Climate catch-22

The geopolitical cost of Australia’s wildfires

Climate catch-22 AFP Photo/Saeed Khan

Australia is at the start of what's shaping up to be a ­­­­record fire season with potentially drastic economic and political repercussions. As of mid-January, brushfires in New South Wales, Victoria, South Australia, Queensland and elsewhere have resulted in insured property damage estimated at over $1.34 billion (AU$1.95 billion), burning nearly 12 million hectares (29.7 million acres) and resulting in 28 deaths. In addition to the areas already engulfed in flames, broad swaths of the country are at higher-than-usual risk of coming into the line of fire. And the damage to date could be just the tip of the iceberg, given that the country's annual fire seasons stretch from December to around April. 

As Australia's climate grows hotter and drier, so too will the severity of its wildfire woes. This sobering prospect has, once again, placed the country's oil and gas exports in the crosshairs of climate concerns. But even given the havoc fires are expected to wreak on Australia's agricultural and tourism industries, the lucrative prospect of growing energy markets in Asia will nonetheless give Canberra incentive to continue to prioritize its fossil-fuel sector — even if it means promoting an industry that has been blamed for the environmental crisis it now finds itself in.

Money to burn?

The losses from Australia’s 2020 wildfire season already have been substantial. According to Australian bank Westpac, the total damage to date including economic loss is likely $3.45 billion, accounting for a gross domestic product (GDP) loss of up to 0.5 percent. East coast fires have hit popular tourist destinations, such as Victoria's East Gippsland and the southern coast of New South Wales, particularly hard with early estimates of damage, lost revenue and demand declines totaling in the hundreds of millions of dollars. Australia's government has promised to dedicate $1.4 billion over the next two years to deal with the destruction, causing Canberra to lay aside its pledge of a 2020 budget surplus. The government will also need to provide substantial recovery funds and may even need to roll out fiscal stimulus.

That said, Australia’s landscapes have always burned as part of a natural and sometimes deliberately human-assisted seasonal cycle. Fire disasters have struck at regular intervals throughout the country’s modern history. This includes the deadly Black Saturday fires of 2009, the Ash Wednesday fires of 1983 and the Victoria fires of 1939 — all of which were part of seasons that each caused roughly $2 billion in insured damage. The 2020 fire season, however, has been made worse by this year’s Indian Ocean Dipole, a sea temperature pattern similar to El Niño that promotes rain in East Africa and dryness in Southeast Asia and Australia. It's also part of an overall trend in recent years toward longer, more severe fire seasons on the Australian continent — a development that will have drastic economic repercussions for this power on the edge of the Pacific and Indian ocean basins.

Farmers on the frontlines

Given the vast impact on rural areas, Australia's agricultural producers will be among those with the most to lose from intensifying fire seasons. Bushfires pose risks to agriculture not only in terms of direct destruction of livestock, timber, crop and stored produce but also through smoke damage to vegetable and fruit crops. In the wake of fires, farmers also must deal with damage to fencing, water infrastructure and farm equipment — plus risks of topsoil loss and runoff due to fire defoliation. Even those farmers not directly affected by fires could see disruptions to transportation infrastructure that pose challenges in bringing goods to market or procuring feed and fuel to sustain output. And this is on top of the severe drought conditions that preceded the fires. 

Increasingly worse fire seasons will have the most direct impact on the dairy sector, which has major operations in Victoria and New South Wales, in addition to beef output in New South Wales and Queensland. Dairy has the added risk, as well, of being vulnerable to power disruption, which jeopardizes milk storage. And industry estimates forecast that the 2020 fire season could result in the destruction of 1.8 percent of Australia's cattle and a 2.4 percent of its sheep, with a nearly 10 percent drop in wool output due to fires and previous drought conditions. 

Over the long term, frequent devastating fire seasons could set Australian farmers back at a time when rival producers in the United States and elsewhere are seeing potential gains amid a drawdown in U.S.-China tensions — jeopardizing Australia’s advantages in terms of its own broad-reaching free trade deals. Australia’s low population and high endowment of arable land have long made it a powerhouse of agricultural exports. Globally, the country is the third-largest exporter of beef and sugar, the fourth-largest dairy exporter and the fifth-largest exporter of both cotton and wheat. And around 60 percent of Australia’s agricultural exports go to growing economies in the Asia-Pacific, where competition among exporters has become particularly intense in the wake of several U.S. bilateral agreements, as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the proposed Regional Comprehensive Economic Partnership.

