The Government’s Emissions Reduction Plan (Reduction Plan) announced earlier this week is a comprehensive and extensive plan covering, by necessity, all aspects of our community and economy. Related budget items were announced also. There are some difficult (and political) aspects to the Reduction Plan and its implementation which will take time to implement, whether by regulation or otherwise. There is also a general election coming up.

Nonetheless, certain tenets of the Reduction Plan – and market realities – are, we think, already sufficiently certain that decision-makers (to the extent they are not doing so already) should be building them into their planning for the next 12-24 months. We explain more below.

The ERP is founded in statute and won’t just “go away”

The Reduction Plan was issued under the Climate Change Response Act 2002, which requires the Minister of Climate Change to set emissions budgets and ensure they are met. The Government has already set the emissions budget for three periods through to 2035: significantly, with the National Party’s support.

The Reduction Plan sets out the strategies to be implemented to achieve the budgets, and also to mitigate the impacts of reducing emissions and effectively to support NZers in the transition. The Reduction Plan belongs to this Government alone; future Governments may take a different approach to the way to achieve the emissions budgets, to the extent that policies are not already locked in – a point the National Party has emphasised in the context of its support for the emission budgets themselves. A new rolling Reduction Plan will be published before the start of each emissions budget period (5 years).

This process is provided for by statute. Unless the Government seeks to repeal the Climate Change Response Act, decision makers should not assume that the Reduction Plan will be shelved.

Target emissions reduction areas are well known, with cost impacts on industry participants

There is nothing new about the ERP’s key target areas: transport, energy, industry, building and construction, agriculture, and waste. There is lots to do in each of the key target areas. The Reduction Plan proposes support and incentives, in several forms, to help or enable these industries to reduce emissions.

Participants in these target industries, and those in those participants’ value chains, will already be well aware of the need to actively reduce their greenhouse gas emissions, with financial and reputational impacts for those who do not respond (although the picture differs for the agricultural sector).

• The ETS settings impose ever-increasing costs for participants in high emitting industries.
• The practical effect of the climate-related financial disclosure regime is to force 200 or so significant companies and financial institutions to understand how climate change impacts them, including measuring emissions and of those in their value chain, and take steps to reduce them - and disclose details publicly.
• Company directors will be well aware of the need to consider climate risks when making decisions on behalf of the company, or risk liability for breach of their directors’ duties.

The ETS and climate-related financial reporting regime are central, and already in operation

Two principal structures designed to compel the NZ economy to shift to net zero carbon emissions already exist, and both are central to the Reduction Plan:

• Imposing a price for emitting greenhouse gases, via the ETS and a proposed bespoke emissions pricing model for the agriculture sector); and
• Requiring key businesses and those in their value chain to disclose their greenhouse gas emissions and their exposures to climate-related risks, as required by the climate-related financial disclosure regime (operational in 2023).

The Reduction Plan seeks to improve the operation of the ETS in several ways, including to better incentivise the reduction of gross emissions, gaining co-benefits with biodiversity/indigenous forest, and mitigation of emissions leakage risk goals. Also expect changes to forestry removals prerequisites, industrial allocation, and an exploration of a carbon border tax, similar to that being considered in the EU and the UK.

Further, voluntary offsetting will be better supported with a framework and rules, allowing businesses to quantify their sustainability efforts in relation to climate change factors.

State sector procurement policies will be a Trojan horse

The Reduction Plan makes very clear that State sector procurement policies, across the board, will be amended with a view to suppliers to Government being required to meet carbon emission reduction goals.

This is potentially a powerful tool in driving change across the economy, given the size of the State sector and the extent of spend within it. Government procurement rules are already used as a means to force behaviour amongst all those who supply to State sector agencies.

Forestry is key to carbon offsetting, presenting risks and opportunities for the forestry sector

Forestry is one of the few means by which greenhouse gas emissions can be accounted for within the ETS as being offset. The forestry sector is already adapting to the economic opportunities presented by a growing demand for and rising price of NZUs. However, the way forestry is currently used in the ETS is a fairly blunt instrument, and changes are afoot.

The Reduction Plan proposes investigation into how greater biodiversity in forestry (ie a move from single species exotic forests to native forests) can allow more effective and greater levels of carbon offsetting. Pre-1990 forests may also become eligible to earn NZUs where they increase carbon storage from their baseline. Landowners may be supported to adopt afforestation of marginal land. (These proposals present challenges to those with a high exposure to exotic forest, including Māori.)

Participants in the forestry sector are likely already well aware of the significant opportunities presented by carbon-reduction needs for development of the sector, and the Reduction Plan indicates further development. Significant amounts of investment funding are proposed (or already allocated) to foster development of technology-based solutions to the need to reduce emissions across all target areas, including forestry. The Reduction Plan also contemplates further development of the forestry and wood processing industry to deliver more renewable fuels (eg as fuel for boilers replacing coal, gas and waste oil).

Continued drive for investment in ‘green’ projects, and global demand for NZ's technology-based solutions

Substantial investment (in the form of ‘green bonds’ or sustainable financing) is already being directed towards ‘green’ projects, in New Zealand and internationally. Drivers include a global demand for solutions to climate-related issues, specific ESG investment strategies, and the effect of climate-related reporting (which highlights ‘green’ investments by reporting entities and those of their principal customers).

The Reduction Plan announced further financing sources to help in the drive for climate action, including through issue of sovereign green bonds and various forms of other funding.  Solutions in renewable energy, and emissions reduction in the agricultural and construction sectors are in particular focus here.

NZ has recently experienced record levels of offshore investment interest in its proven ability to develop effective and scalable technology solutions across many sectors. Additional funding proposed by the Reduction Plan for development of solutions to assist in reducing carbon emissions across all target sectors - and particularly agriculture - presents further and very significant opportunities for NZ’s R&D and technology sectors.

Greater involvement of iwi and Māori in finding solutions

Empowering Māori is one of the 5 principles underlying the Reduction Plan and there is a clear message that the Government wants to work more in partnership with tangata whenua.

Co-governance or co-management with iwi and hapū, arising from Treaty settlements, has been in place for some 30 years in NZ, and with successful outcomes for iwi and hapū involved. The Government has signalled that it intends to explore more co-governance with Māori, with some specific examples already in discussion (Three Waters, Māori Health Authority). These models are attracting some political controversy. This plan indicates a clear direction towards co-governance models being explored more widely, across all areas of the community and economy, to meet the climate change challenges in a way that respect kāwanatanga and tino rangatiratanga.

Some (very) difficult issues remain but that shouldn’t stop progress

Implementing all the steps needed to bring about effective reduction in carbon emissions is, to state the obvious, complex and difficult.

There are some particularly difficult issues: achieving an equitable transition; progressing “investigations” into actual actions; getting people out of cars and into more sustainable transport modes such as public transport, walking, cycling or micromobility; achieving timely and cost effective infrastructure investments needed to support many of the policies (eg increased renewables); changing our “throwaway culture” and moving to a circular economy; ensuring that private enterprise investment is not undermined or disincentivised. NZ does not have the luxury of time to resolve these issues.

The possibility of a change in Government in 2023 is obvious. However, any new Government will still be faced not only with the same set of issues, but also with the same general population that seems to understands the climate change challenge, but seems slow to embrace the changes necessary to reduce emissions and their individual carbon footprint

None of that stops business makers and decision-makers from either getting on with what is already clear, or taking advantage of the many opportunities thrown up by the carbon emissions reduction challenges.

Special thanks to Charlotte McLoughlin for her assistance in writing this article.