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2021 igr ttrp - an indicative assessment of four key areas

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Page 1: 2021 IGR TTRP - An indicative assessment of four key areas

2021 Intergenerational Report

Treasury Technical Research Paper Series

1 The views in this paper are those of the authors and do not necessarily reflect those of NSW Treasury.

This publication can be accessed from Treasury’s website www.treasury.nsw.gov.au.

An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report _________

Nick Wood, Maddy Beauman & Philip Adams1

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Acknowledgement

NSW Treasury acknowledges the Traditional Owners of the land on which we live and work, the

oldest continuing cultures in human history.

We pay respect to Elders past and present, and the emerging leaders of tomorrow.

We celebrate the continuing connection of Aboriginal and Torres Strait Islander peoples to Country,

language and culture and acknowledge the important contributions Aboriginal and Torres Strait

Islander peoples make to our communities and economies.

We reflect on the continuing impact of policies of the past, and recognise our responsibility to work

with and for Aboriginal and Torres Strait Islander peoples, families and communities, towards better

economic, social and cultural outcomes.

The authors thank Michael Warlters for providing the support to launch this research project, and

Luke Maguire for providing ongoing guidance and support throughout the process. Thank you to

Yvonne Scorgie, Nerida Buckley, Joseph Miller, David Hanslow, Chris Weston, Matthew Riley and

others at the NSW Department of Planning, Industry and Environment, Dr Karl Mallon and Max

McKinlay at XDI Pty Ltd for their ongoing engagement and guidance in developing this research and

for contributing essential data, Dr Hamish Clarke, Martin Nolan, Joanna Aldridge and Tim Baynes for

their advice and contribution of data to this project, and Aruna Sathanapally, Angela Cummine, Kevin

Pugh, Jenny Merkley, Richard Cox and Stephen Walters for their input and assistance in reviewing

this paper.

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Contents Acknowledgement ............................................................................................................................. 1

Contents ............................................................................................................................................ 2

Executive Summary ........................................................................................................................... 3

1. Introduction ............................................................................................................................ 7

2. Context: incorporating climate risk assessment to improve the quality of the IGR’s projections 9

3. Approaches to economic and fiscal climate risk assessments ............................................... 13

4. Approach to assessing climate risks ..................................................................................... 15

5. Projected impacts of key areas of climate risk: natural disasters, sea level rise, heatwaves and

climatic effects on agricultural production ......................................................................................... 18

6. CGE Results ........................................................................................................................ 35

7. Discussion ........................................................................................................................... 36

8. Conclusion ........................................................................................................................... 39

TECHNICAL APPENDIX ................................................................................................................. 40

References ...................................................................................................................................... 53

Further information and contacts...................................................................................................... 59

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Executive Summary

Climate risks are expected to materially impact NSW’s long term economic and fiscal outlook.

International financial institutions, including credit ratings agencies Moody’s and S&P Global, and

central banks through the Network for Greening the Financial System, are increasingly considering

climate risks as part of their long-term risk assessments. Understanding the potential scale and

direction of these impacts will improve the quality of estimates for the 2021 NSW Intergenerational

Report (IGR) and contribute to prudent and transparent fiscal management.

Climate risks to New South Wales’ economic and fiscal outlook can be broadly classified into two

categories: physical and transitional risks. Physical risks relate to the direct impact of changes in the

climate on the economy. ‘Transitional risks’ refer to the costs and benefits of the economic transition

toward lower emissions, for example differences in global coal demand or measures undertaken as

part of the NSW Government’s commitment to achieve net zero emissions by 2050. This paper

focuses on an initial set of physical climate risks, while a separate paper titled The Sensitivity of the

NSW economic and fiscal outlook to global coal demand and the broader energy transition for the

2021 NSW Intergenerational Report, focuses on an initial set of transitional risks.

The assessment timeframe is limited to the IGR’s forty-year projection period. The impact of climate

change, particularly under higher warming scenarios, is expected to significantly intensify in the

second half of the 21st century, which is outside the IGR’s projection period. The results reported in

this paper should therefore be interpreted in this context.

This paper sets out an approach to assessing physical climate risks for the NSW Intergenerational

Report and deploys this approach with respect to four initial areas of physical climate risk:

1. selected costs of natural disasters

2. property and land damage from sea level rise

3. the effects of heatwaves on workplace productivity

4. the effects of climate change on agricultural production.

This is intended to provide an initial analytical framework, evidentiary foundation, and reference case

for long-term economic and fiscal risks. This approach provides a foundation that can be extended in

the future to cover a broader range of climate risks and deeper analysis of the risks identified in this

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Costs associated with these four areas of risk are estimated for three climate scenarios as defined by

the Intergovernmental Panel on Climate Change (IPCC). These scenarios represent plausible climate

trajectories that reflect global greenhouse gas (GHG) emissions mitigation efforts. They are:

• a ‘lower warming’ scenario, reflecting climate impacts consistent with the IPCC’s

Representative Concentration Pathway (RCP) 2.6

• an ‘intermediate’ scenario, which is used as the reference case, reflecting climate impacts

consistent with RCP4.5

• a ‘higher warming’ scenario, reflecting climate impacts consistent with RCP8.5.

Note that this paper, and NSW Treasury more generally, does not project which climate scenario is

more or less likely to transpire. Use of the intermediate warming scenario as the reference case is a

technical assumption only. The purpose of the modelling in this paper is to test the sensitivity of the

economic and fiscal outlook to differences in the climate scenario, not to forecast the climate scenario

Costs relating to these four risks are applied as shocks to a Computerised General Equilibrium (CGE)

model, utilising the intermediate warming scenario as the reference case and aligning this with other

research conducted as part of the NSW Intergenerational Report. Relevant shocks are also directly

applied to Treasury’s Long-Term Fiscal Pressures Model (LTFPM), as are outputs from the CGE

model, to assess their fiscal impact. This is aimed at assessing the sensitivity of economic and fiscal

outcomes to differences in the climate scenario.

It is important to note that this differs from the approach taken in some previous research on the

economic impacts of climate change, such as the 2008 Garnaut Review and the 2020 Deloitte report

A New Choice, which are directed to the overall costs of climate change. Rather this approach is

aligned to emerging best practice in assessing the sensitivity of economic and fiscal outcomes to

different climate scenarios, such as recent analysis by the Bank of England.2

Projected economic effects are limited to those relating to the four key areas of risk included in the

assessment and do not constitute a comprehensive climate risk assessment. These were selected

based on two criteria:

1. the likelihood that shocks could materially impact economic or fiscal outcomes within the

forty-year projection period

2. a reasonably robust evidence base being available regarding the likely economic or fiscal

impacts associated with these shocks.

Projected costs for the four focus areas of risk

Natural Disasters

The risk of natural disasters is projected to increase over the next forty years. With the range

dependent on the associated climate scenario:

• Bushfire risk is projected to increase by more than other natural disasters, with the change in

risk estimated at between 2 and 24 per cent by 2061.

• Flood risk is projected to increase by between zero and 12 per cent by 2061.

2 Bank of England, ‘The Bank of England’s Climate-Related Financial Disclosure 2020’.

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• The risk of storms, a category which includes hail and thunderstorms, east coast lows,

tropical cyclones and other storms, are projected to increase by between 2 and 5 per cent by

2061. This is entirely driven by an increased risk of tropical cyclones as they continue to

encroach further south from Queensland.

The expected annual costs of natural disasters is projected to increase both due to socio-economic

factors as well as changes in hazard risk. Expected costs represent a mid-point estimate, with actual

costs in any single year being highly variable.

With the range dependent on the climate scenario:

• The expected total economic costs of natural disasters are projected to increase to between

$15.8 billion and $17.2 billion (real 2019-20 dollars) per year by 2061, up from $5.1 billion in

• If recent variability in the actual instance of natural disasters was repeated, total economic

costs in any single year could range from $30 million to $75 billion (real 2019-20 dollars)

under the intermediate warming scenario.

• The expected direct economic costs of natural disasters (a subset of total economic costs)

are projected to increase from $870 million in 2020-21 to between $2.7 billion and $2.9 billion

(real 2019-20 dollars) per year by 2061.

• The expected direct fiscal costs under Disaster Recovery Arrangements (DRA) of natural

disasters are projected to increase from $200 million per year in 2020-21 to between $630

million and $700 million (real 2019-20 dollars) by 2061.

Sea Level Rise

Sea level rise is expected to impact NSW through coastal erosion and recession, and tidal inundation.

By 2061, between 39,000 and 46,000 properties are estimated to be exposed to coastal erosion or

inundation, and annual costs from property damage and loss of land are estimated at between $850

million and $1.3 billion (real 2019-20 dollars) depending on the climate scenario. These costs do not

account for the potential for policy interventions, which could include either mitigating damage to

existing structures or limiting the exposure of additional structures, for example through development

controls. The costs of policy interventions have not been assessed. These estimates also do not

include costs associated with damages to infrastructure, or additional costs associated with ensuring

the resilience of future infrastructure.

The instance of heatwaves is expected to increase which is expected to impact workplace

productivity. By 2061, between 700,000 and 2.7 million additional days of work are projected to be

lost every year due to the higher frequency and intensity of heatwaves. These costs included in this

analysis are limited to lost workplace productivity across four sectors for which higher proportions are

known to work outdoors: agriculture, construction, manufacturing and mining. This analysis could be

further expanded in the future to focus on human health or infrastructure costs.

Changing climate conditions for agricultural production

Agricultural production is expected to be impacted by climate change through changes in rainfall

patterns, runoff and temperatures. By 2061, lost production in agriculture based on pastoral and

growing conditions is estimated at between $750 million and $1.5 billion (real 2019-20 dollars)

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depending on the climate scenario. This is in addition to the effect of lost workplace productivity

arising from an increase in heatwaves.

Sensitivity of the economic and fiscal outlook to differences in the climate scenario

Differences between climate scenarios are estimated to account for 0.6 per cent of Gross State

Product by 2061, and 0.05 of the fiscal gap, measured as the difference between the higher and lower

warming scenarios. Realising the lower warming scenario instead of the higher warming scenario

would result in additional income in New South Wales of $56 billion (real 2019-20 dollars) over the

forty-year projection. This is measured as the net present value of the difference in the size of the

New South Wales economy between the lower and higher warmings scenarios using a two per cent

discount rate.

The results represent the sensitivity of the economic and fiscal outlook to three climate scenarios, all

of which incorporate some degree of warming compared to current conditions. Estimates are limited

to the impact of the four areas of risk included in the assessment over the forty-year projection period

of the NSW Intergenerational Report. The results should not be interpreted as the ‘cost of climate

Areas for future research

Higher priority areas for future extensions of this modelling include water security and drought, and

infrastructure construction and maintenance. Additional research areas also include health

expenditures, mortality, impacts on tourism, and the impact of climate change on global trade.

Extending the projections beyond the IGR’s forty-year forecast period would also increase measured

effects given climate scenarios are expected to diverge considerably in the second half of the 21st

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1. Introduction

The global and Australian climates are changing, with observed changes including increasing air and

ocean temperatures and rising sea levels.3 These trends are projected to continue and intensify over

the coming decades, which will have consequences for New South Wales’ economic and fiscal

outlook. This paper sets out an approach to assessing and modelling physical climate risks, and

deploys this to assess the impact of four key areas of climate risk. This will inform the preparation of

the 2021 NSW Intergenerational Report, and sits alongside other research papers, most notably The

sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy

transition for the NSW Intergenerational Report,4 which deploys a similar approach to assess a

selection of transitional climate risks, and Projecting Long Run Productivity Growth Rates for the 2021

Intergenerational Report,5 which projects long run productivity growth.

Recent events have demonstrated the potential for the climate to impact New South Wales’ economic

and fiscal position. In 2019-20, economic output in the agricultural sector was the weakest in a

decade following a prolonged drought, and the NSW Government spent a record amount on natural

disaster relief. Alongside this, credit ratings agencies Moody’s and S&P Global have begun

accounting for climate risks in their credit assessments,6 and international financial institutions

including the Organisation for Economic Co-operation and Development (OECD) and the International

Monetary Fund (IMF), and central banks including the Reserve Bank of Australia,7 have

recommended that governments identify and assess climate risks in order to better set priorities and

allocate resources.8 Focusing on physical climate risks is therefore increasingly necessary for New

South Wales to demonstrate its commitment to prudent fiscal management, as required under the

Fiscal Responsibility Act 2012.

The approach set out in this paper builds on those taken in previous economic assessments including

the Garnaut Review in 2008 and by Deloitte in 2020.9 Computerised General Equilibrium (CGE)

modelling is used to assess the overall economic impact of four key climate risks: natural disasters,

sea level rise, heatwaves and the impact of changes in the climate on agricultural production.

This is a relatively limited list and the estimation of costs associated with each of these risks is not

exhaustive. The approach taken is intentionally conservative. It is aimed at:

• developing a robust climate risk assessment framework

• demonstrating the potential of this framework by utilising it to conduct an initial risk

assessment across four key areas.

It is anticipated this framework could be extended in future research to encompass a wider range of

climate risks.

3 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’; Pearce et al., Climate Change in Australia; NSW Office of Environment and Heritage, Impacts of Climate Change on Natural Hazards Profiles. 4 NSW Treasury, ‘The Sensitivity of the NSW Economic and Fiscal Outlook to Global Coal Demand and the Broader Energy Transition for the 2021 NSW Intergenerational Report’. 5 NSW Treasury, ‘Projecting Long Run Productivity Growth Rates for the 2021 Intergenerational Report ’. 6 Moody’s Investors Services, ‘Climate Change & Sovereign Credit Risk’; Kernan et al., ‘How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its Ratings Analysis’. 7 Network for Greening the Financial System, ‘NGFS Publishes a First Set of Climate Scenarios for Forward Looking Climate

Risks Assessment alongside a User Guide, and an Inquiry into the Potential Impact of Climate Change on Monetary Policy’. 8 OECD, ‘Recommendation of the Council on the Governance of Critical Risks’. 9 Garnaut, The Garnaut Climate Change Review; Deloitte Access Economics, ‘A New Choice’.

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The distinctiveness of the approach set out in this paper is twofold:

• firstly, CGE modelling is used in combination with Treasury’s Long-Term Fiscal Pressures

Model (LTFPM) to estimate the fiscal impacts of these risks.

• secondly the modelling assesses the four risks under three climate scenarios:

o a ‘lower warming’ scenario, reflecting climate impacts consistent with the IPCC’s

o an ‘intermediate’ scenario, which is used as the reference case, reflecting climate

impacts consistent with RCP4.5

o a ‘higher warming’ scenario, reflecting climate impacts consistent with RCP8.5.

This contrasts with previous economic analyses which have used a ‘no climate change’ scenario as

their reference case in order to demonstrate the total costs of climate change. Rather, this approach

is in line with emerging best practice in climate risk assessments, such as that conducted by the Bank

of England.10 This approach is aimed at ensuring the modelling is focussed on the sensitivity of the

NSW economy and budget to variations in the climate trajectory. Given the inherent uncertainties in

projecting future climatic conditions, and their potential economic and fiscal impacts, the estimates set

out in this paper are indicative only and aimed at demonstrating the potential scope and scale of the

Chart 1 Illustrative scope of modelling

Chart is a conceptual illustration only and is not to scale. Source: NSW Treasury.

Modelling for the NSW IGR is conducted on the underlying assumption that policies remain

unchanged over the projection period, which allows for an assessment of the long-term

consequences of existing policy settings. Each of the three climate scenarios is therefore assumed to

be possible under current policy settings. The impact of transitioning to a lower emissions economy is

considered in a separate paper, The sensitivity of the NSW economic and fiscal outlook to global coal

demand and the broader energy transition for the 2021 NSW Intergenerational Report.11

10 Bank of England, ‘The Bank of England’s Climate-Related Financial Disclosure 2020’. 11 NSW Treasury, ‘The Sensitivity of the NSW Economic and Fiscal Outlook to Global Coal Demand and the Broader Energy Transition for the 2021 NSW Intergenerational Report’.

2020 2060 2100

Total Cost of Climate Change

Modelled for IGR

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2. Context: incorporating climate risk assessment to improve the quality of the IGR’s projections

International institutions have recommended jurisdictions undertake more systematic

assessment of climate risks

Several international institutions are applying rigorous analysis to estimate the potential for climate

risks to impact economic outcomes. The Network for Greening the Financial System (NGFS), a

network of central banks that includes the Reserve Bank of Australia, recently urged a more

comprehensive consideration of macroeconomic and fiscal risks associated with climate change. This

follows a range of journal articles published by the IMF and OECD outlining the benefits of more

comprehensively accounting for climate risks in long term fiscal statements.12 The credit rating agency

S&P has recently noted that, “climate change could have significant implications for sovereign ratings

in the decades to come.”13 Moody’s already explicitly includes climate risks in its evaluation of

sovereigns’ and sub-sovereigns’ ability and willingness to repay their debts,14 and recently noted that

New South Wales is subject to a range of climate-related risks, including acute climate risks such as

bushfires and floods and chronic climate risks such as cumulative changes to weather patterns and

The climate is changing

Between 1880 and 2012, global average surface temperatures increased by at least 0.85°C.16 This is

driving a range of other changes to the earth’s climate and environment. Over a similar time period,

global average sea levels rose by 25cm,17 and oceans became warmer and more acidic.18 Rainfall

patterns have changed, with more instances of extreme precipitation and a shift in seasonal patterns.

There have been more heatwaves, and fewer periods of extreme cold temperature.19

Changes in the climate have been observed in New South Wales and Australia. Australia has warmed by 1.44°C since records began in 1910 (see

Chart 2).20 Satellite observations since 1993 indicate that sea levels off the south eastern coast of

Australia have been rising at a faster pace than the global average.21 There has been a trend toward

more dangerous fire weather conditions in New South Wales and an earlier start and overall

lengthening of the fire season. There has been a decline in rainfall over winter across much of the

State, combined with an increase in the intensity of heavy rainfall events. There have been fewer East

Coast Lows, particularly during winter, but those that have occurred have been more intense.22

12 Anderson and Sheppard, ‘Fiscal Futures, Institutional Budget Reforms, and Their Effects: What Can Be Learned?’; Cebotari et al., Fiscal Risks. 13 Kernan et al., ‘How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its Ratings

Analysis’. 14 Moody’s Investors Services, ‘Climate Change & Sovereign Credit Risk’. 15 Moody’s Investors Service, ‘Issuer In-Depth 29 January 2020: State of New South Wales (Australia) Droughts and Bushfires

Materially Increase Budget Pressures and Pose Long-Term Challenges’. 16 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report. 17

CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 18 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report. 19 The Intergovernmental Panel on Climate Change (IPCC) summarises the extent of these changes, as at the time of publication, in its Fifth Assessment Report published in 2013. 20 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 21 Ibid. 22 ‘Eastern Seaboard Climate Change Initiative’.

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Chart 2 Surface and ocean temperatures in Australia

Source: Bureau of Meteorology State of the Climate 2020. Anomolies in mean sea surface temperature, and

temperature over land, in the Australian region. Anomalies are the departures from the 1961-1990 standard averaging

period. Sea surface temperature values are provided for a region around Australia (4-46°S and 94-174°E).

Changes in the climate are projected to continue

These trends are set to continue, with their trajectories largely tied to the future outlook for global

GHG emissions, which in turn is dependent on global policy settings and technological development.

In response, the IPCC has developed climate scenarios or “Representative Concentration Pathways”

(RCPs), which represent a range of potential emissions and warming trajectories. The widespread

adoption of these scenarios has allowed for some consistency and comparability across research into

future changes in the climate, and the associated implications.

Chart 3 Temperature Increase and Sea Level Rise Projected for 2060 under selected RCPs

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Australian Surface Air Temperature Sea Surface Temperature

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Source: IPCC AR5. Global mean surface temperature increase and mean sea level rise since 1986-2005 average.

Bands represent 90 per cent confidence intervals on temperature projections and the ‘likely range’ (66% confidence) for

sea level rise projections.

Projections of global surface temperatures and sea level rise by 2060 for three RPCs are outlined in

Chart 3. Under all scenarios, the trends described above are set to continue, with the difference

between scenarios primarily being one of scale. Global surface temperatures will continue to

increase, sea levels will continue to rise, heatwaves and extreme bushfire weather will further

intensify and rainfall patterns will continue to shift.

The changing climate has already impacted New South Wales fiscal and economic position

Risks associated with climate change have already had a range of impacts on New South Wales’

fiscal and economic position. The 2019-20 bushfire season was the most economically damaging on

record, resulting in at least $1.8 billion in direct economic damages (as measured through insurance

losses)23, and $4.4 billion24 in fiscal costs over five years to 2023-24 (including $1.1 billion measured

through Disaster Recovery Funding Arrangements).25 Drought conditions affecting much of New

South Wales since 2016 had a significant impact on agricultural output and also directly impacted the

fiscal position in the form of drought relief payments, made via the NSW Rural Assistance Authority.

Ongoing changes in rainfall levels and patterns have affected water security in both metropolitan and

regional areas, bringing with them economic impacts and fiscal obligations, including the requirement

to build and maintain water infrastructure. As long as these climactic trends continue, their effects on

fiscal and economic outcomes can be expected to persist.

Climate risks have not previously been considered for the NSW Intergenerational Report

NSW Intergenerational Reports have to date focused on the “Three Ps” of economic growth:

population, participation and productivity. These have been modelled using NSW Treasury’s LTFPM,

which projects the incidence of any long term ‘fiscal gap’. The LTFPM projects specific areas of

23 Insurance Council of Australia, ‘Catastrophe Data’ NSW Data only. 24 Some of this is shared with the Commonwealth. 25 NSW Treasury, ‘2020-21 Budget’.

°CTemperature Increase Sea Level Rise

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revenue and expenditure by combining economic and demographic projections, derived through the

“Three Ps” framework, with analysis of historical trends. This approach remains the basis of the IGR

and is well suited to evaluating the impact of changing demographics – most notably the ageing of the

population – on long-term fiscal outcomes.

The purpose of the NSW Intergenerational Report has evolved and broadened over time, beyond the

traditional focus on population ageing to other structural trends and system dynamics. The 2016 NSW

IGR featured the first major expansion of the LTFPM beyond the “three Ps” framework, with explicit

modelling of the housing market. This is in recognition of the importance of housing-related revenue

items to fiscal outcomes and was the result of research which linked the housing market with

interstate and overseas migration. It enabled the 2016 IGR to include detailed analysis of the housing

market, and its role as a key determinant of the State’s long-term fiscal position.

To date, however, the LTFPM has not explicitly considered how risks relating to climate change might

impact fiscal outcomes. In particular, the sensitivity of economic and fiscal projections to different

climate trajectories has not been addressed.

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3. Approaches to economic and fiscal climate risk assessments

Fiscal assessments

Few jurisdictions across the world have incorporated climate risks into long term fiscal modelling,

despite recommendations over the past decade from international economic and financial institutions.

One of the more comprehensive assessments of physical fiscal climate risks was undertaken for the

United States by the White House Office of Management and Budget in 2016.26 This report focused

on estimating fiscal costs associated with four key risks under an unmitigated climate scenario

(RCP8.5). The risks assessed were coastal storms, agricultural production, wildfire management and

air quality. Economic risks were also accounted for through reference to previous studies, without

being explicitly modelled.

