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Major developments for the Zero Carbon and Emissions Trading Reform Bills

October 29, 2019

Contacts

Partners Gerald Lanning, Sarah Scott, Nick Wilson
Special Advisors Mark Baker-Jones
Senior Associates Joanna Lim, Victoria Anderson

Climate change (inc Zero Carbon Bill and Emissions Trading Scheme)

There were major developments for climate change legislation in New Zealand last week. In this update, we look at two key takeaways from these developments: clarification of risk reporting under the Zero Carbon Bill, and the delayed inclusion of agricultural methane in Emissions Trading Reform.

Background

In a major week for climate change legislation in New Zealand:

  • the Government released the Environment Select Committee’s recommendations on the Climate Change Response (Zero Carbon) Amendment Bill (Zero Carbon Bill); and

  • the Climate Change Response (Emissions Trading Reform) Amendment Bill (Emissions Trading Bill) was introduced into the House.

Both Bills will amend the Climate Change Response Act, and are fundamentally linked.

The Zero Carbon Bill establishes New Zealand’s policy framework to manage the effects of climate change (mitigation and adaptation). And the Emissions Trading Bill provides important fixes to the Emissions Trading Scheme, the Government’s main tool for reducing greenhouse gas emissions.

In this update, we look at two key takeaways from these developments. We will also provide detailed commentary on the Bills once they pass into legislation (there is still room for further changes to them).


Key takeaway #1: clarification of risk reporting under the Zero Carbon Bill

What you need to know

  • The Select Committee recommends that reporting under the Zero Carbon Bill aligns with the Task Force on Climate-Related Financial Disclosures framework

  • There are concerns as to whether the framework, designed for financial institutions, is suited for public sector disclosure and sufficient to produce the information necessary to inform the National Adaptation Plan

  • Reporting organisations will need guidance and assistance in repurposing the framework to answer information requests under the Zero Carbon Bill

In respect of the Zero Carbon Bill, the Select Committee has proposed a wide range of changes; some substantial, some less so.

The first takeaway is operational, and in many ways provides an important point of clarification. It relates to reporting on climate-related risk by organisations, such as local authorities, council-controlled organisations, Crown entities, lifeline utilities, and local governments.

Incorporation of the Task Force on Climate-Related Financial Disclosures framework

Under the Zero Carbon Bill, the Minister and the Climate Change Commission will be able to require public organisations to report on their climate-related risk. Since the Bill was introduced in May 2019, there has been a question as to what reporting on climate-related risk might look like.

This question has to some degree been answered by the recommendation of the Select Committee. The Committee recommends that reporting under the Bill aligns with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. The TCFD has developed four recommendations on climate-related financial disclosures that are particularly aimed at asset owners and managers, financial-sector organisations, and insurance companies. However, they are increasingly being applied by other organisations, in addition to financial organisations, as a framework for identifying and addressing climate-related risks.

Incorporation of the TCFD recommendations into the Zero Carbon Bill is a clear and direct signal by Government of its expectation that public organisations will, as best practice, report on their climate-related risk in accordance with the TCFD recommendations. It is also an insight into how Government anticipates the private sector generally will report on its climate-related risk.

Will this work?

There is a concern however as to whether the TCFD recommendations are suited for public sector disclosure. The recommendations were not designed with the risks of public organisations in mind. They were designed for financial institutions. Critics have voiced concern that financial systems have very little regard for social inequities. This was one of the points of discussion raised at the recent TCFD workshops Simpson Grierson hosted with the McGuinness Institute and the Climate Disclosure Standards Board.

There is also a concern that financial sector motives may not be consistent with achieving a stable climate. The question is whether the TCFD recommendations are sufficient to produce the climate change adaptation information necessary to inform development and national risk assessment of the National Adaptation Plan.

Next steps

Reporting organisations will need guidance and assistance in ‘repurpos[ing] information and formats used to make financial disclosures to answer the information requests made under the adaptation reporting powers’ in the Zero Carbon Bill. To this end, we intend to hold further workshops to address and manage these reporting requirements, as well as producing guidance for public organisations on climate-related risk disclosure.


