Tip of the melting iceberg: Emissions Reduction Plan signals extensive climate change policy development over the next four years

Emissions Reduction Plan covering next four years released

New Zealand's first Emissions Reduction Plan (Plan) was released yesterday setting out the Government's approach to reducing greenhouse gas (GHG) emissions to meet the first emissions budget covering the period up to 2025. This follows on from the Climate Change Commission's (Commission) release of its draft recommendations on New Zealand's approach to reducing emissions over a year ago and subsequent consultation by the Government. 

The Plan sets out some of the most significant policy direction in this term of government and impacts every sector of New Zealand's economy (although transport and energy continue to receive particular emphasis). Accordingly, businesses and other interested parties should take time to carefully consider those parts of the Plan relevant to their sectors and incorporate them into strategic planning and risk frameworks.
 
While some of the policy proposals in the Plan have already been put into train as part of the Government's prior work, others are new or in their infancy. It will therefore be important to consider engaging with the lead agencies responsible for particular proposals to ensure that policy is developed in a way that appropriately allocates costs and avoids unintended consequences. Those organisations that will be required to report under the new mandatory disclosures regime should also consider which proposals in the Plan will impact their reporting obligations (for example, in relation to transitional risks).
 
The proposals in the Plan will not be enough on their own to achieve New Zealand's 2050 emissions reduction targets, or its first nationally determined contribution under the Paris Agreement. Rather, the Plan is a "stepping stone", with further reductions to come in future emissions reduction plans.
 
Should you wish to discuss how the Plan relates to your organisation, please get in touch with one of the key contacts below or your usual Russell McVeagh contact.

Summary of the Plan

The Government has proposed a range of cross-sector actions, which are summarised in the table below.

Key actions across sectors

The Government has also provided a helpful breakdown of individual policies and the timeframe for implementation here. 
 
Below we critically assess the key proposals within the Plan on a sector-by-sector approach. 

Key Proposals

The Emissions Trading Scheme (ETS)

Pricing emissions remains the predominant form of influencing New Zealand's climate outcomes. However, the Government (and the Commission) have taken the view that the ETS cannot alone achieve a complete solution to meeting New Zealand's climate change targets. The Government considers that other policy levers are required to achieve an effective and equitable transition and, in some cases, interventions beyond the ETS are required to avoid outcomes that are inconsistent with other core government policy (proliferation of exotic carbon forestry is one example).
 
One of the challenges the Government will face over coming years is to align pricing under the ETS with ambitions under emissions budgets. Our view is that the pricing and availability of New Zealand Units (NZUs) is likely to continue to change over the coming years as the Government finds the balance between reducing emissions and encouraging carbon and production forestry. As an example of this, the Government has recently proposed changes to the ETS to ensure that the price of NZUs can continue to increase without dramatically prioritising carbon farming over other types of rural land uses, including other types of forestry.

Empowering Māori

Empowering Māori will be an important part of the Plan. The Government has proposed a three-fold approach:

• Embed partnership and representation by upholding the principles of Te Tiriti to ensure Māori involvement in the design of processes and mechanisms designed to reduce emissions;

• Development of a Māori climate strategy and action plan; and

• Activate kaupapa Māori and tangata Māori solutions.

 
One particular area of focus in the Plan is the potential effect on Māori rural enterprises and landholdings and their potential vulnerability to physical and transitional risks. This includes recognising the particular historical disadvantages faced by Māori landowners of pre-1990 forests. The Government plans to consider further the opportunities to incentivise and encourage mechanisms to enable the recognition of additional carbon storage in pre-1990 forests. It will be important for the Government to ensure an equitable transition for all under the Plan.

Funding and finance

The Plan recognises that the transition to a low-emissions economy will require a range of changes across the economy and significant and sustained investment. Most of the changes are already underway or have been previously announced. For instance, the FMA's disclosure framework for financial products that incorporate non-financial factors (such as green bonds) and the climate-related disclosure regime will be familiar to our clients.
 
Little additional detail is included in the Plan, though initiatives like exploring the extension of the climate-related disclosure regime and how entities that are not caught by the regime consider climate change risks and opportunities give an indication of next steps. We expect the effects of climate change to be increasingly considered in private sector business, investment, lending and insurance decisions. The Plan includes a number of Government-specific changes that suggest the same will be true of Government decisions.
 
The Plan also recognises that the fiscal impacts from the transition are likely to include increased spending and changes to government income, and calls out declining revenue from fuel excise duty receipts as such a change. While a decline could result from climate-positive goals like decreasing reliance on fuel over time, a decline could also result from the recent 25c per litre fuel excise duty cut – which seems at odds with such goals. This demonstrates that the effects of climate change are likely to be one factor among many in the Government's decision-making process, and this will be the case for the private sector as well. We expect the Plan will increase the relative risk-weighting of the effects of climate change going forward.

Transport

The Government proposes to reduce and electrify light vehicle usage, and decarbonise other forms of transport such as heavy vehicles, shipping and aviation through alternative fuels. The Plan provides clear, measurable targets for reducing transport emissions and the time periods within which they must be achieved. The Government is considering pricing tools such as congestion charges, which are new to New Zealand, but have been adopted overseas.
 
