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Climate Change Initiatives Update

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Published on: September 13, 2017

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Climate Change related policy initiatives are shaping up to be an area of high interest leading into next month's election. This update covers:

  • the in-principle decisions set out in July's Cabinet Paper concerning the review of the New Zealand Emissions Trading Scheme (NZ ETS);
  • sector specific information and developments, including Forestry, Agriculture and Transport and a snapshot of anticipated decision making based on current plans for those sectors; and
  • a summary of announcements made to date by potential government parties; Labour, New Zealand First and the Greens, on climate change related policies.
     

In-principle decisions on Emissions Trading Scheme

On 27 July 2017, the Government announced a package of changes to the NZ ETS set out in a Cabinet Paper (Cabinet Paper) which built on a report released by the Ministry for the Environment (MFE) in February 2016 (Report). The Report sets out the outcomes from stage two of the review of the NZ ETS which assessed the operation and effectiveness of the NZ ETS in light of the Paris Agreement and New Zealand's 2030 emission reduction target. That review has informed four in-principle decisions which are set out in the Cabinet Paper:

  • introducing the auctioning of NZ ETS units (NZUs);
  • limiting the use of international units when the NZ ETS reopens to international carbon markets;
  • developing a different price ceiling to replace the current $25 fixed price option; and
  • coordinating decisions on the supply settings in the NZ ETS over a rolling five-year period.

Further detail on each of those in-principle decisions is set out below.

In-principle decision regarding auctioning

The Government has agreed to introduce auctioning into the NZ ETS with the aim of establishing an auctioning mechanism by 2020. Auctions are a way for the Government to sell NZUs at the market price through a competitive bidding process and are a common feature of many emissions trading schemes internationally. Section 30G(1)(p) of the Climate Change Response Act 2002 (CCRA) already provides a regulation making power to implement an auctioning mechanism. To date that power has not been used.

Before auctioning commences, the Government would need to set a limit as to how many NZUs can be auctioned each year. 

A limit on international units

In the past, more international units were purchased than were needed to meet New Zealand's targets. To avoid this, the Government plans to bring New Zealand into line with overseas norms by limiting the quantity of international units that can be purchased. The exact amount and method of implementation is yet to be decided, pending further advice towards the end of 2018.

A different price ceiling

The current $25 fixed price option allows NZ ETS participants to meet their obligations by paying the Crown $25 instead of surrendering an NZU. It is anticipated that in the 2020s the price of an NZU will go above $25 therefore the Government intended to review various different options to replace this system. The Cabinet Paper sets out the various elements that will be considered, including the price level, whether it should be volume-limited and whether processes need to be put in place to manage the price ceiling over time. The Cabinet Paper recommends that the $25 fixed price option be kept in place at least until auctioning or links with international markets are established.

Coordination of decision-making

Following clear feedback from NZ ETS participants that more regulatory predictability is needed for the NZ ETS to work effectively, the Government intends to use a rolling five-year period to provide a forward-looking view of NZ ETS settings. This means that key settings and unit volumes will be set five years into the future, and updated every year. Decisions relating to the above in-principle decisions would also be made according to this schedule. 
 

Forestry

Many international ETS programmes exclude forestry as it is seen as a temporary carbon sink rather than delivering permanent emission reductions. This is because forests act as a carbon sink only while they are growing and once harvested, the carbon can be released back into the atmosphere. The New Zealand Government has signalled that they are keen to continue working with the forestry sector and enable forestry to remain in the NZ ETS which may have an impact on any potential international linking opportunities with other ETS programmes.

The Government is continuing to address issues in the forestry sector including reviewing the forestry accounting approach which determines how many NZUs can be received as forests grow and how many need to be returned to the Crown if the forests are harvested or deforested. The Government has recognised that the liabilities at harvest can act as a barrier to landowners and foresters participating in the NZ ETS and encourage new planting. 

