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Climate change impacts on our economy

Climate change impacts on our economy

Key points 

  • Climate change presents a range of risks and impacts that are expected to negatively impact our economy. These include property loss and damage, infrastructure and service costs and risks to financial stability.
  • Australia’s property and agricultural sectors will likely face some of the most significant challenges from climate change. This includes the Murray–Darling Basin, which is one of Australia’s largest agricultural regions and covers a large area of NSW. 
  • Banks, investors, asset managers and governments are developing and implementing approaches to manage climate risks and incorporate environmental, social and governance issues into business and investment decisions. This practice is known as ‘sustainable finance’, and works towards a more sustainable future economy. 
  • The NSW 2040 economic blueprint outlines a path for ‘a sustainable environment with reliable and affordable energy’. Other key NSW government documents include the Net Zero Plan Stage 1: 2020-2030 and the Electricity Infrastructure Roadmap

The economy in Australia and NSW 

Australia has a strong economy, with key exports including mineral resources, agriculture, tourism and education. Australia is home to just 0.3% of the world’s population, but accounts for 1.6% of the global economy. Our gross domestic product is about $2 trillion dollars.

NSW is the largest state economy in Australia. In 2019–2020 it was valued at more than $600 billion, and accounts for about 30% of Australia’s economic output.

The health of the NSW economy is strongly linked to the environment, and the natural resources and ecosystem services it provides.  

NSW has a diverse export range based on goods including agricultural produce such as beef, and natural resources, such as coal, copper and aluminium. Service exports account for around 40% of NSW exports, and include tourism and education.  

Over the past 30 years, NSW has been moving from an economy based on non-renewable resources and agriculture, to a more diverse, service-driven economy that includes: 

  • financial services 
  • professional, scientific and technical services 
  • property services 
  • information media and telecommunications 
  • health  
  • education. 

This diversification supports NSW’s strong economy and growth, and helps us prepare for the negative effects of climate change. 

How the economy is affected by climate change  

Climate will continue to have a huge effect on our economy through potential reductions in our productivity and increases to infrastructure and service costs. By 2061, it is projected that between 700,000 and 2.7 million more days of work will be lost every year because climate change will cause more frequent and intense heatwaves. 

Modelling suggests that Australia’s property and agricultural sectors will be some of the hardest hit by climate change in the future. 

    Decreased agricultural and food production

    Extreme events like droughts, heatwaves, cyclones and floods have a negative impact on agriculture and food production. By 2050, extreme events related to climate change are projected to halve the agricultural output of the irrigated areas of the Murray–Darling Basin. The Basin covers much of NSW and currently accounts for 50% of Australia’s irrigated agricultural output by value.  

    Already, severe droughts have reduced Australia’s gross domestic product by about 1%. By 2061, it is projected that climate change impacts on pastoral and growing conditions could lead to annual average production losses of between $750 million and $1.5 billion

    A decline in commodity production could also see these commodities become very expensive. This would have flow-on affects to other areas of the economy which may result in increased inflation and financial instability.

    Property loss and damage 

    Climate change is projected to cause more severe weather events and rising sea levels. This will increase the risk of natural disasters such as bushfire, severe storms, floods, coastal erosion and inundation of low-lying coastal areas. These events impact both private and public property through direct damages and reduced property values. This affects the financial situation of individuals and the economy of the state. 

    By 2030, climate change and extreme weather are expected to reduce the value of the Australian property market by around $571 billion. If greenhouse gas emissions remain high, the market will continue to lose value after 2030. 

    Sea level rise can affect properties through coastal erosion and more frequent or permanent inundation of low-lying and coastal areas. By 2061, it is estimated that between 39,000 and 46,000 properties will be exposed to coastal erosion or flooding. This is expected to increase the annual costs of property damage and loss of land to between $850 million and $1.3 billion. By 2100, even more commercial, industrial, road, rail, and residential assets will be at risk from sea level rise around Australia.  

    Other extreme weather events such as bushfires cause direct property loss and damages. The 2019–2020 bushfires destroyed nearly 2,500 homes in NSW alone. The total cost of the bushfire season is estimated to be over $100 billion. This includes direct property loss and damage, and indirect costs such as relief and recovery operations and costs associated with social and environmental damages. 

    Infrastructure and service costs 

    Essential services such as electricity, water and health services will be under increased pressure with climate change.  

