When considering the words, “climate change”, insurers naturally think about how to appropriately provide cover and set prices in response to and in preparation for adverse weather events.

However, climate change drives a range of risks beyond the physical. Specifically, insurers need to consider “transition risk” — the potential disruption to our economy as we transition to net-zero emissions by 2050. What are the implications of this transition to insurers? And what role can economists play in helping insurers navigate the evolving landscape?

Transitioning to net-zero

The recent Cop28 conference has served to emphasise that globally, there is an urgent and concerted effort towards emissions reduction.

To play its part, the Australian government is aiming for significant cuts by 2030 and net-zero emissions by 2050. As such, we are seeing the implementation of broad-ranging policy, for example, the Safeguard Mechanism [1], to facilitate meeting these targets.

The implications of such policy for the economy will depend on the specifically measured industry investments and commitments, the availability of technologies, changes in consumer preferences, and incentives and regulations implemented by governments.

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