The NZ ETS review is also focused on identifying a range of improvements to forestry operational settings and how the NZ ETS aligns with other carbon forestry schemes, including bringing the administration of the Permanent Forest Sink Initiative under the CCRA. These improvements would reduce complexity for both forestry participants and the Crown.

Officials from MFE and the Ministry for Primary Industries (MPI) are expected to report back to Cabinet on an integrated package of forestry decisions, including advice on potential NZ ETS changes, by 30 June 2018.
 

Agriculture

When the review of the NZ ETS was initiated in 2008, consideration of agricultural emissions was specifically excluded. It was intended that agricultural emissions would be considered separately by a specialised group. In August 2016, the Government formed the Biological Emissions Reference Group (BERG) to seek consensus on what can be done to; reduce emissions and meet New Zealand's 2030 emissions target; create a wide base of scientific evidence to support emissions targets; and minimise costs.

The terms of reference included discussion of the policy options to:

  • address New Zealand’s absolute greenhouse gas emissions, including biological emissions;
  • examine where the liability for the primary industries’ greenhouse gas emissions sit over the longer term; and
  • develop an economy-wide emissions reduction pathway over the longer term, which includes examining measures to address biological greenhouse gas emissions.

BERG has met 11 times since its inception and the Government expects to receive its final report in late 2017.
 

Transport

On 15 August 2017, the Transport and Industrial Relations Select Committee delivered a report which detailed its inquiry into the future of New Zealand's mobility. The report was commissioned in December 2015 to investigate how changing transport technology, and social and economic trends could enhance productivity in the economy, reduce transport costs, and optimise transport infrastructure.

The report suggests that the Government:

  • investigates and develops a targeted procurement programme of electric vehicles in the state sector, and ensure that there are adequate recharging stations to support such a programme;
  • develop a trial programme in conjunction with a local authority, commercial entity and the Ministry of Transport to develop a body of evidence on the viability of electric vehicle usage in a dense CBD environment;
  • develop a star standard system noting electric vehicles' all-of-life costs in comparison to an equivalent-sized internal combustion vehicle; and
  • continue to scale up the successful Urban Cycleway Fund and adopt best-practice cycle facility design standards from countries that have a high cycling uptake.

Productivity Commissioner

On 9 August 2017, the Productivity Commission released an issues paper on its inquiry into a low-emissions economy which can be found here

The purpose of the inquiry is to "identify options for how New Zealand could reduce its domestic greenhouse gas emissions through a transition towards a low-emissions future, while at the same time continuing to grow incomes and wellbeing".

The Commission is interested in hearing about mitigation options (such as increasing the number of electric vehicles), the barriers to these options and any additional options to create a low-emissions economy. 

Submissions on the paper close 2 October 2017.

Timeline of next planned steps

Against the background of the matters set out above, some of the upcoming key dates based on current government plans are as follows:

Date

Event

2 October 2017

Submissions close on Productivity Commissioner "Low-emissions economy" consultation.

Late 2017

BERG is expected to publish its final report on agricultural emissions.

June 2018

Minister for Climate Change Issues to report to Cabinet on advice received on other issues assessed during Stage 2 of the NZ ETS review, including:

  • NZ ETS forestry settings;
  • free allocation of units for emissions intensive and trade exposed activities; and
  • operational and technical improvements.

Ministry for the Environment and Ministry for Primary industries to report on the NZ ETS' forestry settings (including advice on potential changes to the NZ ETS).

The Productivity Commission will release its final report to the Government on how New Zealand can maximise the opportunities and minimise the costs and risks of transition to a lower net-emissions economy.

Late 2018

Minister for Climate Change Issues to receive advice on the necessary restrictions on participants' use of international units such that NZ will meet its 2030 target.

Minister for Climate Change Issues to return to Cabinet to seek decisions on NZ ETS unit supply settings. These decisions are intended to support the credibility of the NZ ETS market.

January 2019

"One-for-two" surrender transitional measure (allowing participants from sectors other than forestry to surrender only one NZU for every two tonnes of emissions) to be fully phased out.

