Chapter 3 Climate Applications and Services

Economics and Finance

Climate variability has huge economic impacts, most clearly shown by the financial impact of drought on the Australian economy, but also evident in many industry sectors, such as retailing and tourism. Professional agricultural associations monitor the effect of climate variability on the incomes of those on the land.

Dealing with drought is a difficult but essential part of farming in Australia. Climate statistics confirm the 2002 drought ranks as one of the worst. The drought has had a significant impact on economic growth in Australia through the direct and indirect linkages between agriculture and other industries. In March 2003, the drought was estimated to reduce the rate of economic growth in Australia in 2002–03 by around 0.7 percentage points, or around $5.4 billion, from what would otherwise have been achieved. During the current drought, the Bureau of Meteorology’s NCC produced seasonal outlooks and progressive analysis of rainfall deficiencies, which were used in economic planning, especially for the agriculture sector. The increased scientific understanding of influences such as ENSO and Indian Ocean sea surface temperatures and the translation of years of research into operational services, has made the Bureau of Meteorology’s climate outlooks more robust.

The Lord Howe Island solar power system owned by SEDA) contributes significantly to the Island's power supplies.

One of the tasks of the Australian Bureau of Agricultural and Resource Economic (ABARE) is to provide industry and government with an estimate of the effect of drought on agricultural production, particularly crops production. The ABARE Outlook Conference in Canberra in March 2003 involved leading national and international economic and agricultural industry experts, as well as climate experts. ABARE uses Bureau of Meteorology monitoring and prediction information to develop its crop production forecasts each quarter. The crop forecasts feed into ABARE's estimates of the economy-wide effects of drought or other weather related events.

Weather derivatives are a recent development, enabling weather-sensitive industries to protect themselves against the costs of seasonal variability. The derivatives market is based on the fact that a weather fluctuation (for example a warmer winter) which decreases the profit of one industry (for example, energy utilities) will be beneficial to another industry sector, such as agriculture. The Bureau of Meteorology’s Victorian Regional Office have become involved in the topic, presenting many talks to energy utilities and other groups across Australia and in New Zealand, USA and Japan.

The insurance sector is particularly vulnerable to natural hazards such as storms, floods and earthquakes. The trend toward higher insured losses continues in view of the risk factors: higher population densities and higher concentrations of insured values, especially in endangered areas such as coastal zones. The effects of this trend are illustrated by the experience of Christmas Island and Cocos Island, where the sole insurer withdrew all forms of insurance from the islands. The West Australian government contracted an insurance broker to find a replacement company. Potential insurers required evidence about the likelihood of severe weather and thus risk of claims and the Bureau of Meteorology’s Western Australian Regional Office completed a climatology of severe weather at Christmas Island and the Cocos Islands to enable a client to conduct a risk analysis.