Key takeaway #2: delayed inclusion of agricultural methane in Emissions Trading Reform

What you need to know

  • The Government is putting the onus on the agricultural sector to make the necessary changes to reduce its methane emissions - with two key backstops

  • Delaying the inclusion of (or possibly excluding) agricultural methane from the Emissions Trading Scheme will require greater CO2 reductions generally and could have significant implications for New Zealand’s ability to meet the Zero Carbon Bill’s 2050 Target

The second key takeaway from last week’s announcements relates to the agricultural sector’s part in achieving New Zealand’s emissions reductions goals. Apart from introducing a range of long overdue and well-signalled reforms to the Emissions Trading Scheme (ETS), the Emissions Trading Bill delays the pricing of agricultural livestock emissions and fertiliser emissions, until 2025. That is, agricultural methane will not be priced under the ETS for another five years.

Self-accountability for the agricultural sector, with backstops

The Government has instead agreed to work with the agricultural sector, with the onus on the sector itself to make the changes that are needed to reduce its methane emissions - with two key backstops:

  • if insufficient progress is made by 2022, the Government can bring the sector into the ETS at processor level before 2025 (ie livestock processors and nitrogen fertiliser processors and importers will account for emissions and pass the cost on to their customers); and

  • ruminant livestock farming will be brought into the ETS at farmgate level from 2025 as a default setting (accounting for only 5% of emissions), meaning that the Emissions Trading Bill (if passed) will need to be amended by subsequent legislation to stop this happening.

The sector has developed He waka eke noa, a five-year work plan for taking action across a number of environmental improvements such as climate change, water quality and biodiversity.[1] Despite the plan having no targets for emission reductions, the sector advises that it is its expectation that the implementation of this plan will be enough to make the Government of the day reverse the 2025 backstop so that agriculture does not come into the ETS.

Implications of excluding agricultural methane from the ETS

New Zealand’s emissions profile is comprised of carbon dioxide (43.8 percent), methane (42.8 percent) and nitrous oxide (11.6 percent). With agricultural methane remaining outside the ETS, it is crucial that the sector does indeed manage to find ways to reduce methane. With the proposed delay, New Zealand will be required to work that much harder to reduce the other greenhouse gases.

The Parliamentary Commissioner for the Environment has already noted that to achieve the overall zero carbon target, with a 10% reduction in methane by 2030, there needs to be a 40% reduction in carbon dioxide over the same period. A lesser reduction in methane means even greater reductions in carbon dioxide are necessary, and this increases the risk that little real reduction will occur for some time. This will make meeting the Zero Carbon Bill 2050 Target significantly more difficult.

Meeting the Zero Carbon Bill 2050 Target - how do we get there?

The IPCC special report on the impacts of global warming of 1.5 °C tells us that limiting warming to 1.5°C would already require ‘unprecedented transitions in all aspects of society’, and that the ‘next 10 years are critical’ in achieving this. Delaying methane pricing for five years cuts deep into that critical time. Free allocations after that will cut even deeper.

The question then is how this decision not to price methane through the ETS for now will affect New Zealand’s ability to meet the Zero Carbon Bill’s 2050 Target. To meet the 2050 Target New Zealand must either reduce or remove emissions, and the Commission will recommend budgets that seek to do this. However, in setting those budgets the Minister must consider, amongst other things, the implications on land use change, such as the impacts of forestry on rural communities. As such, afforestation for the purpose of sequestration of carbon dioxide could be slowed or restricted, and thereby limit capacity for removals.

Meeting the 2050 Target could therefore mean paying for offshore mitigation or requiring huge reductions in domestic carbon dioxide emissions. The former burden will fall on taxpayers, the latter will fall almost wholly on the transport, manufacturing, and construction sectors, with flow-on effects on everyone, including the agricultural sector.

Next steps - no easy decisions

If it turns out that making the emissions reductions necessary to meet the 2050 Target, becomes too much for the economy to bear, the Climate Change Commission can make a recommendation, and the Government of the day can legislate to change the 2050 Target.

As there is inherent uncertainty in the pace of change that can be achieved, the certainty that both Bills have promised to deliver investors, business and industry is somewhat illusory for longer term horizons. In the short to medium term however, the Bills provide a framework and tools for making some hard decisions on how New Zealand responds to the climate change challenge.


Further detail and workshops

Please get in touch with any of our contacts for further detail on the two Bills and the TCFD framework, and how they could impact your sector and organisation, as well as our future workshops on climate-related risk reporting.