Speech To Australia New Zealand Climate Change And Business Conference, Sydney: Implementation Of The Emissions Trading Scheme & Business Response

Hon Dr Nick Smith: Minister for Climate Change Issues

Acknowledgements

Thank you for the introduction. Can I acknowledge the Climate Change & Business Centre and the wide range of participants that have come together for this conference on the challenging issue of climate change.

Introduction

It is with some trepidation that I speak to you as a Kiwi here in Australia right in the middle of a heated and tight campaign.

It is a matter many have asked me to make comment on.

I'm talking about the rugby of course. I remain confident the All Blacks will win this season's Tri Nations rugby series, and I am delighted to have the Bledisloe Cup safely in the bag for another year after just two matches.

In comparison, climate change is far less black and white.

I have been a New Zealand Member of Parliament for 20 years and held many Ministerial portfolios but the science, international relations and economics of climate change make it extraordinarily difficult and the global recession has only made it harder.

I have just completed a nationwide road show of 36 public meetings from the Far North to the Deep South and engaged with thousands of New Zealanders.

For many there remains huge confusion over the science.

There is a natural propensity for people to believe the problem of emissions is caused by others and that they are being asked to carry a disproportionate share.

There is also real resistance to measures involving cost when families and businesses are under budgetary pressure.

Our approach in New Zealand has been about meaningful but realistic progress; about protecting New Zealand's clean, green brand; about finding the least cost way to meet our Kyoto obligations but being careful not to impose unreasonable costs on businesses and households.

NZ’s four climate change goals

Last year I spoke at this conference outlining the New Zealand Government’s four major climate change goals – two domestic and two international – and it is useful today to reflect on progress.

First, I stated our ambition to settle our own domestic policy on emissions trading and our intention to get on and implement a workable and balanced scheme.

I also promoted the need for practical complementary measures that would help New Zealand make the transition to a less emissions intensive economy.

Our third ambition was to make a global contribution in our research efforts to tackle agricultural greenhouse gas emissions.

And our final ambition was to help secure a robust and effective post-2012 global agreement to combat climate change.

I am proud of the progress we have made on three of our four goals. I think we would all acknowledge that insufficient progress has been made in the international negotiations.

NZ’s moderated ETS

The legislation we passed last November gives New Zealand a workable and practical emissions trading scheme.

The economic analysis we commissioned on becoming Government in 2008 clearly concluded that an ETS was the most efficient way for New Zealand to curtail emissions at least cost to the economy.

However, we also identified some real issues with the approach by the previous Government that needed correcting.

The major policy changes we made were in respect to allocations for trade-exposed, emissions intensive industries.

The former rules discriminated against small and medium sized businesses and acted as a disincentive to growth.

It is our view the qualifying limit should be based, not on an absolute level of emissions, but in proportion to a business’ turnover.

These changes mean a far wider group of businesses have been eligible for support – albeit the total allocations to industry have changed little.

We also changed allocations to be production-based. If companies grow, their allocations will increase. If they cut their production, their allocations will drop.

This change reflects the Government’s ambition of wanting the ETS to encourage more efficient production and investment in new technology and not reduced economic activity or result in the exporting of industries offshore.

A further change was in making allocations on an industry average basis. We did not want to reward those with higher emissions and punish those who invested early in improving efficiencies.

The final major challenge to allocations was in slowing down the phase out of industry support. There was no phase out scheduled until 2018 but then at a very aggressive rate of 8% per year.

Our approach of 1.3% per year starting in 2012 generated much more debate than it deserved. The truth is these rates are subject to regular review and it is inevitable they will be altered in response to progress internationally.

The underlying principle for our Government will be to phase out such support in line with our major trading partners.

Other significant changes to the ETS included deferring agriculture’s entry by two years to 2015. The technical difficulties on including agriculture emissions cannot be understated.

We also took a pragmatic view that in the wake of the global recession imposing the full cost of the ETS on households and businesses was not realistic.

However, we did not wish to detract from the full price incentives on the forestry sector that is so important in the New Zealand context.

That is why the scheme provides for only a half obligation during its transitional phase meaning a de facto price for emitters of $12.50 per tonne, while foresters enjoy the full benefit of $25 a tonne price for new plantings.

We also passed a considerable number of amendments to deal with issues such as tree weeds, providing equitable support for the fishing industry and resolving Treaty of Waitangi matters.

Our final ETS design did not by any means achieve universal acceptance.

I have received strident opposition from both extremes of the political spectrum. Some say the ETS doesn’t do enough; others say it goes too far.

This confirms my view that we have the balance broadly right. It is not a complete answer by any means but is an important first step on the path for New Zealand to reduce emissions.

It is often said that on any journey, however far, the most important and difficult step is the first. We made that step on 1 July and it is a significant achievement.

