Footy faces cyclones and record heat – it’s just a taste of what’s to come from climate change

The 2025 Australian Football League has begun. The game is endemic to this island continent, just like the eucalyptus tree which is the world’s most efficient instrument for converting atmospheric carbon dioxide into terrestrial carbon.

AFL is a physically demanding game, played by superb athletes. Players run up to 22km in 80 minutes, well over half a marathon. Some players reach a top pace that, if maintained for 100 metres, would have won every Olympic sprint until about that time. 

The extreme physical demands mean the AFL season, by necessity, avoids the hottest months. Melbourne reached 34.9 degrees Celsius last Saturday. With competition going back 150 years, it was the highest temperature ever for a first-grade game day in this city. 

A week before, a match was cancelled for the first time in the history of the national competition because of safety concerns a cyclonic event in a hitherto sub-cyclonic region presented.

Weather disruption – energy costs higher, productivity lower

Extremes of weather disrupt sport and the supply and demand for energy, and both result in high economic costs as well.

The intensity and costs of extreme heat, rain and wind will continue to increase for as long as we are adding carbon dioxide to the atmosphere. Reduce emissions and the rate of deterioration will slow. But it will continue to get hotter and the extreme wind and rain events more intense until net emissions have been reduced to zero.

That’s the awful reality. Climate change will disrupt our lives more and more until the world reaches net zero. Go directly from now to net zero in 2050 and average increases in temperature above pre-industrial levels will not rise far above 1.5 degrees – costly and disruptive, but not enough to make conditions unrecognisably worse than now. 

Delay to 2060 or 2070, and average temperatures will be higher and more costly when we reach net zero and stay high. Fail to reach net zero at all, and temperatures will continue to rise. That is the atmospheric physics, whatever the beliefs of the President of the United States or the statements on Fox television or the results of opinion polls. 

“On a balance of probabilities, the failure of our generation (on climate) would lead to consequences that haunt humanity until the end of time.”

They were the concluding words of my Climate Change Review, presented to the Australian Prime Minister, the six State Premiers and the two Territory Chief Ministers in September 2008. 

My generation has gone a long way towards failing. Climate disruption is lowering national productivity. Increases in insurance and other costs are lowering real incomes and living standards. That’s one of the reasons why ordinary Australians’ living standards are lower now than twelve years ago. 

Climate change and global dislocations on trade, development, health and security make it unlikely that the next generation or two in the developed countries at least will live as well as mine has done.

There will be less decline if we accelerate movement to net zero. But in the best of circumstances, living standards of future generations will be damaged by an increase in average global temperatures. 

Uncertainty and risk higher

That damage can be reduced by good management of weather uncertainty and risk. That’s the business of participants in this conference. 

Two clear minds, Frank Knight in the US and John Maynard Keynes in the UK, defined uncertainty and risk for us a bit over a century ago. Risk is the unknown outcome from a known probability distribution. We don’t know whether any throw of two fair dices will add up to 3 or 11. But we know fairly closely how many times we will see 3 or 11 if we throw the dice a thousand times.

Uncertainty is when we have no basis for knowing the probability distribution of possible outcomes. The US Defence Secretary in the George W. Bush administration made the concepts famous by referring to known and unknown unknowns arising from the invasion of Iraq.

When societies and polities receive a heavy enough shock, things fall apart, with consequences that cannot be calculated in advance. “Stuff happens,” said Secretary Rumsfeld, when the outcomes were worse than any he had imagined. 

Climate change increases both uncertainty and risk. 

The uncertainties include the falling apart of the domestic and international political order when shocks exceed some bearable limit. We can respond to them only by quickly reducing emissions without the benefit of authoritative calculation of cost and benefit. 

Risk – the dispersion of the probability distribution of extreme weather events – widens as temperature increases. 

Weather risk in one place is insurable if it is not positively correlated with risk in others; or if one outcome is damaging for some firms and advantageous for others; or if one firm is in a better position to absorb bad outcomes than others.

Trade in weather derivatives and other forms of insurance can reduce the risk faced by individual firms in places facing independent probability distributions; or between firms which win and those which lose from unusually hot or wet weather; or between firms that can absorb climate damage more and less easily. 

Australia’s unusually variable weather, made more variable with climate change, increases the value of insurance. Economies in the northern hemisphere with weather patterns correlated only weakly if at all with Australia provides large gains from trade in weather risk.