In the UK, the Office of Budget Responsibility (OBR) included a chapter on climate change in its 2019

Fiscal Risks Report, although this did not include systematic modelling. The OBR intends to further

develop climate modelling in the future in partnership with the OECD and NFFS. A similar qualitative

approach has been taken by a range of other jurisdictions in their long-term fiscal statements

including Ireland27 and New Zealand.28

Economic assessments

Economic assessments have generally separated climate risks into two categories:

• physical risks which arise directly from changes in the climate

• transition risks which arise from efforts to reduce GHG emissions.29

In Australia, the Commonwealth Government reported the findings of economic modelling on both the

physical and transition risks of climate change in its 2010 Intergenerational Report, although this did

not explicitly consider fiscal risks. The modelling was conducted for the Garnaut Review, which

utilised a CGE model (specifically the Monash Multi Regional Forecasting Model or MMRF30) to

estimate the aggregate economic impact of a range of climate shocks under different climate

scenarios. A similar approach was used by Deloitte in research published in November 2020.31 Both

of these approaches considered purely physical risks by modelling an ‘unmitigated’ climate scenario,

before including other ‘mitigation’ scenarios which blended transition risks with an associated

reduction in physical risks. There are some difference in the estimated scale of impacts arising from

physical risks across these two assessments – Garnaut estimated a 2.1 per cent reduction in

Australian GDP by 2050 compared to a 3.6 reduction forecast by Deloitte. Both analyses agreed New

South Wales will likely be less impacted than other States: Deloitte estimated New South Wales

26 Office of Management and Budget, ‘2016 Draft Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act’. 27 Irish Fiscal Advisory Council, ‘Long-Term Sustainability Report: Fiscal Challenges and Risks 2025-2050’. 28 New Zealand Treasury, ‘He Tirohanga Mokopuna: 2016 Statement on New Zealand’s Long-Term Fiscal Position’. 29 Note that there are both costs and benefits involved in reducing greenhouse gas emissions. The term ‘transition risks’ is

commonly used (for example by the NGFS) to refer to the process of greenhouse gas reduction, but does not imply that this process involves only downside risks. This is more fully explored in NSW Treasury, ‘The Sensitivity of the NSW Economic and Fiscal Outlook to Global Coal Demand and the Broader Energy Transition for the 2021 NSW Intergenerational Report’. 30 Adams et al., ‘MMRF: Monash Multi-Regional Forecasting Model: A Dynamic Multi-Regional Model of the Australian Economy’. 31 Deloitte Access Economics, ‘A New Choice’.

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Gross State Product would be 2.2 per cent lower in 2050 under an unmitigated climate scenario while

Garnaut estimated the impact at around 1.5 per cent.32

At a global level the NGFS has set out a range of scenarios encompassing both physical and

transition risks. They projected a global decline in GDP of up to 25 per cent under the ‘hot house

world’ scenario (RCP8.5), which encompasses only physical risks, and then compared this with two

mitigation scenarios, both of which incurred transition costs, but resulted in lower costs associated

with physical risks. Kompas et. al. used a similar approach to that taken in Garnaut and Deloitte,

albeit focused only on physical risks.33 They applied a range of shocks representing physical risks to a

CGE model at a global level to estimate the potential benefits of global compliance with the Paris

Agreement that will limit warming to 2°C (RCP4.5).

The IPCC notes the key limitation present in economic assessments of the costs of climate change is

that they are necessarily “partial and affected by important conceptual and empirical limitations.”34

That is, these estimates typically underestimate total costs due to limitations in data, difficulties in

monetising particular impacts such as biodiversity loss and difficulties accounting for events with low

probability but very high impact, including tipping point events, that may occur outside typical

modelling timescales.35

32 Note this figure was obtained through visual inspection of charts included in the Garnaut Review (technical paper 5, p. 13). 33 Kompas, Pham, and Che, ‘The Effects of Climate Change on GDP by Country and the Global Economic Gains From

Complying With the Paris Climate Accord’. 34 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report, 79. 35 The Garnaut Review labelled these Type 2, 3 and 4 costs respectively.

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4. Approach to assessing climate risks

The approach set out in this assessment draws on previous approaches to estimating both economic

and fiscal impacts of climate change. This paper sets out an approach to assessing physical risks

while transitional risks are considered separately in The sensitivity of the NSW economic and fiscal

outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational

The approach considers three climate scenarios (outlined below). A set of ‘shocks’ are applied to a

CGE model (the Victoria University Regional Model or VURM37), with each shock reflecting the

estimated impact of key areas of climate risk under each scenario. This will provide information on the

potential impact and scale of these risks to the NSW budget and economy. The output from the CGE

model will then be applied to Treasury’s LTFPM, along with some direct fiscal estimates where

relevant. This enables an assessment of the sensitivity of economic growth estimates to different

climate scenarios.

This section will first contextualise this line of research with reference to a range of other research

modules being conducted for IGR. This is followed by a description of the three climate scenarios,

and the associated selection criteria for the initial set of shocks included in this modelling. These

scenarios and shocks are presented regarding their application to the VURM CGE model itself. Lastly,

a range of further modelling extensions are listed to provide direction for further research.

This paper forms one component of a series of research papers being released in advance of the

NSW Intergenerational Report. Publicly releasing these papers ensures that information is available

on how NSW Treasury considers the key components of the NSW Treasury LTFPM, which underpins

the IGR. These research papers cover a range of topics including population (encompassing

overseas and interstate migration as well as fertility), labour market participation and productivity

growth. These form the core ‘Three Ps’ framework and are the key input components for the LTFPM.

Combined they yield sufficient information to facilitate the projection of long run economic growth.

In addition to these, Treasury has also conducted research into some of the most critical factors likely

to impact the State’s long-term fiscal and economic position. Topics covered in these papers include

long-term health expenses, the housing market under COVID and secular stagnation, as well as initial

assessments of a selection of physical and transitional climate risks.

There is overlap between these research topics: specifically, there are factors associated with climate

change that impact economic growth, primarily through impacts on productivity. However, as noted in

the NSW Treasury research paper Projecting Long Run Productivity Growth Rates for the 2021

Intergenerational Report,38 productivity growth depends on a range of factors, including the pace and

scope of economic reforms, technological development, the industry structure of the economy,

demographics, the distribution of income and wealth and geopolitical concerns. It is feasible that

36 NSW Treasury, ‘The Sensitivity of the NSW Economic and Fiscal Outlook to Global Coal Demand and the Broader Energy

Transition for the 2021 NSW Intergenerational Report’. 37 More details of this are in the technical appendix. 38 NSW Treasury, ‘Projecting Long Run Productivity Growth Rates for the 2021 Intergenerational Report’.

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detailed research into each of these would yield conclusions regarding their impact (positive or

negative) on productivity growth. Indeed, the productivity paper endeavours to weigh these factors

and concludes that on balance risks tend toward on the downside. Ultimately, however, the NSW

Treasury productivity technical paper decides against using a ‘building block’ approach, and instead

project productivity growth to eventually return to a long-run historical average, which yields 1.3 per

cent annual productivity growth.39

This approach to projecting productivity growth is relevant for setting the key assumptions underlying

climate scenarios in this paper. Common practice in previous research has been to assume a

baseline ‘no climate change’ scenario, then impose shocks to derive a ‘climate change’ scenario, in

which economic growth, and hence implicitly productivity growth, is lower. This approach is not,

however, consistent with the method used to project underlying productivity growth outlined in the

productivity technical paper. Given the preferred method based on an historical average, rather than

taking a ‘building block’ approach that looks at the component drivers of productivity, it is not

methodologically possible to make modifications to a specific component, such as climate change, let

alone the limited range of physical climate risks assessed in this paper.

It should be noted that the purpose of this research paper is not to project long run economic growth.

Rather, it is to set out an approach that can be used to assess areas of climate risk and utilise this to

assess an initial set of risks, including the degree to which these vary under different global climate

scenarios. For these reasons, the approach developed in this paper operates within the baseline

‘Three Ps’ assumptions adopted elsewhere in Treasury research, incorporating each of these into the

reference case.

Accordingly, the estimates presented in this paper should be interpreted as the sensitivity of the

economic and fiscal outlook to differences in the climate scenario. They are generally applicable to

alternative estimates of long run economic growth. For example, an alternative estimate as to the

productivity outlook for the central case of RCP4.5 may not assume that productivity growth continues

on its 30-year historical trend, but may instead use a lower assumption based on the potential impacts

of climate change under any warming scenario compared with the 30-year historical trend.

A further constraint is that ultimately the IGR is required to provide a single projection of the fiscal

gap. This presents a challenge for estimating climate risks because the global emissions trajectory is

highly dependent on global policy decisions and technological development in the decades to come.

This is why the IPCC sets out a range of scenarios (RCPs), without specifying any one scenario as

the ‘most likely’ outcome.

The three climate scenarios considered in the modelling are:

• a ‘lower warming’ scenario, reflecting climate impacts consistent with RCP2.6

• an ‘intermediate’ scenario, reflecting climate impacts consistent with RCP4.5

The intermediate scenario will act as the reference case for the CGE model and will adopt the ‘Three

Ps’ assumptions outlined in separate Treasury research papers. This is a technical assumption and

does not imply that Treasury has formed a view as to which RCP is more likely: it has not. This, as

well as the inclusion of only a limited range of climate risks, means the findings are not directly

39 This is lower than the 1.5 per cent assumed in the 2016 IGR reflecting weaker productivity growth in recent years.

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comparable to previous analyses, such as those by Deloitte and the Garnaut Review, which have

aimed at putting a ‘cost’ on climate change and have assessed a broader range of risks. The benefit

of the approach outlined here is that the spread between the higher and lower warming scenarios will

be broadly representative of the sensitivity of economic and fiscal outcomes with respect to different

emissions trajectories. The modelling results presented in this paper also limit the scope of this

climate sensitivity to the initial set of climate risks included in the modelling.

NSW Policy Settings, GHG Emissions and Climate Outcomes

This paper focuses on a range of key physical risks associated with climate change, with the implicit

assumption that these occur outside the control of the NSW Government. To a large degree this is

true: New South Wales is responsible for less than 0.4% of global emissions,40 hence even if

emissions were cut to zero tomorrow in New South Wales, in lieu of changes in other jurisdictions the

impact on global climate outcomes would be minimal.

The NSW Government, however, aims to achieve net zero emissions by 2050, along with every other

Australian State and Territory, and a growing list of other countries. Achieving this target will likely

entail significant changes in the production model of many industries, as well as the overall structure

of the economy itself. These changes are likely to be driven by technological development as well as

local and global policy settings. Therefore, even with the IGR’s underlying assumption of ‘no policy

change’ a range of climate scenarios are well within scope.

A separate research paper, also being developed for the IGR, will assess the potential economic and

fiscal impact of the pace of transition in the NSW energy sector.41 Modelling physical risks and

transition risks separately provides more granular information on to the impact of specific elements on

the economy and budget and provides more flexibility in how these findings can be used for policy

making. Analysis incorporating the findings of both papers, as well as other research units, will be

brought together in the IGR itself.

40 Treasury calculation based on information contained in NSW Department of Planning, Industry and Environment, ‘Net Zero

Plan. Stage 1: 2020-2030’. 41 NSW Treasury, ‘The Sensitivity of the NSW Economic and Fiscal Outlook to Global Coal Demand and the Broader Energy Transition for the 2021 NSW Intergenerational Report’.

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5. Projected impacts of key areas of climate risk: natural disasters, sea level rise, heatwaves and climatic effects on agricultural production

Shock Selection

The potential range of climate-related economic shocks (both acute and chronic) is vast and

encompasses minor impacts on specific sectors as well potentially catastrophic tipping-point events.

The intention of this assessment is not to model a full range of shocks – this would be impractical due

primarily to uncertainty regarding their scale and timing. The IGR’s forty-year projection timeframe

further limits the potential scope of the analysis. The modelling is instead focused on piloting an

approach to climate risk assessment and demonstrating the usefulness of this approach by deploying

it for an initial set of shocks. Shock selection is based on:

The second of these criteria requires some further elaboration. There are layers of uncertainty with

regards to how changes in the global climate will impact regional economic and fiscal conditions in

New South Wales. For a given global climate scenario, different climate models can sometimes

provide conflicting projections of how regional and local climates will be impacted. This uncertainty is

heightened for acute climate impacts such as natural disasters which occur due to the complex

interaction of a series of factors. Even if climate and weather conditions were known, there is then

further uncertainty regarding their potential economic and fiscal impacts. The shocks selected for

inclusion in this paper are those which data is relatively reliable regarding both the likely regional

climate impacts, as well their likely economic or fiscal costs. Even with this more limited set of shocks,

there remains considerable complexity which has not been modelled, hence the projections should be

considered indicative only.

This approach ensures the modelling will provide meaningful information about how and why the

selected areas of climate risk are likely to impact New South Wales’ long-term fiscal position. It also

provides an indication of the scale of impact of these areas of risk against specific revenue or

expenditure lines, as well as for the economy overall. By focusing only on a subset of specific and

measurable risks, this analysis does not provide an estimate of the total economic and fiscal impacts

of climate change. Even with future extensions of this modelling to include a broader range of risks,

any assessment will inevitably be only partial. As noted by the IPCC, this is essentially unavoidable.42

Using the above criteria, the key shocks to be applied to the model are:

1. some of the fiscal costs and direct economic damages of natural disasters

2. property and land damages from sea level rise

3. the impact of heatwaves on workplace productivity

4. the effects of climate on agricultural production.

42 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report.

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A final note of caution: it is not possible to definitively model how future changes in the climate will be

realised on a global or regional level. Climate models often provide differing projections even given

the same input data. Ideally projections would be based on the output of multiple models, however

this has not been possible for some of the estimates outlined below. The estimated shocks are

therefore indicative only. Further information on the modelling approach is available in the technical

Increase in frequency, intensity and duration of a range of natural disasters

The frequency, intensity and duration of a range of natural disasters is projected to increase in the

future, including the those with, historically, the costliest impacts on New South Wales: bushfires,

flooding, and storms.43 The bushfire season is projected to lengthen and there are expected to be

more days of extreme fire danger.44 Rainfall patterns are expected to change, with effects including

more intense extreme rainfall events,45 and tropical cyclones are projected to continue to track further

south from Queensland.46 This section outlines how climate change is projected to impact the

economic and fiscal costs of natural disasters in New South Wales over the next forty years.

Economic and Fiscal Impact

Natural disasters can have very significant economic, fiscal and social impacts – the 2019-20 bushfire

season is a high-profile recent example. For communities, livelihoods can be disrupted through

damage to homes and other property, disruption to communities, services and businesses, impacts

on physical and mental health, and in some instances, fatalities.47 These economic, social and fiscal

costs can be significant in aggregate, with some impacts still felt months and years after the disaster

event itself.

Governments have a range of responsibilities relating to natural disasters including in coordinating

and delivering the emergency response, providing individuals and businesses with financial and other

assistance, ensuring continuity of service delivery and funding and coordinating the clean-up and

recovery, including restoration of damaged infrastructure and public lands.48 The NSW Government

provides ongoing funding to emergency response agencies including the Rural Fire Service (RFS)

and the State Emergency Service (SES). Jointly with the Commonwealth, it also provides additional

‘surge’ funding to declared natural disasters through the Disaster Recovery Funding Arrangements

From the NSW Government’s perspective there is also some policy risk, with a range of reviews at the

Commonwealth level proposing changes to funding arrangements, which could have significant

43 Insurance Council of Australia, ‘Catastrophe Data’. 44 CSIRO, ‘The 2019-20 Bushfires’. 45 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 46 Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’. 47 UN Office on Disaster Risk Reduction, ‘“Staggering” Rise in Climate Emergencies in Last 20 Years, New Disaster Research Shows’. 48 Australian Government Department of Home Affairs, ‘Disaster Recovery Funding Arrangements 2018’. 49 These replaced the Natural Disaster Relief and Recovery Arrangements (NDRRA) from October 2018 and are referred to interchangeably throughout this paper. Cost sharing arrangements are set out in Australian Government Department of Home Affairs.

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implications for the NSW budget.50 Modelling the economic and fiscal costs associated with natural

disasters will assist in quantifying the potential scale of these risks.

Projecting Natural Disaster Costs

The process for projecting future natural disaster costs involves:

1. specifying which costs are within scope

2. estimating the current expected level of these costs

3. projecting expected costs in the absence of climate change

4. estimating additional costs arising from increased climate risks.

Costs within scope

This analysis focuses on three measures of the costs of natural disasters:

a. direct economic costs as measured through the value of insurance losses

b. direct fiscal costs as measured through annual NSW Government DRA returns

c. overall economic costs, incorporating direct, indirect and intangible costs.

The choice of which items to include when accounting for the costs of natural disasters depends on

both the purpose of the analysis and data availability. Analyses of total economic welfare, such as

that undertaken by Deloitte in The costs of disasters in our States and Territories,51 cover a broad

range of costs. These include both conventional economic measures such as direct and indirect

economic costs, and intangible factors such as physical and mental health, statistical measures of the

value of human life, and other non-market factors such as wilderness and biodiversity loss. Including

these factors is appropriate – even desirable – when considering total economic and social welfare

withing frameworks such as cost benefit analysis.

The IGR is focused on conventional economic indicators such as Gross State Product and

components thereof, and other factors impacting NSW Government revenue and expenditure. This

means intangible costs are outside the scope of estimates relating to the Fiscal Gap. Therefore, the

core modelling will utilise only estimates direct economic and fiscal costs. However, estimates of the

total economic cost of natural disasters will also be presented in this paper, to assist in better

understanding the overall impact of natural disasters on economic welfare, as well as the overall

impact of changes in climate risk.

Box 1 describes some of the key indirect and intangible costs which are not included in estimates of

direct economic or fiscal costs but are included in estimates of total economic costs.

50 Royal Commission into National Natural Disaster Arrangements, ‘Royal Commiss ion into National Natural Disaster Arrangements Report’; Productivity Commission, ‘Natural Disaster Funding Arrangements, Inquiry Report Volume 1’. 51 Deloitte Access Economics, ‘Building Resilience in Our States and Territories’.

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Box 1: Indirect and Intangible Costs of Natural Disasters

Mortality, Physical and Mental Health

Natural disasters can cause significant physical and mental health impacts. Between 1967 and

2020 natural disasters in Australia are estimated to have directly caused more than 1,400 deaths

and over 7,000 injuries.52 A recent study estimated health costs associated with bushfire smoke

amounted to $1.9 billion in 2019-20 including $1.1 billion in New South Wales.53 98.7 per cent of

these costs in 2019-2054 relate to the intangible costs of 429 premature deaths, with the remaining

1.3 per cent relating to the costs of hospital admissions and attendances at Emergency

Departments.

Natural disasters can also have severe impacts on the mental health of those living in impacted

communities,55 with significant numbers experiencing mental health problems in the months or

even years following the initial event.56 This can have far reaching and long lasting damage on

communities, with some research indicating that anxiety can persist throughout the lifetimes of

children exposed to natural disasters.57

Aboriginal cultural heritage

Destruction from natural disasters goes beyond just physical damage and can permanently impact

Aboriginal cultural heritage. For example, the 2019-20 bushfires potentially impacted thousands of

significant cultural sites representing tens of thousands of years’ history. Sites at risk include trees

that have been modified for cultural use, rock art and engravings, stone-tool sites and grinding

Biodiversity and wilderness loss

Natural disasters can impact the natural environment in ways that have little if any impact on

conventional economic indicators. For example, the 2019-20 bushfires are estimated to have

burned 5.4 million hectares across New South Wales, representing 37 per cent of all NSW national

park estate and 42 per cent of NSW state forest. 25 per cent of suitable Koala habitat was burned;

293 threatened animal species have been sighted in areas burned by fire, as have 680 threatened

plant species. Since 2013 fires have resulted in a 39 per cent reduction in the ecological carrying

capacity in the fire ground.59

Disruption to businesses and tourism

Natural disasters can cause significant economic disruption to businesses in impacted

communities. Even where businesses are not directly impacted, natural disasters can upend

communities in ways that make it difficult or even impossible for businesses to operate. The

2019-20 bushfire season severely impacted tourism in fire-hit communities. For the hard-hit NSW

52 ‘EM-DAT Database’. 53 Johnston et al., ‘Unprecedented Health Costs of Smoke-Related PM 2.5 from the 2019–20 Australian Megafires’. 54 At a national level – the specific breakdown was not provided at a state level. 55 Ingle and Mikulewicz, ‘Mental Health and Climate Change’; Cianconi, Betrò, and Janiri, ‘The Impact of Climate Change on

Mental Health’. 56 Bryant et al., ‘Psychological Outcomes Following the Victorian Black Saturday Bushfires’. 57 McFarlane and Hooff, ‘Impact of Childhood Exposure to a Natural Disaster on Adult Mental Health’. 58 Pickrell, ‘Thousands of Ancient Aboriginal Sites Probably Damaged in Australian Fires’. 59NSW Department of Planning, Industry and Environment, ‘NSW Fire and the Environment 2019-20 Summary: Biodiversity and Landscape Data and Analyses to Understand the Effects of the Fire Events.’

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South Coast, tourism constitutes 11 per cent of the local economy.60 Furthermore the scale of this

event, and extent of global media coverage, could cause long-lasting reputational damage to New

South Wales and Australia in international tourist markets.61 Data limitations constrain the reliable

estimation of the indirect economic costs of natural disasters for businesses and tourism,

particularly given the need to account for displacement of economic activity.62

Chronic climate risks and compounding impacts

The impacts of natural disasters can be exacerbated through compound impacts of chronic climate

risks, or the incidence of multiple natural disasters in relatively quick succession. Research outlined

in the IAG report Severe Weather in a Changing Climate – 2nd Edition, indicates that the

coincidence of multiple natural disasters can increase the severity of impact of natural disasters, by

more than the sum of individual impacts.63 A cascading series of events can exacerbate mental

health impacts, and complicate recovery efforts. The South Coast was subject to a series of natural

disasters through 2019-20, including drought, catastrophic bushfires, flooding and COVID-19.

There is also some emerging evidence that climate change could increase the likelihood of multiple

interconnected events occurring in close proximity.64

Expected vs actual natural disaster costs

Before setting out the projection method, it is important to delineate between expected costs and

actual costs. Expected costs are essentially a mid-point estimate of the total cost of natural disasters

in any given year. The actual incidence of natural disasters is extremely volatile. Actual costs in any

given year are therefore likely to vary, at times highly significantly, from expected costs. For example,

in 2019-20 actual direct economic costs have been estimated at $4.4 billion and direct fiscal costs are

estimated at $1.1 billion, far above the expected levels based on long-term averages. Chart 4

compares expected natural disaster costs with actual natural disaster costs in each year.

60 Including both direct and indirect contribution ‘Regional Tourism Satellite Accounts | Tourism Research Australia’. 61 Judd, ‘“The World Is Utterly Perplexed”: As Australia Burns, Is Our Reputation at Risk?’; Duran, ‘“They Told People Not to Come”’. 62 In general, disruption to businesses, including tourism businesses, other than direct clean-up costs, are excluded from

analyses of the total costs of disasters. 63 Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’, 94–95. 64 Bruyere et al., 96.

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Chart 4 Actual vs Expected NSW Direct Economic Natural Disaster Costs

Source: NSW Treasury

Historically, a small number of events account for the vast bulk of costs: the top five most expensive

events in terms of normalised insured losses accounted for 44 per cent of the NSW total between

1967 and 2020, with 118 other events accounting for the remaining 56 per cent. It is not possible to

predict this random component of natural disasters, hence projecting expected costs provides an

indication of the relative economic significance of natural disasters only over the medium to long-term,

rather than a near-term forecast window. This is reflected in the high degree of variance between

expected and actual economic costs in any given year.

