Treasury climate change models essential for planning

Acting quickly on climate change makes economic sense. Picture: AFP

Dealing with climate change is the biggest economic transformation our economy faces, so revelations that the Australian Treasury is kickstarting modelling on climate change are welcome.

There’s been nearly a decade of climate modelling drought for the Treasury; in fact, we have to go as far back as 2013 when Treasury-led climate modelling developed its third set of emissions projections.

Climate change and the inevitable transition for business has been off the economic agenda for too long.

It turns out that inaction is a policy choice and it’s not costless, with the cost of transition now higher for every business because the window for transition is shorter.

If we don’t get this modelling right, it’s our economic future and our place in global trade that is at risk.

As the Sydney Energy Forum kicks off on Tuesday, new Deloitte Access Economics modelling shows that unchecked climate change could result in a $US178 trillion ($261 trillion) loss of economic growth for the global economy over the next 50 years, and global GDP would be down by 7.6 per cent in 2070. All because insufficient action to stop climate change will damage economies through increased frequency and intensity of natural disasters, the impact of warming on workers’ productivity and the health of citizens, and damage done to our infrastructure and to arable land.

Globally, and in Australia, we will spend more and more just on repairing and coping with damage instead of investing in economic growth.

But the upside from co-ordinated and rapid action is a boon for global growth – some $US43 trillion over the coming 50 years – from avoiding damage and building new industries and new businesses for growth and jobs.

Our analysis, contrary to previous climate posturing, reveals that it is in the interests of countries like India, China, Germany, France, Japan, the US and many others to decarbonise quickly because their economies will benefit.

Globally, tackling climate change is now an economic race.

And Australia, with our abundance of technology, skilled workers, critical minerals and clean energy sources, has comparative advantages which must be made competitive. It’s an economic prize Australia must aim for.

Having downed tools for a decade, there will be a lot of ground for the Treasury modelling to make up. It must deal with six challenges:

First, the modelling needs to establish a new baseline for economic growth, recognising that climate change actually damages and limits our economic potential, and that there is “locked-in” climate damage we need to account for.

Second, the modelling done a decade ago assumed an efficient and economy-wide policy to reduce emissions. This is not the world we live in, and so future modelling will need to deal with the increased complexity and potential for reduced effectiveness of policy.

Third, the modelling must confront the transition pathways for business and capture the potential emergence of new industries and the complete transformation of existing ones. Articulating the hard truths on costs as well as opportunities, by industry, is critical, as will be the transition requirements for skills and the workforce.

Fourth, given that demand for some of Australia’s key resources is going to be decided overseas, the modelling should explore exactly what this will mean for our economy (including the impact of green tariffs) and whether it changes what mix of policies is best when it comes to our exports.

Fifth, most of these factors affect some of Australia’s regions much more than others. If we ignore this in the modelling work done, then you can imagine how well the work will be received in those regions and how difficult it will be to plan any kind of transition efforts or support packages.

Sixth, to help business and communities, transparency and access to the analysis will be critical. The costs of uncertainty for business have been ignored for too long, and markets are crying out for new baselines and transition paths in order to plan and invest rationally.

The most important thing this Treasury-led modelling can do is now place climate change at the heart of economic policy thinking – what it means for business, investment and growth; what it means for citizens, their jobs, and the distribution of growth; and what it means for Australia’s place in the world including our exports.

Given the commitment from new Treasurer, Jim Chalmers, to publish more regular intergenerational reports, it might not be a bad idea to make climate modelling, scenarios, and transition pathways a new key feature of these reports.

After all, climate change is an economic crisis Australia has to tackle head on, from which there is no turning back.

Dr Pradeep Philip is head of Deloitte Access Economics. Cedric Hodges is a director at Deloitte Access Economics.