The Reserve Bank has warned it will have to take the impact of climate change into account when setting interest rates.

"The economy is changing all the time in response to a large number of forces," Guy Debelle said in a keynote address to the Centre for Policy Development.

"Monetary policy is always having to analyse and assess these forces and their impact on the economy.

"But few of these forces have the scale, persistence and systemic risk of climate change."

Dr Debelle drew a distinction between weather cycles — such as drought and cyclones — and trends such as climate change.

The current drought has had a dramatic effect on economic output, reducing farm output by 6 per cent and overall GDP by 0.15 per cent.

The drought has had a dramatic effect on economic output. ( Instagram: zarakphotography )

But the long-term trend of climate change meant that "we need to reassess the frequency of climate events".

"The trend changes aren't likely to be smooth," he said.

"There is likely to be volatility around the trend, with potential for damaging outcomes from spikes above the trend.

"But the physical impact of climate change and the transition are likely to have first-order economic effects."

Dr Debelle said financial stability was "better served by an orderly transition to a low-carbon economy than an abrupt disorderly transition".

"Challenges for financial stability may arise from both physical and transition risks of climate change," he said.

"For example, insurers may face large, unanticipated payouts because of climate change-related property damage and business losses. In some cases businesses and households could lose access to insurance.

"Companies that generate significant pollution might face reputational damage or legal liability from their activities, and changes to regulation could cause previously valuable assets to become uneconomic.

"All of these consequences could precipitate sharp adjustments in asset prices, which would have consequences for financial stability."

China will be important

Workers walk near wind turbines at a wind farm in Guazhou, China. ( Reuters: Carlos Barria )

The massive investment in renewable energy in recent years has had a significant impact on the Australian economy.

That has been driven by both government policy and consumer action around the world, combined with advances in technology which have made renewable energies like solar and wind cheaper and price-competitive with coal-generated power.

Dr Debelle said the most recent capital expenditure survey from the Australian Bureau of Statistics showed that investment would continue to be significant in the foreseeable future.

"How these price and investment developments evolve over the coming years is something we are paying close attention to, given the importance of the cost of electricity in inflation," he said.

He added the effect of climate change on the Australian economy was a function of the political environment in Australia, as well as that of other countries, specifically trading partners such as China and India.

He noted that Beijing had issued a policy directive to move to cleaner sources of energy.

"As China transitions away from coal, natural gas is expected to account for a larger share of its energy mix, and Australia is well placed to help meet this demand," he said.

"More generally, Australia is also benefiting from the increased demand for battery inputs, especially lithium, and other metals that are used intensively in renewable generation."

Dr Debelle urged governments, regulators and business to understand the wide-ranging impacts of climate change and take it seriously.

"Decisions that are taken now can have significant effects on future climate trends and can limit or eliminate the ability to mitigate the effect of those trends."