Current expected natural disaster costs

Current expected natural disasters costs are assumed to be an average of historical natural disaster

costs, adjusted to account for growth in the economy and population. The scope for any given natural

disaster to cause economic damage is ultimately related to the size of the economy itself. Adjusting

for this, known as ‘normalisation’, is a process commonly used by insurers and others conducting

major assessments of the costs of natural disasters65 to facilitate comparisons over time. Total

economic costs are estimated by assuming they are proportionate to recorded insurance losses. The

technical appendix includes further details of how expected annual natural disaster costs have been

calculated.

Using this method, expected natural disaster costs in 2020-21 are estimated to be $5.1 billion in total

economic costs, including $870 million in direct economic costs. Expected direct fiscal costs under the

are estimated at $200 million.66 Chart 5 provides a breakdown of how this was allocated across the

main natural disaster types: bushfires, floods and storms, and other which primarily incorporates

65 Productivity Commission, ‘Natural Disaster Funding Arrangements, Inquiry Report Volume 1’; Deloitte Access Economics,

‘Building Resilience in Our States and Territories’. 66 Figures are rounded. Note this measure of fiscal costs is limited to only that recorded through Disaster Recovery Arrangements returns and is shared with the Commonwealth. This is only a portion of total disaster costs – for example the

2020-21 NSW Budget outlines that $4.4 billion was spent in relation to the 2019-20 bushfires, only $1.1 billion of which is recorded in DRA returns. These additional costs are not within the scope of this initial assessment due to limited availability of consistent data, but would be an obvious candidate for future extensions of this work.

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earthquakes. Around half of total economic costs related to floods, and another third related to storms

(which incorporates hail and thunderstorms, east coast lows, tropical cyclones and other severe

weather). By comparison, bushfire activity contributed relatively little to expected total economic

damage. Around half of expected fiscal costs were associated with floods, which can cause extensive

damage to infrastructure such as roads, with the remainder split relatively evenly between bushfires

and storms.

Chart 5 Expected cost of natural disasters in NSW 2020-21

Source: NSW Treasury estimates. Figures are rounded.

Projected Natural Disaster Costs

Projecting the future costs of natural disasters must account both for economic and population

growth, which increases the potential damage that can be inflicted by natural disasters, and any

increase in the risk of natural disasters that are generally attributable to climate change. In line with

previous assessments,67 the first component is assumed to be proxied by growth in Gross State

Product. Estimating how changes in the climate will affect the risk of specific natural hazards is based

on modelling conducted by XDI Pty Ltd,68 and informed by additional quantitative and qualitative

evidence. Note it is assumed climate change will not change the risk of the ‘other’ category which

primarily comprises earthquakes. Further details of the projection method are included in the technical

Under the reference case, by 2061 the risk of bushfires is projected to increase by 17 per cent, flood

risk is projected to increase by 6 per cent by 2061 and the risk of storm damage is projected to

increase by 3 per cent compared with current conditions. As expected, bushfire and flood risks

increase with higher warming.

67 Productivity Commission, ‘Natural Disaster Funding Arrangements, Inquiry Report Volume 1’. 68 XDI have expertise in modelling climate risks. Their services have been used by multiple governments in Australia and their modelling underpins other major climate research including Deloitte’s recent assessment of climate risks.

Total EconomicCosts (LHS)

Direct EconomicCosts (RHS)

Direct FiscalCosts (RHS)

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Table 1 Change in natural disaster risks between 2020 and 2061

Disaster Type Change in Risk by 2061

Lower Warming

Reference Case

Higher Warming

Bushfires +2% +17% +24%

Floods - +6% +12%

Storms +2% +3% +5%

Other - - -

Source: NSW Treasury estimates. Figures have been rounded.

A caution in interpreting these projections: ultimately natural disasters occur due to the complex

interaction of an array of factors. While modelling has accounted for some of these, it is not possible

to account for all of them, and there will always be significant uncertainty in those that have been

modelled. Hence the estimates presented are indicative only. The approach is intentionally

conservative with qualitative evidence suggesting risk factors may increase by more than those

estimated for this assessment.

Combining both the socio-economic and climate risk projections, total natural disaster costs under

each climate scenario are set out in Table 2. By 2061 the annual expected total economic cost of

natural disasters is projected to be between $15.8 billion and $17.2 billion per year by 2061 (real

2019-20 dollars), depending on the climate scenario. This includes direct economic costs of between

$2.7 billion and $2.9 billion per year. Expected direct fiscal costs under the DRA are projected to be

between $630 million and $700 million per year. Growth in costs is primarily driven by socio-economic

factors, although differences in the climate scenario account for variance of up to $1.3 billion in total

economic costs per year (calculated as the difference between the higher and lower warming

scenarios).

As noted earlier, the actual annual cost of natural disasters will reflect great variability. As an

illustrative example, if the volatility of the past 10 years was repeated in the 2050s, actual annual total

economic costs by 2061 would range from $30 million to $75 billion under the reference case of

intermediate warming, the latter of which would be equivalent to 6 per cent of Gross State Product.

Annual direct fiscal costs under the DRA would range from $210 million to $4 billion.

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Table 2 Expected Annual Natural Disaster Costs by 2060-61 (real 2019-20 dollars)

Total Economic

Direct Fiscal

Costs under

Annual Growth

Fiscal Costs70

2020-21 $5.1b $870m $200m

Warming $15.8b $2.7b $630m 5.3%

Case $16.5b $2.8b $670m 5.5%

Warming $17.2b $2.9b $700m 5.6%

Source: NSW Treasury. Total economic costs are not included in CGE modelling.

Rising sea levels

Sea levels are rising through thermal expansion of the oceans and the melting of ice sheets. Since

the late 19th century average global sea levels have risen 25cm,71 with half this occurring since 1970.

Furthermore the rate of sea level rise off the southeast of Australia has been significantly higher than

the global average.72 Over the coming decades sea levels on the NSW coast are projected to rise

further, with the central estimate under the reference case (RCP4.5) being a 23cm additional rise by

2061 compared with 2020 levels.73 Furthermore a significant portion of this is already locked in, with

sea level rise projected to continue for centuries or even millennia, even under the lowest emissions

scenarios.74

Sea level rise poses increased risk to NSW communities by exacerbating coastal erosion resulting in

coastal recession (i.e. where beaches are eroded resulting in property damage and in loss of land),

and inundation (where regular tidal or storm-surge related water levels rise,75 inundating properties

surrounding rivers, harbours, lagoons and other estuaries, as well as on the coast itself).76

Coastal erosion has attracted significant public interest in recent years, with notable events at

Wamberal beach on the Central Coast, Main Beach in Byron Bay and at Narrabeen and Collaroy in

Sydney. It can cause significant damage to properties and infrastructure, as well as loss of beach

amenity. Some erosion events are associated with coastal storms, while on some coasts, cumulative

69 Includes the value of insurance claims plus an additional 20 per cent for uninsured property loss. Further details in the technical appendix. 70 Growth in sum of fiscal and private costs 71 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 72 CSIRO and Bureau of Meteorology, 13. 73 Glamore et al., ‘Sea Level Rise Science and Synthesis for NSW’. 74 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report. 75 Note this section models storm surge damage arising from rising sea levels. This is different to the section on natural disasters which considers changes in the risk of storms forming themselves. The modelling approach is calibrated to preclude

double counting. 76 ‘Coasts and Sea Level Rise’; Hague et al., ‘Sea Level Rise Driving Increasingly Predictable Coastal Inundation in Sydney, Australia’.

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erosion, or shoreline recession, can occur due to an imbalance in coastal sediment transportation

systems. Rising sea levels are expected to contribute to additional erosion over coming decades.77

Sea level rise will also increase the number of properties that may become inundated at high tide

levels. Sea levels are variable and impacted by “regular and irregular processes associated with

astronomical bodies, ocean waves, oceanic currents, meteorological factors and geological

phenomena.”78 An increase in average sea levels due to climate change will increase the number of

properties exposed to inundation during high tides and increase the frequency of that inundation.

Economic costs associated with sea level rise generally relate to damage to properties and

infrastructure, as well as the loss of land through inundation and coastal recession. The NSW

Government’s framework on coastal management79 gives local governments primary responsibility in

managing the key risks associated with sea level rise, therefore for the purposes of the IGR’s ‘no

policy change’ assumption, fiscal costs would generally be assumed to be limited to damages and

additional maintenance to existing infrastructure and potentially additional build costs for new

infrastructure.

Both state and local governments, however, may consider the merits of a range of policy interventions

if the projections outlined in this assessment are realised. Options include those aimed at protecting

existing developments including sea walls, beach nourishment, house and infrastructure raising and

tidal gauges on storm water, and those aimed at limiting unnecessary growth in exposure to sea level

rise – generally regulatory interventions in the planning system. These all carry the potential for fiscal

Projecting the costs of Sea Level Rise

The costs of sea level rise that have been modelled are limited to direct economic costs arising from

the following two components:

a. structural damage to properties exposed to inundation or coastal erosion

b. land loss arising from inundation and coastal recession.

The number of addresses impacted by each type of risk is sourced from exposure assessments

conducted by the (then) NSW Office of Environment and Heritage.80 Additional adjustments were then

made to the estimates to align with the forecast period and climate scenarios, with an overriding

assumption that future development follows current development patterns. Damages are estimated as

proportions of total structure and land value. Full details of the modelling approach are outlined in the

technical appendix.

A limitation in this approach is its restriction to property damage. Sea level rise is also expected to be

associated with a range of additional costs, including impacts on ecological services such as coastal

wetlands and fisheries, and coastal infrastructure, for example ports and roadways. Modelling of the

77 Office of Environment and Heritage, ‘Coastal Erosion in New South Wales Statewide Exposure Assessment Report’. 78 Glamore et al., ‘Sea Level Rise Science and Synthesis for NSW’, 4. 79 NSW Office of Environment and Heritage, ‘Our Future on the Coast: An Overview of Coastal Management in NSW’. 80 Office of Environment and Heritage, ‘Coastal Erosion in New South Wales Statewide Exposure Assessment Report’;

Hanslow et al., ‘A Regional Scale Approach to Assessing Current and Potential Future Exposure to Tidal Inundation in Different Types of Estuaries’; Kinsela et al., ‘Second-Pass Assessment of Potential Exposure to Shoreline Change in New South Wales, Australia, Using a Sediment Compartments Framework’.

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potential costs of these additional areas is not available for this assessment but is an obvious

candidate for any future extension of this work.

The key projections are outlined in Table 3. By 2061, between 35,000 and 40,000 properties are

estimated to be exposed to inundation and a further 5,000 to 6,000 are estimated to be exposed to

coastal erosion. Total direct annual economic costs are estimated at between $850 million and $1.3

billion per annum (in 2019-20 dollars), the bulk of which relates to the loss of land through inundation

and coastal recession.

Sea level rise is also projected to continue well beyond 2061, with the rate of increase in the second

half of the century being similar to that outlined in the table below under the reference case and lower

warming scenarios, but nearly double under the higher warming scenario. Although the impact of this

has not been modelled as part of this assessment, costs will generally increase with sea level rise and

therefore are virtually certain to grow beyond 2061.81

Table 3 Projected Annual Sea Level Rise Costs by 2061 (real 2019-20 dollars):

(2020-61)82

Properties83

(RCP2.6) $280m $580m 20cm 39,000

(RCP4.5) $310m $660m 23cm 41,000

(RCP8.5 $410m $910m 30cm 46,000

Note that shocks are applied to the CGE model as proportions of factors of production. Dollar amounts reported here are preliminary and illustrative only. Sea Level Rise will result in costs additional to those listed in this table.

Frequency, duration and intensity of heatwaves

The frequency, duration and intensity of heatwaves are all expected to increase over the next 40

years (see Chart 6). Since 1911 there has been a substantial increase in the frequency and duration

of heatwaves across most of New South Wales, with some regions experiencing up to 18 additional

heatwave days per year compared to the early 20th century.84 As global temperatures increase, these

trends are expected to continue, with the frequency and duration of heatwaves projected to increase,

and their peak temperatures expected to be higher.

81 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report. 82 Estimated additional sea level rise along the NSW coast by 2061 compared to 2020. Note global sea levels in 2020 have

already increased by around 25cm since 1880. 83 Note the number of exposed properties is not the same as the number of impacted properties in any given year. 84 NSW Office of Environment and Heritage, ‘Heatwaves Climate Change Impact Snapshot’.

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Chart 6 Historical frequency of heatwaves in Australia

Source: Bureau of Meteorology State of the Climate 2020. Number of days each year where the Australian area-

averaged daily mean temperature for each month is extreme. Extreme daily mean temperatures are the warmest 1 per

cent of days for each month, calculcated for the period 1910 to 2019.

Heatwaves can have a range of economic and fiscal impacts. Days of extreme heat can reduce

workplace productivity, particularly for outdoor workplaces that require physical activity. 85 Heatwaves

can also cause significant health issues and have been linked with more deaths than any other

natural disaster in Australia. Beyond physiological impacts on humans, heatwaves can also inflict

damage on infrastructure, for example by overheating electricity substations, and can disrupt service

delivery.86 All of these have the potential to impact the NSW fiscal position. Direct fiscal impacts

include additional infrastructure costs through higher maintenance and repairs, building infrastructure

to higher specifications, and costs relating to service delivery. Increased hospital admissions also add

upward pressure to healthcare expenditure. Indirectly, economic impacts reduce the overall size of

the economy, with flow on effects for government revenues.

Projecting the costs of heatwaves on workplace productivity

The economic impact of heatwaves is modelled in this assessment as lost productivity in selected

industries arising from additional days of extreme heat. In line with the approach taken in the Garnaut

Review, impacts are limited to four key industries where a significant proportion of work is conducted

outdoors: agriculture, construction, manufacturing and mining. Also in line with the approach taken in

the Garnaut Review, moderate productivity loss is assumed to occur where maximum daytime

temperatures exceed 32°C, with higher productivity loss on days where maximum temperatures

exceed 35°C. Temperature projections for each region of New South Wales are matched with ABS

85 NSW Office of Environment and Heritage; Handmer, Ladds, and Magee, ‘Updating the Costs of Disasters in Australia’; Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report; Deloitte Access Economics, ‘Building Resilience in Our States and Territories’; Steffen, Hughes, and Perkins, Heatwaves; Bi et al., ‘The Effects of Extreme

Heat on Human Mortality and Morbidity in Australia’. 86 National Climate Change Adaptation Research Facility (NCCARF), ‘Impacts and Adaptation Response of Infrastructure and Communities to Heatwaves: The Southern Australian Experience of 2009’.

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labour force data to determine the proportions of each industry that will be exposed to extreme heat.

Full details of the modelling approach are in the technical appendix.

Projected workplace productivity loss from the four industries modelled is set out in Table 4. By 2061

additional working days lost to heatwaves is estimated at between 700,000 and 2.7 million per year,

depending on the climate scenario. The highest impacts are on construction, mainly due to the high

proportion of the workforce working outdoors. Agricultural productivity is also significantly affected

across all climate scenarios, with more of this industry being in regions expected to experience a

significant increase in days of extreme heat. For all industries, the impacts under the higher warming

scenario are approximately double those of the reference case. A further increase in the number of

days of extreme heat and increasing divergence across climate scenarios are projected beyond 2061.

Table 4 Working days lost per year due to heatwaves by 2061

Agriculture Construction Manufacturing Mining

(RCP2.6) 100,000 520,000 100,000 4,000

(RCP4.5) 200,000 1,030,000 190,000 8,000

(RCP8.5) 380,000 1,940,000 360,000 15,000

Measured as the increase in days lost compared to current climatic conditions.

Note that a range of additional costs associated with heatwaves are not within the scope of this

modelling. This includes impacts on human health and mortality87 and on infrastructure construction

and maintenance costs, as well as costs associated with infrastructure failure. Heatwaves also have

potential to impact workplace productivity beyond those effects modelled for this analysis, including

through impacts on additional industries and additional impacts from a reduction in cool nights, which

can impact recovery and recuperation. These areas likely represent higher priority areas for future

extensions of this research.

Agriculture

The other shocks included in this modelling have been related to specific climatic events. This fourth

shock is instead focused on the aggregate impact of a range of climatic changes on a specific sector.

This is separate and in addition to the workplace productivity shock of heatwaves relating to

agriculture estimated in the previous section.

Crop output and quality

Crops are generally suited to a particular range of climatic conditions. Crop output and quality depend

on factors including the range of temperature, timing and intensity of rainfall, water run-off, the

concentration of carbon dioxide in the atmosphere, and soil properties including acidity, carbon and

87 Bi et al., ‘The Effects of Extreme Heat on Human Mortality and Morbidity in Australia’; Bambrick et al., ‘The Impacts of Climate Change on Three Health Outcomes’; Coates et al., ‘Exploring 167 Years of Vulnerability’; Longden, ‘The Impact of Temperature on Mortality across Different Climate Zones’.

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nutrient content, salinisation and erosion.88 Climate change has the potential to impact all of these

factors, with these impacts being highly location-specific.

In New South Wales, climate change is expected to reduce the availability of water in the

Murray-Darling Basin region, impacting not only agricultural outputs but also posing challenges and

risks to the livelihoods of communities in the region.89

The agricultural sector, including forestry and fishing, accounted for 1.3 per cent of NSW Gross State

Product in 2019-20. However, the industry is highly trade-exposed. It accounts for 10 per cent of total

NSW exports, which can amplify its impact on the overall economy. Agricultural output is also the

most volatile sector in the economy90 and can be highly impacted by both chronic and acute climate

change impacts including droughts and natural disasters. The impact of climate change on

agricultural production could therefore impact both overall economic output as well as contribute to

additional volatility.

Fiscal risks associated with the agricultural sector are generally concentrated in the role governments

play to mitigate some of this volatility, including through the provision of drought and natural disaster

relief assistance payments to primary producers. Additional risks lie in the provision of water

infrastructure and management responsibilities under the Murray-Darling Basin Plan and water

management legislation.

Projecting the costs of changed agricultural production

The impact of climate change on the agricultural sector is modelled as the expected change in

agricultural output across five subsectors: crops, dairy cattle, beef cattle, sheep and other agriculture

(which includes horticulture). The modelling was conducted by the CSIRO for NSW Treasury utilising

their Land Use Trade Offs (LUTO) model,91 which was used for the Australian National Outlook

reports in 2015 and 2019.

The model can be used to estimate agricultural output given a range of factors including rainfall,

temperature and productivity assumptions. These settings were calibrated to reflect the three climate

scenarios. Further details of the modelling are set out in the technical appendix. As with other shocks

included in this assessment, this is a partial assessment and does not account for a range of potential

additional costs associated with the agricultural sector. In particular, the potential acute impacts of

drought on the sector and regional economies more broadly have not been modelled but present a

clear opportunity for further research.

88 ‘Projected Impacts of Climate Changes on Agriculture | NSW Department of Primary Industries’. 89 Pearce et al., Climate Change in Australia. 90 Measured as variance in annual agricultural output from ABS 5220. 91The LUTO model is described in detail in Bryan, B., Nolan, M., McKellar, L., Connor, J.D., Newth, D., Harwood, T., King, D.,

Navaroo, J., Cai, Y., Gao, L. Grundy, M., Graham, P., Ernst, A., Dunstall, S., Stock, F., Brinsmead, T., Harman, I., Grigg, N., Battaglia, M., Keating, B., Wonhas, A. and Hatfield-Dodds, S. ‘Land-Use and Sustainability under Intersecting Global Change and Domestic Policy Scenarios’.

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Chart 7 Makeup of NSW agricultural sector output 2019-20

Source: NSW Treasury calculations from LUTO and NSW Department of Primary Industries

The projections are set out in Table 5 below. Chart 7 provides some additional context for the size of

each subsector in 2019-20. The reduction in crop production, a subsector that includes wheat and

cotton, is projected to have the most significant economic impact, with this subsector constituting a

significant proportion of overall agricultural output, and also experiencing climate impacts nearly twice

those of other subsectors. Significant impacts are also expected in all other subsectors.

Table 5 Projected Changes in Agricultural Output Due to Climate Change 2061

Subsector Lower Warming

Crops -6% -9% -11%

Beef Cattle -3% -5% -6%

Sheep -2% -4% -6%

Dairy -3% -5% -6%

Other Agriculture -0% -1% -1%

Translating this into dollar values, the annual value of lost production in agriculture is estimated at

between $750 million and $1.5 billion (real 2019-20 dollars), depending on the climate scenario. Note

that this estimate does not account for changes in the operation or structure of the economy or the

agricultural sector – the overall economic impact of all shocks is more comprehensively measured

using the CGE modelling.

Opportunities to extend this approach to climate risk assessment

As noted in the introduction, this research paper is aimed at setting out an approach to climate risk

assessment and demonstrating this by assessing several key areas of risk. This approach could be

extended in future research to incorporate a broader range of climate risks. Some of the higher

priority areas for extending this approach are outlined below. This should not be considered an

exhaustive list.

Water resources and drought

Climate change is expected to lead to a reduction in winter rainfalls across much of New South

Wales, and an increase in summer rainfalls across parts of New South Wales, with many regions

shifting from winter- to summer-dominated rainfall patterns. The aggregate impact is a shift toward

drier overall conditions. These changes have already been observed: the BOM recently reported on

key trends in Australia’s climate including a 12 per cent decline in April-October rainfall in South

Beef Cattle17%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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Eastern Australia since the late 1990s.92 Streamflows across major catchments have also declined,

including in the Murray-Darling Basin as well as the NSW South East Coast drainage division.93

Higher temperatures associated with climate change, as well as the shift toward summer-dominated

rainfall, are also likely to increase evaporation levels, leading to drier soil conditions, particular in the

west of the State.94

While modelling of agricultural output incorporates changes in rainfall patterns, there are a range of

additional economic and fiscal risks associated with changing rainfall patterns, including drought.

These risks include the maintenance of the metropolitan and regional water supply; regulatory risks

associated with the allocation of water, particularly west of the Great Dividing Range; the provision of

financial assistance and other services to primary producers in the case of drought; and a range of

second round economic effects. Consideration of these issues would likely benefit from climate data

and rainfall modelling being conducted as part of the NSW Regional Water Strategies.95

Infrastructure

Climate change will introduce shocks and stresses to NSW’s infrastructure system. This could affect

infrastructure and lead to economic, social and environmental impacts. For example, the 2019-2020

bushfires alone damaged nearly $1 billion of Government infrastructure (equivalent to approximately

5% of the average NSW annual capital budget).96 When infrastructure is damaged or impacted, it can

affect the delivery of services to communities and have further social and economic impacts. When

multiple shocks and stresses occur simultaneously or sequentially – as has been the case in 2020 – it

can increase risks and compound the impacts.

The NSW Government is partnering with state government agencies, publicly owned infrastructure

providers, local governments and XDI Pty Ltd to develop more comprehensive climate risk

assessment tools for critical infrastructure and assets. Critical infrastructure classes being assessed

include water supply, rail networks, electricity generation, transmission and distribution,

telecommunications, hospitals, waste management facilities and coastal management infrastructure.

These issues are also being considered through the implementation of the 2018 State Infrastructure

Strategy, the NSW Government’s Critical Infrastructure Resilience Strategy, and will be further

explored as part of the 2022 State Infrastructure Strategy development.

Health and Mortality

While the total economic impacts outlined in the section on natural disasters include impacts on

human health, this could be more systematically considered in future research, alongside other

climate impact NSW health expenditures. Climate risks include increased instances of infectious

diseases, the impact of heatwaves (noting this is likely partly offset by a decrease in cold-related

health issues). This research could be further extended to cover mortality and incorporated into future

population modelling.