Overall, the proposals regarding transport emissions reductions place heavy reliance on better transport and land use planning. However, the details of how emissions reductions will be achieved are largely kicked to more national direction and strategic guidance with input from industry to identify ways to reduce emissions, including:

• A national freight and supply chain strategy;

• A sustainable aviation fuel mandate;

• A national action plan to reduce commercial and recreational maritime emissions; and

• Implementation of the Sustainable Biofuels obligation.

Planning and infrastructure

RMA reform is painted as having the key role in embedding the necessary changes to ensure land and resources are managed in a low carbon way. Well-functioning urban environments are seen by the Government as key to reducing emissions, with climate outcomes baked into the reformed RMA.
 
Some of these changes have already arisen through the National Policy Statement on Urban Development, which have been expedited through the Enabling Housing Supply Act. Later this year we will also see effects of climate change once again able to be taken into account in RMA decision-making with the statutory bar being lifted from that Act.
 
The Emissions Reduction Plan (ERP) points to a range of other key initiatives already underway to support emissions reductions, including the Infrastructure Commission's Infrastructure Strategy These initiatives look to the Plan as providing further guidance on these matters, but the ERP provides little beyond what is being proposed under existing workstreams.

Energy and industry

Many of the Government proposals in energy and industry are already underway, either led by the Government (eg Lake Onslow) or by the private sector (eg hydrogen). The Ministry for the Environment has already released draft proposals banning new coal burners by 2037, with companies like Fonterra acting ahead of those proposals.
 
The Plan anticipates that New Zealand will need 70% more renewable generation to electrify process heat and transport which requires significant growth in generation and transmission over what could be a short timescale. The Government has recognised that policy settings will need to change to encourage investment and development of more renewable electricity. One significant development is the emerging market in offshore wind (see our blog post here).
 
Finally in relation to the energy sector, the Government now sees its target of '100% renewable electricity by 2030' as aspirational. That makes room for other more cost effective and practical emissions reductions in this first emissions budget. There is a target of 50% total final energy consumption from renewable sources by 2035 and a proposal to build a strategy to address strategic challenges in the energy sector and signal pathways away from fossil fuels. This strategy, the detail of which will be crucial to New Zealand's energy future, is still to be developed.

Building and construction

The Plan aims to reduce emissions from two types of construction-related emissions, being:

• embodied carbon of buildings through the building life cycle, including extraction of raw materials, manufacture, operation and disposal; and

• operational emissions through effective building design.

A key question in relation to both types of emissions is whether reductions would be more appropriately addressed through planning or building controls.
 
As outlined above, the effects on climate change effects will soon need to be assessed under the RMA, but it is unclear at this stage the extent to which these changes will require consideration of matters such as embodied carbon or building design. Businesses impacted by these changes may wish to engage with future policy design to ensure that there is a clear and consistent approach that avoids the double-counting of emissions.
 
As housing affordability and construction supply chain constraints continue to be significant issues, further regulation of building and construction needs to be as efficient as possible to minimise barriers to development.

Agriculture

The measures proposed in the Plan do not purport to reduce agricultural emissions significantly, at least over the short term. There have not been many changes from the Commission's initial advice to the Government in this space and the key steps to reduce emissions remain: pricing on-farm emissions under He Waka Eke Noa; investing in scientific research to reduce emissions on a per animal basis; and, land use change.
 
There remain a number of uncertainties in relation to these policy actions. For example, He Waka Eke Noa has been delayed and it remains uncertain as to whether emissions will be calculated on per farm basis, or whether agricultural emissions will be bought under the ETS at the producer level.
 
If achievable in the required timescales, the use of farm environment plans to quantify and then reduce emissions matches up with current thinking under the RMA framework that places a greater reliance on plans to manage other environmental concerns such as diffuse discharges of contaminants to waterways.

Forestry

The Government's focus is on the "right trees in the right places". This seems difficult to achieve in the face of the sheer number of hectares of planting required as advised by the Commission under its advice to Government. Controlling where trees are planted will in part fall to a revamped National Environmental Standard for Plantation Forestry, which will be consulted on in 2022 and then administered under the RMA.
 
The Government remains keen on indigenous carbon forests, and has proposed reviewing how indigenous carbon forests are rewarded under the ETS as critical policy to support this. The Government has also proposed driving down the cost of establishment of native forests by supporting the nursery and indigenous sylviculture sector.
 
Finally, the Government has the growth of the forestry and wood processing industry as a clear goal. This will be achieved by developing a forestry and wood processing industry transformation plan, investing in expanding the supply of woody biomass and developing policies that support Māori to meet their aspirations.

Waste and fluorinated gases

The approach to waste is focused on creating a more circular economy – reducing, reusing and recycling. Specific measures include reducing the amount of organic waste diverted to landfill (and in some cases banning organic waste from 2030), reducing construction and demolition waste and redirecting it to beneficial uses, and requiring landfill gas capture at all municipal (Class 1) landfills by the end of 2026.
 
The Government has recommended a new Waste Strategy be published in 2022 with the goal of reducing waste (and emissions) across the board. Changes to the Litter Act 1979 and the Waste Minimisation Act 2008 will give legal effect to the Waste Strategy and legislation will be updated in 2024.
 
The Plan does not comment specifically on whether the Government endorses energy from waste (ie incineration).
 
The Government proposes to build on existing laws to ban the import of fluorinated gases into New Zealand and support the transition away from those substances.