In the energy sector, Australia’s need for and the northern economies’ opportunities for trade in weather-related derivatives and other insurance products will expand as Australian production and export of renewable energy generation for zero-carbon goods increases – as Australia utilises its opportunity to be the energy superpower of the low carbon world economy.  

Trade in risk products is of limited value when an adverse event is likely to have similar effects at a similar time over large parts of the world. Sea level rise is an example. Rising seas are likely to destroy the value of properties near the sea to roughly the same extent and at similar if not identical times in low-lying Florida and around Port Phillip Bay in Melbourne.

Not many firms win from sea level rise (maybe some in the construction, security and arms businesses), so there are few opportunities for trade with those that lose. The similarity of timing across many places’ limits opportunity for trading different chances of the damage occurring at a particular time. 

There are some similarities and some differences with life insurance. Death, like sea level rise with global warming, is certain. Unlike sea level rise, death may come much earlier or much later for any individual. Life insurance has two sources of value. One is as a form of savings: members surviving members of a family will benefit if the member who dies early has saved and invested more and passes it to other family members.

The larger source is the trading of risk, between those who happen to die early and those who happen to die late.  The first source of value in life insurance is relevant for sea level rise. Higher savings and investment would help if sea level damage comes early. The second and larger source is not. The correlation of sea level damage across locations leaves little opportunity to trade risk on the timing of loss. 

When I was working on my Climate Change Review 18 years ago, the science was already suggesting that the westerly winds that brought winter rain and wind energy to southern Australia may move south as average temperatures rose.

We did not know much about the timing or extent. Southern Australia would probably become drier as well as hotter, leading to much lower stream flows into dams storing water for hydro-power. And wind would become less reliably strong in winter. At some time, weaker wind would reduce energy available from southern wind turbines. There was uncertainty around the extent and timing of the change, and greater variability of possible outcomes increased risk.

Winter 2024’s wind and water droughts 

Last winter brought less wind and water energy. Wind droughts in southern Australia reduced the supply of renewable energy at a time when demand for power was strong in the Melbourne winter. And whereas Melbourne has usually imported hydropower from Tasmania through the winter, low water levels last year caused Tasmania to import the maximum possible amounts of power from the Melbourne region.

To make things harder, reduced reliability of coal power generators as they grow old saw power supply from this source fall when it was most needed, exacerbating the fall in energy output at the critical time. 

All of this was a special challenge for any retailer of electricity drawing its power mainly from wind and solar energy. The energy retailer of which I am a director, Zen Energy, is at the forefront of Australian use of high proportions of renewable energy.

ZEN, for Zero Emissions Now, has been preparing for this challenging world by leading Australia’s investment in mechanisms to turn variable into firm power. These include storage, in batteries and pumped hydro. It has been leading work on new industries using renewable hydrogen that can reduce or cease demand for power when it is scarce and expensive. And it has been an early user of weather derivatives for trading risk. 

Last winter’s challenge came before Zen had all the mechanisms in place to manage them on the scale required. This was costly, but educative. Zen passed that stress test, and is in a stronger position now.

It has a pipeline of 1GW of multi-hour storage in its ZEBRE platform jointly owned with Taiwan company HDRE, and access to a further 3.95 GW of progressed storage projects. It is actively engaged in development of close to another 6GW of storage projects. Its Western Sydney Pumped Hydro project on the outskirts of Sydney will supply more than a GW of power for 20 hours.

Zen’s work with others on zero carbon iron in South Australia and transport fuel in northern Tasmania shows promise of delivering Australia’s first commercial scale hydrogen-based industrial projects. These will use large amounts of power flexibility.

The combination of large expansion of variable generation with large expansion of flexible demand increases reliability of power supply for loads which are not flexible. And Zen has increased its investment in understanding and use of the increasing range of weather derivatives.

This is the energy transition. It is hard work. But we are learning that it can be done. Whichever firms contribute to making it work, the end point will be globally competitive energy supporting a multi-generational period of Australian economic development. 

The costs of climate change are already high and will grow with each passing decade until emissions have been reduced to net zero. The value of weather derivatives will increase – especially for Australia, with its highly variable climate.

Opportunities for trade between Australia and the large economies of the northern hemisphere are of great value to us all. International trade in weather derivatives and other insurance will become larger and more valuable as Australia emerges as the energy Superpower of the zero-carbon world. 

Ross Garnaut is director of Zen Energy and The Superpower Institute, and Emeritus Professor of Economics at The University of Melbourne and the ANU