92 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 93 CSIRO and Bureau of Meteorology. 94 NSW Office of Environment and Heritage, ‘New South Wales Climate Impact Profile Technical Report: Potential Impacts of

Climate Change on Biodiversity’. 95 NSW Department of Industry, ‘New Climate Data and Modelling - Water in New South Wales’. 96 Source: INSW

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The potential for natural disasters to impact tourism is outlined in Box 1. In addition to this, some

chronic climate risks impact particular tourist destinations: for example, the BOM has noted a

declining trend in maximum snow depths in Australia’s alpine regions since the 1950s,97 which if

continued is likely to impact New South Wales’ ski fields. New South Wales could also be affected by

the degradation of iconic tourist attractions such as the Great Barrier Reef reducing overall tourism to

Australia. Nonetheless robust modelling is not available for inclusion in this analysis.

Other risks

Additional climate risks include:

• additional risks to agriculture, including dust storms and pests

• the warming and acidification of oceans

• impacts on biodiversity, including species decline

• impacts on supply chains and access to commodities

• international factors including trade, migration and geopolitical stability.

Most climate risk research also projects the intensification of risks as the three climate scenarios

increasingly diverge through the second half of the 20th century and beyond.98 For example, sea

levels are projected to continue rising for centuries or even millennia: they could be up to 7 metres

higher if the Greenland Ice Sheet melts, which is likely under the higher warming scenario and

possible under all scenarios. The economic impact of this would, were it to occur, likely be orders of

magnitude greater than that of anything modelled in this assessment. Future assessments may

therefore consider extending the timeframe beyond the next forty years.

Finally, it is noted that even for those areas included within this assessment, there is scope to

consider a wider range of costs. There is also scope to further refine the estimation method and

projected outcomes for those costs that have been modelled.

97 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 98 Intergovernmental Panel on Climate Change 2014, Climate Change 2014: Synthesis Report.

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6. CGE Results

CGE Results

The findings of the CGE modelling are set out in Chart 8. As noted in section 3, the approach to CGE

modelling focuses on assessing the sensitivity of long-term estimates to differences in the climate

scenario, rather than the overall impact of climate change itself. For the four areas of risk included in

the assessment, differences in the climate trajectory account for 0.6 per cent of GSP by 2061,

measured as the difference between the higher warming scenario and the lower warming scenario.

In dollar terms, the projected benefit, in net present value terms, of realising the lower warming

scenario compared to the higher warming scenario is estimated at $56 billion (real 2019-20 dollars) in

additional income over the next forty years.99

Chart 8 Climate impacts on Gross State Product

Fiscal Impacts

Fiscal impacts arise from two sources: the direct impact of natural disaster expenditure, via the DRA,

and the indirect impact of lower economic growth, which impacts a range of areas through the

LTFPM, primarily revenue. For the four key risk areas included in the assessment, variance in the

climate accounts for 0.05 per cent of the fiscal gap by 2061.

Note that the results presented here are preliminary and will be updated in line with overall economic

forecasts and a range of other modelling for the IGR itself.

99 Note this utilises a 2 per cent discount rate as was recently used by Deloitte. The Garnaut review utilised discount rates of 1.4 and 2.7 per cent. The Bank of International Settlements notes the choice of discount rate can radically impact modelling

results and cites work by Nicholas Stern who argued the inherent arbitrariness in discount rate selection could lead to outcomes that are “grossly misleading”. For example using a 7 per cent discount rate the net present value of lost income is projected at $12 billion. Bolton et al., ‘The Green Swan’.

Lower Warming Higher Warming

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7. Discussion

The projections outlined in this paper are aimed at beginning a process for assessing the potential for

the climate to impact the NSW economic and fiscal outlook. Section 5 presents projections of the

impact of climate for four areas of risk across three different climate scenarios, while section 6

presents projections of how differences in the climate scenario would impact overall economic and

fiscal outcomes.

Projections of individual climate effects (section 5) compared with projections of overall

economic impact (section 6)

The projections in section 5 focus on the potential impact of climate change on specific sectors by

projecting economic costs and other factors likely to be impacted. These are presented as ranges,

depending on the climate scenario. The projections in section 6 indicate the difference in climate

scenarios only, noting that NSW Treasury separately estimates long run economic growth through a

top-down approach that incorporates productivity, population and participation. This approach is

preferred because it allows the estimates of climate sensitivity to continue to be useful even where

long run growth estimates change under the reference case.

Sectoral impacts

The projections outlined in section 5 indicate a range of costs are expected to increase significantly

over the coming decades. Hazard risks of all three major natural disaster types impacting New South

Wales are expected to increase, with bushfire risk projected to increase by 24 per cent under the

higher warming scenario. Overall, the total annual economic cost of natural disasters is projected to

increase to between $15.8 and $17.2 billion by 2061. Furthermore, volatility in the actual occurrence

of natural disasters means annual economic costs could exceed $70 billion in some years. While

fiscal costs under the DRA are significantly smaller and are shared with the Commonwealth under

current policy settings, there is some risk associated with the combined impact of increased hazard

risk and any changes in Commonwealth policy settings.

Sea level rise is projected to impact coastal communities and annual costs have potential to exceed

$1 billion per year by 2061. As with natural disasters these costs will not be evenly distributed, with

much higher costs likely in some years. This could lead to pressure on state and local government to

review policy settings, both in terms of mitigating the risk to existing properties and reducing

development in exposed areas.

Heatwaves are projected to lower workplace productivity across a range of regions. Combined with

projected climatic impacts on agriculture and issues relating to water security (not modelled in this

paper), effects are likely to be felt most acutely in inland regional areas of the State.

Contextualising in the projection method

The results in section 6 should not be interpreted as the overall costs of climate change. As outlined

in the previous paragraph, they represent the sensitivity of economic outcomes under different climate

scenarios. Given the timescales in which the effects of climate change operate, differences between

the three climate scenarios are relatively minor until the second half of this century, meaning that so

too are projected changes in output and the fiscal gap across these scenarios. Extending the

projection beyond the IGR’s 2061 projection timeframe would certainly yield more significant

differences across the three climate scenarios.

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This assessment has also been limited to four areas of climate risk, with the intention of

demonstrating the viability of the approach to climate risk assessment. Extending the range of climate

risks beyond these would also certainly increase the projected impact of differences across climate

scenarios, even within the limited projection timeframe. An additional limitation is that this modelling

has considered only a subset of costs relating to each of these risks. For example, natural disasters

are expected to impact the costs of constructing and maintaining infrastructure, but these costs have

not been incorporated into the economic or fiscal modelling. Similarly, costs arising from heatwaves,

including infrastructure and healthcare are not included.

Comparisons with other estimates

Previous research of a more comprehensive set of risks have estimated that unmitigated climate

change (RCP8.5) would impact the NSW economy by between around one and two per cent by 2050,

with costs then rising sharply over the second half of the century.100 These studies measured the

costs of climate change against a hypothetical ‘no climate change’ scenario, whereas this paper has

estimated variance based on three climate scenarios. Given this difference in modelling approach, the

more limited range of risks assessed and the relatively short projection period to 2061, these findings

appear broadly in line with this other research.

Long term economic and fiscal modelling is not intended to predict exactly how each year will unfold,

but rather the general direction and scale of overall trends. Inevitably long-term projections, including

this one, are represented as smooth lines. In reality, this is not how climate risks are expected to play

out in New South Wales. The actual occurrence of natural disasters, heatwaves and storm surges is

highly variable. If the variability in natural disaster costs experienced over the past decade were the

same in the years to 2061, the actual total economic cost of natural disasters in any one year could

be as low as $30 million and as high as $75 billion. Similarly, climatic factors which impact agricultural

production may be benign for many years before abruptly becoming extremely damaging. Climate

and economic modelling cannot predict in advance when or where these events will occur and hence

must rely on smoothed projections. This is an unavoidable limitation.

Future Extensions

The primary purpose of this assessment has been to pilot an approach for climate risk assessment

and to demonstrate that approach with regards to a relatively limited range of risks. The intention has

been to first demonstrate the viability of the framework by focusing on only those areas for which

costs and climate risks could be estimated relatively robustly. It is anticipated that this approach can

be developed and extended as the NSW Government moves toward more systematically accounting

for climate risks across Government.

Two priority candidates for further extension of this approach have been identified: water security and

infrastructure. These both have potential to have much more significant impacts on the fiscal position

over the coming decades. Furthermore, modelling the overall economic impact of these climate risks

could better assist the Government as it develops regional water strategies, and longer-term

infrastructure priorities. A further extension would be beyond the forty-year timescale used for this

100 Garnaut, The Garnaut Climate Change Review; Deloitte Access Economics, ‘A New Choice’.

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assessment. The findings are focused primarily on differences between climate scenarios, and these

differences are expected to grow significantly over the second half of the century and beyond.

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8. Conclusion

This paper has piloted an approach to assessing fiscal and economic risks associated with climate

change and demonstrated this through an initial assessment of four key climate impacts. A range of

impacts are found for each of the four areas of risk, with the largest being in the total economic costs

of natural disasters which is projected to increase to between $15.8 and $17.2 billion per year by

2061 (real 2019-20 dollars). The sensitivity of the economic and fiscal outlook with regards to these

risks under different climate scenarios accounts for 0.6 per cent variation in Gross State Product and

0.05 per cent of the fiscal gap by 2061.

These estimates do not constitute a comprehensive assessment of the impacts of climate change but

are intended to focus on a more limited set climate impacts relating to four key areas of risk. Future

research could extend this assessment to account for additional risks. Higher priority areas for

research include water security including drought and costs associated with the construction and

maintenance of infrastructure. Extensions to the projection period beyond 2061 will also likely yield

further useful information.

Despite the relatively limited scope of this study, the methodology has nonetheless provided for a

discrete assessment of four areas of climate risk and providing an indication of the sensitivity of New

South Wales’ economic and fiscal outlook under different scenarios in relation to these risks. This is

the first time a quantitative assessment of climate risks has been conducted for any Australian

jurisdiction as part of their long-term fiscal planning processes. The inclusion of this analysis for the

2021 IGR should provide confidence that New South Wales is managing risks in a robust and

transparent manner.

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TECHNICAL APPENDIX

Victoria University Regional Model

The Victoria University Regional Model (VURM), an evolution of the Monash Multi-Region Forecasting

Model (MMRF) used for the Garnaut Review, is used to produce a number of scenarios for the NSW

and Rest of Australia (RoA) economies. The first is a reference case calibrated to match the IGR’s

central assumptions derived in separate research regarding population growth, participation and

productivity growth. In addition, it incorporates the intermediate climate scenario (RCP4.5). The

remaining scenarios depart from the reference case in response to different assumptions relating to

the costs of natural disasters, sea level rise, heatwaves and agricultural production. This section

briefly describes the VURM model and then explains some of the key behavioural assumptions

underlying the deviation scenarios.

Model settings and calibration

In the version of VURM used for the study, there are 83 industry sectors in two regions, NSW and the

RoA. The latter region is an aggregation of the other five Australian states and the two territories.

Investment is allocated across industries to maximise rates of returns to investors (households, firms).

Capital creators assemble, in a cost-minimizing manner, units of industry-specific capital for each

industry. Each state has a single representative household and a state government. There is also a

federal government. Finally, there are foreigners, whose behaviour is summarised by export demand

curves for the products of each state and by supply curves for international imports to each state.

As is standard in CGE models, VURM determines the supply and demand for each regionally

produced commodity as the outcome of optimising behaviour of economic agents. Regional industries

choose labour, capital and land to maximize their profits while operating in a competitive market. In

each region a representative household purchases a particular bundle of goods in accordance with

the household’s preferences, relative prices and its amount of disposable income.

Interregional trade, interregional migration and capital movements link each regional economy.

Governments operate within a fiscal federal framework.

VURM provides results for economic variables on a year-on-year basis. The results for a particular

year are used to update the database for the commencement of the next year. In particular, the model

contains a series of equations that connect capital stocks to past-year capital stocks and net

investment. Similarly, debt is linked to past and present borrowing/saving and regional population is

related to natural growth and international and interstate migration. For a detailed description of the

theoretical structure of the VURM model, see Adams et al (2011).101

101 Adams et al., ‘MMRF: Monash Multi-Regional Forecasting Model: A Dynamic Multi-Regional Model of the Australian Economy’.

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Key assumptions underlying the alternative scenarios

Labour markets

At the national level, it is assumed that (lagged) real wages adjust in response to shocks imposed on

the model. These changes can cause employment to deviate from its reference value initially, but

thereafter, real wage adjustment steadily eliminates the short-run employment consequences. This

labour-market assumption reflects the idea that in the end national employment is determined by

demographic factors, which are unaffected by climate change.

At the regional level, labour is assumed to be mobile between state economies. Labour is assumed to

move between regions to maintain inter-state unemployment rate differentials at their reference-case

levels. Accordingly, regions that are relatively favourably affected by the different climate costs will

experience increases in their labour forces as well as in employment, at the expense of regions that

are relatively less favourably affected.

Private consumption and investment

Private consumption expenditure is determined via a consumption function that links nominal

consumption to household disposable income (HDI). In the alternative simulations, the average

propensity to consume (APC) is an endogenous variable that moves to ensure that the balance on

current account in the balance of payments remains at its reference case level. Thus, any change in

aggregate investment brought about by different climate costs is accommodated by a change in

domestic saving, leaving Australia’s call on foreign savings unchanged.

Investment in all but a few industries is allowed to deviate from its reference-case value in line with

deviations in expected rates of return on the industries’ capital stocks. In the alternative scenarios,

VURM allows for short-run divergences in rates of return from their reference-case levels. These

cause divergences in investment and hence capital stocks that gradually erode the initial divergences

in rates of return.

Government consumption and fiscal balances

VURM contains no theory to explain changes in real public consumption, with fiscal impacts modelled

separately in Treasury’s LTFPM. In the CGE simulations, public consumption is simply indexed to

nominal GDP. The fiscal balances of each jurisdiction (federal, state and territory) as a share of

nominal GDP are allowed to vary relative to reference case values in line with projected changes in

expenditure and income items.

Production technologies and household tastes

VURM contains many variables to allow for shifts in technology and household preferences. In the

alternative scenarios, most of these variables are exogenous and have the same values as in the

reference-case projection. The exceptions are technology variables that are used to introduce the

shocks to the model.

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Shock Estimation

Insurance Council of Australia Catastrophe Database

The first of two key data sources utilised in the modelling is insurance claims data, available from the

Insurance Council of Australia’s Catastrophe Database.102 This database includes all major

catastrophes (defined as claims exceeding $10 million) since 1967.103 The data was filtered to

exclude natural disasters not relating to New South Wales. Where events impacted multiple states,

the NSW proportion was estimated using descriptive information provided in the database (for

example some descriptions included a breakdown of the number of claims or impacted properties by

state). Events were classified as either floods, storms (including hail and thunderstorms, east coast

lows, tropical cyclones or other severe weather), bushfires and other (primarily earthquakes).104

Events described as both storms and floods were classified as floods where this appeared to be the

primary driver of damages.

Costs in the catastrophe database are stated in both original and ‘normalised’ terms, with the latter

utilised to derive current expected costs. The ICA database only includes records of insured losses,

therefore excluding uninsured losses. The Productivity Commission notes that estimates of the

proportion of losses that are uninsured vary considerably across sources, but cites the Actuaries

Institute estimates that uninsured losses account for 20 to 40 per cent of direct economic losses,105

hence the mid-point of this estimate (i.e. 30 per cent) is adopted as the assumption throughout this

Disaster Recovery Funding Arrangements (DRA)

Disaster relief and recovery costs are based on NSW Government annual returns to the

Commonwealth under the Disaster Recovery Funding Arrangements (DRA).106 Partial records are

available since 2002-03, via the Commonwealth Productivity Commission, with more detailed records

available between 2009-10 up to an including 2019-20. For the purposes of deriving current expected

costs, expenditure from previous years is adjusted using normalisation factors derived from the

insurance council database.

The DRA records present an additional challenge due to the relatively limited time series and extreme

volatility in natural disaster expenditure. Estimates of ‘average’ annual normalised expenditure are

heavily influenced by single events, specifically the 2019-20 bushfire season. The records also do not

cover enough time for earthquakes to feature. To account for this, the DRA records are adjusted with

102 Insurance Council of Australia, ‘Catastrophe Data’. 103 However some inconsistencies between the current online database and previous versions were noticed. For example the updated database did not include the 1994 NSW bushfires, which resulted in $59 million in claims, as well as several other

major events. Records were therefore adjusted to account for obvious omissions that were found to be present in previous versions of the database, accessed via earlier versions of Insurance Council of Australia Catastrophe Database accessed via web.archive.org. 104 Other also includes a building explosion and an event in 1990 that is not described with sufficient detail to allocate a category. 105 Institute of Actuaries of Australia, ‘Actuaries Institute Submission to Royal Commission into National Natural Disaster

Arrangements’. 106 Formerly the Natural Disaster Relief and Recovery Arrangements (NDRRA), which this paper refers to interchangeably with the DRA.

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reference to the longer insurance claims time series. This has the effect of ‘diluting’ the 2019-20

bushfires from the baseline to ensure this single event does not unduly impact the baseline estimates.

Expected DRA expenditures relating to earthquakes (and other events) are assumed to be

proportionate to the overall ratio of DRA expenditure to insurance losses.

Natural disaster expenditures are partially reimbursed by the Commonwealth, with arrangements

generally providing for higher proportional reimbursement in years with higher expenditure levels.

Over the period 2008-09 to 2019-20, 39 per cent of costs were reimbursed to New South Wales,

which is adopted as the long-run assumed average for the modelling.107

Estimating total economic costs

There is no consistent approach to the collection of costs relating to natural disasters in NSW or

Australia. As a result, costs additional to those captured by insurance records and NSW Government

DRA returns must be estimated using standardised ratios. These assume that, at an aggregate level,

unmeasured costs, including direct, indirect and intangible costs, are proportionate to measured

insurance losses. These ratios were sourced from Deloitte’s report Building Resilience to Natural

Disasters in our States and Territories,108 which itself draws on a Bureau of Transport Economics

Report from 2001,109 as well as some more recent case studies. The ratios used to estimate total

economic costs are set out in Table 6. Estimates of total economic costs are illustrative only and not

included in the CGE or fiscal modelling.

Table 6 Ratio of total economic costs to recorded insurance losses

Disaster Type Ratio

Bushfires 4.9

Floods 21.7

Source: Deloitte Access Economics110

Projecting underlying costs growth

Future expected natural disaster costs are derived by first estimating that portion of growth relating to

growth in the population and economy. This is based on the same principle as is used to ‘normalise’

historic natural disaster costs. However, using this exact same method to project would require

projections of the future replacement value of the housing stock, which are unavailable, hence a proxy

measure is required. The Productivity Commission noted that growth in the value of insurance losses

was consistent with trend growth in GDP, which accounts for population, wealth and prices. Given

this, and the fact that projections of GSP are readily available as part of the calibration of the

reference case, growth in GSP is used as a proxy for underlying growth in expected annual natural

disaster costs. Note this estimate is somewhat lower than that used in Deloitte’s 2017 report Building

Resilience to Disasters in our States and Territories, which, like normalisation practices, is based on

107 Note that this modelling is undertaken on the basis of no policy change, therefore any proposals to change the funding arrangements are not considered in this analysis. 39 per cent refers to the ‘normalised’ average reimbursement. 108 Deloitte Access Economics, ‘Building Resilience in Our States and Territories’. 109 Bureau of Infrastructure, Transport and Regional Economics, ‘Economic Costs of Natural Disasters in Australia’. 110 Deloitte Access Economics, ‘Building Resilience in Our States and Territories’.

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the projected value of the housing stock, but unlike normalisation methods, also includes the value of

Changes in hazard risk under climate change

The next section sets out the approach to estimating changes in hazard risks for the three key natural

disaster types included in the modelling: bushfires, flooding and storms. The risk of other natural

disasters (which mainly refers to earthquakes) are assumed not to be impacted by climate change.

The frequency and intensity of bushfires is impacted by a range of factors. These include climate,

which can influence rainfall, impacting fuel load and dryness, and weather including that measured by

the McArthur Forest Fire Danger Index (FFDI) as well as sources of ignition such as lightning. Fire

prevention and management practices also impact the intensity and destructiveness of fires and best

practice in fire management and response is constantly evolving.111 The occurrence and intensity of

fires, as well as their cost, are determined by complex interactions between all of these factors.

Modelling the evolution of these factors and their interactions over the coming decades is extremely

challenging, however it is relatively clear that climate change has already led to an increase in

dangerous fire weather. These trends are predicted to continue into the future, with the extent of

further changes linked to the trajectory of GHG emissions.112

Modelling conducted by XDI Pty Ltd,113 and provided to Treasury, provides an indication of how

climate change could impact bushfires risks across New South Wales under the higher warming (RCP

8.5) scenario. The modelling utilises a modified version of the Hot-Dry-Windy (HDW) index as the

measure of fire risk. HDW is more commonly used in the United States as an alternative to FFDI. It is

normally calculated using hourly readings at multiple atmospheric layers, however for this modelling it

has been estimated using projected daily surface temperature data. This means it does not explicitly

account for changes in the upper atmosphere which were associated with the development of

firestorm events such as those observed during the 2019-20 bushfire season.

A historical series was first estimated using data sourced from the Bureau of Meteorology. Forward

projections utilise a General Circulation Model (GCM) from the Max Planck Institute (MPI) provided

through CORDEX. Regional climate modelling is sourced by the Climate Limited-area Modelling

Community (CLMcom). This was combined with fire exposure maps developed by XDI Pty Ltd which

utilised satellite imagery of forest canopy cover, spatial mapping of urbanisation and additional

adjustments to provide an indication of the exposure of specific properties. The modelling also

incorporated historical annual burn extents from sources including insurance records, the CSIRO

(Bushfires in Australia: Prepared for the 2009 Senate Inquiry into Bushfires in Australia July 2009)

and satellite data. The overall results were then calibrated to the historical records of building losses

available in insurance data.

There are some limitations to this modelling: it does not account for grass fires or account for

coincident bushfire risk factors such as the combined impact of both high fire danger weather,

sustained drought or fuel load. Given expected trends in these other factors, this suggests these

results are likely a conservative estimate. A further limitation is that the modelling is based on the

111 CSIRO, ‘The 2019-20 Bushfires’. 112 CSIRO; Clarke, ‘Climate Change Impacts on Bushfire Risk in NSW’. 113 Mallon et al., ‘Climate Change Risk to Australia’s Built Environment: A Second Pass National Assessment’.

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higher warming scenario (RCP8.5), with estimates for RCP4.5 and RCP2.6 derived by assuming

these would be proportionate to the total expected change in global mean surface temperatures under

each scenario.

While again emphasising that it is not possible to quantify the complex interactions of all factors

impacting bushfire risks, the modelling nonetheless provides an indication of how climate change is

likely to impact those factors which have been modelled. The modelling indicates that by 2061, these

factors are expected to increase the risk of bushfires by 24 per cent under RCP8.5, 17 per cent under

RCP4.5 and 2 per cent under RCP2.6. Although these results are indicative only, and do not capture

the full range of factors impacting bushfire risks, they are nonetheless utilised in this assessment to

provide an indication of changed bushfire risks under climate change. The only alternative approach

would be to assume no change in bushfire risk, and thus ignore known changes to these key risk

Table 7 Expected Annual Bushfire Costs in 2061 (real 2019-20 dollars)

Fiscal Costs115

2020-21 $270m $80m $50m

$830m $240m $140m 5.3%

$950m $280m $160m 5.7%

$1,010m $300m $170m 5.9%

Damages associated with floods are influenced by a range of complex factors. These include the

frequency and intensity of extreme precipitation events, the location and characteristics of properties

and infrastructure, draining capacity of waterways and dam storage.

