Treasurer Jim Chalmers has recently acknowledged the economic risks that many purport climate change poses to Australia but is confident the nation is more than capable of weathering the storm.
“We have an optimistic view about the future, and one of the reasons we are optimistic about the future is if we get the policy settings right in this defining decade, then we can be major beneficiaries and not victims of the shifts underway,” Mr. Chalmers said at a press conference in Canberra today.
The treasurer also maintains his government’s climate policies, most notably surrounding net zero emissions targets and an energy transition, are conducive to “providing industrial opportunities and lifting the living standards for Australians.”
Australia’s Sovereign Credit Ratings to Plummet
Mr. Chalmers’ comments came shortly after a report was released claiming Australia will be one of the world’s worst-affected nations economically by anthropogenic climate change.‘Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness’ is a report released earlier this month, compiled by a number of academics at the Universities of East Anglia, Oxford and Cambridge.
The overarching aim of the study was to provide today’s politicians with a clear link between the negative effects of climate change and economic ramifications, the main one being the rapid downgrade in credit ratings for nations that fail to act quickly enough in response.
The report predicts that under a scenario in which the earth continues to experience current levels of carbon emissions, around 60 nations will likely experience downgrades from global rating agencies like Standard & Poors (S&P) and Moody’s by 2030.
The particularly concerning outlook outlined in the study involves the inverse relationship between a nation’s credit rating and interest payments, projecting that climate-related risks could increase annual payments on sovereign debt by $70-105 billion AUD by the end of the century.
“To bridge the gap between climate science and real-world financial indicators, we simulate the effect of climate change on sovereign credit ratings for 109 countries, creating the world’s first climate-adjusted sovereign credit rating. Under various warming scenarios, we find evidence of climate-induced sovereign downgrades as early as 2030, increasing in intensity and across more countries over the century,” the report said.
The report has particularly dire projections for Australia, estimating that if the global temperature increase is kept to two degrees, our government will have between an extra $374-$562 million tacked onto interest payments on its sovereign debt due to a likely downgrade from its current triple-A credit rating from the world’s most prominent agencies.
In essence, a lower credit rating increases the risk of lending to someone, so to compensate for this risk, banks and other lending institutions will charge higher interest rates.
This is concerning due to the way most economies are structured, particularly the reliance economic productivity and prosperity have on credit. If governments can’t afford as much credit because of increased interest payments, then economic welfare will falter.
Many researchers have explored this phenomenon, most notably the Swiss Re Institute, a global insurance company, who in April 2021, released a report detailing the relevant economic effects and risks associated with climate change.
The study projects the global economy’s gross domestic product (GDP) to fall by 18 percent by 2050 under severe circumstances but by just four percent if net zero targets are unanimously met internationally.
Most dire economic predictions related to climate risk for Australia are based on figures deeming the nation slow to react relative to its developmental counterparts. As of late 2022, Australia ranked 55th out of a possible 63 places by the Climate Change Performance Index (CCPI) for its supposedly poor environmental protection efforts.
The Feasibility of Energy Transition
Many, however, dispute the idea that Australia will make any significant contributions to global efforts given current geopolitical circumstances and that such an expedited transition in energy sources is unfeasible for the majority of the population.Former Minister for Resources Keith Pitt believes that the swift transition, recently proposed to curb carbon emissions, will be too costly for rural Australian communities because of their inability to decouple from carbon-intensive industries.
“This is about who pays. And who pays is regional Australia because they are the ones that rely on the mining sector, the gas sector, the agricultural sector, the big exporters, and our intensive (emissions-intensive) industries in terms of where we deliver our products right around the world,” Mr. Pitt told ABC’s Q&A in 2021.
“The people I represent, they have one of the lowest per-capita incomes in the country. It’s about $32,000 AUD a head per year, and every time I step into the Parliament, they are first and foremost in my mind. I’ve got to tell you, they can’t afford to pay.”
Despite differing opinions on the appropriate speed Australia should adopt in its decarbonisation efforts, the credit analysis methodology used by the world’s most prominent creditors and ratings agencies will likely remain, putting the onus back onto the nation’s politicians and bureaucrats to find a way to maintain economic productivity during such a transition.
Treasurer Chalmers is adamant Australia’s vast natural resources sector is the answer to such a question, claiming it will underpin nationwide efforts to transition from fossil fuels to renewable energy in a timely manner.
“We don’t need to choose between resources and renewable energy or between mining and manufacturing. Our task is to recognise how these sectors can best work together,” Mr. Chalmers said in his address to the 26th World Mining Congress in June.
“By diversifying our approach to resources, we can deepen and broaden the industrial capacity of our economy—from mining into refining and from processing into advanced manufacturing. We will reinvent and redefine what it means to be a resources powerhouse.”