ETS implementation

It is interesting to reflect today on the implementation. Despite a great deal of pre-introduction hype, 1 July passed with only modest price changes.

Variations in fuel and electricity prices were consistent with Government estimates and small compared to the many other factors that influenced energy prices.

The allocation process is well underway for the fishing, industrial and forestry sectors.

We expect to allocated 11.7 million units worth $290 million to the industrial sector between now and the end of 2012

For the industrial sector the Government is deciding on and issuing allocations in three tranches or groups.

The first group of these will be a number of large, energy intensive companies, performing activities such as aluminium smelting, and the production of paper and packaging.

We have already received a number of applications from these companies and when fully allocated this group will represent more than 80% of the total units expected to be allocated.

Applications for Group two and three, which includes many smaller enterprises, are progressing well – albeit a number of industries have sought a slowing of the timetable to enable accurate data to be collected.

This year there will also be a one off allocation of 700,000 New Zealand Units to fishing quota owners. This is to compensate for the effect of increased fuel costs from the ETS on the value of their quota and is a transitional measure.

The Government received more than 760 applications and I’m pleased to announce that this week, successful applicants will be receiving notice of their provisional allowances of units.

Some allocations have already occurred in the forestry sector and the New Zealand government estimates that approximately 75 million units will be allocated to this sector in the period to 2012.

This massive allocation reflects the huge importance of forestry to New Zealand in the context of climate change.

It is only through the substantial plantings of the new forestry since 1990 that New Zealand has been able to offset its significant 25% increase in gross emissions.

Without these plantings New Zealand would face a substantial Kyoto deficit.

It is also important to note that quite modest new plantings into the future could play a very important role in reducing New Zealand’s net emissions in coming decades, and the incentives provided by the ETS will play a crucial role in securing these long-term investments.

Now the ETS is implemented there is evidence that the scheme has presented new business opportunities and started to motivate businesses to take positive action against climate change.

Forestry is critical to New Zealand’s long term emissions profile and there are signs the ETS has already started to have a positive impact in this area.

Up until 2009, deforestation was on the increase – with 30,000 hectares lost from 2005 to 2008. However with the positive signals sent by the ETS, this has turned around and in 2009 planted forest area switched from a loss to a gain. The indications we have received from foresters is that this trend is set to continue.

Some companies have already entered into significant afforestation projects since the legislation for the revised NZ ETS was passed.

For example in February this year, Taupo company Puketapu 3A Incorporation, electricity generator Mighty River Power and the Lake Taupo Protection Trust have made a 2400-hectare forest deal in Taupo that will reduce carbon emissions and nitrate run-off. This deal involves a farm-to-forestry conversion and the subsequent sale of carbon credits from the forests to Mighty River Power.

And it’s not just major players realising these benefits – more than half of the almost 400 voluntary forestry participants in the ETS are for forests of less than 50 hectares.

In response to the ETS, some farmers have started to plant forests on their properties. For farmers who have steep, erosion-prone and largely unproductive land, forestry offers them a chance to boost their returns – both economically and environmentally.

Apart from creating incentives for afforestation, the NZ ETS has also encouraged renewable energy.

The bulk of new electricity generation in the last ten years has been from coal, gas and diesel. However, since the passing of the NZ ETS into law, more than 80 percent of new consents lodged have been for renewable generation in hydro, wind, geothermal and marine.

We know that people respond to incentives and the early evidence is indeed encouraging.

Complementary measures

As I mentioned earlier the ETS is not New Zealand’s only tool to reduce our carbon emissions. We also have a suite of complementary measures either in place or coming on line.

The Resource Management Act, or RMA, is New Zealand’s primary environmental statute and governs how we manage our resources.

While effective in deciding who gets what resource in linear terms, the RMA has not been useful in facilitating the type of renewable generation that we are after.

In fact quite the opposite - it has been easier to get a consent for a new thermal plant than for renewable wind, hydro or geothermal generation!

As resource management decision making in New Zealand is devolved to local government under the RMA, central government relies on tools such as National Policy Statements under the Act to provide guidance and direction.

It is therefore the Government’s intention to have a National Policy Statement on Renewable Electricity Generation in place by the end of the year.

As a result of this National Policy Statement, decision makers will need to place greater weight on the benefits to be gained from renewable electricity generation when deciding on resource consents.

We also have a number of complementary measures aimed at a domestic level

The Government programme Warm Up New Zealand: Heat Smart will allocate $347 million to improve at least 188,000 homes over four years.

This programme is helping make Kiwi homes warmer and healthier on an unprecedented scale. In the first year alone, a record 58,000 homes benefited under the scheme, including nearly 13,000 installing efficient, low emissions heaters.

