In today’s newsletter we talk about the wildfire sweeping parts of Australia and the economic implications of climate change

The Story

News of the Australian bushfire crisis is spreading through our timelines like…well, you know what we mean. But that begs the question — how do these fires start, what’s being done to stop them from burning the country down and more importantly what’s the financial impact?

And before we get to the meat of this story, some extra backdrop.

Australia has a hot, dry climate populated by dense vegetation. In conditions like these, all it takes is a tiny spark to get a roaring fire going. But bear in mind, the bushfire problem is not a new one. In fact, it’s a problem that’s persisted for a long time now. Australia even has a “fire season” spanning months during which time wildfires get intense. However, this year has been particularly bad even by “fire season” standards. Climate change aided by extreme heatwaves, strong winds and a rather troubling drought has fostered the perfect conditions for raging bush fires.

But what’s the cost involved here? How expensive is climate change after all?

Well the first expense accrues by way of Hazard Reduction. Meaning all efforts aimed at getting rid of flammable bushland in order to control future fires. Think of it this way. The behaviour of fire depends on weather, fuel and topography. Now you can’t control whether and topography. Mother Nature holds the bargaining chips here. But fuel- such as shrubbery, dry leaves, twigs etc — that you can control. So if there was some way you could get rid of trees and vegetation in areas that are particularly prone to wildfires, maybe you can prevent the fire from spreading quick. You do this by way of controlled burning.

For instance, the National Parks and Wildlife Service has already spent millions in hazard reduction programs trying to prune areas with thick dry vegetation. Between 2011 and 2017, they’ve treated close to 680,000 hectares of parks and reserves. That’s massive. But yet, the fire continues to burn. Some fires were so intense, that they’ve burned through treated areas as well. In fact, experts now peg that the government might have to increase its spending by as much as five times to better implement these programs.

So now that we know hazard reduction programs aren’t working as well, we look at the costs involved once wildfires do start spreading. Now, the fires started popping up in late July last year- much earlier than usual. So far, around 24 people have already died nationwide and more than 2000 homes have been damaged or destroyed in the state of New South Wales (NSW) alone. Thousands of people are now homeless, while many cities are experiencing electricity and telecommunications cuts, and in some cases, drinking water shortages.

The Australian economy was already worse for wear, and this calamity is bound to make things worse. There's also talk of the Reserve Bank of Australia having to cut interest rates further to boost spending and propel economic activity. The head of economic analysis at SGS Economics and Planning, Terry Rawnsley, has estimated that the loss of income in the tourism, agriculture and retail sectors already lies between $1.1- 1.9 billion this financial year.

In addition, the smoke haze that hangs like a heavy black cloud over major cities is reducing national economic output and the medical bills are beginning to rack up now. And then there’s insurance. The Insurance Council of Australia has increased its estimate for damage claims from the fires to more than A$700 million, with the numbers set to increase when more fire-hit areas are accessible.

To top it all off, Prime Minister Morrison recently pledged $1.39 billion to a newly created National Bushfire Recovery Agency. So the next time somebody asks you what’s the cost of climate change. Use this as a case study and explain how we are doomed if we don’t wise up.

That’s all folks

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