Open for consultation: Climate Change Commission's advice on the second emissions reduction plan

The Climate Change Commission (Commission) released its draft advice on the second emissions reduction plan on Wednesday, covering the 5-year period from 2026 to 2030 (Advice). The Advice identifies nineteen recommendations that the Commission believes should be considered in the second emissions reduction plan, addressing key areas such as agriculture, urban development, energy and industry, forestry, transport, and waste management.

Key takeaways:

The 19 key actions in the Advice focus on achieving a balance between gross and net emissions reductions, the role of the New Zealand Emissions Trading Scheme (ETS) in reducing emissions, resourcing for Iwi/Māori, and sector-specific recommendations. The Commission emphasises the need for cooperation between businesses, organisations, and the government in developing and implementing effective strategies for emissions reduction and transitioning to a low-carbon economy. Consultation on the advice is open until 30 June 2023, presenting an opportunity for stakeholders to contribute their insights and perspectives.

Organisations should carefully consider the Commission's advice (including the proposed gross emissions reduction targets, ETS changes and sector-specific recommendations) and assess the extent to which their sustainability and broader operational strategies align with the direction of travel proposed by the Commission. For example, proposed changes to the ETS may give rise to new risks for businesses that need to be factored into the forward strategy, and which may also be relevant to an organisation's disclosure of its climate risks and opportunities. Similarly, the Advice may give rise to new risks or opportunities for an organisation's customers, employees or other stakeholders, and may highlight the need for further government support or incentives in particular areas.

Overview of the Advice:

Although some of the detailed recommendations in the Advice are new, they largely build upon the Commission's advice in other recent reports, including the Commission's major 2021 package of advice.

A key focus of the Advice is the appropriate balance between "gross" and "net" emissions and the Commission's view on the role of the ETS in driving emissions reductions. Key takeaways from the Advice on these issues include:

1. The Commission has been emphasising for some time that it considers it necessary for the Government to prioritise both gross and net emissions reductions. It has now gone further by recommending that the Government introduce specific targets for gross emissions reductions (excluding the impact of carbon removals from forestry) in the second and third budget periods.

2. The Advice reiterates previous advice that the ETS is not currently structured to reduce gross emissions or to drive the carbon dioxide removals required by forests to reach net zero by 2050. The Government has previously announced that it is reviewing the ETS in relation to the balance of gross and net emissions (see our earlier update here) and organisations interested in this issue should closely monitor the progress of that review, as any changes to incentives are likely to have a significant impact on investment returns.

3. The Advice outlines (at a high level) some possible options for amending ETS incentives but does not necessarily endorse one or more of them. These include, for example, limiting the proportion of forestry units that emitters can surrender or introducing a minimum emissions price for emitters via an additional levy or fee. Organisations wishing to engage with the Government on potential ETS reform should carefully consider the options posed by the Commission and the extent to which they are likely to contribute to or detract from key priorities. We expect the Government to consider the options put forth by the Commission as part of its review.

4. The Commission asserts that the current system of free industrial allocation for emissions-intensive, trade-exposed industries is inconsistent with the ETS incentivising net zero long-lived gas emissions by 2050 and is disproportionate to the risk of so-called "emissions leakage" (where high-emissions activities shift offshore in response to any NZ compliance burden).^[1]

5. Following its March advice on unit control and price settings in the ETS (see our earlier update here), the Commission again states that the Government should use tools other than suppressing ETS prices to manage the impacts of the transition on households. This Advice follows the Government's decision in December last year to reject the Commission's advice to raise trigger prices in the ETS due to the impact of increased emissions pricing on the cost of living.

The Advice also includes several sector-specific recommendations, addressing areas such as agriculture, urban development, energy and industry, forestry, transport, and waste management. At a high-level, these recommendations include:

• Accelerating the roll-out of EV charging infrastructure.

• Bringing more renewable electricity generation online faster and ensuring distribution companies can support growth and variability of demand and supply.

• Scaling up efforts to decarbonise industrial processes (eg. by moving industry away from coal).

• Preparing for the roll-out of low emissions technologies and practices on farms through advisory and extension services.

• Advancing pricing of agricultural emissions to recognise emissions reducing practices and incentivise gross emissions reduction.

• Implementing a planning system that builds urban areas upwards.

• Retrofitting buildings so they are healthier, more resilient, lower emissions and cheaper to run.

• Avoiding new installations of fossil gas where there are affordable low emissions alternatives.

• Simplifying planning and increasing funding of integrated transport networks that optimise public and active transport.

• Developing incentives to accelerate the uptake of zero emissions commercial vehicles, including vans, utes, and trucks.

• Applying regulatory and policy instruments to improve landfill gas capture.

Finally, the Advice recommends accelerating emissions reductions initiatives by Iwi/Māori by providing more direct resourcing.

If you would like assistance preparing your submission or would like to discuss the implications of the Advice for your particular sector or business, please get in touch with one of the experts below or your usual Russell McVeagh or Te Whakahaere contact.