Second emissions reduction plan: an opportunity for engagement on key policy details

On 17 July, the Government released a discussion document outlining proposals for the second emissions reduction plan (ERP2), which the Government is required to publish by the end of this year under the Climate Change Response Act 2002 (CCRA) to cover the period 2026 to 2030.

Unsurprisingly, the proposals are a significant departure from the policies put forward by the last Government in the first emissions reduction plan, published in May 2022 (ERP1). The proposals for ERP2 place heavier reliance than ERP1 on the New Zealand Emissions Trading Scheme (ETS) as the primary tool for incentivising emissions reductions and/or removals, and move away from complementary policy interventions such as the Government Investment in Decarbonising Industry Fund. While some proposals are new, others have been previously announced or signalled, and the Government has also discontinued a number of policies from ERP1.

While it is helpful that the discussion document brings together in one place the Government's climate plans, many of the new proposals are high level and details remain to be ironed out. This gives rise to questions as to when and how policies will be implemented, and the extent to which they will drive emissions reductions consistent with New Zealand's domestic and international climate change targets. The current consultation is therefore an important opportunity for organisations impacted by ERP2 to influence the direction of travel for the second emissions budget period. Consultation is open until 21 August 2024.

In this update, we outline 6 key themes from the ERP2 proposals, along with a summary table of key policies by sector.

Key theme 1: "least cost" net-based approach to emissions reductions

The ERP2 proposals take a "net-based approach" to emissions reductions, which involves reliance on both reductions in gross emissions and incentivisation of removals (e.g. through forestry). The primary reason identified in the ERP2 for this approach is that it is expected to be the most cost-effective way to reduce emissions and meet the second emissions budget.

While New Zealand's legislation and international commitments are all net-based, in recent years there have been increasing calls (including from the Climate Change Commission) for a greater focus on reductions in gross emissions through decarbonisation initiatives. Indeed, the last Government had announced a review of the ETS last year with a view to better incentivising gross emissions reductions, while still recognising the role that forestry removals can play (see our update here). We expect this point to be a key focus of submissions on the ERP2 from those stakeholders who either wish New Zealand to show greater leadership on gross emissions reductions over the remaining half of this decade, or are looking for Government support for gross emissions reduction initiatives.

On the other hand, the "net-based approach" proposed will provide certainty to the forestry sector, which has faced wobbles in market confidence in light of the last Government's ETS review and other regulatory interventions.

Key theme 2: a credible ETS

In line with previous indications, the ERP2 proposals emphasise the ETS as the primary tool for incentivising "least cost" emissions reductions in New Zealand. The Government has committed to aligning New Zealand emission unit (NZU) supply and the NZ ETS cap with the second emissions budget through annual updates of the ETS settings, and recently closed consultation on the settings for the period 2025 – 2029.

Given the Government has already scrapped the review of the ETS commenced by the last Government last year, it is unsurprising that the discussion document emphasises that forestry removals will continue to be treated as equivalent to emissions (with 1 tonne of CO₂e emitted equivalent to 1 tonne of CO₂e sequestered). The only significant change that the Government is proposing to the treatment of forestry under the ETS is the introduction of new limits on the entry of forests into the ETS where these are on productive farmland. 

The Government remains committed to a split-gas approach to achieving climate change targets, and has reiterated its commitment to pricing on-farm agricultural emissions by 2030 through a "fair and sustainable" system. In relation to this, the Government has recently promulgated a legislative change, which has just passed its first reading, that removes agriculture from the ETS altogether, including by removing the current obligation on agricultural processors to report their emissions. Should that proposal become law, there will be no legislative "backstop" for the pricing of agricultural emissions.

Key theme 3: focus on emerging technologies

The ERP2 proposals heavily emphasise the role that emerging technologies might play in reducing emissions.  

In addition to emphasising carbon capture and storage as an option to reduce emissions over the longer-term (see our earlier update here), the discussion document identifies other potential abatement opportunities such as vaccines and methane inhibitors to reduce agricultural emissions, while acknowledging that many technologies are not yet commercially available. The Government's work in this area will be focussed on a structured research and development programme to drive the development and commercialisation of tools to reduce emissions on-farm, streamlining the regulatory approvals process for new technologies, and the provision of informational "extension services" to support farmers with the transition. 

Key theme 4: spotlight on energy

The energy transition is a key component of the Government's response to climate change.

While New Zealand's electricity system is highly renewable (with significant additional renewable generation also in the investment pipeline), the consultation document highlights that electrifying the economy depends on affordable and secure electricity. This reflects the "energy trilemma", whereby our energy system faces three interconnected (and often conflicting) objectives of being affordable, secure and sustainable. 

The Government has already announced flagship policies relating to the energy transition. Most significantly, the National Party's Electrify NZ policy, announced prior to the General Election, involves a commitment to doubling renewable energy by 2050 and focuses on enabling electrification by removing regulatory barriers to private investment. The Fast-Track Approvals Bill (see our earlier update here), currently making its way through Parliament, is a critical part of this strategy. The discussion document indicates that further details of the Electrify NZ programme are to be announced, and highlights work that the Government has underway relating to each of the three limbs of the energy trilemma.  