January 2020

Intended end of development of an auctioning mechanism to be introduced into the NZ ETS. This auctioning mechanism is designed to allow the Government to sell NZUs at a competitive market price. Auctions are a common feature of emissions trading schemes internationally.

December 2020

The commitment not to change free allocation levels for participants in the NZ ETS ends.

January 2030

Deadline for a reduction in emissions of 30% below 2005 levels.

 

Post-election outlook

The content in the timeline above, of course, reflects initiatives put in place by the current National Government. In the lead to the general election on 23 September 2017, more focus is turning to the policies of other political parties which may become government policy after the election. Given that current polls suggest there is potential for Labour, the Green Party and/or New Zealand First (NZF) to play a part in the next government, we have noted some of these parties proposed climate change initiatives below.

Labour

The Labour Party announced its Climate Change policy on 8 September 2017. As the party that introduced the NZ ETS when it was in government in 2008, Labour remains committed to the scheme. The party has endorsed the view of the Parliamentary Commissioner for the Environment in her recent report Stepping stones to Paris and beyond: Climate change, progress, and predictability. The report called for legislating greenhouse gas emissions targets. This model, based on the Climate Change Act 2008 (UK), would introduce set "carbon budgets" which limit the amount of carbon that could be emitted into the environment. Labour has set the goal of net zero greenhouse gas emissions by 2050. 

The Labour party has announced it would establish an independent Climate Change Commission to regulate the NZ ETS and other climate change issues. The Commission would monitor progress on emissions reduction targets and provide the government with objective advice on how the targets could be best achieved.

Labour would extend the NZ ETS to cover all emissions and businesses. Notably, this change would extend the NZ ETS scheme to cover the agricultural industry but would start with giving the sector 90% of emissions free. The extra revenue gained from the NZ ETS extension would be used to support the Labour party's goal of transitioning to a low carbon economy. The party would then work with farmers to ensure low-emissions famers are rewarded with a lower costs through the NZ ETS what Labour is calling a "farm-level" approach.

The party would require all state-owned enterprises and other government organisations to opt for low-carbon options including requiring all future government vehicles to be electric unless an exceptional reason not to exists.  

The Labour party has also proposed setting up a Youth Climate Change Challenge open to children from Year 7 to engage them in climate issues. They also propose a Transitions National Science Challenge to consider challenges around a transition to a low-carbon economy.

An outline of Labour's climate change policy can be viewed here.

New Zealand First

NZF, a potential coalition partner for both National and Labour following the election, has proposed repealing the NZ ETS which it claims is "profiteering from our environment". Similar to the Labour party's policy above, NZF would establish a Parliamentary Commission for Climate Change based on the United Kingdom's Climate Change Act. The Commission would be tasked with evaluating New Zealand's level of achievement under both the Kyoto and Paris Climate Change Agreements. The Commission would also be responsible for setting a 'carbon budget' every three years. It is not clear if NZF would include the agricultural emissions within the scope of the Commission.

NZF has committed to requiring all government vehicles to be completely electric by 2025 or 2026. Emergency services and defence force vehicles would be exempted from this requirement. NZF would also hold a public Inquiry in to New Zealand's use of petrol and diesel vehicles.

Green Party

The Green Party has announced a number of climate related policies which can be found here. Notably on 10 September 2017, the Greens announced they would replace the NZ ETS with a Kiwi Climate Fund. This fund will be resourced by a tax on climate pollution, including from agriculture. The Greens point to this being a more transparent and predictable system for businesses than the NZ ETS.

The revenue gathered from the new tax will be used to provide a guaranteed payment for people who plant trees, with all remaining revenue recycled to New Zealanders over the age of 18 via a dividend payout. This has been projected as $250 per person by 2020.

The Greens will pass a Zero Carbon Act within their first 100 days of government with the goal of net zero emissions by 2050. Similarly to Labour, they also intend to establish an independent Climate Commission tasked with guiding government decision-making on climate targets and emission prices.


This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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