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2021 igr ttrp - an indicative assessment of four key areas
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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
TTRP21-05 An indicative assessment of four key areas of climate risk 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, 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.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 2
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
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 3
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
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 4
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 5
• 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)
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 6
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
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 7
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 8
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
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 9
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 10
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
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 11
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
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 12
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.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 13
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 14
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.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 15
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 16
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.’
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 22
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 29
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 30
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 31
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 38
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.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 39
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 41
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’.
TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 52
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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TTRP21-05 An indicative assessment of four key areas of climate risk for the 2021 NSW Intergenerational Report 59
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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Ministers Treasury portfolio
- The Hon Josh Frydenberg MP
- Media releases
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
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).
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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The intergenerational report sets the scene for 2063 – but what is it?
Professor of Health Economics, University of Technology Sydney
Disclosure statement
Michael Woods is a Professor of Health Economics at the University of Technology Sydney and was a former Deputy Chair of the Productivity Commission. He currently receives funding from governments and organisations in relation to ageing research.
University of Technology Sydney provides funding as a founding partner of The Conversation AU.
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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.
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
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.
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.
- Climate change
- Population growth
- commonwealth budget
- Intergenerational report
- commonwealth treasury
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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
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.
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
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).
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
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.
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
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’.
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.
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’.
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’.
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 11
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’.
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 12
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.
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 13
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.
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 14
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.
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 16
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.
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 17
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)
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 26
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’.
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 31
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
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 32
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
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 33
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.
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 34
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.
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 35
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.
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———. ‘NEM Data Dashboard’. Accessed 18 January 2021. https://aemo.com.au/energy-systems/electricity/national-electricity-market-nem/data-nem/data-dashboard-nem.
Australian Government Department of Industry, Science, Energy and Resources. ‘State and Territory Greenhouse Gas Inventories 2018’. Australia’s National Greenhouse Accounts, May 2020. https://www.industry.gov.au/sites/default/files/2020-05/nga-state-and-territory-greenhouse-gas-inventories-2018.pdf.
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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 38
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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