Climate-change initiatives in New Zealand
More than a year into the coalition government’s term in office in New Zealand and the Green Party’s influence on the administration is beginning to be felt. Guy Lethbridge, partner at Russell McVeagh in Wellington, discusses government and private-sector initiatives designed to support New Zealand’s transition to a net-zero-emissions economy by 2050.
Late in 2018, the government launched New Zealand Green Investment Finance (NZGIF), an investment fund established to reduce New Zealand’s greenhouse-gas emissions. The launch follows the coalition government’s allocation of NZ$100 million (US$67.9 million) over 10 years toward kick-starting the fund in its 2018 budget.
NZGIF is the product of an agreement between the Labour Party and the Green Party with a goal of stimulating NZ$1 billion of new investment in low-carbon industries by 2020. NZGIF is established as a company under Schedule 4A of the Public Finance Act 1989 so it can operate independently from government and with a commercial focus.
NZGIF’s scope should be more than its own investment mandate as it is focused on accelerating private-sector investment into emissions-lowering projects. New Zealand’s Treasury believes other private investment will follow once the new fund demonstrates investment and commercial success.
Specifically, NZGIF is designed to encourage private-sector investment in high-value, low-carbon industries, clean technology and new jobs. It will work with businesses, infrastructure owners and investors to bring forward emissions-reduction projects. The fund’s returns over future years are expected to pay back the government’s initial investment and ultimately see NZGIF operate as a commercially independent entity.
In late 2017, the government announced its intention to enact a Zero Carbon Act in an effort to drive meaningful climate-change action in New Zealand. The proposed act responds to New Zealand’s 2016 ratification of the Paris Agreement and presently has three key objectives.
First, the act will commit New Zealand to zero carbon by 2050 by ensuring the government sets binding five-year “carbon budgets” and plans to meet these budgets. A Climate Change Commission will be established to lead the transition by providing expert advice on policy and climate risks and holding the government to account.
Second, the act will ensure there is a comprehensive national response to the inevitable impacts of climate change. This objective will be achieved via the preparation of a national climate-risk assessment every five years alongside the production of an adaption programme to address climate risks.
Finally, the act will certify New Zealand’s delivery of its international climate-change obligations. Transparent planning and reporting will ensure New Zealand fulfils its duties under the Paris Agreement to support mitigation and adaptation in developing countries.
In June and July 2018, the government undertook a thorough consultation process involving 14 public meetings across the country and more than 15,000 submissions regarding the Zero Carbon Bill. The submissions received were overwhelmingly supportive of moves to reduce emissions and respond to climate change (see chart).
Submissions were summarised in October and are being considered by ministers alongside reports from the Productivity Commission and the parliamentary commissioner for the environment. The Zero Carbon Bill is to be introduced in parliament early in the new year with the aim of passing it in mid-2019.
Submissions on the Zero Carbon Bill strongly support the government’s desire to establish a Climate Change Commission (CCC). The majority of submissions recommend that such a commission should have an advisory role, monitoring New Zealand’s progress and making policy decisions in select areas. The commission will stay politically independent. Submissions also indicate that the commission should advise on New Zealand’s emissions trading scheme (ETS) rather than making decisions itself.
The principal role of the CCC will be to advise the government on specific targets that are consistent with the Zero Carbon Act’s statement of ambition – which itself reflects the collective ambition set out in the Paris Agreement.
In April 2018, New Zealand’s climate change minister, James Shaw, announced the terms of reference and membership for the interim CCC. The committee consists of six members and its purpose is to produce independent evidence and analysis on the issues set out in the terms of reference in the interim period before the full commission is established. The committee will pass this information on to the commission to inform its recommendations.
From late 2015 to mid-2017, the government undertook a two-stage review of the New Zealand ETS to assess how the scheme should evolve to support future emissions-reduction targets. The review focused on transitional measures, operational and technical improvements and what is required for the ETS to evolve with New Zealand’s changing circumstances.
The review found that the ETS must improve for New Zealand to meet its duties under the Paris Agreement and specifically its first nationally determined contribution (NDC). The NDC specifies that New Zealand will reduce its greenhouse-gas emissions to 30 per cent below 2005 levels by 2030.
The review culminated in two sets of proposed improvements to the ETS. The first set of proposed improvements aim to strengthen the ETS framework, ensuring it is a “credible and well-functioning scheme” that aids New Zealand to meet its climate-change targets.
The proposals aim to make the NZ ETS fit for purpose, improving predictability for market participants and flexibility for the government to make adjustments where necessary. These proposed improvements have resulted in the government releasing a cabinet paper outlining four in-principle decisions.
First is the introduction of auctioning of units to align the ETS to its climate-change targets. Second is limiting participants’ use of international units when the ETS reopens to international carbon markets. This follows the government’s understanding that New Zealand must access international emissions reductions in the 2020s to meet its 2030 target cost effectively. Third is developing a different price ceiling eventually to replace the current NZ$25 fixed-price option (FPO). Fourth is coordinating decisions on the supply settings in the ETS over a rolling five-year period.
On 12 December 2018, the government confirmed a number of these in-principle decisions with its most recent announcement establishing a framework to enable New Zealand’s emissions to be capped under the ETS by restricting the number of units supplied into the scheme1.
The announcement also confirmed the introduction of an auctioning mechanism, which incorporates a cost containment reserve (CCR) that will ultimately replace the current NZ$25 FPO2. Units held in the CCR will be auctioned once the price ceiling is reached3. However, to ensure regulatory predictability the FPO will remain at NZ$25 in 2019.
The second set of proposed improvements relate to forestry, specifically reducing complexity and other barriers to forestry owners being part of the scheme. Improvements include changing how forests earn and repay carbon credits in the ETS, introducing a mechanism for recognising emissions mitigation from harvested wood products, creating a new permanent forest activity in the ETS and introducing operational changes to improve the way the ETS works for forestry participants.
The government’s most recent announcement also confirmed that a new permanent post-1989 forestry activity within the ETS will replace the current permanent forestry sink initiative (PFSI). Current participants of the PFSI will not be adversely affected and the changes will not come into effect until the amendments to the Climate Change Response Act 2002 are enacted.
The ETS is subject to New Zealand’s provisional carbon budget for 2021-30 and is influenced by the long-term emissions-reduction goals set out in the Zero Carbon Bill. Depending on its mandate, the Climate Change Commission may have the power to set the overall level of units supplied into the ETS. The government will draft legislation by mid-2019 with amendments to the Climate Change Response Act to be enacted in late 2019.
NZX green-bond market
Meanwhile, the NZX has committed to supporting the development of the green-bond market in New Zealand. In June 2018, NZX listed the first green bond on the NZX Debt Market, supporting the exchange’s strategic commitment to grow New Zealand’s environmental markets.
Auckland Council listed NZ$200 million of unsubordinated, fixed-rate bonds with the intent of using the proceeds to refinance existing debt used to buy electric trains and equipment, and to help finance new ones.
NZX has stated that, for the future, it is considering setting up green-bond lists or segments, developing guidelines for green-bond listings, supporting green-bond indices and exchange-traded funds, and promoting market education.
investing with impact Yearbook 2018
KangaNews's latest supplement focusing on sustainability in the Australian fixed-income market.