Climate change and Australia’s energy transition could have a significant impact on future decisions regarding the official interest rate, according to Reserve Bank of Australia Deputy Governor Michele Bullock. She emphasized that the uncertainty surrounding climate change and its potential effects on the economy is particularly significant. The changing climate and energy transition will affect inflation and, consequently, the cash rate. Bullock stated that these concepts are already challenging to assess in real-time, and the introduction of additional variability and uncertainty from climate change complicates the assessment further.
While the impact of extreme weather events on crop viability and worker health can be predicted, the potential impacts of transitioning to net-zero emissions are less clear. Bullock recognized that emissions reduction policies will affect prices for families and businesses. The concern in setting future interest rates lies in how smoothly the transition to net-zero emissions will occur. Furthermore, she pointed out that the closure of coal-fired power plants, driven by pressure from climate change advocates, could raise electricity prices if not matched by renewable energy supply. Bullock suggested that coal plant closures might be delayed to ensure sufficient electricity generation to meet demand.
On the other hand, advancements in renewable energy and storage technology could accelerate the transition and reduce prices. Regardless of how the transition unfolds, energy prices will continue to be a significant factor for monetary policy in the coming years. Bullock explained that energy prices have a direct impact on inflation, with retail electricity and gas prices accounting for around three percent of the CPI basket. There are also indirect effects as businesses gradually pass on higher energy costs to consumers’ prices for goods and services.
In terms of global demand for fossil fuels, which make up one-third of the value of Australian exports, the downward trend could be offset by the demand for critical minerals used in renewable technology, particularly batteries and solar panels. The Australian government predicts exponential growth in global lithium demand, expanding Australia’s future export market. Bullock cautioned that there is significant uncertainty surrounding the speed and means by which countries achieve their net-zero targets and future technological developments.
The focus on climate change and its impact on the economy aligns with the federal government’s forecast that higher temperatures could cost Australia up to $423 billion over the next 40 years. The recent Intergenerational Report indicates that a temperature increase of over 3 degrees Celsius will affect productivity, especially for physically intense and outdoor occupations like agriculture, construction, and manufacturing. The report estimates that reduced economic output of $135 billion to $423 billion will be due to a decline in crop yields and reduced tourism to Australia’s natural attractions. Australian Treasurer Jim Chalmers expressed that the report’s increased focus on climate change and its impact on the budget was intentional, aiming to address the pressures impacting the economy, society, and budget.
Overall, climate change and Australia’s energy transition are expected to have a significant influence on future interest rate decisions and the overall economy. The uncertainties surrounding climate change’s effects and the smoothness of the energy transition create challenges for policymakers in assessing and predicting the impacts on inflation and monetary policy. However, it is recognized that the transition to net-zero emissions and the adoption of renewable technologies present both challenges and opportunities for energy prices, business costs, and Australia’s export market.