Australia’s climate policies could push NSW into a debt spiral – report

Australia’s failure to commit to net zero targets or any credible climate policy is a growing economic threat to New South Wales and other states, argues a new report by the Institute of Energy Economics and Financial Analysis (IEEFA).

The Reserve Bank of Australia’s deputy governor Guy Debelle last week urged Australia to begin planning for the investment needed in the transition to zero carbon with Deloitte Access Economics determining the economic losses of doing nothing to mitigate the impacts of climate change would shrink Australia’s GDP by six per cent, a $3.4 trillion loss in GDP in present value terms.

IEEFA’s report finds that Australia’s climate policies will have an extremely detrimental impact on the NSW economy.

Report author and analyst Trista Rose said increased spending resulting from climate mitigation and damage from extreme weather events would push out debt levels. Couple that with declining coal royalties and continued reliance on high emitting fuels, the state’s net debt is estimated to reach 100 per cent of GSP by 2060.

Rose said: “The combined effect of drought, bushfires, floods and the first round of COVID-19 lockdowns have taken debt in NSW to unprecedented levels.

“The bond market has reacted strongly, pushing out the cost NSW pays for its borrowing by 30 basis points representing $300 million per annum.

“Increased expenditure from climate mitigation will push out bond spreads, with the bond market’s reaction to NSW’s recent recovery spending evidence we will see more of the same.

“NSW could wind up in a vicious cycle of spending and debt related to environmental costs and interest expenditure, rather than a virtuous cycle of spending which results in broader economic gain which benefits the residents of NSW.”

IEEFA’s report also notes that Australia’s climate stance will inhibit access to cheap capital and drive the cost of capital higher.

NSW has relied heavily on offshore investors for funding requirements and, as foreign investors increasingly shun assets with high carbon exposure as the world commits to net zero, access to foreign capital is likely to become increasingly challenging.

“Australian sovereign and sub-sovereign bonds will not meet the international community’s low carbon goals.

“Global investors will look to proactively divest bonds in high emitting markets, particularly in relatively insignificant global markets such as NSW.”

Picture: Port Augusta Renewable Energy Park (PAREP)

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