The adaptation challenge

Australia faces escalating climate risks from more frequent and severe heatwaves, floods, bushfires, storms and chronic impacts such as rising temperatures, altered rainfall patterns and sea level rise. Climate-related disasters currently cost around $38 billion annually, projected to reach at least $73 billion per year by 2060, affecting health, productivity, agriculture, infrastructure and essential services. Adaptation can materially reduce future damage through investments in resilient housing, infrastructure, systems and communities, and evidence shows these investments often deliver strong returns via avoided losses, lower maintenance and insurance costs, productivity gains and social and environmental co-benefits. However, adaptation remains underprovided due to undervaluation of long-term benefits, dispersed costs and benefits across interconnected systems, funding constraints, and risks of maladaptation where actions reduce risk in one area but increase vulnerability elsewhere.

Valuing adaptation: Enabling better decisions

The report finds that existing investment appraisal tools, particularly cost-benefit analysis (CBA), systematically undervalue adaptation because they rely on deterministic estimates, short appraisal periods and high discount rates that fail to capture low-probability, high-impact events and long-term benefits. As climate change increases tail risks, probabilistic approaches such as average annual damage or loss estimates are better suited to valuing avoided disaster costs. Quantitative evidence shows outcomes are highly sensitive to assumptions: for example, estimated returns on resilience investments fall materially as discount rates increase, and short appraisal horizons can cause economically beneficial projects to fail CBA tests. The report recommends revising CBA guidance to lower the central social discount rate to 5%, require sensitivity testing at 2–3%, adopt appraisal periods of at least 30 years, use probabilistic methods for disaster risk, and incorporate material social and environmental impacts through simplified adjustments, with regular reviews to align with best practice.

Coordinating adaptation: A national framework for adaptation investment

Given the scale, duration and cross-sectoral nature of adaptation, the report argues that Australia needs a nationally coordinated approach and proposes a National Adaptation Investment Framework aligned with the National Adaptation Plan. Coordinated by the Australian Government and co-developed with states, territories and key stakeholders, the framework would identify adaptation programs that deliver the best value for money through rigorous evaluation, support equitable cost allocation across society, and shift spending from reactive post-disaster recovery towards proactive, evidence-based investment. Clearer roles and responsibilities across governments and the private sector are required to reduce fragmentation and maladaptation, including reviewing and updating existing principles governing adaptation responsibilities. The report also recommends strengthening governance by giving the Climate Change Authority a formal mandate to monitor, evaluate and report biennially on adaptation policy effectiveness and funding priorities.

Financing adaptation: Growing and diversifying revenue streams for adaptation investment

Meeting Australia’s adaptation needs will require tens of billions of dollars over coming decades and a mix of public and private finance. Public funding is justified where adaptation delivers broad societal benefits, supports essential services, addresses distributional issues or catalyses private investment, with revenue options including taxation, non-tax revenue, borrowing and reallocation of existing expenditure, and carbon pricing identified as an efficient long-term option. The private sector also has strong incentives to invest, as adaptation can protect revenues, reduce costs, improve creditworthiness and lower insurance premiums, but barriers such as unclear valuations, fragmented data and cost-sharing challenges persist. The report highlights mechanisms including green and resilience bonds, loans, equity, public-private partnerships, guarantees and value-capture models, and recommends extending the Australian Sustainable Finance Taxonomy to include clear definitions of adaptation and co-developing a private adaptation finance strategy to crowd in institutional capital, including from superannuation funds.