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ANALYSIS: One of the most serious risks of climate change listed in a recent government report was not a threat to nature or the physical environment.
It was the threat to the stability of the government’s finances, by paying for escalating disaster relief, lost productivity (and tax collection) caused by worsening droughts, floods and other disasters, and the instability of the financial sector resulting from the alteration of the climate.
The researchers say that the costs of climate change used by central banks and treasuries are probably too low.
Take Hurricane Harvey, in the US in 2017. Not only was it deadly for 107 people, climate change exacerbated the financial damage by about $ 67 billion, according to the work of Ilan Noy and Dave Frame of the University of Victoria, Suzanne Rosier de Niwa and others.
Given that the current expected costs of climate change for the entire US are around $ 21 billion for an entire year, this suggests that our current estimates of the fiscal costs of climate change are very under-elaborated, says Frame.
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In another study, Frame, Noy, Rosier and others found that New Zealand’s major droughts of 2007 and 2013, which Treasury estimates led to $ 4.8 billion in GDP loss, were about $ 800 million more expensive due to to climate change.
This is what’s known as ‘event attribution’, a combination of climate science and economics aimed at unraveling how much of a storm, drought or heat wave is caused by ‘normal’ climate variation and how much is due to gases. greenhouse effect of people. Among other uses, the field was started in order to help people sue polluters for the costs of the damage they had caused.
The research is complex, but the concept is simple. For example, every degree Celsius that people add to the climate system means that the atmosphere can hold about 7% more moisture, increasing extreme rains, Frame says. The costs of that can be quantified.
While the models need more refinement, they are good enough to tell us that the cost of the carbon we are currently using is “too low,” he says, in part because the models focus too much on changes in the averages, when it is higher. . extremes that generate really massive costs.
You do not need to own shares in a bank or insurance company to be affected by this.
SUPPLIED / Stuff.co.nz
Worsening droughts, floods, and floods that follow droughts reduce productivity and pose a threat to the financial system.
For starters, the latest research suggests that the cost to society of each ton of carbon emitted is probably higher than we think, and the case for divesting from fossil fuels is stronger than people assume.
But there is also a risk to the financial system.
If it turns out that banks, insurers, airport owners, agricultural export companies and others are not adequately assessing the risks that climate change poses to their assets, sales and productivity, there is a risk of a sudden adjustment in value. .
Our Reserve Bank and the Treasury are aware of the research: both institutions receive regular updates on the work of Frame and others in the field.
But the risk to individual companies has been largely invisible.
Former Bank of England Governor Mark Carne warned of the “huge” levels of financial risk related to unquantified and unreported climate change that appear on company balance sheets.
In May, Carney appeared on a Zoom call with Reserve Bank Governor Adrian Orr and Climate Change Minister James Shaw, where all three said much greater corporate transparency was needed for the transition to zero. carbon emissions to occur.
The same month, Orr delivered a speech asking banks and insurers to begin disclosing climate risk on a voluntary basis.
For a time, this polite request seemed like the end: the central bank did not make disclosure mandatory, despite having the power to do so.
When asked why, the Reserve Bank said Stuff that although the law gave him the ability to require disclosure of measures of climate-related risks, or information on how a bank manages these risks, he did not believe there were well-defined metrics available to support that type of edict. “If we go ahead and require banks to disclose climate risk, it seems likely that the information is at risk of being inconsistent and possibly selective.”
Meanwhile, the government had already consulted about mandatory disclosure from a much broader range of companies and found overwhelming support for the idea.
But he had punished the decision “later” this year.
Chris McKeen / Stuff
Companies that wanted to disclose their climate risk, like BNZ, faced an uneven playing field before mandatory disclosure.
That left big companies with the media and the desire to be transparent in a bind. Banks like BNZ were working on voluntary disclosures.
But without a level playing field, the pioneers faced the risk of being bundled with all the compliance costs of their climate risk measurement, only to possibly end up being punished for their transparency, if other companies kept quiet.
Today, the government announced that all publicly traded companies, and all private banks and insurance companies managing investments of more than $ 1 billion, must begin reporting their climate risk.
The requirement will cover listed retailers, construction companies, airports, transportation companies, airlines, and listed agricultural companies, as well as major investors such as ACC and NZ Super Fund.
Other government agencies won’t have to disclose their climate risk yet, if they haven’t already, but Climate Change Minister James Shaw said he was looking to demand more transparency using powers under the Zero Carbon Act.
Initially, the estimates may not be very detailed.
Shaw said the initial focus may simply be to identify what the threats are and what business leaders are doing to manage them – both the risks of climate change and people’s actions to reduce emissions.
Oil companies may sell less oil due to rising carbon prices, for example, Shaw said, while an airport near the coast could be at physical risk of flooding.
For some companies, there will be opportunities to improve with the changes. Others will find great threats to their business models. In his May speech, Orr called ‘flying embarrassment’ and the switch to plant-based protein as “unique challenges” to our highly concentrated export economy, in addition to the physical threats to agriculture from more severe droughts and floods. or, like Northland recently experienced extreme floods after extreme droughts.
Ricky Wilson / Stuff
Listed airlines and airports will need to disclose climate risk. New Zealand has several coastal airports.
Over time, being transparent should help investors and the public differentiate between companies that are responding to threats and those that don’t think long-term.
But government policy is harder to predict. Will the governments of the future let the carbon market put a price on emissions or restore price controls? Will the emissions cap be maintained and, if so, what will it be? As the costs of switching to low-emission forms of work begin to affect, which industries will get special exemptions, and which industries will bear the brunt? Which industries will strengthen and which will collapse, and how much will the government spend to help find alternatives? Where businesses and households invest too much in vulnerable property, who will rescue them?
The Climate Change Commission will make recommendations on much of this, starting next year. Randerson’s review already suggested a new law that will govern who will bear the cost of the coastal retreat, which Shaw says he would implement within two years, if it is up to him.
But these recommendations are not binding on future governments, and bipartisan support for the Zero Carbon Act only signaled support for the overall carbon reduction goal, not for a particular political action.
It is difficult to assess the true risks to the financial system without knowing the climate plan.