The Government is also providing grants to encourage the installation of solar water heating. In 2009 more than 2000 residential installations were supported by the grant - the highest number ever.

And it’s not just physical improvements we are focused on.

The government’s Energy Spot advertising campaign, launched last year, is the most comprehensive electricity conservation campaign New Zealand has seen and promotes practical and sensible things people can do in their own homes.

Another initiative of which I have a personal interest is encouraging the uptake of electric car technologies.

New Zealand having such a large percentage of renewable electricity is uniquely placed to reduce emissions from the new generation of battery powered cars.

Full credit to Blade Electric Vehicles in Melbourne who converted my Hyundai Getz into full electric.

My nine-year old son disapprovingly calls it a “nana car” but it is technology such as this that is helping pave the way with its zero emissions.

Our legislation last year to exempt such vehicles from road user charges is aimed at kick starting this technology and will save owners more than $40 per 100 kilometres travelled.

In addition to electric cars the government is also seeking to incentivise vehicles utilising biofuels by providing a grant scheme to support domestic biodiesel producers.

While the government is optimistic about the long term contributions biofuels can play, we are cautious of the market distorting expensive subsidy schemes that have occurred in other countries.

New Zealand’s Parliamentary Commissioner for the Environment has just released a report into biofuels which we welcome and will take into account in conjunction with the Government’s review of biofuels policy later this year.

We are doing a lot in the space currently about assisting households in improving their energy efficiency but we need to do more in assisting business, particularly our SME's. This is one of our Government priorities in the immediate future.

Global Agricultural Research Alliance

Much of this work is similar to initiatives taken in other nations, but the issue that is so challenging for New Zealand is the large portion of our emissions that come from agriculture. Nearly 50% come from the methane and nitrous oxide from our all important pastoral farming industry, whereas for most developed nations this is less than 10%.

New Zealand has been concerned that for all the billions that is being spent on new energy and transport technologies, insufficient is being put into resolving how to feed a growing world population without adding to global emissions.

That is why at Copenhagen the New Zealand Government initiated the Global Research Alliance on Agricultural Emissions which now has 29 country members. I particularly want to acknowledge Australia's strong encouragement and support.

This project brings together expert scientists from a wide range of agricultural disciplines and through their collaboration will ensure that future research is focussed on the discovery and development of technologies that contribute to the huge increase in demand for food while minimising the levels of emissions.

We are particularly encouraged by the number of developing countries that have joined the alliance. Their emissions profile, like New Zealand's, has a far greater weighting towards agricultural emissions and food security is critical to their future.

We also see a wider political benefit in bringing together developed and developing countries in this initiative as we grabble with the fundamental problem in the international negotiations of an agreed pathway forward on emissions containment.

International Negotiations

Copenhagen was disappointing in that expectations were extremely high and the outcome was less than ideal.

The development of the Copenhagen Accord was essential to allow some carry over of the work undertaken by officials in a number of important areas.

Since Copenhagen however there has been little progress. The most recent meeting in Bonn rehashed old ground and consequently expectations for Cancun are not high.

New Zealand has a unique profile for a developed country and, alongside agriculture, has a strong interest in the rules regarding forestry.

The existing Kyoto rules have anomalies in some areas. It is good to note that there is a far greater understanding internationally around the improvements required in the rules for land use, land use change and forestry to ensure they provide the right incentives going forward.

It is difficult to predict the structure of any future international agreement but it is clear that global action to reduce emissions is required.

This means that each country will need to develop domestic policy that best suits its economy while contributing to the global goal of reduced emissions.

ETS Review

The legislation passed at the end of last year requires that a review of the NZ ETS be undertaken every five years with the first review in 2011.

The scheme is going to require regularly refinement in response to progress internationally, the development of technologies to mitigate emissions and the real life experience of how it is working.

The government has made plain that the stepping up of the scheme in 2013 and the addition of further sectors is conditional on substantive progress being made in other countries, particularly our major trading partners like Australia.

We will be finalising the terms of reference and membership of the review group prior to Christmas. Our ambition is to try and undertake the review on a non-political basis so that whoever forms the next Government post our 2011 election will be able to advance its recommendations.

Conclusion

In conclusion, New Zealand is making good progress in addressing the challenge of climate change.

After a protracted and long debate, we have a system of emissions pricing in place that provides real incentives to reduce emissions.

Investment is flowing into renewables and deforestation has been reversed with optimistic projections of new plantings. Record numbers of homes are being insulated and installing solar water heating systems.

We're determined to make an international contribution through the 29 country research alliance on agricultural emissions.

Our efforts are a work in progress and much is still to be done, but as a small nation that is proud of its clean, green brand we are determined to do our fair share to address this global problem.

ENDS

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