Climate action and regulation

The first report of the Climate Change Commission, Ināia tonu nei: a low emissions future for Aotearoa, signals that directors need to start thinking about regulatory changes that will affect the organisations they govern.

The Commission is a Crown entity tasked with providing independent, expert advice to the government on mitigating and adapting to the effects of climate change.

Its first advice proposes emissions budgets out to 2035, along with suggested emissions reduction pathways to achieve these as well as New Zealand’s 2050 emission targets.

It includes broad policy recommendations to encourage behavioural change across sectors and ways to reduce biogenic methane emissions to meet domestic and international obligations. The government also sought advice on New Zealand’s approach to delivering on its international emissions reduction commitments.

In addition to its advisory role, the Commission is responsible for monitoring and reporting on the government’s progress towards achieving its emissions budgets and the 2050 target. It proudly declares that its job is to hold the government to account on climate action.

Call for fast change

The advice presents some clear messages, particularly the need for transformational and lasting change across society and the economy.

The Commission is clear that current policies will not meet the recommended emissions budgets, New Zealand’s 2050 targets or our international commitments. Its analysis shows that elected officials need to make changes to legislation and structures to make it easier for people and industry to make low-emissions choices. Moving too slowly will push the burden of addressing climate change onto young people and future generations.

The Commission estimates the overall costs of transition are small relative to the size of the whole economy: in 2050, 1.2% of projected annual GDP. However, it warns that these costs will not be evenly felt, and action is needed to ensure the costs of the climate transition are not inequitable. New Zealand’s current tool to price emissions in the market, the Emissions Trading Scheme needs to change so that it is fit for purpose and sends a strong price signal.

Priority areas for action include transitioning to electric vehicles, increasing total renewable energy, improving farm practices, reducing heat generation using fossil fuels and planting more native trees.

Directors need to consider the practical implications of the Commission’s advice for their organisations – how might it change the regulatory environment in which their organisation operates, impact planning and budgeting for the future and provide opportunities for growth?

Decarbonising transportation is a focus

The Commission places a lot of weight on New Zealand decarbonising almost the entire country’s land transport over time. The Commission suggests that the importation of internal-combustionengine light vehicles should stop by 2032; slightly slower timeframes are suggested for medium and heavy trucks.

Directors need to consider how possible government interventions to achieve the Commission’s recommendations might impact vehicle fleets. There may be unexpected regulation, incentives (like subsidies, tax benefits) and campaigns to change behaviour. Businesses that previously owned vehicle fleets may consider leasing to assist with the transition. Demand for electric vehicles may increase, but the supply of them may not.

This tension between aspiration and reality may show up as challenges in procuring low emission transport. There is likely to be opportunity in low-carbon fuel development, import of low-carbon fuels and EV technology, including hydrogen fuel cells

Construction and manufacturing

Renewable electricity will be key to meeting New Zealand’s emission reduction targets. Directors should expect more wind, solar and geothermal infrastructure development opportunities to be explored; with market settings being impacted by government decisions around damming Lake Onslow and closure of Tiwai Point. Battery storage and distributed electricity generation will also be increasingly of interest.

The construction sector will be broadly affected by the Commission’s recommendations as it is influenced by other sector changes, eg buildings, transport, forestry, waste and manufacturing. Directors will need to identify the extent to which their organisations need to use older, lessefficient building stock that relies on natural gas for heating, hot water and cooking as these devalue over the next decade and require upgrading to meet regulatory and market expectations. The Commission’s path assumes a 30% improvement in commercial and public buildings is possible by 2035 compared to today’s performance.

Coal and gas heating systems will be eliminated in the future – the Commission recommends no new gas heating systems are installed after 2025. By 2030, coal use should be eliminated and gas should start being phased out in existing buildings. Organisations that are designing and constructing buildings or are involved in manufacturing will be focused on who is paying for change, and the support available to remove embodied emissions and emissions associated with process heat. They will also be taking opportunities to save costs as the cost of energy increases.

A focus on the supply chain will continue when directors seek to make changes to reduce costs associated with emissions. Some supply chains could make accounting for emissions or responsibility for making emission reductions complicated or expensive.

The Ministry of Business, Innovation and Employment has started working on a framework to reduce embodied carbon emissions and increase the operational efficiency of buildings. Demand for sustainably contracted, low-carbon and efficient buildings will increase over time and the value of old, less-efficient building stock will decrease.

Forestry is not the answer

It is no surprise that forestry will play an important role in meeting the country’s emissions budgets and targets. Permanent forests could provide an enduring carbon sink to help offset residual long-lived emissions over the long term.

The Commission’s path for gross emissions requires 25,000 hectares of new native forests per year by 2030. However, the Commission is wary of further reliance on forestry as a carbon sink as it could divert action away from reducing gross emissions in other sectors and make maintaining net zero emissions after 2050 challenging.

Now is the time to consider an organisation’s reliance on timber and the forestry sector. If the government accepts the Commission’s recommendations, increased investment in native forestry and forestry infrastructure (eg nurseries, labour force, pest control) is likely. Opportunities may arise if the government seeks to incentivise planting and increases planting on Crown land.

RMA changes

The pressure on local government and other government agencies to consider climate change and other environmental, social, economic and cultural aspects is increasing. While a new environmental system replacing the Resource Management Act (RMA) and a new focus on climate risks and adaptation/ mitigation is some time away, some changes to the resource management system will take effect from the end of this year.

On 31 December 2021 past prohibitions on considering the direct and indirect effects of greenhouse gas emissions and climate change in decision-making will be removed from the RMA. The ramifications of that change are significant for those seeking resource consents or a plan change where climate change could be raised as an adverse effect, including by opponents.

Local government will have to grapple with a significant change to decision making and the type of information sought and considered from applicants. The government has released a discussion document on national direction and guidance to local government on how to manage the change, but currently more questions are being raised than answers given.

Decisions are likely between June and October

Minister for Climate Change James Shaw will be attending COP26 in Glasgow in November this year to present New Zealand’s progress towards the goals of the Paris Agreement. Decisions on the Commission’s draft advice are likely to be made before then, even though they are not required until 31 December.

The government is expected to take the Commission’s recommendations seriously. It has set emissions reduction targets at a national and international level, established the Commission and it is now facing significant pressure to implement change. The Commission will call the government out if it fails to act or take enough action.

Questions for directors

• Is your organisation tracking the regulatory changes that are being made (and expected to be made) as a result of the Climate Change Commission’s advice?
• Have you considered the regulatory changes and other government action that your sector may face as a result of the Climate Change Commission’s advice, and how this may affect your business?
• Has your organisation identified the risks and opportunities arising from the Climate Change Commission’s advice?
• Have you considered how your supply chain and your customers will be affected by the Climate Change Commission’s advice or how the advice may affect your dealings with them?
• Have you assessed which operations or processes will need to be stopped, adapted or transitioned to a low emissions economy?
• Have you considered how your business plans and budgets may need to change to factor in the changes arising from the Climate Change Commission’s draft advice?
• Have you considered how the Climate Change Commission’s draft advice and the regulatory and other risks associated with climate change may need to be managed by way of insurance cover?