AMP chief economist Shane Oliver says investors should treat both extremes with scepticism after a week of starkly different climate projections.
In the space of a week, Australians have been told climate change could either slash hundreds of billions from the economy or add trillions in growth, underscoring both the stakes and the uncertainty around long-term climate modelling.
One report warned climate change could wipe hundreds of billions from the economy, while another projected an orderly transition could add $2.2 trillion by 2050.
Oliver said: “From gloom to boom with climate-related projections for the Australian economy over the last week – best to be sceptical!”
Indeed, last week, the National Climate Risk Assessment painted a grim picture.
It found climate change could lead to annual disaster costs of around $40 billion, up to 2.7 million work days lost each year by 2061, a $600 billion loss in property values by 2050, and up to a 0.8 per cent hit to productivity, costing the economy up to $423 billion by 2063.
Oliver noted that such forecasts carry significant uncertainty and should be treated with a “degree of scepticism” due to the difficulty in modelling impacts of climate change.
“They likely under allow for the boost to economic activity from disaster recovery spending in the short term and mitigation, adjustment and technological change in the long term,” he said, adding that modelling exercises in the past have often projected dramatic impacts on the economy that ultimately failed to materialise.
“Over the last 40 or so years, I have seen numerous modelling exercises showing a big impact on the economy … and yet the economy has just kept motoring along with no big lasting impact.”
Oliver further warned against the allure of catastrophic predictions, citing examples from Thomas Malthus to the Club of Rome’s Limits to Growth, “only to be proven wrong”.
“Such analyses underestimate resources, technological advances, the role of price increases in driving change and human ingenuity in facilitating it,” he said. “Hopefully, worst case predictions flowing from climate change will prove wrong for similar reasons.”
However, he acknowledged that climate risks will still affect certain sectors.
“In terms of home prices, while they may be depressed in high-risk areas… there will likely be an offsetting boost in lower risk areas,” Oliver said.
Thursday last week saw the Treasury modelling offer a more optimistic outlook, suggesting that an “orderly transition” to lower emissions could boost the economy by $2.2 trillion by 2050, following the announcement of Australia’s 2035 climate target.
Oliver, however, urged caution on this figure too, branding it a “big hairy number”, which “also needs to be treated with scepticism”.
“It seems we went from gloom to boom in less than a week,” Oliver said.
He stressed that scepticism should not be mistaken for inaction and warned against denying that climate change is likely occurring or its potential impacts on the economy.
“It’s just that we need to treat big projections of damage and any boost to the economy with caution,” Oliver said.
Speaking to Super Review, Associate Professor Johanna Nalau from Griffith University said investors need to approach climate modelling with both literacy and pragmatism.
“In relation to long-term modelling, investors should seek best practice advice and also use scenarios when interpreting long-term climate modelling,” she said.
“But these discussions should start from understanding what a particular investor values, what their priorities are and how climate change might impact [them].”
She added that investors should improve their understanding of both mitigation and adaptation.
“Investors should seek to increase their ‘climate literacy’… some insurers are also embedding climate teams in the organisation… that can translate the models into more specific information for a particular investment or business operation,” Nalau said.
“The divergence comes partly from different assumptions put in the models but also levels of uncertainty of emission reductions and potential for escalating climate impacts due to the already locked-in emissions.”
On the policy front, Nalau said governmental certainty is critical. “[There’s a] huge role for the government in providing policy certainty. Businesses are waiting for clear signals that there is a clear pathway e.g. on renewables and that the government is making a long-term strategy for those investments.”
She said that legislated policies would provide confidence and narrow the gap between best- and worst-case outcomes.
“Locking in long-term climate policies… can give more of that certainty over [the] long-term, and this is what would be needed for example on climate adaptation in Australia. Effective adaptation in particular can narrow this gap significantly in climate outcomes,” Nalau said.