Climate change is expected to increase the frequency and intensity of extreme precipitation events,

even for areas which are expected to see a reduction in average annual rainfall. A warmer

atmosphere is able to hold more water vapour, with the carrying capacity increasing by around 7 per

cent for every degree of global warming. Higher moisture content, as well as warmer ocean

temperatures, in turn can provide more energy for atmospheric processes that generate extreme

rainfall, further increasing the likelihood of these events.116 Short term extreme precipitation events

114 Includes the value of insurance claims plus an additional 20 per cent for uninsured property loss. Further details in the technical appendix. 115 Growth in sum of fiscal and private costs 116 Pearce et al., Climate Change in Australia; CSIRO, ‘Understanding the Causes and Impacts of Flooding’; CSIRO, ‘FAQs on Floods’; Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’.

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have been observed to increase at a higher rate than the moisture-carrying capacity of the

atmosphere.117

These changes have already been observed, with some regions in Australia recording a 10 per cent

increase in the intensity of short-duration extreme rainfall events.118 For New South Wales specifically,

NARCliM projections indicate that rainfall extremes are projected to increase in the near and far

future. These changes are within the range of inter-annual variability across all regions in the period

2020-39, however some indices and regions show statistically significant increases for the period

2060-79.119

Modelling changes in natural disaster costs relating to floods in this paper relies on two separate

sources. Modelling provided to Treasury by XDI Pty Ltd, based on a national risk assessment,

indicates that the property value at risk from floods will increase by 12 per cent by 2060 under

RCP8.5. This was checked against separate modelling provided to Treasury by Munich Re, which

indicates potential damages from a 100-year ARI flood will increase by between 9 and 27 per cent by

2050, also under RCP8.5.120

Modelling was not available for the other climate scenarios, which were instead estimated as fixed

proportions of the highest warming scenario. The IAG report Extreme Weather in a Changing Climate,

notes that the relative change in maximum one day rainfall in Eastern Australia by 2080-99 under

RCP4.5 is around half that expected under RCP8.5, and that changes are less evident under

RCP2.6.121 On this basis, and noting the limitation that maximum one day rainfall is only one of many

factors that should ideally be considered, flood risk under RCP4.5 is estimated to increase by half the

amount of RCP8.5. Risk under RCP2.6 is estimated to remain similar to current levels.

As with changes in bushfire risk, these estimates should be treated with caution and it is

acknowledged they capture expected changes in only some of the many complex factors impacting

overall changes in flood risk.

Table 8 Expected Annual Flood Costs in 2061 (real 2019-20 dollars)

117 Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’. 118 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 119 Evans et al., ‘NARCliM Extreme Precipitation Indices Report.’ 120 The range relates to uncertainty regarding floor height, with the lower estimate corresponding with a 50cm floor height

assumption for all properties, and the higher estimate corresponding with 0cm floor height. Insurers generally resolve this uncertainty in ex post assessments. 121 Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’, 442.

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Fiscal Costs123

2020-21 $2.5b $170m $90m

$7.8b $510m $270m 5.3%

$8.2b $540m $290m 5.4%

$8.7b $570m $300m 5.6%

A range of severe weather events are present in the natural disaster records, with subtle differences

in classifications between DRA and insurance records. For the purposes of this analysis, storms are

taken to include hail and thunderstorms, east coast lows, tropical cyclones, and other severe weather

excluding events where flooding was the primary driver of damages. Hailstorms accounted for 69 per

cent of insurance losses relating to storms, with East Coast lows accounting for a further 12 per cent

and cyclones just 2 per cent.124

Hailstorms and Thunderstorms

Projections of severe thunderstorms, including those that produce hail, are challenging for climate

models, which generally are not calibrated at a small enough scale to simulate the development of

thunderstorms, or able to effectively simulate the processes required for hail development.125

Challenges also exist in interpreting the observational record, which are strongly influenced by the

population density of locations impacted by hail, leading to low confidence.

However, a range of evidence suggests climate change could increase the instance of severe

thunderstorms, including those with hail. Radar observations across the NSW coast indicate an

increase in the number of ‘hail days’ over the past 20 years, although the occurrence of hailstorms is

also known to vary with the El Nino Southern Oscillation, meaning additional caution needs to be

applied to observed trends over relatively short periods. Warming is likely to increase “convect ive

available potential energy,” which would increase the risk of severe thunderstorms developing,126 but

other factors are also necessary for hailstorm development, and more research is required to

definitely determine their likely future trend.

122 Includes the value of insurance claims plus an additional 20 per cent for uninsured property loss. Further details in the

technical appendix. 123 Growth in sum of fiscal and private costs 124 Note this excludes the impact of ex-tropical cyclones which have generally caused extensive flood damage. 125 Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’; NSW Office of Environment and Heritage, Impacts of Climate Change on Natural Hazards Profiles. 126 Allen, Karoly, and Walsh, ‘Future Australian Severe Thunderstorm Environments. Part II’.

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East Coast Lows

East Coast Lows (ECLs) are intense low-pressure systems that occur off the east coast of Australia,

with an average of 10 events occurring every year. A decline in the overall number of winter ECLs has

been observed in recent years, but the number of more intense ECLs has increased. Modelling by the

Eastern Seaboard Climate Change Initiative,127 a research collaboration led by the NSW Government,

projects that that this trend will continue into the future. Specifically, the number of less severe ECLs,

and the number of ECLs overall, is expected to decline. However, there is projected to be a 28 per

cent increase in the number of severe ECLs128 in summer, alongside a 6 per cent decline in severe

winter ECLs by 2050.

Tropical Cyclones

Climate change is expected to reduce the frequency of tropical cyclones forming near Australia but

increase the intensity of those that do.129 Tropical cyclones are projected to track further south, which

presents a potentially serious threat to the north eastern corner of New South Wales.130 Modelling by

Munich Re indicates the potential scale of an intense tropical cyclone event impacting New South

Wales. Under current conditions, the total NSW exposure to a 100-year ARI tropical cyclone

producing winds over 143kmh in New South Wales is estimated at $20.8 billion, more than doubling

to $51.8 billion under the mid-range climate scenario (RCP4.5) by 2050.131 Under the higher warming

RCP8.5 scenario, the projected impact is 25 per cent higher still. For the purposes of this modelling,

risks are assumed to increase linearly in each year between 2020 and 2050, and that trend is further

extended until 2061. Risks under the lower warming scenario are assumed to lie between current

conditions and the reference case. The change in tropical cyclone risk by 2061 is therefore estimated

at 102 per cent under the lower warming scenario, 205 per cent under the reference case and 291 per

cent under the higher warming scenario.

In addition to the usual caveats regarding the need to treat the estimate of changed risk with

significant caution – tropical cyclones are driven by a complex array of factors, and modelling can only

capture some of these – additional caution is required for the modelling of costs associated with

tropical cyclones. Only one full strength tropical cyclone has made landfall in NSW since 1967 –

cyclone Nancy, which crossed the coast near Byron Bay in 1990. Hence projected costs are made off

a very small base. However, there is some evidence that NSW has been experiencing a historically

unusual absence of cyclones in recent decades, thought to relate to an increase in El Nino activity.

Hence this baseline may prove to be too conservative. Furthermore, housing and other buildings in

New South Wales have generally not been built to withstand cyclonic conditions, exacerbating the

potential for damages.132 There is therefore considerable uncertainty regarding the increased risk of

cyclones estimated for this modelling.

Expected costs of storms

While it is clear that climate change will impact the timing, frequency and intensity of hail and

thunderstorms, and east coast lows impacting New South Wales, the evidence is somewhat

127 The Eastern Seaboard Climate Change Initiative is a research collaboration led by the NSW Government and includes the Bureau of Meteorology, the Sydney Institute of Marine Science, UNSW, the University of Newcastle, and Macquarie University. More details are available at ‘Eastern Seaboard Climate Change Initiative’. 128 Defined as wind speed above 20ms 129 CSIRO and Bureau of Meteorology, ‘State of The Climate 2020’. 130 Abbs, ‘The Impact of Climate Change on the Climatology of Tropical Cyclones in the Australian Region’, 8–9. 131 Note this modelling is based on the current number and value of housing stock. The estimate would be significantly higher if applied to projected housing stock values and numbers in 2050. 132 Thompson, ‘Severe Cyclones Are Spreading Further South and It Could Mean Tens of Billions in Damages’.

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ambiguous regarding the sign and quantum of changes in the risk profile. This assessment therefore

assumes no change in the current risk profile relating to these storms under any of the climate

scenarios. A range of research is also expected to report in the near future which may provide

additional detail in quantifying future hazard risk from storms.133 The change in storm risk is therefore

derived entirely from changes in tropical cyclone risk, which while quite high, have only accounted for

a relatively small share of total storm-related natural disaster losses.

Table 9 Expected Annual Storm Costs in 2061 (real 2019-20 dollars)

Fiscal Costs135

2020-21 $1.8b $514m $44m

$5.5b $1,600m $137m 5.3%

$5.6b $1,627m $139m 5.4%

$5.7b $1,650m $141m 5.4%

Data on the number of addresses exposed to risks associated with sea level rise is sourced from two

studies produced by the NSW Office of Environment and Heritage (OEH), now part of the NSW

Department of Planning, Industry and Environment:

• Coastal Erosion in New South Wales: Statewide Exposure Assessment (2017)

• NSW Estuary Tidal Inundation Exposure Assessment (2018).

Both of these assessments project the number of NSW addresses exposed to coastal erosion, or

inundation due to sea level rise, as well as the proportions of these properties expected to be

exposed. Specifically, the coastal erosion assessment includes projections of the number of NSW

addresses exposed to coastal erosion during a 100-year ARI storm surge in 2050 under a higher

warming scenario. The tidal inundation assessment includes projections for three increased sea

levels (0.5m, 1.0m, 1.5m) and delineates between properties projected to lie within the High High

Water Solstice Springs (HHWSS) tidal plan, which is reached regularly throughout the year, and those

projected to be vulnerable to exposure during 100 year ARI storm surges. It also improves on earlier

“bathtub” methods by accounting for variation in tidal levels both between and along estuaries.

133 Bruyere et al., ‘Severe Weather in a Changing Climate (2nd Edition)’, 96. 134 Includes the value of insurance claims plus an additional 20 per cent for uninsured property loss. Further details in the technical appendix. 135 Growth in sum of fiscal and private costs

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Data on land values is obtained from the NSW Valuer General’s 2019 report on NSW Land Values,

and the value of structures is obtained from the ABS (5220 Table 21). Sea level rise projections are

based on 50 per cent exceedance values of NSW coastal sea level rise, using projections for each

RCP in the IPCC Special Report on the Ocean and Cryosphere in a Changing Climate,136 calculated

by taking an average of cells located along the NSW coast. Using the 50 per cent exceedance value

implies that there is a 50 per cent chance actual sea level rise will exceed these values.

Projection Method

An estimated of the number of properties exposed to each hazard in each year of each projection was

obtained by first assuming the overall size and value of the housing stock would increase in line with

existing development patterns. This relies on the (informed) assumption that development controls

are not currently deterring further development in exposed areas. It was further assumed that the

number of exposed properties in any single year would be proportionate to the estimated sea level

rise in that year and scenario compared with the levels assessed in the two studies. While this

oversimplifies the relationship between sea level rise and the number of exposed properties, which is

likely non-linear due to the presence of development controls and natural topological features, it is a

necessary simplification given the available data and should provide a reasonable approximation.

For regular inundation (i.e. the HHWSS tidal plane), the number of impacted properties in any given

year was assumed to be the change in the number of properties exposed in that year. This is on the

grounds that properties can only be damaged once, and also excludes properties already exposed to

inundation, which are assumed to have already been impacted. The number of properties impacted

by inundation during 100-year ARI storm surges is assumed to be one per cent of total exposed

properties less those already counted as exposed to regular inundation. The number impacted by

coastal erosion is just one per cent of total exposed properties.

Damages from coastal erosion and regular inundation were assumed to include structural damage to

properties as well as loss in land value, with both of these increasing as more of the properties were

inundated. Damages from ‘storm surge’ inundation were assumed to be limited to structural damage

only and estimated in line with standard flood damage assumptions used by insurers.137 The value of

structures was assumed to be in line with the statewide average, while land values were assumed to

be higher given impacted properties were in coastal and waterfront locations. Specific values were

drawn from previous economic assessments of coastal erosion.138

Summary results are presented in the main body, while

Table 10 provides a breakdown of damages by each hazard type. Note that shocks are applied to the

CGE model as proportions rather than dollar values, and modelling of the housing market is not yet

complete for the 2021 IGR. Hence the below table is indicative and based on projections of housing

and land values from the 2016 IGR.

Table 10 Expected annual damages from sea level rise in 2061 (real 2019-20 dollars)

Coastal Erosion Regular Inundation

Storm Surge

136 Intergovernmental Panel on Climate Change, ‘Special Report on the Ocean and Cryosphere in a Changing Climate’. 137 Information provided by Munich Re 138 Kinrade, Carr, and Riedel, ‘Wamberal Beach Management Options: Cost Benefit and Distributional Analysis’.

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(RCP2.6) $260m $28m $310m $130m $120m

(RCP4.5) $290m $31m $380m $160m $125m

(RCP8.5) $350m $39m $560m $230m $135m

Climate data was sourced from the CSIRO and Bureau of Meteorology.139 Data was available for

regions across New South Wales and specified the number of days where temperatures were

expected to exceed specific threshold values, in this case 32°C and 35°C. Projections were available

for the reference case (RCP4.5) and higher warming (RCP8.5) scenarios from a range of GCMs, with

CanESM2 selected as it matched one of those used in the agricultural modelling (see below).

Data on the location of workers for each of the four focus industries, agriculture, construction,

manufacturing and mining, was sourced from the ABS (6291).

Projection method

The climate data was matched with labour force data to yield estimates of the proportions of each

industry exposed to heat beyond the threshold values under the reference case (RCP4.5) and higher

warming scenario (RCP8.5), with the proportions exposed under the lower warming scenario

assumed to lie in between the reference case and current levels. Productivity loss functions were

adapted from those used in the Garnaut Review.

Alternative productivity loss functions were considered but ultimately rejected due to both lack of data

availability and their suitability for Australian conditions. For example, calculating “Wet Bulb Globe

Temperatures” would require coincident projections of both temperature and humidity, which were not

available.140 Alternative damage functions projected steep declines in productivity at temperature

thresholds already commonly exceeded through much of New South Wales, suggesting these may be

better suited to European conditions, or less granular temperature information.

As noted in the main body, modelling of agricultural production was provided to Treasury by the

CSIRO using their Land Use Trade Offs (LUTO) model. Detailed information on LUTO is available in

a range of published research, including Bryan et al (2016).141 Model settings were calibrated to

reflect the broader assumptions in this assessment, and are outlined in the Table 11. Results reported

139 ‘Climate Change in Australia’. 140 Roson and Sartori, ‘Estimation of Climate Change Damage Functions for 140 Regions in the GTAP9 Database’; Tord Kjellstrom, ‘Working on a Warmer Planet’. 141 Bryan et al., ‘Land-Use and Sustainability under Intersecting Global Change and Domestic Policy Scenarios’.

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in the main body, and used in the CGE modelling, reflect a simple average of outputs from each of the

Table 11 LUTO modelling settings

Scenario Name Global

GCM Productivity

Other Settings

Lower Warming L1

/ CAN-ESM2 Medium

Other settings relate to how

quickly/easily land would be

converted into carbon plantings or

biodiversity uses and are therefore

not relevant where no carbon price

is in place to drive land use

Reference Case M2

Higher Warming H3

Application of shocks to VURM

The shocks applied to VURM are to agricultural production by industry and to all-factor technological

progress by commodity. The latter is the instrument via which climate-change costs associated with

natural disasters, sea level rise and heatwaves are introduced into the model.

Agricultural production is naturally model-determined (endogenous). To impose changes in

agricultural production, we reverse the natural setting of the model, by making agricultural production

exogenous and a previously naturally exogenous variable endogenous. The latter is all-factor (labour,

capital and land) technological progress in agricultural production. Thus, exogenous changes in

agricultural production are imposed via model-determined (endogenous) shifts in the productivity of

factors (labour, capital and land) used in agricultural production.

It is assumed that climate costs associated with natural disasters, sea level rise and heatwaves affect

the economy via technological deterioration in production across a range of sectors. As indicated

already, technological change is naturally exogenous in VURM. Hence, changes in climate costs are

imposed directly.

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Kernan, Peter, Mark Button, Alexandre Birry, Kurt E Forsgren, Moritz Kraemer, and Andrew D Palmer. ‘How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its Ratings Analysis’, 21 November 2017. https://www.spglobal.com/_assets/documents/ratings/research/how-does-sp-global-ratings-incorporate-environmental-social-and-governance-risks-into-its-ratings-analysis.pdf.

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———. ‘NSW Fire and the Environment 2019-20 Summary: Biodiversity and Landscape Data and Analyses to Understand the Effects of the Fire Events.’, 2020. https://nla.gov.au/nla.obj-2866183049.

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Steffen, W. L, Lesley Hughes, and Sarah Perkins. Heatwaves: Hotter, Longer, More Often. Climate Council, 2014. https://www.climatecouncil.org.au/uploads/9901f6614a2cac7b2b888f55b4dff9cc.pdf.

Thompson, Geoff. ‘Severe Cyclones Are Spreading Further South and It Could Mean Tens of Billions in Damages’, 5 March 2020. https://www.abc.net.au/news/2020-03-06/cyclones-spreading-south-could-cause-tens-of-billions-in-damage/12020218.

Tord Kjellstrom, Nicolas Maître. ‘Working on a Warmer Planet: The Effect of Heat Stress on Productivity and Decent Work’. Report, 1 July 2019. http://www.ilo.org/global/publications/books/WCMS_711919/lang--en/index.htm.

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Further information and contacts

For further Information or clarification on issues raised in this paper, please contact:

Principal Economist

NSW Intergenerational Report Team

NSW Treasury

Email: [email protected]

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Commonwealth of Australia

Ministers Treasury portfolio

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2021 Intergenerational Report

The 2021 Intergenerational Report (IGR) details the economic challenges, and the opportunities facing Australia and underlines the fact that the economic impact of COVID-19 won’t be short lived.

The IGR provides a modelled view of the future over the next 40 years. It’s not a guarantee of what will be, but an insight into what could be.

The report, the fifth of its kind, delivers three key insights:

  • Our population is growing slower and ageing faster than expected.
  • The Australian economy will continue to grow, but slower than previously thought. Growth will continue to be highly dependent on productivity gains.
  • While Australia's debt is sustainable and low by international standards, the ageing of our population will put significant pressures on both revenue and expenditure.

Population:

As a result of COVID-19 this is the first IGR where the size of the population has been revised down.

Closed borders have seen more people leave than come to our shores over the last 12 months which has seen population growth at just 0.1 per cent, the lowest in 100 years.

Migration levels are forecast to get back to where they were in 2024-25, but do not recover the ground lost during COVID-19.

As a result, Australia’s population is expected to reach 38.8 million in 2060-61, six years later than was forecast in the last IGR.

On top of this a lower than expected migration intake contributes to the ageing of the population as the average age of migrants is below that of the existing population.

Economic growth:

Australia’s economy is expected to be more than two and a half times bigger in 2060-61 than it is today, with real GDP per person growing at an average annual rate of 1.5 per cent compared with 1.6 per cent over the last 40 years.

To generate this growth, it is assumed that productivity growth will maintain its 30 year average of 1.5 per cent.

This, however, will require an improvement in Australia’s recent productivity performance of 1.2 per cent over the most recent cycle.

Further investments in skills, infrastructure and digital transformation are required together with reforms generating red tape reduction, more flexible workplaces, increased business investment and a more efficient tax system.

With productivity responsible for over 80 per cent of Australia's national income growth over the past 30 years, the task is obvious and the choice is clear.

If we want to maintain our living standards, generate higher wages and create more jobs, Australia has no alternative other than to pursue economic reform, much of which is hard and contested.

Environment:

The changing climate will also affect the economy and the budget.

The physical and transitional effects of climate change, the impacts of mitigation efforts and the benefits of early adaptation measures will all affect the economy and the budget over time.

The transition to lower carbon emissions globally will mean that some sectors will need to adjust to falling demand for some exports, while new opportunities will be created in other sectors.

The effects will depend on domestic and global actions, as well as the pace and extent of climate change.

Australia is playing its part on climate change, having met our 2020 commitments and being on track to meet and beat our 2030 target.

Sustainable debt :

Deficits are expected to decline from 7.8 per cent of GDP today to 0.7 per cent in 2036-37, before widening to 2.3 per cent in 2060-61.

It’s a trajectory similar to many of the previous IGRs reflecting the impact of an ageing population and existing policy settings, however, the budget position is significantly better than projected in most past IGRs.

The Howard Government’s 2002 and 2007 IGRs forecast deficits at the end of the 40 year period of 7 per cent and 5 per cent respectively and the Rudd Government's 2010 IGR forecast a deficit of 4 per cent in 2050.

Only in 2015 was a surplus forecast of 0.5 per cent at the end of the period, but that was in the absence of COVID, the biggest economic shock since the Great Depression.

In this year’s IGR, health accounts for the biggest shift in Government spending over the next 40 years, going from 4.6 to 6.2 per cent of GDP, with aged care going from 1.2 to 2.1 per cent of GDP and spending on the NDIS at 1.4 per cent of GDP, nearly 30 per cent higher than what was forecast in the 2015 IGR.

Significantly, as expenditure rises, the tax take doesn’t go beyond 23.9 per cent of GDP, the self-imposed cap the Coalition put in place.

Growing the economy is Australia’s pathway to Budget repair, not austerity or higher taxes.

Only by growing the economy can we continue to guarantee the essential services Australians rely on.

We are relatively well placed, but at the same time, there are warning signs.

There remains much work to do be done.

The Report is available via the Treasury website.

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Why you should care about the Intergenerational Report

Why you should care about the Intergenerational Report

Hugh Miller takes a closer look at the 2021 Intergenerational Report, an important plank in long-term planning in many sectors.

The 2021 Intergenerational Report was released by the Federal Government at the end of June. Its great strength is that it provides a long-term lens to think about the economic challenges facing the country. Actuaries have an interest in many topics covered, and indeed we maintain our own Intergenerational Equity Index . This article explores the report and offers some thoughts on what it means, and what’s missing.

What the report tells us

I think of the report as a story in three layers.

The first layer comprises of the big long-term trends that have consistently highlighted in all iterations of the Intergenerational Report. In short:

The second layer of results are about understanding what has changed since the last intergenerational report (which was met with mixed reviews at the time).

2021 intergenerational report treasury technical research paper series

The third layer of the report is the tone of commentary in the report. While much of this is separate from the technical assumption setting, it gives some insight into how Treasury is thinking about the future and reflects the breadth of thought required in modern macroeconomics. Here are a few that I particularly appreciated:

Some items hiding in the detail

Any projection over decades requires assumptions and long-term historical averages are a reasonable place to start. I’ve no real issues with the specific choices. and the report does a commendable job exploring the sensitivities around assumptions. Some of the key ones are:

What I would have loved to see more of

Final thoughts.

Actuaries know that serious long-term strategic thinking is incredibly valuable. There is no excuse for not planning around the demographic trends for which we can anticipate with certainty. The challenge is continuing the conversation so that long-term thinking can be better reflected in short-term decisions.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.

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Treasurer Jim Chalmers is preparing to release the Treasury’s sixth Intergenerational Report on Thursday.

Whereas the first, in 2002, made projections out to 2042, this one will take us beyond the middle of the century, to 2062-63.

Already, Chalmers has spent some of the weekend pre-releasing headline numbers. More on those numbers later.

But first: what is the Intergenerational Report and why do we have it?

