The Productivity Commission has laid out a detailed strategy to achieve net carbon neutrality by 2050 in its draft report, released today, on the transition to a low emissions economy.
Key elements are a strengthened Emissions Trading Scheme (ETS), a look-up-and-take-notice carbon price, a Zero Carbon Act supported by a Climate Change Commission, and mandatory climate-related financial disclosure.
Submissions close on 8 June. Final recommendations are due with the government in August.
The Commission has identified three principal drivers toward reducing greenhouse gas (GHG) emissions in New Zealand:
- afforestation – another 1.3 million to 2.8 million hectares in trees, most of the land converted from marginally profitable beef and sheep farms
- electrification (primarily of transport), and
- changes to the structure and methods of agricultural production.
This reflects New Zealand’s emissions profile, the composition of which is: agriculture 47.9%, transport 40.5%, industrial processes and products 6.6% and waste 5%. Currently forestry offsets 29.7% of this volume.
A much higher carbon price will be needed
At the centre of the Commission’s analysis is that price will drive behavioural change. Modelling commissioned for the inquiry predicts a carbon price range of $75 a tonne of CO2 equivalent (CO2e) to over $200 in the next few decades. The Commission expects this will be in line with other developed countries. It is substantially higher than the current New Zealand market price of $21, and the effective market cap of $25, indicating that the transition will be difficult.
ETS to remain, but needs reform
The Commission recommends that the ETS be retained rather than replaced by a carbon tax. However, it has identified a number of reforms to make the scheme more effective. These include:
- improved control over unit supply through effective emissions budgets with rolling five-year forward caps
- protecting against destabilising price swings by setting a reserve price on government auctions of New Zealand Units to create a price floor and releasing reserved units for sale only when the price exceeds a certain point, to create a price ceiling, and
- improved forward transparency and policy stability to incentivise long term investment decisions resulting in emission savings.
Other components of a successful response
Other components that the Commission considers essential to a successful strategy are:
- a strong long-term commitment from the government to emissions reduction and transparency about the levers which will be used to achieve this
- laws and institutions to support stable policy settings with legislated targets and accountabilities, including exposure to judicial review (although the Commission accepts that the courts may not be able to enforce an order against the government)
- other supportive regulations and policies to address non-price barriers, encourage change and manage serious impacts on lower-income households and affected businesses
- harnessing the full potential of innovation through significantly more public resourcing for research, and
- supporting investment in low emissions technology, infrastructure and other activities.
Mixed report for the government
The Commission discussed the UK model at some length in its original issues paper, published in August last year. The Labour-led government has now adopted this approach and is in the process of implementing it through the passage of a Zero Carbon Act and the proposed appointment next year of a Climate Change Commission. A predecessor body – the Interim Climate Change Committee – was appointed earlier this month.
But, while the government and the Commission are largely “on song”, there are areas of disagreement. In particular, the Commission:
- suggests that the extension of the Overseas Investment Act to forestry cutting rights may have a “chilling effect on investment” in the sector
- queries the practicality of moving to 100% renewable electricity generation given the occasional unreliability of supply and the importance of electricity prices to the adoption of low emissions technologies, most obviously, electric vehicles
- notes that fossil fuel use is still being subsidised through concessionary tax deductions for petroleum mining and R&D funding for the oil industry, and
- describes the government’s support for the emergence of clean technologies as lacking focus and being inadequate in size and scope.
The Commission accepts that emissions pricing can make New Zealand producers non-competitive internationally, causing carbon leakage (or the relocation of production overseas, often to more emissions-intensive countries). It received submissions to this effect from the aluminium, methanol, urea, dairy, steel and oil and gas sectors.
It is proposing that agriculture be brought within the ETS but provided with free allocation for a defined period, with a measured phase-down. Similarly it would continue to allow free allocation to emissions intensive, trade-exposed industries - until competitors in other jurisdictions are subject to a comparable emissions price.
The government will almost certainly take up the Commission’s recommendation that listed issuers be required to provide climate-related financial disclosures. In addition to this, the Commission is recommending emissions reduction investment mandates for the NZ Super Fund and ACC, and alignment of government grants and other forms of assistance with climate change performance.
The Commission has delivered 50 recommendations. Among them are:
- that there should be separate targets under a single cap for long-lived GHGs (CO2 and nitrous oxide) and short-lived ones (methane). Long-lived would need to go to net zero “at a minimum” while short-lived would need to be reduced to stabilise global warming
- emission standards for all new and used vehicle imports and the introduction of a “feebate” scheme under which vehicle importers would pay a fee or receive a rebate, depending on the emissions intensity of the vehicles
- consideration of a National Environmental Standard for waste and waste disposal sites and extension of the levy to all known disposal facilities (allowing that this may need to be offset to avoid overlap with the ETS)
- expansion of the ETS to include waste water treatment plants
- specific legislation for Carbon Capture and Storage, and removal of the limit in the ETS on who may generate removal units for such activities
- consideration of how the National Policy Statement for Renewable Electricity Generation 2011 might be strengthened, and
- a review of the Building Code to ensure that it does not discourage the use of low emission building techniques and materials.
This list does not attempt to be exhaustive. We will be reviewing the document for sector specific impacts within the next few days and invite you to contact us if you have any queries.