Public consultation that could have far-reaching implications for business is underway on the Government's proposed Zero Carbon Bill, following the release of a Discussion Document by the Ministry for the Environment. There is currently no draft bill; the Discussion Document seeks feedback on key questions of policy and systems architecture that will underpin the legislative regime. This is an early opportunity for those affected to have their say on the Government's approach to some fundamental questions as it seeks to transition New Zealand to a net zero emissions economy. Consultation closes at 5pm on 19 July 2018.
Given the economic implications of much higher carbon prices and the costs of adaptation, it is important that businesses understand the climate change risks facing their business and how they need to prepare for the eventual transition to a net zero economy.
This Update provides an overview of:
what the Government is consulting on;
the economic implications of moving to a net zero emissions economy;
the importance of striking a balance between action and protecting the economy; and
key considerations for New Zealand businesses.
What is the Government consulting on?
The Zero Carbon Bill, if passed into legislation, will significantly alter New Zealand's climate change landscape. The Discussion Document sets out four key proposals that will underpin the Zero Carbon Bill:
a new, net zero emissions target for 2050;
a requirement on Government to have three five-year emissions budgets in place at any given time, as short-term targets;
the establishment of an independent Climate Change Commission; and
a requirement on Government to have national climate change risk assessment and adaptation plans.
The most significant issue out for consultation is the type of emissions that will be covered by the 2050 net zero target. The Government has identified three options: net zero carbon dioxide; net zero long-lived gases (CO2 and nitrous oxide) while stabilising short-lived gases (including methane); or (most ambitiously) net zero emissions across all greenhouse gases. The impact of this Bill on the agricultural sector will depend to a very large extent on which target is chosen, because the principal emission from agriculture is methane.
The Discussion Document also asks whether the target should be legislated, or set in a two-stage process based on advice from the proposed Climate Change Commission, and whether the Bill should allow the target to be revised based on changing circumstances. The Government envisages the Climate Change Commission having an independent advisory role, similar to the UK model, including in relation to the New Zealand Emissions Trading Scheme.
The Government is also looking to set shorter term emissions budgets but is seeking views on how they should be designed. Key elements to be decided include the duration, revision, planning and monitoring obligations, and the consequences if there is a failure to meet the budget.
Finally, the Discussion Document suggests introducing an obligation on Government to publish national climate change risk assessment plans, and national adaptation plans. This is to recognise that some climate change is already locked in, and that as a country we will need to improve and co-ordinate our risk analysis and ability to adapt to the effects of climate change. The Discussion Document asks for input on whether organisations (including, potentially, private companies that provide public services like energy and transport) should be subject to reporting obligations in relation to climate change risks and opportunities.
Economic implications of the transition to a low-emissions economy
The Discussion Document does not shy away from the challenges of moving to a net zero emissions economy, acknowledging that the economic impacts could be significant. For instance:
Carbon pricing will become a much more material issue for business through to 2050. Currently, carbon trades at approximately $21 per tonne and some of the more moderate and optimistic scenarios in the Discussion Document suggest carbon prices of approximately $100 - $275, depending on the ambition of the particular target. That would suggest an increase in petrol prices of 23c to 63c per litre.
The Discussion Document further acknowledges that the GDP growth rate could be 0.2% lower per annum through to 2050 under the net zero emissions target.
While the Discussion Document addresses the need for and importance of adaptation, the costs associated with such adaptation could have their own significant economic impact on top of higher carbon prices (a cost which does not currently feature in the economic modelling). For instance, the costs of adapting to extreme weather events, the cost of relocating and protecting infrastructure, roads, and houses, and the cost of stranded assets.
Striking the right balance
The economics are potentially confronting. However, by establishing the framework now for the transition to a low carbon economy over the next thirty years, New Zealand businesses can have more certainty and be better prepared for the transition, rather than face a sudden shock at a later date. Creating incentives for businesses to transition to a lower carbon economy will be an essential part of this process.
At the same time, in our view the economic modelling in the Discussion Document highlights that international carbon trading from reputable sources, and to a reasonably significant degree, will be an essential mechanism to ensure that New Zealand can make the transition without undue impact on the economy.
In identifying different possible emissions targets the Government has recognised the difference between short-lived and long-lived gases for the agricultural sector, and thus the potential economic impact. This suggests the Government is trying to increase the prospects of winning cross-party and agriculture sector support for the Bill.
Further considerations for business
Another area where businesses should expect change is the growing international trend towards requiring businesses to report their climate change risks to investors. In its recent draft report on the transition to a low carbon economy, the Productivity Commission recommended that the Government should incorporate mandatory climate-related financial disclosures into existing regulatory frameworks. The Productivity Commission did not consider that the Zero Carbon Act was the appropriate avenue for these requirements, particularly given timeframes and the Government's priorities for the Zero Carbon Act. Nevertheless this is an important development that businesses should be anticipating and preparing themselves for.
If you or your business would like further information or advice in relation to this discussion paper, please do not hesitate to contact us.