What is an intergenerational report?

Australia is one of many countries to produce such reports. They had their genesis in the 1980s, when much of the world became concerned that baby boomers (born in the years after the second world war) would be reaching older ages in the second decade of the 21st century.

At that time they would start leaving work and stop paying income tax.

But – and this was important – it was also the time they would also be needing more taxpayer-funded health care and aged care.

2021 intergenerational report treasury technical research paper series

In 1982, the United Nations held a World Assembly to discuss these challenges. By the mid-1990s, four countries – New Zealand, Norway, the United Kingdom and the United States – were producing long-term fiscal projections .

In 1998 the Australian parliament made a similar commitment, legislating the Orwellian-sounding Charter of Budget Honesty . This required an intergenerational report within every five years to assess where Australia will be in 40 years’ time.

To date, Australia’s five reports have focused on the key drivers of economic growth, including the size and structure of the population, workforce participation, and productivity.

Some big expenditure items have also been looked into, including the three big supports of the care economy: health care, aged care and disability care. More recently, interest payments and defence spending have also gained prominence. These analyses have allowed the Treasury to compare the proportion of national income it is spending now with the proportion it is likely to be spending in 40 years’ time.

Extract from 2021 Intergenerational Report

2021 intergenerational report treasury technical research paper series

Some things included, others not

I am one of a number of public policy experts who have just published a book, More than Fiscal , analysing the strengths and weaknesses of Australia’s 2021 Intergenerational Report.

2021 intergenerational report treasury technical research paper series

While we concluded it had some value, we also identified significant shortcomings.

One was that nearly all of the reports to date have been very narrow in their scope. Many of the issues the public wants addressed have been missing.

Apart from the 2010 report, produced by the Rudd Labor government, the reports have included little about climate change, or about such other topics as social and economic inequality, housing availability and affordability.

They have said little about the performance of our cities, life in regional and rural Australia, geopolitical tensions and coping with natural disasters.

One clue that this year’s intergenerational report might be an improvement is Chalmers’ reference at his press conference on Monday to a report that would build our understanding of five big shifts, from

globalisation to fragmentation, from hydrocarbons to renewables, from information technology to artificial intelligence, from younger to older, and what that means them for our industrial base and in particular for a bigger role for the care economy

And yet a flurry of “ backgroundings ” issued over the weekend have largely served to update data on the topics the report usually covers.

Population growth is projected to slow, but is expected to reach 40 million by the early 2060s. As predicted in previous intergenerational reports, Australia will have a greater proportion of older people.

The budget pressures identified in previous reports – health care, aged care, disability care, interest payments and defence spending – are projected to grow from one-third of total Commonwealth government spending today to one-half of all Commonwealth government spending by 2062-63.

The care economy in particular is expected to almost double from around 8% GDP to around 15% in 2062–63. Further pre-announcements are expected over the next few days.

Too political, and still lacking input from Australians

Another serious concern identified by the expert group is that the reports have at times shown a decidedly political bias. In 2015, this went as far as making projections based on the Abbott government’s unlegislated policy and contrasting them with projections made if the policies weren’t adopted.

Yet another is that the reports have been focused on Commonwealth government spending. This is despite Australia being a federation, in which the states and territories play a very significant role – including running hospitals and schools and having responsibility for legislation relating to housing.

There is no sign Treasurer Chalmers will address these concerns this time, despite solutions being fairly easy to implement.

Read more: Intergenerational reports ought to spark action, as well as scare us

The next intergenerational report will be published in three years, as Chalmers has increased the frequency to once every three years . It would be great if that and future reports were prepared by an independent body, such as the Productivity Commission, and spanned the full range of government activity across all jurisdictions.

A final thought centres on a key role for the intergenerational reports – to generate widespread discussion about the direction Australia is taking.

Why not require the independent body issue a draft report, which could be debated by all parts of society, with that public input taken into account in the final publication?

Thursday’s report has already fallen short of what it could have been, but there will be another one – and fairly soon.

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Page 1: 2021 IGR TTRP - The sensitivity of the NSW economic and

2021 Intergenerational Report

Treasury Technical Research Paper Series

1 The views in this paper are those of the authors and do not necessarily reflect those of NSW Treasury.

This publication can be accessed from Treasury’s website www.treasury.nsw.gov.au.

The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report _________

Nick Wood, Maddy Beauman & Philip Adams1

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TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 1

Acknowledgement

NSW Treasury acknowledges the Traditional Owners of the land on which we live and work, the

oldest continuing cultures in human history.

We pay respect to Elders past and present, and the emerging leaders of tomorrow.

We celebrate the continuing connection of Aboriginal and Torres Strait Islander peoples to Country,

language and culture and acknowledge the important contributions Aboriginal and Torres Strait

Islander peoples make to our communities and economies.

We reflect on the continuing impact of policies of the past, and recognise our responsibility to work

with and for Aboriginal and Torres Strait Islander peoples, families and communities, towards better

economic, social and cultural outcomes.

The authors thank Michael Warlters for providing the support to launch this research project, and

Luke Maguire for providing ongoing guidance and support throughout the process. Thank you to

Yvonne Scorgie, Nerida Buckley, Joseph Miller, David Hanslow, Matthew Riley and others at the

NSW Department of Planning, Industry and Environment, Dr Karl Mallon and Max McKinlay at XDI

Pty Ltd for their ongoing engagement and guidance in developing this research and for contributing

essential data, Erin Holmes at DRN, and Angela Cummine, Aruna Sathanapally, Kevin Pugh, Jenny

Merkley and Richard Cox at Treasury for their input and assistance in reviewing this paper.

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TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 2

Contents Acknowledgement ................................................................................................................. 1

Contents ............................................................................................................................... 2

Executive Summary .............................................................................................................. 3

1. Introduction ................................................................................................................ 7

2. Context ....................................................................................................................... 9

3. Previous approaches to modelling the energy transition ........................................... 13

4. Modelling approach .................................................................................................. 15

5. The sensitivity of the economic and fiscal outlook to global coal demand ................. 18

6. The broader transition in energy generation ............................................................. 22

7. Economic and fiscal impacts of the broader energy transition .................................. 26

8. Discussion ................................................................................................................ 28

9. Conclusion ............................................................................................................... 30

Technical Appendix ............................................................................................................. 31

References ......................................................................................................................... 35

Further information and contacts ......................................................................................... 38

Page 4: 2021 IGR TTRP - The sensitivity of the NSW economic and

TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 3

Executive Summary

Coal mining is a major industry in New South Wales and a significant revenue source for the NSW

Government. Most coal produced in New South Wales is exported and therefore the future of the

industry is largely dependent on global demand. In 2020, New South Wales’ three top thermal coal

export markets – Japan, South Korea and China – all announced their intention to achieve net zero

emissions by the middle of the century. Consequently, global demand and thus coal production is now

projected to be significantly weaker than the long-term estimates presented in the 2016 NSW

Intergenerational Report (IGR).

The factors underpinning weakening global demand for coal – technological development and policy

settings aimed at reducing greenhouse gas (GHG) emissions – will also impact domestic energy

generation. All five of New South Wales’ coal generators which, together, supply 84 per cent of the

State’s utility-scale electricity, are expected to retire over the coming two decades. Research by the

CSIRO indicates that solar and wind generation, combined with storage technologies, will be the

cheapest way to replace these generators. Alongside this, while 99 per cent of light vehicles on New

South Wales roads currently have internal combustion engines, the number of electric vehicles is set

to grow considerably over coming decades.

It is fairly self-evident that declining global coal demand, relative to projections made in previous

IGRs, will impact NSW’s economic and fiscal outlook. The domestic energy transition, however, also

presents both risks and opportunities. This paper presents an approach to assessing the potential

magnitude and scale of the economic and fiscal impacts of this transition for the 2021 NSW

Intergenerational Report. It constitutes an indicative assessment of some transitional climate risks,

and accompanies a separate paper An indicative economic and fiscal impact assessment of four key

areas of climate risk for the 2021 NSW Intergenerational Report, by the same authors, which focuses

on a selection of physical risks of climate change.

This paper draws on output from Computable General Equilibrium (CGE) modelling as well as NSW

Treasury’s Long Term Fiscal Pressures Model (LTFPM) to test the sensitivity of New South Wales’

fiscal and economic outlook to global coal demand.

Global coal demand scenario

The modelling will initially focus on three scenarios:

• a central projection, or reference case

• a higher global coal demand scenario

• a lower global coal demand scenario.

The reference case is calibrated to reflect the NSW IGR’s broader assumptions regarding long term

economic growth, including population, participation and productivity. It is also the same as the

reference case used in An indicative economic and fiscal impact assessment of four key areas of

climate risk for the 2021 NSW Intergenerational Report. All three scenarios also incorporate central

projections of the technological composition of electricity generation and wholesale electricity prices

from the NSW Electricity Infrastructure Roadmap and estimates of electric vehicles uptake from the

Australian Energy Market Operator (AEMO).

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TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 4

The scenarios differ in projected global coal demand, and therefore NSW coal production.

Specifically:

• Under the reference case, coal production remains at current levels until 2031 before

declining to 44 per cent of current levels by 2061

• Under the higher global coal demand scenario, coal production increases by 20 per cent by

2027, before declining to 52 per cent of current levels by 2061

• Under the lower global coal demand scenario, coal production declines to zero by 2042 and

remains there until 2061.

The sensitivity of the NSW fiscal and economic outlook to global coal demand

In comparison to the reference case, the higher global coal demand scenario projections show:

• Gross State Product (GSP) to be 0.3 per cent higher in 2041, and 0.1 per cent higher in 2061

• the fiscal gap to be 0.04 percentage points smaller, indicating an improved budget position.

In comparison to the reference case, the lower global coal demand scenario projections show:

• GSP would be 0.9 per cent lower in 2041, and 0.6 percent lower in 2061

• the fiscal gap to be 0.12 percentage points larger

Chart E1: Sensitivity of NSW Gross State Product to global coal demand

Source: NSW Treasury and VURM

Lower Global Coal Demand Higher Global Coal DemandDevia

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TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 5

The broader transition in energy generation

The modelling is then extended to consider the potential impact of the broader transition in energy

generation. Two additional scenarios are introduced:

• Higher Global Coal Demand + Slow and Disorderly Transition Scenario

o this scenario assumes that both the global and domestic transition to renewable

energy is slower and more disorderly than under the reference case. Specifically, it

extends the core assumptions underlying the higher global coal demand scenario –

that the transition to renewable energy generation is slower than anticipated – to the

domestic setting. This is put into effect with two additional assumptions: firstly, the

transition toward renewable energy generation in NSW is assumed to be slower and

more disorderly than the reference case, leading to higher and more volatile

electricity prices. Secondly, the uptake of electric vehicles is assumed to be lower

than under the reference case.

• Lower Global Coal Demand + Higher Electric Vehicles Uptake Scenario

o this scenario extends the assumptions underlying the lower global coal demand

scenario by incorporating faster uptake of electric vehicles into the scenario. The

transition to renewable electricity generation is assumed to share the same

characteristics as under the reference case, given this transition path reflects the

recently legislated Electricity Infrastructure Roadmap.

The sensitivity of the NSW economic and fiscal outlook to the broader energy transition.

In comparison to the reference case, the lower global coal demand + higher EVs scenario

projections by 2061 show:

• GSP to be 0.4 per cent, or $6.4 billion (real 2019-20), lower

• the fiscal gap to be 0.10 percentage points larger.

Higher electric vehicle uptake in this scenario improves economic growth compared to the original

lower global coal demand scenario. Electric vehicles utilise cheaper and domestically produced

electricity, rather than more expensive imported petrol, providing economic benefits.

Page 7: 2021 IGR TTRP - The sensitivity of the NSW economic and

TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 6

Chart E2: The sensitivity of Gross State Product to the broader energy transition

Source: VURM and NSW Treasury

In comparison to the reference case, the higher global coal demand + slow and disorderly

transition scenario projections by 2061 show:

• GSP to be 0.9 per cent, or $13.7 billion (real 2019-20 dollars), lower

• the fiscal gap to be 0.08 percentage points larger.

This scenario has the slowest economic growth of all scenarios included in this paper. Higher and

more volatile electricity prices dampen economic activity across the economy, while lower electric

vehicle uptake acts as a further drag on growth. These are sufficient to more than outweigh the

economic and fiscal benefits of higher global coal demand.

The results reported here are preliminary and will be refined in line with newer data and updates to

the LTFPM prior to the publication of the 2021 IGR.

Declining global demand for coal will reduce New South Wales’ economic growth over the projection

period and will have impacts both on employment and the fiscal outlook. There are also significant

economic and fiscal risks in the broader transition in energy generation. Specifically, a slow and

disorderly transition in domestic energy generation would be sufficient to more than offset any

benefits from higher global coal demand. Further opportunities for industry development are beyond

the scope of modelling in this paper but are considered in the report NSW: A Clean Energy

Superpower.2

2 KPMG and NSW Office of the Chief Scientist and Engineer, ‘NSW: A Clean Energy Superpower Industry Opportunities

Enabled by Cheap, Clean and Reliable Electricity’.

Lower Global Coal Demand+ Higher EVs

Higher Global Coal Demand+ Slow & Disorderly Transition

Page 8: 2021 IGR TTRP - The sensitivity of the NSW economic and

TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 7

1. Introduction

Coal mining is a major industry in New South Wales and has a significant impact on the economy and

NSW Budget. The industry is highly export oriented and also constitutes a significant revenue source

for the NSW Government. Over the coming decades, however, global demand for coal is expected to

weaken considerably. This is being driven by a combination of policy measures at a global scale

aimed at reducing greenhouse gas (GHG) emissions, and technological development which is

lowering the cost of renewable generation. This will impact the New South Wales economy and

budget, and because it is driven by global factors, is largely outside the control of the New South

Wales Government.

Beyond coal exports, energy more broadly plays a critical role in the NSW economy. It is a key input

for every industry and an essential expenditure item for households. Since the industrial revolution,

most energy used in Australia, and globally, has been generated through the combustion of fossil

fuels, including coal and oil. Over the coming decades, the factors which are driving changes in global

coal demand will also impact the way energy is generated in Australia and this is also expected to

have a significant impact on the New South Wales economy and budget.

New South Wales Treasury is required to produce the NSW Intergenerational Report (IGR) every five

years under the Fiscal Responsibility Act 2012. It includes projections of the economic and fiscal

outlook over the next 40 years, with a specific legislative requirement to estimate the ‘fiscal gap’,

defined as the change in the primary balance of the general government sector as a share of GSP.

Internationally, the scope of IGR equivalent reports has been expanding beyond their initial focus of

ageing risks, to include analysis of other long-term structural economic and fiscal risks, such as

housing and productivity.

The 2021 IGR will be the first NSW IGR to include explicit modelling of the potential impacts of

climate change and will incorporate modelling of both physical and transitional risks. Physical risks

relate to the impacts of changes in the climate itself, while transitional risks refer to those in the

economic transition toward lower GHG emissions.

This paper will set out an approach to modelling a selection of key transitional risks for New South

Wales, while a separate paper An indicative assessment of four key areas of climate risk for the 2021

NSW Intergenerational Report3 sets out the approach to modelling a selection of physical risks. The

paper will utilise Computerised General Equilibrium (CGE) modelling to assess a range of scenarios

encompassing changes in global coal demand, as well as the broader transition in energy generation

domestically. Outputs from the CGE modelling will then be used in Treasury’s Long-Term Fiscal

Pressures Model (LTFPM) to test the sensitivity of the fiscal outlook to changes in the pace of the

transition.

The modelling focuses initially on three scenarios:

• a high global coal demand scenario

• a low global coal demand scenario.

3 NSW Treasury, ‘An Indicative Assessment of Four Key Areas of Climate Risk for the 2021 NSW Intergenerational Report’.

Page 9: 2021 IGR TTRP - The sensitivity of the NSW economic and

TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 8

In order to contextualise the projected impacts in these scenarios, the modelling is then extended to

consider the broader transition in energy generation. The additional scenarios are:

• a high global coal demand + slow and disorderly transition scenario

• a low global coal demand + high electric vehicle uptake scenario.

The findings of this paper will be used in the IGR alongside the findings of the modelling on physical

climate risks4 to demonstrate the sensitivity of the NSW economic and fiscal outlook to some of the

key risks associated with climate change. This will improve the quality of fiscal and economic

estimates in the IGR by ensuring robust and transparent analysis of the key risks facing New South

Wales over the coming decades.

4 NSW Treasury.

Page 10: 2021 IGR TTRP - The sensitivity of the NSW economic and

TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 9

Coal mining is a significant industry in NSW and is highly dependent on global demand

The NSW coal industry is heavily export oriented. 86 per cent of NSW coal is exported and this

constitutes New South Wales’ largest export commodity.5 Most of New South Wales’ coal production

is thermal coal – the type used to generate utility-scale electricity. Hence the key driver of NSW coal

production is global demand – only a very small proportion is used domestically. This means that it is

global demand, not domestic policy settings, that will be the primary driver of future coal production in

New South Wales.

Coal mining also has a significant impact on New South Wales’ fiscal outlook and the economy more

generally. Coal royalties revenue is also a significant revenue source for NSW, contributing $1.5

billion to the NSW Government budget in 2019-20.6

Global demand is expected to weaken considerably since the 2016 IGR

In 2020 New South Wales’ top three thermal coal export destinations – Japan, South Korea and

China – all announced their commitment to net zero emissions by the middle of the century.7 More

recently, the European Union and the Biden Administration in the United States have outlined policies

which would impose carbon tariffs on imports from countries with higher greenhouse gas (GHG)

emissions.8 This, plus the lasting effects of the COVID-19 pandemic, has led to forecasts of global

demand being revised down considerably, including, for example the 2020 World Energy Outlook,

published by the International Energy Agency.9

Chart 1 CSIRO projected levelised cost of electricity generation by technology for 2030

Source: CSIRO Gencost 2020-21

5 Mining, Exploration and Geoscience (MEG), Department of Regional NSW, ‘NSW Mining Industry Overview FY2018-2019’. 6 Source: NSW Treasury 7 2050 for Japan and South Korea, 2060 for China. 8 Holzman, ‘Biden Could Seek Carbon Taxes with Same Strategy Trump Used for Steel, Aluminum’. 9 International Energy Agency, ‘World Energy Outlook 2020’.

Page 11: 2021 IGR TTRP - The sensitivity of the NSW economic and

TTRP21-07 The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for the 2021 NSW Intergenerational Report 10

A broader transition in energy generation is also underway

In the coming decades, the way we generate energy looks set to undergo the most significant change

since the industrial revolution. In the year to November 2020, 84 per cent of utility-scale electricity

generated in New South Wales was sourced from five coal generators,10 all of which are expected to

reach the end of their useful lives over the coming two decades.11 Research from the CSIRO

indicates that wind and solar power, combined with storage, will be the cheapest way to replace these

generators (see Chart 1).12

The generation of energy in the transport sector is also set to change. 99 per cent of light passenger

vehicles on New South Wales roads are internal combustion engine vehicles (ICEVs), fuelled by

either petrol of diesel.13 This fuel is generally imported from other States (mostly Western Australia)

and from overseas14 and distributed by some 2,000 petrol stations around the State.15 It is also

subject to fuel excise, levied by the Commonwealth, which acts as a de facto road user charge.

Over the coming decades this economic system is set to be disrupted. Technological innovations are

driving down the price of electric vehicles and improving their functionality, for example through

increasing range and reducing charging times. Supply constraints may also play a role: an increasing

number of countries, including two of the largest right hand drive markets, Japan and the UK,

announced their intention to phase out sales of ICEVs by the 2030s.16 General Motors has also

recently announced it will cease production of ICEVs by 2035.17 Given Australia imports all of its light

vehicles, global factors outside the control of Australian governments are likely to be a key driver of

the transition to electric vehicles.

The New South Wales Government has announced a range of policy initiatives aimed at better

managing this change

The New South Wales Government, along with other Australian governments, has already started to

respond to these developments with a range of policy commitments. The New South Wales

Government announced in the NSW 2020-21 Budget that royalties revenue from coal would be

placed into the New Generations Fund (NGF), a sovereign wealth fund, to ensure future generations

are able to benefit from the sale of today’s non-renewable resources.

Along with all other state and territory governments, NSW has committed to Net Zero emissions by

2050.18 Combined, GHG emissions from coal mining, electricity generation, and private motor

vehicles constitute more than half of all New South Wales GHG emissions, meaning transition in

these three sectors will constitute a key component of this commitment.

In late 2020, the New South Wales Government also announced, and then legislated, the Electricity

Infrastructure Roadmap (through the Electricity Infrastructure Act 2020), which sets out measures to

10 Australian Energy Market Operator, ‘NEM Data Dashboard’. 11 Australian Energy Market Operator, ‘2020 Integrated System Plan’. 12 Graham et al., ‘GenCost 2020-21: Consultation Draft. CSIRO Publications Repository: CSIRO’. 13 Roads and Maritime Services, ‘Motive Power by Vehicle Type - Registered Vehicles as at 30 September 2020’. 14 Department of Industry, Science, Energy and Resources, ‘Australian Petroleum Statistics, Commonwealth of Australia 2021’. 15 Knight Frank, ‘NSW Service Stations Insight’. 16 Davis, ‘Japan Plans Phase-Out of New Gasoline Cars by Mid-2030s’. 17 Welch, ‘GM Plans to Sell Only Zero-Emission Models by 2035’. 18 Osborne, ‘Net-Zero Emissions by 2050 Target Adopted’.

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facilitate the State’s coal generators replacement with renewable energy and storage. In August, the

New South Wales Government released the findings of the NSW Review of Federal Financial

Relations, which recommended the introduction of a new road user charge to replace declining fuel

excise revenues. The Victorian and South Australian Governments also announced the introduction of

a distance-based charge for electric vehicles.

A range of international institutions have recommended jurisdictions undertake more

systematic assessment of risks associated with climate change

Risks associated with climate change can be generally classified into two key types: physical climate

risks, which relate to the impacts of changes in the climate on the economy; and transitional risks

which relate to the process of reducing GHG emissions and include both costs and benefits. A range

of international institutions, including credit ratings agencies Moody’s and S&P, and central banks

(including the Reserve Bank of Australia) through the Network for Greening the Financial System

(NGFS), have recommended that governments more explicitly consider and account for both the

physical and transitional risks of climate change in fiscal planning.19

Previous IGRs have considered the impact of changes in energy generation. The 2011 IGR included

analysis of the fiscal impacts on New South Wales of the Commonwealth’s carbon price. The 2016

report (and previous reports) included projections of coal production based on data from the

International Energy Agency, which at the time anticipated continued growth in coal production

through the projection period. Since these reports, Commonwealth policy settings have changed (the

carbon price has been repealed) and consensus forecasts of global coal demand have been revised

down considerably. The 2021 IGR has the opportunity to extend its modelling to consider the wider

economic impacts of the energy transition, as well as direct impacts on the fiscal outlook.

