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Incoming RBA Boss Considers Climate Change’s Impact on Future Interest Rate Decisions

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Climate change and Australia’s energy transition could become a new factor that will impact future decisions when setting the official interest rate, Reserve Bank of Australia Deputy Governor Michele Bullock said.

Ms. Bullock, who will step into the role of governor on Sept. 18, said the uncertainty around climate change and its future impact on the economy was “particularly acute.”

But any potential effects of a changing climate, as well as the energy transition and its impact on energy prices, will affect inflation and, therefore, also the cash rate.

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“This is because climate change might have important effects on an economy’s capacity to produce goods and services—that is, on potential output,” Ms. Bullock said in Canberra on Aug. 29.

“These concepts are difficult enough to assess in real-time in the normal course, let alone when climate change is introducing additional variability and uncertainty.”

While it can be predicted that extreme weather events in the future could reduce crop viability and the health of workers, possible impacts of the transition to net-zero emissions were “less clear.”

She acknowledged that policies to reduce emissions will impact prices for families and businesses and said the concern in setting future interest rates was in how smoothly the transition would take place.

Additionally, she noted that coal-fired power plant shutdowns, which are occurring at an increasingly accelerated pace due to pressure from climate change advocates, will raise electricity prices if they are not matched by renewable energy supply.

“Looking forward, coal plant closures may be delayed to ensure electricity generation is sufficient to meet demand,” Ms. Bullock said.

On the other hand, innovation in renewable energy and storage technology could also bring about a faster-than-expected transition, which would push prices down.

But regardless of how the transition unfolds, energy prices will be an important factor for monetary policy in the upcoming years.

“This is because energy prices have a sizeable direct impact on inflation, with retail electricity and gas prices accounting for around three percent of the CPI basket,” Ms. Bullock said.

“There are also indirect effects, as businesses can be expected to gradually pass on higher energy costs to the prices consumers pay for goods and services.”

In terms of global demand for fossil fuels, which accounts for one-third of the value of Australian exports, its downward trend could be offset by the need for critical minerals in renewable technology, particularly batteries and solar panels.

The Australian government has already predicted that global lithium demand to increase exponentially in the next few decades, expanding Australia’s future export market.

“In scenarios where net zero emissions is achieved by mid-century, there is a significant decline in demand for fossil fuels, including Australian coal exports,” Ms. Bullock said.

“There is significant uncertainty associated with these scenarios—including around the speed and the means by which countries make progress towards their net zero targets and future technological developments.”

Growing Focus on Net Zero Agenda

The highlight of climate change and its effect on the economy comes in line with the federal government’s forecast that higher temperatures could cost Australia up to $423 billion (US$273.8 billion) over the next 40 years.

The latest Intergenerational Report, published on Aug. 24, said that an increase in average global temperatures of over 3 degrees Celsius will impact productivity, particularly for occupations that are physically intense and/or are done outdoors, such as agriculture, construction, and manufacturing, the report forecasts.

Part of the reduced economic output of between $135 billion and $423 billion would be due to crop yields falling up to four percent and a fall in tourism to Australia’s large number of natural attractions that always stand at risk of environmental degradation.

Australian Treasurer Jim Chalmers said the report’s increased focus on climate change and its forecasted impact on the budget was deliberate.

“We want to think about the pressures which are impacting our budget as well as the pressures that are impacting our economy and our society, and climate change is among the most obvious of those, and so we have tried to lean into that a bit more in this report,” he told the National Press Club.

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