##al change. [ 8 ] there has been a rapid decline in the cost of renewable energy sources, in part because of extensive spending on research and development in renewable energy technology around the world occurring both because of government policies and private actors anticipating the transition to a lower carbon economy. as a result of the price decline, the investment cost - benefit analysis has changed and continues to change quite rapidly. graph 1 shows the levelised cost of generating electricity and how that has declined in the case of wind and solar to the point where they are now cost - effective sources of generation. however, we also know that the cost of generation is not the whole story. storage and transmission are also relevant costs. [ 9 ] but the cost of storage of electricity through batteries is also declining rapidly, and pumped hydro storage can effectively operate as a very large battery. https : / / www. rba. gov. au / speeches / 2019 / sp - dg - 2019 - 03 - 12. html 5 / 10 3 / 13 / 2019 climate change and the economy | speeches | rba graph 1 transmission is a more complicated picture. as more households and businesses have installed rooftop solar, they are putting electricity into a grid that was primarily designed to distribute energy from a wholesale - scale source of generation. it was not designed to receive and redistribute power from multiple ( small ) generators at one part of the day and then go back the other way at night. moreover, large - scale renewable generators can be located far away from traditional fossil fuel generators, requiring additional investment in transmission infrastructure. this is another example of needing to think in a general equilibrium sense about how people respond to changing price signals. changes in behaviour in response to these price changes are now occurring within the horizon period where monetary policy cares about. hence we need to gain a better understanding of what is driving those changes and what is in prospect to affect future changes. the reserve bank's business liaison program has been a very useful source of information to help us gain that understanding. the most recent capital expenditure survey from the abs shows there is more investment in renewables in prospect over the next two years in a way that has a noticeable influence on the aggregate business investment profile. this is also apparent when looking at available information on the probable spending planned or committed and underway now for specific renewable generation and storage projects ( graph 2 ). https : / / www. rba. gov. au / speeches / 2019 / sp - dg -

be aware that decisions taken now by businesses and government may have a sizeable https : / / www. rba. gov. au / speeches / 2019 / sp - dg - 2019 - 03 - 12. html 4 / 10 3 / 13 / 2019 climate change and the economy | speeches | rba influence on that transition path. both the physical impact of climate and the transition path can cause both shocks and cause the trend to change. the challenges we have to address are to take the outcomes from climate modelling and map them into our economic modelling. similarly, the scenario analysis from climate models needs to be translated into the horizons of our economic models, taking account of price changes and how that affects decision - making. general equilibrium analysis also doesn't always take account of adjustment burdens and costs. i see that as one lesson from the debate around trade liberalisation. trade theory clearly acknowledges that there are winners and losers from trade but that the winners can compensate the losers. but it is clear from the current debate that, in practice, the compensation generally has not occurred. the adjustment costs have fallen on groups that have not received their share of the benefits. a similar situation is present in the case of climate change. the transition path poses challenges, but it also presents opportunities. particular industries and particular communities that are especially exposed to the costs of changes in the climate will face lower costs if there is an early and orderly transition. others will bear greater costs from the transition to a lower carbon economy. while others still, such as the renewables sector, may benefit from that transition. but unlike the example of trade, it may not be possible for the winners to compensate the losers in a way that leaves no - one worse off. in economic jargon, it may not be possible to find a pareto improving outcome, at least in the narrow monetary sense. current examples of climate - related effects on the australian economy i will now turn to two current examples of how climate is affecting the economy that illustrate some of these issues. i will firstly talk about investment in renewable energy sources in the australian economy. i will then talk about how environmental policy decisions taken in china have had a direct effect on the australian economy. there has been a marked pick - up in investment spending on renewable energy in recent years. it has been big enough to have a noticeable impact at the macroeconomic level and affect aggregate output and hence the monetary policy calculus. it is a good example where price signals have caused significant behaviour