This paper will assess the sensitivity of the New South Wales economic and fiscal outlook to

changes in the pace of transition away from fossil-fuel based energy generation

The modelling presented in this paper is aimed at providing a greater understanding of the economic

and fiscal impacts associated with changes in global coal demand, as well as the broader transition in

energy generation. This will be incorporated into the 2021 NSW IGR alongside a separate paper

focused on selected physical risks of climate change.20 Together, these papers will better inform New

South Wales long-term fiscal planning by considering how sensitive economic and fiscal outcomes

are to differences in the pace of the global transition toward lower GHG emissions, and to differences

in the climate scenario. This will provide additional confidence and transparency in New South Wales

long term fiscal planning processes, and thus contribute to the objectives of the Fiscal Responsibility

The modelling is aimed at understanding the sensitivity of the economic and fiscal outlook to

differences in global coal demand, and the broader transition in energy generation. It does not

19 Moody’s Investors Service, ‘Issuer In-Depth 29 January 2020: State of New South Wales (Australia) Droughts and Bushfires

Materially Increase Budget Pressures and Pose Long-Term Challenges’; Kernan et al., ‘How Does S&P Global Ratings

Incorporate Environmental, Social, And Governance Risks Into Its Ratings Analysis’; Network for Greening the Financ ial

System, ‘NGFS Publishes a First Set of Climate Scenarios for Forward Looking Climate Risks Assessment alongside a User

Guide, and an Inquiry into the Potential Impact of Climate Change on Monetary Policy’. 20 NSW Treasury, ‘An Indicative Assessment of Four Key Areas of Climate Risk for the NSW Intergenerational Report 2021’.

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constitute an assessment of New South Wales Net Zero Emissions commitment, nor does it account

for potential new industry opportunities, for example the deployment and export of hydrogen energy.

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3. Previous approaches to modelling the energy transition

Modelling for the NSW Intergenerational Report

The 2016 NSW Intergenerational Report included projections relating to two revenue items of

relevance to subsectors modelled in this paper. Coal volumes were projected to grow at a long-term

rate of 1.2 per cent per annum over the projection period (to 2056), a finding that was then used to

estimate royalties revenue. Projections also accounted for Commonwealth grants through National

Partnerships, one of which relates to transport expenditure including roads. However, there is no

formal link between Commonwealth road-related revenues, which are primarily derived from fuel

excise, and road-related expenditures. This approach did not include an assessment of wider

economic impacts or sensitivity analysis of changes in these assumptions.

Modelling transitional risks of climate change

A number of reports have sought to estimate the economic impact of transitioning to a lower

emissions economy including, most notably, modelling conducted for the Garnaut Review in 2008, the

Network for Greening the Financial System (an assemblage of central banks including the Reserve

Bank of Australia) and for Deloitte in 2020.21 These reports assessed both the physical and

transitional risks of climate change together, and assumed that lower GHG emissions would be

accompanied by reduced physical risks. This assumption holds at a global level but may not hold

within a single country or subnational jurisdiction. For example, New South Wales GHG emissions

account for less than 0.4 per cent of global GHG emissions,22 which are not material in isolation.

Separating the analysis of physical and transitional risks that face an individual jurisdiction can

facilitate a better understanding of the dynamics of both kinds of climate risks.

A second feature adopted by Garnaut, the NGFS and Deloitte has been the assumption that a carbon

price mechanism would drive the transition to a lower emissions economy. While entirely appropriate

for these analyses – the Garnaut Review recommended the introduction of a carbon price – such an

approach is not appropriate for the New South Wales IGR. There is no carbon price in New South

Wales, or Australia more generally, and the IGR is conducted on the basis of no policy change.23

Furthermore, the transition in the subsectors covered in this paper is driven by changes in global

demand for NSW coal, and the falling cost of low emissions generation technologies domestically. It

does not rely on an explicit, or even implicit, carbon price.

Sector-specific modelling

Other modelling of the energy transition has focused on specific subsectors of the economy. For

example, the Australian Energy Market Operator modelled different transition scenarios in the

National Energy Market, focused on the energy sector specifically, through the Integrated System

Plan. This also included projections on electric vehicle uptake, which were estimated in partnership

21 Garnaut, The Garnaut Climate Change Review; Deloitte Access Economics, ‘Building Resilience in Our States and

Territories’; Network for Greening the Financial System, ‘NGFS Publishes a First Set of Climate Scenarios for Forward Looking

Climate Risks Assessment alongside a User Guide, and an Inquiry into the Potential Impact of Climate Change on Monetary

Policy’. 22 Global Carbon Project, ‘Global Carbon Project (GCP)’; NSW Department of Planning, Industry and Environment, ‘Net Zero

Plan. Stage 1: 2020-2030’. 23 In contrast, there was a carbon price in place at the Commonwealth level at the time the 2011 IGR was published, hence the

impact of this was included in projections contained in that report.

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with the CSIRO. A range of forecasts have also been made regarding the future of global coal

demand, including most recently by the International Energy Agency.24 Sector-specific modelling can

provide valuable information about how specific parts of the economy are likely to develop, by

including more detailed information in its assumptions and approach than is generally possible with

modelling focused on the wider economy. However, this modelling generally does not provide an

indication of how these sector-specific developments will impact the wider economy.

24 International Energy Agency, ‘World Energy Outlook 2020’.

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4. Modelling approach

Modelling in this section is aimed initially at providing an indication of the scale and direction of

economic and fiscal impacts associated with changes in global demand for NSW coal. The modelling

is then broadened beyond the coal industry to consider the economic and fiscal impact of different

transition scenarios across the broader energy sector, specifically in electricity generation and the

uptake of electric vehicles. The scenarios in this assessment do not represent all possible outcomes.

Rather, they are intended to illustrate the relative impact of changes in global coal demand, and then

contextualise these impacts with reference to transition across the broader energy sector. Combined,

the subsectors included in this modelling account for over half of total NSW GHG emissions,25

meaning the results of this modelling constitute a partial assessment of some of the key transitional

risks associated with climate change. A separate paper, An indicative assessment of four key areas of

climate risk for the 2021 NSW Intergenerational Report,26 provides an indication of the economic and

fiscal impacts of four key physical climate risks.

The approach taken in this paper is similar to that utilised to assess physical climate risks.27 The

modelling initially considers three scenarios:

A series of ‘shocks’ are applied to a Computable General Equilibrium (CGE) model – the Victoria

University Regional Model (VURM) – reflecting different levels of global coal demand. The model then

provides information on how the different scenarios would impact the overall economy. This is then

combined with analysis utilising Treasury’s Long-Term Fiscal Pressures Model (LTFPM) to estimate

the sensitivity of the fiscal outlook across the three scenarios.

Following this, the modelling is extended beyond coal mining to include transition across the broader

energy sector. Firstly, the higher global coal demand scenario is extended to also encompass a slow

and disorderly transition in electricity generation and electric vehicles uptake. The lower global coal

demand scenario is in turn augmented with higher uptake of electric vehicles. These additional

scenarios are intended to provide more holistic analysis of how the global transition to renewable

energy generation technologies could impact the NSW economy and budget.

Scenarios are used in this assessment to test a range of potential transition pathways in the global

and domestic transition toward lower emissions. A reference case is first estimated with three key

characteristics. Firstly it is calibrated to match projections and assumptions on the “Three Ps” of

economic growth (productivity, participation and population), which have been estimated in separate

25 Adams et al., ‘MMRF: Monash Multi-Regional Forecasting Model: A Dynamic Multi-Regional Model of the Australian

Economy’; NSW Department of Planning, Industry and Environment, ‘Net Zero Plan. Stage 1: 2020-2030’. 26 NSW Treasury, ‘An Indicative Assessment of Four Key Areas of Climate Risk for the NSW Intergenerational Report 2021’. 27 NSW Treasury.

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research papers.28 Secondly, the reference case is identical to the reference case used in the

assessment of physical climate risks and therefore assumes an ‘intermediate warming’ scenario

(Representative Concentration Pathway 4.5).29 Thirdly, the reference case incorporates the central

projections for each of the subsectors considered in this paper (electricity generation, coal production

and electric vehicles uptake). This means that the central estimate of transition in each of these

subsectors is assumed to be consistent with the long run productivity growth rate assumption

recommended in the NSW Treasury paper Projecting Long Run Productivity Growth Rates for the

2021 Intergenerational Report,30 which is 1.3 per cent per annum.

There is overlap between this paper and the topics covered in other technical research papers in this

series: specifically, there are factors associated with the energy transition that impact economic

growth, primarily through impacts on productivity. However as noted in the NSW Treasury productivity

research paper,31 productivity growth depends on a range of factors, including the pace and scope of

economic reforms, technological development, the industry structure of the economy, demographics,

the distribution of income and wealth and geopolitical concerns. It is feasible that detailed research

into each of these would yield conclusions regarding their impact (positive or negative) on productivity

growth. Indeed, the productivity technical paper endeavours to weigh these factors and concludes

that on balance risks tend toward on the downside. Ultimately, however, the NSW Treasury

productivity technical paper decides against using a ‘building block’ approach, and instead assumes

productivity growth to eventually return to a long-run historical average, which yields 1.3 per cent

annual productivity growth.32

This approach to projecting productivity growth is relevant for setting the key assumptions underlying

scenarios in this paper. Common practice in previous research has been to assume a baseline

‘business as usual’ scenario, then impose shocks to derive a new energy transition scenario, which

generally utilises a carbon price and generally finds lower economic, and implicitly, productivity

growth. This approach is not, however, consistent with the method used to project underlying

productivity growth outlined in the productivity technical paper. Given the preferred method is based

on an historical average, rather than taking a ‘building block’ approach that looks at the component

drivers of productivity, it is not methodologically possible to make modifications to a specific

component, such as changing global demand for NSW coal. The purpose of this research paper is not

to project long run economic growth. Rather, it is to set out an approach that can be used to assess

the sensitivity of the economic and fiscal outlook to a range of risks relating to the global energy

transition. The approach developed in this paper therefore operates within the baseline ‘Three Ps’

assumptions adopted elsewhere in Treasury research, incorporating each of these into the reference

Accordingly, the estimates presented in this paper should be interpreted as the sensitivity of the

economic and fiscal outlook to differences in global coal demand and the broader energy transition.

They are generally applicable to alternative estimates of long run economic growth. For example, an

alternative estimate as to the productivity outlook for the reference case may not assume that

28 NSW Treasury, ‘Preliminary Participation Rate Projections for the 2021 Intergenerational Report’; NSW Treasury, ‘Projecting

Long Run Productivity Growth Rates for the 2021 Intergenerational Report’. 29 NSW Treasury, ‘An Indicative Assessment of Four Key Areas of Climate Risk for the NSW Intergenerational Report 2021’. 30 NSW Treasury, ‘Projecting Long Run Productivity Growth Rates for the 2021 Intergenerational Report’. 31 NSW Treasury. 32 This is lower than the 1.5 per cent assumed in the 2016 IGR reflecting weaker productivity growth in recent years.

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productivity growth continues on its 30 year historical trend, but may instead use a lower assumption

based on the potential impacts of lower global coal demand than was projected in previous IGRs.

Having generated a reference case consistent with the “Three Ps” assumptions, an intermediate

warming scenario and the central projections for each of the three subsectors considered in this

paper, the VURM CGE model is used to consider four alternative scenarios, as described in the

previous section.

Unlike some previous assessments, differences across the scenarios do not rely on an explicit or

shadow carbon price. Information on the nature of the transition in each subsector is imposed directly

into the model. The VURM CGE model then estimates how these different transition paths would

impact the economy overall and provides information in the form of a deviation from the reference

case. The specific assumptions underlying each scenario are outlined in the following sections.

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5. The sensitivity of the economic and fiscal outlook to global coal demand

Coal Production in New South Wales

Coal mining is a major industry in New South Wales, with 39 mines operating throughout the State

employing around 22,000 people.33 In 2019-20, New South Wales produced 200 Mt of coal. Most of

this - 88 per cent - was thermal grade. 86 per cent of coal mined in New South Wales was exported

(see Chart 2). The NSW Government raised $1.5 billion in royalties revenue levied on coal production

in 2019-20, accounting for 1.9 per cent of total NSW Government revenues.34 Meanwhile, fugitive

methane emissions from coal mining account for around 9 per cent of the State’s total GHG

emissions.35

Chart 2 New South Wales Coal Production by type and destination (2019-20)

Source: NSW Treasury; Department of Regional NSW

Transition in the coal sector

The heavy reliance of the NSW coal industry on exports of thermal coal means that future production

will be largely determined by global demand. Recently the top three markets for NSW thermal coal –

Japan, South Korea and China – have all announced their commitment to net zero emissions within

the forecast period of the IGR (2050 for Japan and South Korea; 2060 for China).36 Furthermore, the

costs of renewable generation and storage are forecast to fall considerably over the coming decades.

This does not necessarily mean that no coal will be used in the future – new coal generators continue

to be built37 and net zero policies allow for offsets. Nonetheless, future coal production is now

expected to be considerably weaker than was forecast for the 2016 IGR.

Projecting future coal production

The Department of Regional NSW produces projections of coal production over the coming decades

for the NSW Government. These projections underpin the New South Wales Government’s Strategic

Statement on Coal Exploration and Mining in NSW, released in 2020.38 Forecasts are based on

33 Mining, Exploration and Geoscience (MEG), Department of Regional NSW, ‘NSW Mining Industry Overview FY2018-2019’. 34 Source: NSW Treasury 35 Australian Government Department of Industry, Science, Energy and Resources, ‘State and Territory Greenhouse Gas

Inventories 2018’. 36 It is noted that coal shipments to China are already being disrupted as part of ongoing trade tensions. 37 Thurbon et al., ‘Forget about the Trade Spat – Coal Is Passé in Much of China, and That’s a Bigger Problem for Australia’. 38 Department of Regional NSW, ‘Strategic Statement on Coal Exploration and Mining in NSW’.

Export (Thermal)

al) Domestic

(Metallurgical)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Proportion of NSW coal volume

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analysis of current and potential future mines, and include a central projection, as well as ‘maximum’

and ‘minimum’ projections. The scenarios differ in their assumptions as to whether or not new mining

proposals will ultimately proceed. Approvals are based on a range of factors, with all scenarios

possible under current policy settings. The overall economic and fiscal impact of differences between

these forecasts will be assessed as part of this paper.

Chart 3 presents the projections for coal production volumes. As outlined in the Strategic Statement,

coal production is projected to remain relatively stable over the medium term (i.e. until the mid-

2030s), before declining to less than half of today’s current production volumes. Under the higher

global coal demand scenario, coal production increases to near 250 Mt through the 2020s, before

declining over the later years of the forecast. Under the lower global coal demand scenario, NSW coal

production declines more quickly, with no coal production beyond 2042.

Chart 3 NSW Treasury and Department of Regional NSW projected coal volumes (total tonnage)

Source: NSW Treasury; Department of Regional NSW.

Economic impacts

The key economic impacts of the differences in global coal demand produced by the CGE modelling

are set out in Chart 4. Compared with the reference case, the higher global coal demand scenario lifts

GSP by up to 0.3 per cent by 2041, although this scenario trends closer to the reference case over

time, and GSP is projected to be only 0.1 per cent higher than the reference case by 2061. The lower

global coal demand scenario, in which coal production in NSW ceases after 2042, results in GSP

being 0.9 per cent lower than the reference case in 2041 and remaining 0.6 per cent lower in 2061.

2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2061

Actual Lower Global Coal DemandReference Case Higher Global Coal Demand2016 IGR

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Chart 4 Sensitivity of NSW Gross State Product to global coal demand

Declining global coal demand will also impact employment in the coal mining sector, which currently

employs around 22,000 people. Depending on the level of global demand, this is projected to decline

by between 75 and 100 per cent by 2061, with a central estimate of 80 per cent decline, or 18,000

fewer jobs (see Chart 5).

Chart 5 NSW employment in coal mining

Higher Global Coal Demand Reference Case Lower Global Coal Demand

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Fiscal impacts

Chart 6 shows projected coal royalties revenue under each of the three scenarios. Under the

reference case, annual royalties revenue from coal is projected to decline to $580 million (real 2019-

20 dollars) by 2061, or around a third of current levels. Under the lower global coal demand scenario,

coal royalties revenue declines to zero by 2042. Under the higher global coal demand scenario, coal

royalties revenue is projected to be $810 million (real 2019-20 dollars) by 2061 as global demand

remains stronger than that projected under the reference case.

Under all scenarios, royalties revenue is substantially below that projected in the 2016 IGR, reflecting

significant shifts in expectations of global demand in recent years. The 2016 IGR projected $73 billion

(real 2019-20 dollars) in cumulative coal royalties revenue between 2020-21 and 2055-56.39 This has

been revised down to $35 billion under the reference case, $51 billion under the higher global coal

demand scenario and $11 billion under the lower global coal demand scenario (all real 2019-20

Chart 6 Coal Royalties Revenue Projections (Real 2019-20 Dollars)

Source: NSW Treasury

The fiscal outlook is sensitive to both royalties revenue as well as economic growth. Specifically,

under the higher global coal demand scenario, the fiscal gap is projected to be 0.04 percentage points

smaller than under the reference case, indicating an improved budget position. Under the lower global

coal demand scenario, the fiscal gap is projected to be 0.12 percentage points larger than under the

reference case.

Note that the results presented here are preliminary and will be updated in line with overall economic

forecasts and a range of other modelling for the 2021 IGR, to be published later in 2021.

39 This was the final year of the 2016 IGR projection.

$billion (re

Actual Lower Global Coal Demand Reference Case

Higher Global Coal Demand 2016 IGR

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6. The broader transition in energy generation

While the impact of declining global demand for NSW coal will be significant, this needs to be

considered in the context of the challenges and opportunities that come with the broader transition

towards renewable energy. This section extends the modelling above by considering two additional

• Higher Global Coal Demand + Slow and Disorderly Transition Scenario: this scenario

assumes that both the global and domestic transition to renewable energy is slower and more

disorderly than under the reference case. Specifically, it extends the core assumptions

underlying the higher global coal demand scenario – that the transition to renewable energy

generation is slower than anticipated – to the domestic setting. This is put into effect with two

additional assumptions: firstly, the NSW transition away from aging coal plants is not

effectively planned and accordingly replacement energy generation is not in place in timely

manner, leading to higher and more volatile electricity prices. Secondly the uptake of electric

vehicles is assumed to be lower than under the reference case.

• Lower Global Coal Demand + Higher Electric Vehicles Uptake Scenario: this scenario

extends the assumptions underlying the lower global coal demand scenario by incorporating

faster uptake of electric vehicles into the scenario. The transition to renewable electricity

generation is assumed to share the same characteristics as under the reference case, given

this transition path reflects the recently legislated Electricity Infrastructure Roadmap.

The next section discusses the modelling inputs for each of these two additional subsectors in more

Electricity Generation in NSW

84 per cent of utility scale electricity generated in NSW in 2020 was derived from NSW’s five coal

generation plants (see Chart 7).40 Although the sector accounts for only around one per cent of GSP,

and represents around 0.5 per cent of employment,41 it forms a critical input for nearly every other

part of the economy, and an essential expense for households. GHG emissions from electricity

generation were 51 Mt CO2-e in 2017, or 39 per cent of NSW’s total emissions – the largest single

source of GHG emissions.42

Chart 7 Electricity Generation in NSW by Source 2020

Source: AEMO Data Dashboard. Utility-scale generation only (excludes rooftop solar).

40 Australian Energy Market Operator, ‘NEM Data Dashboard’. Note this excludes generation from rooftop solar and other

distributed energy resources. 41 Australian Bureau of Statistics, ‘5220.0’; Australian Bureau of Statistics, ‘6291.0’. 42 NSW Department of Planning, Industry and Environment, ‘Net Zero Plan. Stage 1: 2020-2030’.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Coal (84%) Gas (2%) Hydro (4%) Solar (3%) Wind (7%)

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Transition in Electricity Generation

The electricity sector is expected to undergo significant change in the coming decades as each of the

State’s coal generators are progressively retired. Given the substantial role each plant plays in the

State’s energy system, there are risks associated with their retirement: when coal generators have

been decommissioned in other states, these have often been accompanied by significant spikes in

electricity prices across the National Energy Market (NEM), including in New South Wales. To

address this risk, the NSW Government has recently announced and legislated the Electricity

Infrastructure Roadmap, which seeks to ensure replacement electricity generation infrastructure is in

place in time for the expected plant closures. This is to be achieved through the NSW Government

sharing some of the investment risk for new generation and storage infrastructure with the private

Projecting the Future of Electricity Generation

Modelling of electricity generation in this paper considers two key inputs:

• the amount of electricity generated by each technology type

• the wholesale price of electricity

These are assumed to be in line with modelling conducted by Aurora Energy Research as part of the

development of the Roadmap.43 This modelling extended only to 2042 and must therefore extended

to 2061 for the purposes of this modelling project. Given the Aurora modelling indicated prices would

be broadly stable in real terms to 2042, it is assumed this trend continues to 2061 (see Chart 8).

Under the slow and disorderly transition scenario, however, new forms of generation are not in place

by the time coal generators are decommissioned, leading to significant price spikes (see Chart 8).

These subside over time, but prices are assumed to remain higher than under the other scenarios,

reflecting relatively slower technological development under this scenario. Specifically, after 2042,

prices are assumed to return to the average experienced between 2031 and 2035 prior to the closure

of the Bayswater coal generator (which leads to a large spike in prices).

Chart 8 Projected Wholesale Electricity Price in NSW

43 NSW Department of Planning, Industry and Environment, NSW Electricity Infrastructure Roadmap.

Slow & Disorderly Transition Scenario All Other Scenarios

Bayswater Retires

Mt Piper Retires

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Long term projections of electricity prices are inherently uncertain, and comprehensive modelling for

the period after 2042 was not available for this analysis. The pricing assumptions adopted for this

modelling are designed to be broadly consistent with the overall scenario drivers, but do not represent

all possible trajectories.

Electric Vehicles in New South Wales

The overwhelming majority of motor vehicles in New South Wales are powered by internal

combustion engines: 99 per cent of light vehicles currently registered in NSW are Internal Combustion

Engine Vehicles (ICEVs), fuelled by either petrol, diesel or LPG (see Chart 9). The fundamental

characteristics of most motor vehicle engines have remained unchanged in over a century, and an

array of physical and economic infrastructure is based on this basic model: Australia imports around a

third of its automotive fuel, with most domestic production occurring in Western Australia.44 This is

then distributed to consumers through a network of around 2,000 petrol stations located throughout

New South Wales.45

Chart 9 NSW Vehicle Registrations by Fuel Type (September 2020)

The Commonwealth Government levies excise on petrol, which operates as a de facto road user

charge. The Commonwealth raised $17.6 billion in excise on diesel and petrol in 2019-20,46 which

represented over 80 per cent of total Commonwealth road related revenues.47 The Commonwealth in

turn contributes to road construction and maintenance in New South Wales, with Commonwealth

grants accounting for 31 per cent of the State’s road-related revenues (see Chart 10).

Chart 10 New South Wales Road Related Revenues

Source: Bureau of Infrastructure and Transport Research Economics; NSW Treasury. Excludes GST and tolls.

44 Department of Industry, Science, Energy and Resources, ‘Australian Petroleum Statistics, Commonwealth of Australia 2021’. 45 Knight Frank, ‘NSW Service Stations Insight’. 46 Commonwealth of Australia, ‘Budget 2021-21’, 10–24. 47 Bureau of Infrastructure, Transport and Regional Economics, ‘Australian Infrastructure Statistics Yearbook 2018’.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Petrol (76%) Diesel (23%) LPG/Gas (0.3%) Electric/Hybrid/Hydrogen (1.1%)

Registration Charges Commonwealth Grants Stamp Duty Licences

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Transition to electric vehicles

The uptake of electric vehicles is accelerating, with global sales increasing 40 per cent in 2019.48 As

part of their commitments to achieve net zero emissions by 2050, some countries have recently

announced they will prohibit sales of petrol-fuelled vehicles in the coming decades, including the UK

in 2030 and Japan in 2035,49 two of the largest markets for right hand drive vehicles. The pace of

transition in New South Wales will ultimately depend on whether and when prices become competitive

with conventional vehicles, other technological advances such as improved range and faster

charging, the availability of charging facilities, and potentially on the global supply of vehicles.

