Against the legal backdrop of a recent International Court of Justice (ICJ)’s advisory determination that nation states are responsible for the greenhouse gas emissions that emanate from their countries – and potentially liable to other countries for the climate change damages that those emissions cause – the Australian market is now focused on two climate-related developments.

The National Climate Risk Assessment and the National Adaptation Plan

The first – and now delivered – is the government’s long-awaited National Climate Risk Assessment (NCRA) and the accompanying National Adaptation Plan (NAP). Together, they provide the first government issued, national modelling of Australia’s climate risk exposure, and its initial framework in response.

The NCRA findings are sobering. The report assesses physical risk from climate change across three scenarios (+1.5°C, +2.0°C, and +3.0°C) out to 2090 – considering current and future climate. As the government puts it: “climate hazards will get worse under all plausible futures” and the risks are “cascading, compounding and concurrent”. For those of us that way inclined, the assessment notes that economic output could fall by AUD$0.42tn pa against baseline by 2063, and projected disaster costs could swell to AUD$40.3bn pa by 2050.

The report assesses the vulnerability of eight key systems to climate change, across 10 hazards, presenting 63 identified nationally significant risks (11 of which are deemed national priorities). It notes that climate change is expected to drive local migration, health impacts, and pressure on critical infrastructure. It also forecasts a reduction in access to insurance and lending, and the redirection of discretionary economic resources to adaptation and recovery – causing cost of living pressures.

To take an example of one system of interest to our audience, climate change is expected to have pronounced impacts on Australia’s economy, trade and finance system. This is pithily summarised as “the interconnected insurance and investment markets, import and export markets, the labour market, the production, distribution and consumption of goods and services, and the institutional arrangements governing economic activities and trade networks across all scales”. The assessment notes that:

“Heatwaves, tropical cyclones, bushfires and severe floods have direct impacts on homes, businesses, and infrastructure. These events will become more frequent and severe (high confidence) leading to property damage, increased insurance costs, and loss of income. Chronic climate change impacts will also drive risk, especially rising temperatures (very high confidence) and rising sea levels (very high confidence). Coastal erosion and sea level rise pose significant risks to coastal communities and infrastructure and significant current exclusions for insurance cover mean that repair and recovery costs remain with households and businesses or may be transferred to governments”.

The report includes assessment of the economic impacts of climate change across the eight identified systems. In dollar terms the assessment suggests:

• Losses to property values could total $AUD611.0 billion by 2050 and $AUD770.0 billion by 2090
• Annual disaster costs across each state and territory for extreme weather under a 1.5C scenario, could total $AUD40.3 billion by 2049–50.
• Average annual government expenditure under the Disaster Recovery Funding Arrangements could quintuple under an equivalent +2.0°C warming scenario or by 7.2 times under a sub +4.0°C warming scenario by 2090
• Extreme heat could reduce labour productivity by 0.2% to 0.8% by 2063, reducing economic output by between $AUD135 billion and $AUD423 billion. This is expected to have particular impact for the agriculture, construction, manufacturing and mining sectors.

Although this won’t land as a surprise for many, it is the first time the Australian Federal Government has laid the impacts out in a wide-reaching view. And perhaps the most impactful illustration of the risk is to be found in the data exploration tool, released alongside the NCRA. This allows public access to summary information on climate exposure at the local government area level.

This level of specificity and uniformity in a Federally sanctioned package represents a step change for the market. Many organisations have until now relied on a patchwork of private models and assumptions to identify and navigate climate risk, usually with a paywall. As a consequence, climate risk isn’t uniformly visible or integrated in many processes – from lending and insurance through to procurement, approvals, and development.

Having a nationally mandated and publicly available, central set of scenarios provides a new baseline for business, insurers, investors and regulators. This will necessarily have very real market impacts – on insurance pricing, capital allocation, disclosure requirements, and board-level decision-making.

We do not expect that this new data will find its way into the first wave of reporting, given its recent release. However, we do expect that over the coming year companies and institutions country-wide will begin to make use of (and indeed might be expected to make use of) this new source of uniform information.

The 2035 target

The second major development, still pending, is the country’s 2035 emissions reduction target, which the government has flagged is likely to fall within the range of 65-75% (from 2005 levels).

Support from the business sector about where the target should fall within that range has not been uniform. The Business Council of Australia has not advocated for a particular target level, but has warned that a figure above 70% would necessitate economic trade-offs – particularly for Australia’s emissions-intensive export industries. Other business and investor coalitions have published open letters in support of a 75% (or higher) target, including the “Business for 75” group (with 500 signatory companies large and small – including household names such as Unilever, Atlassian, Canva, Fortescue, Ikea, Bank Australia, Lendlease and AFL team the Gold Coast SUNS), and some of Australia’s largest superannuation funds.

What is uniform is the rationale that each group is using to support their position: not in the name of koala bears, but squarely ‘jobs and growth’. This is also the language the government is using – acting on climate risk is described as seizing “the global jobs and economic opportunity before us”.

The release of the NCRA has implications for the 2035 target, expected to be released shortly. The NCRA and Adaptation Plan have already shifted the conversation: we now have a centrally defined, economy wide, assessment of the extent of the country’s risk exposure. This presents a new benchmark against which industry will plan for and price in climate-related risk, but also a new set of risks against which a target will and should be assessed. How much ambition is sufficient to answer the threats laid out in the NCRA? We will shortly see.

This article offers just a glimpse into our thinking on this issue. We provide a range of tailored Insights services to support our clients. For more information or to discuss how we can support you, please reach out Pollination Law Managing Director Sarah Barker, or Head of Knowledge & Insights Kate Hilder, to discuss.