BUSINESS ADVISORY
Sydney, Australia
October 31st, 2006
climaterisk.net
Climate Risk Pty Ltd, 35 Lauderdale Ave, Fairlight, NSW 2094, Australia
Climate Risk Europe Ltd, Raven House, 113 Fairfield St., Manchester M12 6EL, UK
Initial Analysis: Stern Review and Australian Business
The results of the Stern Review relevant to Australian business can be split into three;
(a) the direct physical impacts of the changing climate;
(b) the indirect effects of those physical impacts, and;
(c) the effects of global and national policy interventions to mitigate greenhouse gas emissions.

(a) Direct Physical Impacts
First effects may be from extreme events
Stern points out that it is extreme events such as storms, floods, droughts, heatwaves and bushfire that will impinge first in a developed country because of the exposed asset stock. Stern suggests that, “This could lead to significant infrastructure damage and faster capital depreciation, as capital-intensive
infrastructure has to be replaced, or strengthened, before the end of its expected life. Increases in
extreme events will be particularly costly for developed economies, which invest a considerable amount in fixed capital each year (20% of GDP or $5.5 trillion invested in gross fixed capital today). Just over one-quarter of this investment typically goes into construction. The long-run production losses from extreme weather could significantly amplify the immediate damage costs, particularly when there are constraints to financing reconstruction.”
Water for Agriculture and Cities
Water will be a central issue of Australian cities and agriculture. According to Stern, “In Australia (the
world’s driest continent) winter rainfall in the southwest and southeast is likely to decrease significantly, as storm tracks shift polewards and away from the continent itself.” Stern notes that river flows in NSW are predicted to drop by 15% for a 1 - 2øC rise in temperature, where as in Western Australia, increasing water shortages in regions are likely to limit the carbon fertilisation effect leading to major crop yield declines.
Stern also notes that , “the east coast [of Australia] - home to over 70% of the population and location for most major cities and crop farming - has suffered longer droughts and declining rainfall.
Southerly regions have lost most rainfall as the warmer ocean and related air currents have pushed rain
further south. The 2002 drought cut farm output by 30% and shaved 1.6% off GDP. Water supply to
big cities will become more difficult - Melbourne’s could fall by 7 - 35% with only 2øC of warming.”
Extreme Wind and Cyclones
Stern discusses the US hurricane and Japanese typhoon intensity increase which are relevant to Australian cyclones. Wind related damage can be expected to increase for example a 5-10% increase
in wind speed can double the destructive power. This is important for exposed assets and crops in the
cyclone belt, and accords with intelligence from some banana growing areas in Queensland where crops are now uninsurable. We would also expect this to impact infrastructure exposure in affected regions.
 

Coastal Flooding
Stern indicates a high risk for countries with coastal asset bases, which is particularly important for
Australia. According to Stern “Rising sea levels will increase the risk of damages to coastal infrastructure and accelerate capital depreciation. The Costs of flood [defenses] on the coast will rise,along with insurance premiums.” The analysis indicates that the cost of coastal protection in Australasia will exceed 1.5 billion Australian dollar per decade by the 2080s and “storm surge heights all along Australia’s East Coast from Victoria to Cairns could rise by 25 - 30% with only a 2øC increase in global temperatures.”
 

Tourism:
Stern refers to the exposure of “Australia’s $32 billion tourism industry [which] will suffer from almost complete bleaching of the Great Barrier Reef.” There is also a passing reference to marked reductions in snow cover in Australia. Interestingly Stern indicates a possible increase in tourism in some colder countries like Russia.
Energy Sector
Energy sector impacts will include reduce efficiency, and examples from Stern from around the world of the sectors vulnerability include, “France’s nuclear power stations fell because the river water was too hot to cool the power stations adequately. Similarly, at the height of the 2002 drought, Queensland’s power stations had to reduce output considerably. In California, hydropower generation is predicted to fall by 30% for a warming of 4øC globally as storage lakes deplete.”
 

Resilience
Based on Stern we may consider that Australia like other developed countries will have a comparatively high adaptive capacity to physical impacts due to its wealth and flexible economy and liquid financial markets all of which increase resilience to climate change. However this appears to be temperature related with a global warming of 3-4 degrees being far more destructive than a warming of 2-3 degrees.
(b) Indirect Effects from Physical Impacts
Increased insurance premiums:
Stern quotes insurance industry data showing that weather-related catastrophe losses have increased by 2% each year since the 1970s (over and above changes in wealth, inflation and population growth/movement)
There will also be an increased cost of capital for insurers, “Increasing costs of extreme weather will
not only raise insurance premiums - they will also increase the amount of capital that insurance companies have to hold to cover extreme losses. If the insurance industry looks to access additional
capital from the securities and bond markets, investors are likely to demand higher rates of return for
placing more capital at risk, causing a rise in the cost of capital.”
 

