Australia’s 2023 Intergenerational Report—the 40-year economic and fiscal outlook—included an analysis of the impacts of physical climate risk on the Australian economy for the first time.
A subset of physical climate risks was selected for the first stage of analysis, based on their likelihood of being realized in the coming decades, their measurability, and their applicability to economic modeling frameworks. The potential impacts of these selected risks were estimated using bottom-up damage functions applied to the Treasury Industry Model (TIM), a multisector general equilibrium model of the Australian economy with forward-looking agents.
Key Messages
- The risks considered were the impact of heat stress on labor productivity, the impact of heat stress and lower precipitation on agricultural productivity, and the impact of environmental degradation and travel disruption on tourism flows and expenditure. This was necessarily a partial analysis, and tipping points and tail risks were not considered.
- Results were reported under several climate scenarios and based on climate projections from four global circulation models (GCMs) to help communicate possible future global emissions pathways and their effects. The impact estimates should not be considered forecasts, given the inherent uncertainty in predicting long-term climatic conditions.
- If global temperatures increase beyond 2°C by 2100, the direct impact of heat stress on labor productivity could reduce economic output by between A$135 billion and A$423 billion in today’s dollars over the next 40 years. The agricultural, construction, manufacturing, and service sectors could be particularly exposed to labor productivity impacts.
- The agricultural sector is particularly vulnerable due to its dependence on natural resources and climatic conditions. Without adaptation, Australian crop yields could be up to 4% lower by 2063 in a scenario where temperature increases by 3°C or more this century.
The first stage of analysis was to develop a set of detailed, Australia-specific damage functions and to incorporate these within an economy-wide modeling framework. Future work could include additional damage functions (e.g., related to sea-level rise), using more disaggregated data to calibrate existing damage functions, and using alternative estimation techniques to better capture the compounding effects of multiple physical climate impacts.