Any transition to electric vehicles will have a range of implications for the economy and governments.

As noted in the NSW Review of Federal Financial Relations, fuel excise would no longer operate as a

broad de facto road user charge and associated funding source, a consideration which has already

resulted in the introduction of electric vehicle charges in Victoria and South Australia. Vehicle range

and charging facilities are both more challenging and more critical in regional New South Wales due

to the combination of lower population density and the number of longer journeys driven. Given

uncertainty in how all these issues are ultimately resolved, modelling different uptake scenarios of

electric vehicles will ensure the IGR is accounting for a range of economic, fiscal and policy

development risks.

Projecting electric vehicle uptake

Projections of electric vehicle uptake to 2050 are sourced from the AEMO Integrated System Plan

and extended for an additional ten years with reference to growth in the overall vehicle fleet and linear

extension of trends regarding vehicle preference. Chart 11 outlines which AEMO scenario has been

used for each scenario in this paper, along with the specific projections.

Chart 11 Projected number of light electric vehicles registered in NSW

Source: Australian Energy Market Operator; NSW Treasury.

48 International Energy Agency, ‘Global EV Outlook 2020’. 49 Reuters, ‘Japan May Ban Sale of New Gasoline-Powered Vehicles in Mid-2030s’.

2020 2030 2040 2050 2060

Higher EVs (AEMO 'step change' scenario)Slow & Disorderly Transition (AEMO 'slow change' projection)All Other Scenarios (AEMO central projection)

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7. Economic and fiscal impacts of the broader energy transition

Impacts on Economic Output

The projected economic impacts of the broader energy transition scenarios produced by the

CGE modelling are set out in Chart 12. Under the lower global coal demand + higher EVs

scenario, economic growth is lower throughout the projection period than under the

reference case and remains 0.4 per cent lower in 2061.

Under this scenario, higher uptake of electric vehicles significantly moderates the negative

economic impacts of lower global coal demand. This is because electric vehicles are

powered by domestically produced and relatively inexpensive electricity, rather than

imported petrol. Under this scenario, the economy is projected to be 0.6 per cent below the

reference case in 2041 (compared with 0.9 per cent without higher electric vehicles uptake).

By 2061, the NSW economy is projected to be 0.4 per cent smaller than under the reference

case, compared with 0.6 per cent smaller in the scenario with only lower coal demand.

Chart 12 The sensitivity of Gross State Product to the broader energy transition

Under the slow and disorderly transition scenario, higher and more volatile electricity prices,

combined with lower uptake of electric vehicles have a significant negative impact on

economic growth, and result in growth being lower than under the reference case, despite

higher global coal demand supporting higher coal production. These effects also build over

time, as higher and more volatile electricity prices work their way through the economy. This

scenario has the slowest economic growth of all scenarios by 2061, with GSP being 0.9 per

cent below the reference case.

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Fiscal Impacts

While the broader energy transition scenarios do not impact the fiscal position through direct

impacts on specific revenue collections, they have an indirect impact through their effect on

overall economic growth. Under the higher global coal demand scenario + slow and

disorderly transition scenario, the fiscal gap is projected to be 0.08 per cent larger than

under the reference case by 2061. As with the broader economic impacts, the effect of

higher and more volatile electricity prices, and lower uptake of electric vehicles fully offset

higher revenue from coal royalties. Under the lower global coal demand + higher EVs

scenario, the fiscal gap is projected to be 0.10 per cent larger than under the reference case

by 2061, with higher uptake of electric vehicles moderating, but not fully offsetting lower coal

royalties revenue.

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8. Discussion

Declining global coal demand will impact the economy and NSW budget

The NSW coal mining industry is primarily oriented around the export of thermal coal, which

is used to generate electricity overseas. This means the future of the industry will be largely

determined by global demand for this type of electricity generation, which in turn will be

impacted by the cost of alternative electricity generation technologies as well as global policy

settings. Since the 2016 New South Wales IGR there has been a significant shift in the

outlook for the coal mining industry. Australia’s top three thermal coal export markets have

committed to achieving net zero emissions by the middle of the century, and the cost of

renewable energy generation has fallen below the cost of new coal generation. There

remains some uncertainty around the pace of the decline in global demand however, and

this paper explores the potential for these differences to impact New South Wales’ economic

and fiscal outlook.

Declining global demand for NSW coal will impact employment in coal mining. Under the

reference case, employment in coal mining is projected to decline by an average of 600 jobs

per year for the next two decades, with many of these being relatively highly skilled

positions. The NSW Budget will also be significantly impacted, with cumulative coal royalties

revenue between 2021 and 205650 projected to be $38 billion (real 2019-20 dollars) lower

under the reference case than that projected in the 2016 IGR.

Transition in energy generation more broadly presents both risks and opportunities

The modelling presented in this paper extends beyond just the coal mining sector to more

comprehensively test the implications of the underlying assumptions regarding the broader

energy transition. Global demand for NSW coal is largely outside the control of the NSW and

Commonwealth Governments, but the broader energy transition will present a range of both

risks and opportunities. Firstly, there would be significant economic costs under a slow and

disorderly transition toward renewable energy. The modelling presented here indicates that

the impact of higher and more volatile electricity prices could more than offset any economic

benefits from higher coal production. Under this scenario, growth is projected to be the

slowest of all scenarios, despite higher global coal demand. The fiscal outlook under this

scenario is also roughly the same as under the lower global coal demand + higher electric

vehicle uptake scenario, again despite significantly higher global demand for coal and

associated royalties.

The modelling also projects economic benefits from higher uptake of electric vehicles. The

benefits arise from electricity being produced within New South Wales to power electric

vehicles, rather than importing energy from other states or from overseas, as is currently the

case for motor vehicle fuel. Electricity is also cheaper than petrol per unit of energy.

50 This was the final year of the 2016 IGR projection

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Some factors are outside the scope of the modelling

This modelling has not accounted for the economic impact of potential future policy

measures, such as changes in the tax treatment of electric vehicles. There are also

opportunities in newer industries that have not been included in the modelling, for example

the potential for New South Wales to increase exports of newer energy technologies such as

hydrogen. The potential for the development of new industries are explored further in NSW:

A Clean Energy Superpower, conducted by KPMG for the NSW Government.51

51 NSW Department of Planning, Industry and Environment, NSW Electricity Infrastructure Roadmap.

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9. Conclusion

The modelling presented in this paper is aimed at improving the quality of economic and

fiscal projections in the 2021 NSW IGR through considering the potential impact of changes

in global coal demand, and the broader transition in energy generation. This modelling

constitutes an assessment of some of the key transitional risks of climate change and is

accompanied by a separate paper focused on a selection of physical climate risks.52

Together these papers provide an indication of the direction and scale of physical and

transitional climate risks.

A key motivation for the modelling presented in this paper has been to understand how the

future trajectory of coal production in New South Wales is likely to impact the NSW economy

and budget. The NSW Government derives revenue directly from coal production hence the

NSW IGR has always included projections of coal production. The scope of the paper is

broader than this, however, to ensure that the impact of declining global coal demand is put

in context of other risks associated with the broader transition in energy generation.

Broadening the scope beyond coal allows for a more robust and nuanced economic

assessment of the future impacts of the energy transition. Overall, the results indicate that

there are both risks and opportunities associated with the development of new, low

emissions energy generation technologies. While it is clear the NSW Budget is sensitive to

differences in global demand for coal, the modelling in this paper finds that a slow and

disorderly transition to renewable energy could pose an even more significant risk to the

fiscal outlook. Furthermore, the State’s economy could benefit from higher electric vehicles

uptake as they are powered by relatively cheap renewable electricity generated within the

State, rather than imported and more expensive petrol.

The scenarios considered in this paper represent only some of the many potential futures for

NSW and should not be considered comprehensive. The potential for new innovations or

policy changes have not been modelled. The analysis in this paper will, however, assist in

understanding the scale, drivers and consequences of the energy transition, and will

therefore inform more robust economic and fiscal projections in the NSW IGR.

52 NSW Treasury, ‘An Indicative Assessment of Four Key Areas of Climate Risk for the NSW Intergenerational Report 2021’.

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Technical Appendix

The Victoria University Regional Model (VURM) is used to produce a number of scenarios

for the New South Wales and Rest of Australia (RoA) economies based on the inputs

outlined in section 5. The first is a reference case. The remaining scenarios depart from the

reference case in response to different assumptions relating to key energy variables in the

NSW economy.

In this section, we briefly describe VURM, and then explain some of the key behavioural

assumptions underlying the deviation scenarios. The section concludes with a short

explanation of how the shocks are applied.

In the version of VURM used for the study, there are 83 industry sectors in two regions, New

South Wales and the RoA. The latter region is an aggregation of the other five Australian

states and the two territories.

Investment is allocated across industries to maximise rates of returns to investors

(households, firms). Capital creators assemble, in a cost-minimizing manner, units of

industry-specific capital for each industry. Each state has a single representative household

and a state government. There is also a federal government. Finally, there are those

overseas, whose behaviour is summarised by export demand curves for the products of

each state and by supply curves for international imports to each state.

As is standard in CGE models, VURM determines the supply and demand for each

regionally produced commodity as the outcome of optimising behaviour of economic agents.

Regional industries choose labour, capital and land to maximize their profits while operating

in a competitive market. In each region a representative household purchases a particular

bundle of goods in accordance with the household’s preferences, relative prices and its

amount of disposable income.

Interregional trade, interregional migration and capital movements link each regional

economy. Governments operate within a fiscal federal framework.

VURM provides results for economic variables on a year-on-year basis. The results for a

particular year are used to update the database for the commencement of the next year. In

particular, the model contains a series of equations that connect capital stocks to past-year

capital stocks and net investment. Similarly, debt is linked to past and present

borrowing/saving and regional population is related to natural growth and international and

interstate migration. For a detailed description of the theoretical structure of the VURM

model, see Adams, et al (2011).53

53 Adams et al., ‘MMRF: Monash Multi-Regional Forecasting Model: A Dynamic Multi-Regional Model of the Australian

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Key assumptions underlying the alternative scenarios

Labour markets

At the national level, lagged adjustment of the real-wage rate to changes in energy-related

variables is assumed. These changes can cause employment to deviate from its reference

value initially, but thereafter, real wage adjustment steadily eliminates the short-run

employment consequences. This labour-market assumption reflects the idea that ultimately

national employment is determined by demographic factors, which are unaffected by energy-

related volumes and prices.

At the regional level, labour is assumed to be mobile between state economies. Labour is

assumed to move between regions to maintain inter-state unemployment-rate differentials at

their reference-case levels. Accordingly, regions that are relatively favourably affected by

changes away from base in the energy sector will experience increases in their labour forces

as well as in employment, at the expense of regions that are relatively less favourably

Private consumption and investment

Private consumption expenditure is determined via a consumption function that links nominal

consumption to household disposable income (HDI). In the alternative simulations, the

average propensity to consume (APC) is an endogenous variable that moves to ensure that

the balance on current account in the balance of payments remains at its reference case

level. Thus, any change in aggregate investment brought about by different energy-related

assumptions is accommodated by a change in domestic saving, leaving Australia’s call on

foreign savings unchanged.

Investment in all but a few industries is allowed to deviate from its reference-case value in

line with deviations in expected rates of return on the industries’ capital stocks. In the

alternative scenarios, VURM allows for short-run divergences in rates of return from their

reference-case levels. These cause divergences in investment and hence capital stocks that

gradually erode the initial divergences in rates of return.

Government consumption and fiscal balances

VURM contains no theory to explain changes in real public consumption. The primary fiscal

modelling is conducted using NSW Treasury’s Long-Term Fiscal Pressures model, which

utilises the output from VURM as an input. In the VURM simulation, public consumption is

simply indexed to nominal GDP. The fiscal balances of each jurisdiction (federal, state and

territory) as a share of nominal GDP are allowed to vary relative to reference case values in

line with projected changes in expenditure and income items.

Production technologies and household tastes

VURM contains many variables to allow for shifts in technology and household preferences.

In the alternative scenarios, most of these variables are exogenous and have the same

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values as in the reference case projection. The exceptions are technology variables, used to

introduce shocks to the model.

The deviation scenarios shift away from the Base case in response to three sets of shocks

relating to:

1. Coal Production

2. Electricity generation, and

3. Electric vehicle uptake.

Coal production (and price)

Coal production is a naturally model-determined (endogenous) variable. To impose changes

(away from reference case) in coal production, we reverse the natural setting of the model,

by making production exogenous and a previously naturally user-determined (exogenous)

variable endogenous. The latter is all-factor (labour, capital and land) technological progress

in the coal industry. Thus, exogenous changes in coal production are imposed via model-

determined shifts in the productivity of factors (labour, capital and land) used in coal

production.

Fixing production via a supply-side shift causes the price of coal to move away from

reference case values. These price movements will typically be quite large and require

control. This is handled by making price exogenous via endogenous shifts in demand. The

variable (previously exogenous) made endogenous is world demand for Australian coal.

Thus, the model determines changes in world coal demand that are necessary to achieve a

given path for coal price in an environment where coal production is also exogenous.

Electricity generation

Changes away from the reference case are imposed on sent-out generation shares by type

(coal generation, gas generation, hydro generation and other renewable generation) and on

wholesale electricity prices. These are imposed separately for New South Wales and the

Changes in generation mix are imposed via endogenous changes in retail demand. For

example, in the slow transition case, coal generation is required to increase relative to

reference case levels. This is achieved by model-determined shifts in retail demand towards

coal generation and away from other forms of generation. The shares imposed are initially

cost-neutral and so have no effect on the wholesale and retail prices of electricity. External

estimates of changes in the average retail price of electricity in each region are introduced

via model-determined changes in a miscellaneous other cost category in the model’s retail

electricity industries.

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Electric vehicles uptake

In its current state of development, VURM does not explicitly recognise electric vehicles

separately from internal-combustion vehicles. To model changes in the rate of electric

vehicles uptake, we simply enforce changes in the mix of energy used by users of

passenger and light-commercial vehicles. These users are the road-transport industries

(excluding heavy-vehicle freight) and the household sector.

The changes in fuel mix are constrained to be energy-neutral in the sense that 1 Pj of

electricity replaces 1 Pj of petroleum product. However, they are not necessarily cost-neutral

because 1 Pj of electricity for vehicle power is less expensive that 1 Pj of petroleum.

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Adams, Philip, Janine Dixon, James Giesecke, and Mark Horridge. ‘MMRF: Monash Multi-Regional Forecasting Model: A Dynamic Multi-Regional Model of the Australian Economy’. Centre of Policy Studies/IMPACT Centre Working Papers. Centre of Policy Studies/IMPACT Centre Working Papers. Victoria University, Centre of Policy Studies/IMPACT Centre, 2011. https://ideas.repec.org/p/cop/wpaper/g-223.html.

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———. ‘Labour Force, Australia, Detailed, December 2020 | 6291.0’, 28 January 2021. https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia-detailed/latest-release.

Australian Energy Market Operator. ‘2020 Integrated System Plan’, July 2020. https://aemo.com.au/-/media/files/major-publications/isp/2020/final-2020-integrated-system-plan.pdf?la=en&hash=6BCC72F9535B8E5715216F8ECDB4451C.

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Thurbon, Elizabeth, Hao Tan, John Mathews, and Sung-Young Kim. ‘Forget about the Trade Spat – Coal Is Passé in Much of China, and That’s a Bigger Problem for Australia’. The Conversation. Accessed 4 February 2021. http://theconversation.com/forget-about-the-trade-spat-coal-is-passe-in-much-of-china-and-thats-a-bigger-problem-for-australia-153300.

Welch, David. ‘GM Plans to Sell Only Zero-Emission Models by 2035’. Bloomberg Green, 28 January 2021. https://www.bloomberg.com/news/articles/2021-01-28/gm-commits-to-sell-only-electric-zero-emission-vehicles-by-2035.

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Further information and contacts

For further Information or clarification on issues raised in this paper, please contact:

Principal Economist

NSW Intergenerational Report Team

NSW Treasury

Email: [email protected]

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1000 Igr s Karandashom

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取 扱 説 明 書...T04013-7 取 扱 説 明 書 品名: 絶縁監視装置 型式:IGR-400 A1/A4/A8 IGRA-400A IGR-401 IGRS-410 IGR-400-A8(8ch版) IGR-400-A4(4ch版)

取 扱 説 明 書...T04013-7 取 扱 説 明 書 品名: 絶縁監視装置 型式:IGR-400 A1/A4/A8 IGRA-400A IGR-401 IGRS-410 IGR-400-A8(8ch版) IGR-400-A4(4ch版)

Iain GillottMatthew Vartabedian (512) 263-5682(708) 387-0475 iain@iGR-Inc.comiain@iGR-Inc.commattv@iGR-Inc.com

Iain GillottMatthew Vartabedian (512) 263-5682(708) 387-0475 [email protected] @ [email protected]

Konkyrs didakticheskih igr po razvitiyu rechi 2013

Konkyrs didakticheskih igr po razvitiyu rechi 2013

SAP  INTERGOVERNMENTAL RELATIONs (IGR)/HUBUNGAN ANTAR PEMERINTAHAN

SAP INTERGOVERNMENTAL RELATIONs (IGR)/HUBUNGAN ANTAR PEMERINTAHAN

Strana Igr 8 2012

Strana Igr 8 2012

IGR Cancer du sein

IGR Cancer du sein

Especificaciones técnicas del producto «IGR Poblaciones

Especificaciones técnicas del producto «IGR Poblaciones

Company Profile- iGR

Company Profile- iGR

Federalism and IGR

Federalism and IGR

Igr Projet d'Etablissement p 103

Igr Projet d'Etablissement p 103

IMAGES

  1. 2021 NSW Intergenerational Report Treasury Technical Research Papers

    2021 intergenerational report treasury technical research paper series

  2. 2021 Intergenerational Report

    2021 intergenerational report treasury technical research paper series

  3. What is the Intergenerational Report?

    2021 intergenerational report treasury technical research paper series

  4. CEDA

    2021 intergenerational report treasury technical research paper series

  5. NSW Intergenerational Report Treasury Technical Research Papers

    2021 intergenerational report treasury technical research paper series

  6. 2021-22 NSW Intergenerational Report

    2021 intergenerational report treasury technical research paper series

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COMMENTS

  1. PDF 2021 IGR TTRP

    Treasury Technical Research Paper Series ... 2021 NSW Intergenerational Report, focuses on an initial set of transitional risks. The assessment timeframe is limited to the IGR's forty-year projection period. The impact of climate change, particularly under higher warming scenarios, is expected to significantly intensify in the ...

  2. 2021 Intergenerational Report

    The Treasurer has released the 2021 Intergenerational Report. The report projects an outlook for the economy and the Australian Government's budget over the next 40 years. It examines the long-term sustainability of current policies and how demographic, technological and other structural trends may affect the economy and the budget. Related papers

  3. Health and Aged Care in the Intergenerational Report

    2021 intergenerational report: Ageing and health expenses in New South Wales-revisiting the long-term modelling approach, Treasury Technical Research Paper series 21-03 Feb 2023 J Cheung

  4. PDF 2021 Intergenerational Report

    (a) The following definitions are used in this report: ­ 'real' means adjusted for the effect of inflation ­ real growth in spending is calculated by the Consumer Price Index as the deflator ­ one billion is equal to one thousand million. (b) Figures in tables and generally in the text have been rounded.

  5. Preliminary Participation Rate Projections for the 2021

    August 2020 TTRP 20-01 2021 Intergenerational Report Treasury Technical Research Paper Series Preliminary Participation Rate Projections for the 2021 Intergenerational Report _____ Dougal Horton1 1 The views in this paper are those of the author and do not necessarily reflect those of NSW Treasury. This publication can be accessed from Treasury ...

  6. 2021 igr ttrp

    April 2021 TTRP 21-05 2021 Intergenerational Report Treasury Technical Research Paper Series 1 The views in this paper are those of the authors and do not necessarily reflect those of NSW Treasury. This publication can be accessed from Treasury's website www.treasury.nsw.gov.au. An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report _____ Nick ...

  7. Intergenerational reports

    ABN: 92 802 414 793 The Australian Government produces intergenerational reports. These reports project outlooks for the economy and the Australian Government's budget over the next 40 years.

  8. 2021 Intergenerational Report

    The 2021 Intergenerational Report (IGR) details the economic challenges, and the opportunities facing Australia and underlines the fact that the economic impact of COVID-19 won't be short lived. The IGR provides a modelled view of the future over the next 40 years. It's not a guarantee of what will be, but an insight into what could be.

  9. 2021 intergenerational report : Australia over the next 40 years

    Creator Australia. Treasury Created/Published Parkes, ACT : Department of the Treasury, June 2021 ©2021 Standard Ids 9781925832372 (ISBN) View Catalogue Image: 0 Up a level Down a level Book / nla.obj-2969966724

  10. Getting more value from Australian Intergenerational Reports

    Abstract This article highlights the lessons learned from a study of the 2021 Intergenerational Report hosted by the Academy of the Social Sciences in Australia. That study, published in a book, Mo... Getting more value from Australian Intergenerational Reports - Podger - Australian Journal of Social Issues - Wiley Online Library

  11. Preliminary Fertility Rate Projections for the 2021 NSW

    January 2021 TTRP 21-01 2021 Intergenerational Report Treasury Technical Research Paper Series Preliminary Fertility Rate Projections for the 2021 NSW Intergenerational Report _____ Riley Kelly1 1 The views in this paper are those of the author and do not necessarily reflect those of NSW Treasury. This publication can be accessed from Treasury ...

  12. Background Paper for the 2021 Statement on the ...

    The Australian Treasury published their latest Intergenerational Report (IGR) in June 2021. With this publication they appear to have moved away from using a truly stable long-run assumption for the annual nominal return rate on the Australian government 10-year bond, and instead are applying a similar logic to that used by the United Kingdom's ...

  13. Why you should care about the Intergenerational Report

    The 2021 Intergenerational Report was released by the Federal Government at the end of June. Its great strength is that it provides a long-term lens to think about the economic challenges facing the country. Actuaries have an interest in many topics covered, and indeed we maintain our own Intergenerational Equity Index.This article explores the report and offers some thoughts on what it means ...

  14. Getting more value from Australian Intergenerational Reports

    This article highlights the lessons learned from a study of the 2021 Intergenerational Report hosted by the Academy of the Social Sciences in Australia. That study, published in a book, More than Fiscal, (Podger et al., 2023, More than Fiscal, ANU Press), also advises how to improve future IGRs. The article includes a brief assessment of the ...

  15. PDF Intergenerational Report Factsheet

    Intergenerational Report 2023 at a glance. Five major forces that will shape the Australian economy over the coming decades are population ageing, expanded use of digital and data technology, climate change and the net zero transformation, rising demand for care and support services, and increased geopolitical risk and fragmentation.

  16. The intergenerational report sets the scene for 2063

    Print Treasurer Jim Chalmers is preparing to release the Treasury's sixth Intergenerational Report on Thursday. Whereas the first, in 2002, made projections out to 2042, this one will take us...

  17. 2021 IGR TTRP

    May 2021 TTRP 21-07 2021 Intergenerational Report Treasury Technical Research Paper Series 1 The views in this paper are those of the authors and do not necessarily reflect those of NSW Treasury. This publication can be accessed from Treasury's website www.treasury.nsw.gov.au. The sensitivity of the NSW economic and fiscal outlook to global coal demand and the broader energy transition for ...

  18. Federal Treasury Intergenerational Report (IGR) Projected Fiscal Gap

    This paper examines the complicated linkages between money, soils, and ethical land stewardship. Law and policy reform is important, but the many impediments to voluntary soil stewardship that ...