The impacts of climate change extend beyond the environment – global warming is also hitting people in their wallets.

From rising insurance premiums to increased energy bills and grocery prices, the economic impacts are wide-ranging. The financial burden of climate change also has the potential to infiltrate our finances in other, more subtle ways.

Here’s how the warming planet could significantly drive up day-to-day costs.

Rising premiums and insurance retreat

Insurance premiums reflect risk and climate change is changing that risk, says Professor Ilan Noy, Chair in the Economics of Disasters and Climate Change at Victoria University of Wellington.

“If the risk is increasing, then the price of insurance is increasing,” he said.

House insurance prices have already begun to climb following the Auckland Anniversary weekend floods and Cyclone Gabrielle last year.

“Those floods were much worse than anything we had ever experienced before in New Zealand, so those led to a reassessment of the risk not only by the insurers, but also by their reinsurers.”

Reinsurers are companies that provide insurance to insurance companies. They help insurance companies manage risk by taking on some of the financial burden when there are extreme events.

“Reinsurance is going to be much more expensive ... and insurance companies are transmitting that extra cost to customers in higher [premiums],” Noy said.

Insurance retreat — where companies reduce or withdraw their coverage from certain areas because it’s become too expensive or risky to insure them — is also a threat for parts of the country. Some homeowners are already experiencing that problem following last year’s flooding events.

“Companies may say ‘we don’t want to insure this house at all’ or ‘we’ll insure you, but just not for flooding,’” Noy said.

If you can’t insure your home, and you have a mortgage on that home, Noy said that is technically a default on your mortgage.

“The bank can call back the loan if they want,” Noy said. “They haven't done that in New Zealand, but they can.

“[The bank could] tell you that you have to pay back [the loan], which means you have to sell the house, for most people. Now you’re selling the house in a market where you can't insure it, which means that no one who needs a loan to buy the house is going to be able to buy it. So, you will only look at selling to people who can pay cash, which is a much smaller number of people, and therefore the price is going to go down.”

This might make homes much cheaper to buy for people otherwise struggling to afford one, Noy said, but those homes would not be insured, making them a high-risk investment.

Food for thought

Climate change can also push up food costs via extreme weather events, changing growing conditions, and increasing droughts. Supply chain disruptions and higher production costs are also linked to climate change and can drive up food prices.

The world has already seen these effects, such as the spike in olive oil prices this year following droughts and extreme heat in the world’s biggest exporter of olive oil, Spain.

It’s hard to clearly say climate change has caused food prices to go up, says David Hall, Climate Policy Director at Toha Network.

This is because food prices are dependent on local factors as well.

“But, as we say in the business, climate change is a risk multiplier,” Hall said. “It multiplies these risks and makes these sorts of integrated shocks more likely to happen.”

Very few industries, if any, will be left untouched by climate change in New Zealand, Hall said, including the vast agricultural and forestry sectors the country currently relies on.

“These [industries] are well known to be highly exposed to climate-related impacts or physical risks of climate change,” he said.

“The greater frequency and intensity of extreme weather events, whether we're talking about extreme rainstorms on the one hand or prolonged droughts and wildfires on the other hand, these are both highly impactful for agriculture and forestry.

“Depending on how bad climate change gets, some of that adaptation that will be required from agriculture and forestry could potentially be quite disruptive. It may be the case that certain crops that grew in one part of the country no longer grow in those places anymore.”

The flipside to that, Hall said, is that some crops might grow in a place that they didn’t used to.

“But mostly this is around disruption of things that used to work in one place and no longer necessarily work as well.”

The energy equation

Energy prices have also gone up and will continue to go up due to the ongoing impacts of climate change, Noy said.

“It’s not a sustainable equilibrium, where we’re just digging up energy from the ground [coal, oil, gas] and burning it ... so energy is going to be more costly – that’s inevitable,” he said.

“Everything else uses energy, so everything is going to become more expensive in some ways, and some things more than others.”

Energy costs mean driving a car powered by fossil fuels will become much more expensive.

While more people should be using public transport, Noy said, some people simply don’t have that option.

“If you live in a more remote area that has no efficient public transportation, you have to use a car,” he said.

This is another example of the costs of climate change not being shared evenly, Noy said.

“There are very significant inequities in the way those costs are distributed. There isn't a generic experience with climate change. It's already unequal with some people getting harmed in multiple ways, much more than others.”

There is an opportunity side to the energy equation though, Hall said.

“A lot of what we need to do for climate action will actually put us in a better economic position,” he said.

“Investment in energy transition [from fossil fuels to electrification] means we would end up with an energy system that costs us all less; we won’t need to spend as much money on energy as we [currently] do in our daily household bills.”

Higher taxes or levies?

Climate change could also mean higher taxes or new levies as future governments grapple with the costs of both mitigating the effects of a warming planet and adapting to that new reality, Noy said.

“The government [would] need to spend money on reducing greenhouse gases and establishing alternative energy sources and making sure, for example, we have enough charging stations for electric vehicles,” he said.

Money would also need to be spent on things like flood protection and supporting people and communities affected by climate impacts, such as those whose homes can no longer be insured.

“All of these things will cost money, and that money comes out of people's taxes,” Noy said.

“So, it might mean higher taxes, or it might mean cutting in other areas of government spending.”

NZ's place in the world

But, Noy said, the biggest climate-related cost to New Zealand would be what is happening in the rest of the world.

“We are, relatively to the rest of the world, both more wealthy and experiencing milder impacts of climate change,” he said.

“But a lot of the rest of the world and, tragically, a lot of the poor parts of the world are going to suffer a lot more from climate change.

“It's both a moral cost because it's tragic for a lot of poor countries that can't adapt and their government doesn't have the resources to assist, and it's also a cost because it's going to spill over on us.

“There will be more disruption in things like global food markets, and there's going to be potentially conflict surrounding various hot spots because of the changes brought about by climate change.”

Hall said New Zealand is a temperate country that might not suffer the same severity of climate-related impacts that equatorial countries will but many local companies rely on those other countries for supply of produce or other goods and services.

“Those disruptions in other parts of the world will flow through to New Zealand being able to access the materials or technology that it needs,” he said.

“We've had a small taste of that in the Covid pandemic and the disruption of supply chains then, which has flow-on effects for things like inflation.

“Potentially with climate change, we've got similar sorts of disruptions happening on a regular basis.”

A sliver of hope?

But, Hall said, there’s also economic opportunities in coming up with solutions to these problems.

“We've got lots of great companies which have emerged out of New Zealand which are oriented towards solutions in this space,” he said.

“As someone who's been in this game for nearly 20 years now, I feel like the upside is more visible and more tangible than it's ever been.”

Hall said there’s a greater appetite to invest and support solutions for tackling climate change.

“These are all global opportunities and ... we can expose ourselves to those opportunities if we want to and that's a source of future prosperity for the country,” he said.

“And we're really going to need that prosperity because unfortunately alongside that we will be dealing with these physical impacts and these transition impacts, so we're really going to need to have a thriving economy to be able to pay for [that].”

Banner image by Crystal Choi and Vania Chandrawidjaja (Source: Getty)

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