    There may be an increase in electricity demand as homes and business use air-conditioning to stay cool as temperatures increase. This increase in demand, as well as extreme temperatures themselves, increase the risk of failure of energy services – for example, heatwaves in 2017 caused power failures across NSW, Queensland and South Australia. 

    Increased temperatures and more variable rainfall will impact water supplies in both regional and urban areas. Reduced water availability will result in stronger water restrictions. 

    Health services are likely to come under pressure, as heatwaves and other health effects of climate change increase. These services will need to grow and adapt to cope with demand. 

    Financial stability risks 

    Australia’s financial institutions and system are vulnerable to risks from climate change. Although our financial systems are currently stable, climate change is forcing people to consider these future risks. 

    Insurance premiums are likely to increase as a result of climate change, due to the increasing risk of natural disasters. This includes crop insurance, property insurance, and health and life insurance. Some properties may not be insurable if they are in areas at risk of climate impacts, such as bushfire, flooding or sea level rise. Having non-insurable properties would force property owners to bear the risk or build elsewhere. 

    Banks and other lenders can be financially exposed if the collateral they are lending against decreases in value due to climate change. 

    Natural disasters can also have wider impacts on the economy, through disruption to businesses, impacts on tourism (both in the immediate aftermath of disasters as well as in the longer term) and in impacts on the physical and mental health of people in the community. 

    Health and wellbeing

    Climate change affects our health and wellbeing. This affects livelihoods and productivity. For example, heatwaves and natural disasters result in loss of life and injuries that may affect people’s ability to work and contribute to society. Events such as drought affect mental health. These all affect the economy. 

    In addition, impacts on health and wellbeing can increase demand for healthcare services, which in turn can increase heathcare costs. 

    How economies are adapting to climate change 

    Across the world there is increasing awareness of the need to transition our economies to manage the unavoidable impacts of climate change and reduce the risks of future climate change. Many countries are also considering ways to take advantage of the opportunities that this transition offers. Australia’s – and NSW’s – economy is linked to other countries, especially our trading partners. 

    ‘Sustainable finance’ is being adopted to help economies adapt to climate change. Sustainable finance refers to financial activities that aim to ensure better environmental outcomes. It includes consideration of environmental, social and governance factors when making financial decisions.  


    The United Nations Framework Convention on Climate Change supports the global response to climate change. The convention is made up of around 197 parties from across the world, that regularly come together through events known as Conference of the Parties. At the 2015 Conference of Parties, the historic Paris Climate Agreement was signed by world leaders to commit to tackling climate change. Part of the agreement includes working to make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. 

    Some actions already being taken by governments and institutions to help the economy adapt to climate change include:  

    • the United Nations Sustainable Development Goals which includes goals to promote sustainable economic growth 
    • the Task Force on Climate-Related Financial Disclosures, which aims to improve and increase reporting of climate-related financial information, and provides recommendations to manage the economy for future with climate change 
    • the United Nations Environment Programme Finance Initiative which works with banks, insurers, investors and supporting institutions to support a sustainable financial sector 
    • the Network for Greening the Financial System (NGFS) which is a global network of 83 central banks and financial supervisors, focused on scaling up sustainable finance and recommending roles of central banks in mitigating climate change. 

    Several national organisations, industry bodies and initiatives are paving the way for a sustainable economy that is resilient to climate change risks. A resilient economy will depend on collaboration between governance and agencies. 

    The Australian Sustainable Finance Initiative (ASFI) helps to shape an Australian economy that prioritises wellbeing, social equity and environmental protection. The initiative underpins financial system resilience and stability. ASFI has released a roadmap to protecting Australia’s economy from climate change. 

    The Australian Government Productivity Commission advises on microeconomic policy, regulation and a range of other social and environmental issues. The 2013 inquiry report, Barriers to Effective Climate Change Adaptation, highlighted the need for governments to consider climate change in risk management practices, and ensure flexible approaches to policy-making to manage the risks of climate change. 

    The Australian Prudential Regulation Authority’s Prudential Practice Guide – Draft CPG 229 Climate Change Financial Risks is designed to assist APRA-regulated entities (such as banks, insurers and superannuation trustees) in managing the financial risks of climate change. 


    The NSW Government has developed policies and resources to help state and local governments better consider climate change risks in their planning and decision-making. Key policies and strategies to help NSW manage the impacts of climate change on its economy include: