more frequent. And the insurance industry's records tell us the number of catastrophic weather events is already increasing, with the economic losses associated with weather rising.

As for the idea there's no hurry in preparing for problems that may not become acute until later this century, consider this. Had a levee to protect Roma, in Queensland, been built in 2005, it would have cost $20 million. Since it wasn't built, $100 million has been paid out in insurance claims since 2008 and a repair bill of more than $500 million incurred by the public and private sectors since 2005.

This sort of thing is happening in other countries, too. Hurricane Sandy, in October 2012, caused widespread damage in New York, crippling electricity infrastructure and leaving downtown Manhattan without power for four days. The record-breaking storm surge alone cost the local electricity company $500 million and New York businesses $6 billion.

Perhaps such events explain why many other countries are moving forwards rather than backwards in their efforts to combat climate change. Australia's coal and natural gas industries won't escape being affected by tougher regulation of the use of fossil fuels in the countries to which they export.

While Europe has had a weak emissions trading scheme since 2005, the Chinese are trialling such schemes in six provinces. South Korea, one of our main trading partners, is to introduce a scheme next year. The US is taking direct action to cut power station emissions.

China is moving to limit coal to 65 per cent of energy consumption by next year and has banned new coal power generation in Beijing, Shanghai and Guangzhou. Wilder says this will cut demand from the largest importer of Australian coal and thus affect the value of big mining and loading assets in Australia.

The more the rest of the world seeks to reduce its use of coal and other fossil fuels, the more Australian businesses need to contemplate the possibility of their mines becoming "stranded assets" - assets that suddenly become unprofitable and so lose their value.

Until recently, foreign investors and financiers haven't taken climate-change risk into account. Now they're starting to worry not just about the morality of emitting more greenhouse gas, but the risk that investments in new mines and power stations will lose their value before they reach the end of their useful lives. The change started with international agencies such as the World Bank, but is spreading to pension-fund investors.

Then there's the threat from the rise of renewable energy. China's goal of becoming a world leader in renewable energy has made it the world's largest maker of renewable energy equipment and the single largest destination for investment in renewables.

Wilder says renewables are reaching a "point of disruption" and will displace coal and gas power stations in many parts of the world. In Australia, the sharply rising price of gas is increasing the cost-competitiveness of renewables.

"Unlike natural gas and coal, the input for renewable energy is not subject to the volatility of global energy markets and with renewable costs continuing to decline, renewable generation represents a safer long-term investment," he says.

I know, let's get the government to put the kybosh on renewables. That would be a smart move.