One important change in the approach to the energy sector from the last Government is that the new Government places greater emphasis on an ongoing role for natural gas to support the affordability and security of electricity supply, and to incentivise electrification. Key policies from the last Government, including the ban on new exploration and the development of a gas transition plan, have been scrapped.

Given the significant focus of the ERP2 proposals on the energy sector, we have prepared a sector-specific analysis, available on our Energy Blog here.

Key theme 5: unlocking private capital

An important overarching theme in the ERP2 proposals is the Government's emphasis on mobilising private capital towards emissions-reduction initiatives by removing barriers to investment. While the consultation document highlights some initiatives already underway (such as the development of a sustainable finance taxonomy – see our update here), other ERP2 proposals remain at the exploratory phase. For example, the Government proposes to test which barriers to investment are a priority and implement them over the next 18 months, including through engagement with the private sector.

Key theme 6: the role of nature

The Government sees a role for nature-based solutions as part of the "least cost" transition to a low-emissions future. While exotic forestry is a central part of the ERP2 proposals, the discussion document also recognises potential for non-forest measures, including wetland restoration, coastal vegetation management and Predator Free 2050 to contribute to future emissions budgets. The Government also sees these options as potentially providing new options for landowners and businesses, incentivising land use change, and providing other environmental co-benefits.

In terms of which options to prioritise, the Government will make decisions based on affordability, scalability, scientific validation and overseas acceptance of the relevant non-forestry removals option.

The exact mechanism that will be used to deliver non-forestry removals has not yet been decided, and the Government seeks feedback on the opportunities and barriers in this space. In our view, the development of a framework for recognition of additional nature-based solutions is likely to give rise to a number of complexities, whether delivered through amendments to the ETS, a separate voluntary carbon market or a biodiversity credit system. Any proposed solution will need to carefully consider the interaction of the system with other laws, including those relating to property rights and resource management, to ensure that the full benefits of non-forestry nature-based solutions are able to be realised.  

Key plans for ERP2 by sector

Energy	Proposed proportion of emissions reductions in ERP2 (2026 – 2030): 20% (-15MtCo2e) Key policies: Commitment to doubling renewable energy by 2050. Aim to accelerate renewable generation and electricity networks by streamlining regulations. A "smarter electricity system", using demand-side response to manage demands on the electricity system. Enabling carbon capture, utilisation and storage to improve the investment climate for gas supply. Enabling the use of biomethane and hydrogen to replace natural gas, by exploring what measures are needed to increase the uptake of renewable gases. Supporting private investment in hydrogen, with MBIE progressing work to understand regulatory barriers to the uptake of hydrogen and the Government exploring the potential for collaboration with the private sector. Supporting private investment in offshore wind by establishing a regulatory framework (with legislation due to be introduced to Parliament by the end of 2024). For further detail of these key policies and the policies that have been discontinued from ERP1 in relation to the energy sector, see our separate update here.
Transport	Proposed proportion of emissions reductions in ERP2: 1.3% (-1MtCo2e) Key policies: Accelerating the rollout of 10,000 public EV chargers (subject to a cost-benefit analysis as agreed by National and Act in their Coalition Agreement).  This policy includes two components, being facilitating private investment by reducing barriers such as regulation and connection costs, and reviewing Government co-investment so it is fit for purpose and targeted. Reviewing the Clean Car Importer Standard (this has recently been made less stringent in line with Australia). Reviewing vehicle dimension and mass rules to support the uptake of zero-emissions heavy vehicles. Supporting the development of sustainable aviation and maritime biofuels by facilitating industry discussions and working with other countries on sustainable aviation fuels. Public transport investments, including a rapid transit network for Auckland and improvements to increase capacity and reliability on lower North Island train services.
Agriculture	Proposed proportion of emissions reductions in ERP2: 26.7% (-20MtCo2e) Key policies: Supporting the development of, and access to, tools and technology to reduce emissions by food and fibre producers. Enabling regulatory pathways for agricultural mitigation, including working with other countries to streamline the process for regulatory approval for emerging tools and technology, developing methodologies to recognise the use of emissions reduction tools in the greenhouse gas inventory, and improving the regulatory environment for genetic technologies. Implementing pricing for on-farm agricultural emissions by 2030 and keeping agricultural emissions out of the ETS.
Waste	Proposed proportion of emissions reductions in ERP2: 5.3% (-5MtCo2e) Key policies: Investigating improvements to organic waste disposal and landfill gas capture by engaging with industry and through the Waste Minimisation Fund.
Forestry and wood processing	Proposed proportion of emissions reductions in ERP2: 40% (-30MtCo2e) Key policies: Managing whole-farm conversions to exotic forestry by placing limits on registrations in the ETS on newly planted exotic forests on productive land. Exploring opportunities to partner with the private sector to plant trees on Crown land. Improving consenting for infrastructure that will support forestry and other primary production. Ensuring the Wood Processing Fund supports investment in domestic wood processing. Addressing regulatory barriers to enable building with wood.
Non-forestry removals	Proposed proportion of emissions reductions in ERP2: N/A Key policies: Recognising removals from activities other than forestry and investigate options to reward non-forestry removals.