Reduced access to finance in vulnerable areas.
Stern points out the correlation between ability to insure and the ability to raise finance against the
value of the asset. If insurance is withdrawn due to excessive risk then the ability to raise finance may
follow, Stern says, “Banks, for example, would be unable to offer finance where insurance is required
as part of the collateral package for mortgages or loans.”
Population Movement:
Stern raises several trends that could impact population trends in Australia. One of interest is the
spread of disease vectors that could affect the `livability’ of southern Queensland and northern NSW,
currently high growth areas and centres of major investment inflow. “Tropical diseases are spreading
southward as the north becomes wetter. The dengue fever transmission zone could reach Brisbane and
possibly Sydney with 3øC of warming.”
Global Trade Disruption
Global trade may be disrupted by physical impacts of climate change in other developed regions like the EU and North America - “For example, a collapse of the Atlantic Thermohaline Circulation would have a massive effect on many parts of the economy of the countries around the Northern Atlantic Ocean and polar seas.

A collapse in the next few decades would lead to a decrease in temperatures across much of the northern hemisphere, accompanied by a reduction in rainfall over much of the northern hemisphere ,reducing agriculture productivity, water supplies and threatening ecosystems.”
Global trade could be also be disrupted by physical impacts in developing country trading partners.
“Climate change will affect the prices and volumes of goods traded between developed and developing
countries, particularly raw materials for manufacturing and food products, with wider macroeconomic
consequences.” Stern identifies that developing countries are likely to be much less able to adapt than
developed countries and highly vulnerable to multiple climate related catastrophes the undermine the
ability to recover. For example, “one-quarter of China’s population (300 million people) could suffer
from the wholesale reduction in glacial meltwater.”
Sea Based Trade
Australia’s dependence on sea-born trade exposes potentially high adaptive costs and increased risks.
Stern notes that, “Rising sea levels will demand heavy investment in flood protection around ports and
the export and import related activities concentrated in and around them. Stronger storm surges, winds
and heavier rainfall already point to the requirement for stronger ships and sturdier offshore oil, gas and
other installations.” Stern also points to the processing installations such as oil refineries and LNG plants that may have to be re-located. “This would reverse decades of building steel mills,petrochemical plants and other energy-related facilities close to the deepwater ports.” And clearly increased protection and relocation would have add major capital and transport costs, and make exports and imports more expensive.
(c) The effects of global and national policy interventions to mitigate greenhouse gas emissions.
There are a variety of policy reactions that could affect Australian businesses depending on how national and global policy evolves. The Stern report considers both national (with a focus on the UK) and international policy coordination that would be required to address climate change to the net benefit of the long term global economy. Here we consider three possible ramifications for Australian business.
Carbon Based Trade Barriers
Should countries like the UK, regional trading blocks like the EU, or multinational groupings such as the Kyoto Protocol signatories deepen cuts, while Australia remains outside such schemes, it is plausible that carbon based border adjustments could be enacted as protections for their own industries and to avoid `carbon leakage’ or `regulatory flight’. This could adversely impact Australia where products manufactured with electricity have a high carbon intensity due to the dominance of coal in the
power mix. The large distances to market would also add to the `carbon content’ of exported products.
Energy Export Ups and Downs
As one of the worlds largest exporters of coal, a shift to zero and low emission fuels would have a
serious impact on sales of coal unless until carbon capture and storage technologies become
commercially viable and carbon trading comes into force. On the other hand exports of gas, with half
of the emission intensity as coal for the same electrical energy, would be expected to increase substantially. Exports of Australian renewable energy products and services can be expected to continue to grow.
The Australian Dilemma
Australian businesses are having to consider two broad groupings moving in different directions, the
Kyoto grouping which is using a regulatory approach to drive down emissions and the US led
approach which is technology push focused with no regulatory aspect and which currently includes
Australia.A key risk facing Australian businesses is deciding which grouping has the competitive advantage, for how long and where in the technology spectrum they sit. For example high tech companies are likely to benefit faster under market pull regimes like Kyoto, where as energy and carbon intensive incumbents are likely to resist entering a regime with a carbon price without trade protections.