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Whirlwind in climate change

April 05, 2019

Contacts

Partners Greg Allen, Gerald Lanning
Senior Associates Joanna Lim

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

It was a whirlwind of reports and announcements in the climate change space last week. Let’s take a deep breath and catch up.

On Tuesday (26 March 2019), the Parliamentary Commissioner for the Environment, Simon Upton, recommended that forest sinks not be used to offset carbon dioxide emissions in his report Farms, forests and fossil fuels: The next great landscape transformation? The report recommends dealing with agricultural gases and forest sinks together, while dealing with fossil carbon dioxide emissions separately.

Climate Change Minister James Shaw immediately rejected this suggestion on the same day (see the media release here), stating that “for the sake of providing policy stability and predictability for emitters and the forestry sector, the Government is committed to retaining the use of forestry off-sets for carbon dioxide and other greenhouse gases emissions.” Anything else would have seriously undermined the investment signals the forestry sector needs to have the confidence to plant the trees the Government is relying on.

On Wednesday James Shaw admitted that he had given up trying to set a date for when the Government would get agreement on its Zero Carbon Act. National’s climate change spokesperson Todd Muller has said that talks between Labour and National over climate change policy are “closer to the end than the beginning”. However it is clear that there remain differences in opinion in relation to the “sequence and pace” of agricultural changes, not to mention strong differences about whether the oil and gas exploration decision should be able to be revisited.

Mere hours later on the same day, Cabinet announced further changes to the Emissions Trading Scheme (ETS) (see here for the media release).

And on Friday, the New Zealand Super Fund released a white paper on its climate change investment strategy. A strong theme in the paper is the view that carbon risk is under-priced in markets, at least over the time horizon for investment of the Fund. Given the time horizon of the Fund, steps have been taken to mitigate exposure to climate change risks. The Fund has also invested in alternative technology opportunities related to climate change.

We look at all of these developments in more detail below.

The Parliamentary Commissioner for the Environment’s Report

The report recommends a two part approach to the net reduction of greenhouse gases:

  1. Carbon dioxide emissions from fossil fuels would be managed down to zero by 2075 (stating “there is nothing magic about 2050”) and would not be offset by forest sinks.
     
  2. Biological gases from agriculture (methane and nitrous oxide) would need to be reduced and could be offset by forest sinks. However, a target has not been set in the report, Upton explaining that it would be based on advice of the new Climate Commission.

The key reasons for Mr Upton’s recommendations are:

  1. The fossil fuel carbon dioxide emitted into the atmosphere has a warming effect for centuries to millennia. While forests can be long-lived, they are not permanent and they are at risk from fire, pests, disease and climate change itself. Continuing to emit fossil fuel carbon dioxide on the basis that an equivalent amount of carbon is being sequestered by forest sinks therefore carries significant risks.
     
  2. In contrast, biological gases are removed more quickly from the atmosphere by natural processes. Therefore, a single target that includes all sources and forest sinks renders the temperature outcomes of climate policies uncertain. If no specific target is set for gross fossil carbon dioxide emissions, emissions reductions of methane or nitrous oxide could be substituted for action on reducing fossil carbon dioxide. This would not address the long-term warming effects of carbon dioxide.

While the suggestion to treat greenhouse gases differently and limit forest sinks to biological gases only been rejected, Mr Upton notes that his report was written with a long term view, and his report is likely to carry weight as discussions on climate change emissions continue.

Changes to forestry in the ETS

Forestry Minister Shane Jones and Climate Change Minister James Shaw announced a second set of changes to the ETS as part of broader reforms previously announced. These changes aim to lay the groundwork for the planting of an estimated 89 million more trees in the coming years and an extra 45 million tonnes of carbon dioxide stored in New Zealand’s forests.

The new changes include:

  • Introducing averaging accounting for all forests planted from 1 January 2021 (facilitation of more carbon trading for forestry by removing the extremes in unit issue and unit surrender that come from tying units to growth/harvest, and rather looking at average carbon sequestration over forestry cycles);
  • Six major operational changes, including:

    • Making it easier to identify ETS-eligible land prior to investing in planting;
    • Ensuring the 6 year stand-down period for grant-funded forests works as intended;
    • Aligning the ETS Mandatory Emissions Return Periods with the Paris Agreement timing;
    • Enabling better enforcement in cases of persistently non-compliant returns or missed returns from post-1989 forest owners;
    • Strengthening the compliance process for transmissions of interest when a forest changes hands; and
    • Enabling enforcement in cases of permanent forest being intentionally clear-felled; as well as
  • Six further minor and technical changes to resolve ‘bugs’ in the system and enable better operation of the ETS over the long term.

The Government will also make decisions on the following this year:

  • the use of proceeds from auctions;
  • a potential price floor;
  • how decisions to phase down industrial allocation should be made; and
  • the broader market governance framework.

Consultation on unit supply settings and trigger price levels is also happening later this year.

New Zealand Super Fund white paper

Although the investment horizon of the NZ Super Fund is longer than that of many businesses, the white paper outlines a four-pronged approach that could be a useful framework for businesses and investors when assessing and responding to climate change risk:

  • reduce exposure;
  • incorporate climate change into analysis and decision-making toolkit (mainly in terms of risk elements);
  • engage with companies, managers and policymakers as an active shareholder;
  • search for opportunities presented by the transition to a low-carbon energy system.

Please contact us for questions regarding any of the above information.

Contributors tamara.wimsett@simpsongrierson.com