With a federal election on its way, there's increased talk about reviewing the Reserve Bank of Australia.
Rightly, a lot of the attention has focused on the bank's inflation target of 2 to 3 per cent in the medium term. Undershot for quite some time, it now looks likely to be exceeded in the next round of inflation data.
But we often forget that the bank has twin objectives: controlling inflation and supporting economic prosperity. There has been much less focus on the latter - for some reason, people think that domain is the purview of fiscal policy only. This is not true.
A true review of the RBA must scrutinise how the RBA is working to achieve its economic prosperity mandate - how it assesses the structure of our economy, its competitiveness, and, most importantly, its vulnerabilities.
That's why the IPCC's latest report (warning global greenhouse-gas emissions must peak no later than 2025 to have any hope of meeting the 1.5-degree limit) should be front of mind for central bankers concerned about economic growth.
The topic of climate is not unknown to the RBA, with the now-former deputy governor Guy Debelle warning: "Climate change is a first-order risk for the financial system ... To date, we have only isolated examples of divestment from Australia because of climate risk, but the likelihood of more significant divestment is increasing."
But Debelle has now moved to Fortescue Future Industries, to tackle the climate challenge from the private sector. And as the urgency of the IPCC report suggests, public bodies like the RBA can't let their focus on climate slip.
The recent and repeated flooding is proof enough that Australia is extremely vulnerable to the increase in catastrophic weather events caused by a changing climate. Our own analysis for the Business Council of Australia suggests that without meaningful action on climate, the Australian economy could face a $3.4 trillion hit over the next 50 years and lose nearly 600,000 jobs.
And as Debelle has pointed out, the economic damage won't be attributable to just more extreme events: Our highly emissions-intensive economy also leaves us vulnerable as the global economy steps up to the decarbonisation challenge.
Australia's Future Fund notes that climate comes up regularly in conversations with foreign investors. The implications of Australia not keeping up with the globe's rate of decarbonisation include a cost-of-capital increase between 100 and 300 basis points, according to Treasury modelling of the Australian government's net-zero policy.
Globally, the Network for the Greening of the Financial System, a collection of central banks and banking regulators (of which the RBA is a member), has been hard at work looking at this issue of climate sustainability, the finance system, and economic growth.
It won't be long before our banks assess and report all their loan books against climate and transition risks, with significant financing consequences for corporate Australia and small businesses. This is no longer abstract, but a fast-growing reality - despite our political discourse on climate still failing to fully accept the science and economics of climate change.
The risks of a massive economic hit from climate and a suboptimal transition should worry us all. But we should also worry about missing out on the upside of decarbonisation. Our research also tells us that meaningful action could add $890 billion to GDP over the next 50 years.
This task of tackling the effects of climate change is the greatest monetary policy challenge of the coming decade. Any review of the RBA must examine the extent to which it is incorporating climate risk into its decision-making.
At its core, the RBA serves to "contribute to the economic prosperity and welfare of the people of Australia". Our prosperity and welfare have rarely faced greater challenges, and our politicians would do well to examine how the RBA is tackling them.
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