Canberra comes under fire 

This year’s high-profile, extreme wildfire season also presents political risks for Prime Minister Scott Morrison and his pro-energy Liberal-National coalition government. Amid the slow federal response to the crisis, Morrison's personal approval rating dropped by 8 percentage points in Jan. 12 polls. The leader of the opposition Labor Party, Anthony Albanese, also surpassed Morrison for the first time in favorability. Narrow ruling majorities and sudden, precipitous downfalls of prime ministers have defined Australia’s political scene for the past decade. Morrison and his ruling coalition, however, managed to beat expectations in the May 2019 election to secure a slim majority in the country's House of Representatives. But the Liberal-National coalition's lead in the lower house is still based on only a four-seat advantage over the opposition and crossbench parliamentarians. The 2020 wildfires could jeopardize that slim hold on power by bringing climate change issues back to the forefront of domestic politics. 

At roughly 1 percent, Australia accounts for a comparatively small share of global carbon dioxide emissions, which scientific consensus has tied to warming global temperatures. For this reason, the political controversy has focused more on reducing the country's carbon-emitting energy exports. Australia boasts the status as the third-largest global exporter of liquefied natural gas (LNG), comprising 11 percent of the world's total exports. It's also the largest coal exporter with 38 percent of the global total. Since 2014, both of these LNG and coal numbers have increased by 18 percent and 9 percent, respectively. Energy exports account for around 35 percent of Australia's total exports by value, with coal alone comprising nearly one-fifth of the country's exports. In addition to climate concerns, however, Australia's increased energy production and distribution have also become a domestic bread-and-butter issue. Amid massive LNG exports, shortfalls in domestic natural gas supplies have led to risks of shortfalls for the Australian market — spurring calls for increased production, as well as curbs on exports or increased imports.

Despite these concerns, however, the conservative side of Australian politics has long argued that curbing the output of these energy resources would come with unacceptable economic costs. Indeed, this was the message that won out in the 2019 election, given that the coalition's campaign pitted its pro-business, pro-energy policies against the Labor Party’s heavy emphasis on climate-change issues. But by putting the spotlight back on climate policy, continued fires could increasingly threaten the government's fragile hold on power.

Elections for either the House or Senate aren't due until 2021-2022, which means the coalition has time to adjust its approach by imposing greater scrutiny on new oil and gas projects, though the economic importance of the country's energy sector will still limit its ability to do so. Mineral and oil and gas extraction have long helped cushion the Australian economy, which has famously avoided recession for nearly three decades due in part to diversification between resource exports and a services economy. Planned drilling in the Great Australian Bight, for example, could open up well over 9 billion barrels of crude oil reserves — a substantial increase from the total 1.8 billion barrels of proven reserves (as of 2016). Domestically, oil and gas production is also critical in keeping costs low to transport goods and people across Australia's vast geography, as well as fueling Australia's vital mining sector. 

Australia's climate catch-22

With this booming oil and gas windfall at stake, the Australian government will thus find it hard to substantially draw down its exploitation of its energy reserves, even with the added furor over wildfires. The Labor Party’s stance in the 2019 elections reflected this awkward balance: Despite emphasizing climate change, the opposition party said it'd still support hydraulic fracturing in the Northern Territory and promised $1.5 billion in new pipelines. It also notably shied away from pledging to halt the Adani Carmichael coal mine, which has long stoked environmentalist ire.

For the time being, the economic importance of the oil and gas sector means that neither political camp in Australia is likely to substantively shift the country's export-oriented energy policies. But that won't keep increasingly intense and lengthy fire seasons from ravaging the country in the coming decades, challenging agricultural producers trying to maintain a foothold in competitive Asian markets. Combined with tourism losses, this will sap Australian growth. But actions on climate change also risk curbing the lucrative oil and gas exports that have themselves helped the remote country harness Asia's explosive growth. Thus, even if the ruling coalition remains in power, it will still be left to grapple with the increasingly tricky task of balancing Australia's short-term economic needs against looming existential threats to its environment. 

This essay first appeared on the website of Stratfor, the US-based global intelligence firm with which Strategic Review has a content-sharing agreement.

 



This essay first appeared on the website of Stratfor, the US-based global intelligence firm, as part of its 2019 annual global forecast. Strategic Review has a content-sharing agreement with Stratfor.

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