Mansion House

London

Thank you for the opportunity to present today on the decisions that New Zealand has taken to do its bit in terms of what is a global challenge. I am not going to speak of the imperatives we face; we know what they are. The jury is not still out; we have a verdict and we know what the sentence will be if we do not act.

New Zealand’s greenhouse gas emissions represent between 0.2 and 0.3 per cent of global emissions. So why are we treating this with the sense of urgency we have adopted? New Zealand’s Climate Change Minister, Hon David Parker, expressed this exceptionally well when he said recently:

“We are blessed with abundant sources of renewable energy. We are a wealthy country, with a functioning democracy and a highly educated population. We have people that care about their environment. If New Zealand cannot tackle climate change, who can?”

New Zealand has always been willing to contribute to international efforts from aspects of international standard setting in the commercial world through to humanitarian aid. We have been noted on many occasions for our ability to ‘punch above our weight’. We are more than willing to step up to the plate on climate change because we know it to be one of the most pressing challenges facing the world today.

However, in the context of today’s discussion, I should make the point that this is not an entirely selfless challenge.

We all know that there is growing consumer awareness about climate change and we are seeing more people starting to demand to know the carbon footprint of what they buy and the sustainability of the practices behind the investments they make. This concern is driving the development of new clean energy systems, of more efficient and cleaner methods of food and industrial production, of more environmentally sustainable and ethical business practices and of improved resource recovery and recycling. This is the market response to consumer demand and we are capturing the essence of that in our policies.

Although I mentioned our small contribution to world emissions, it would be remiss of me not to mention that our per capita contribution is high, so we have more than a sense of moral obligation in terms of our imperative to act.

The New Zealand Emissions Trading Scheme is the cornerstone of our domestic response to climate change and that is what I wish to traverse with you today. Its purpose is clear and simple - to produce a price signal that changes both behaviour and investment decisions, moving New Zealand to a low-emissions and therefore a more resilient economy long term. How the scheme meets New Zealand’s needs, while ensuring that it can link with international emissions trading schemes, has been a particular focus of the design.

The scheme is currently going through New Zealand’s parliamentary process and I should mention that it has not had an easy road through the process and it isn’t over yet. The main opposition party has withdrawn support, and if the numbers are not resolved soon then it will become an election issue; which I believe will represent a lost opportunity for Parliament to set aside political differences and act in the best interests of the nation and indeed the planet.

The NZETS is a cap and trade scheme. It is an ambitious scheme in that by 2013 it will cover all sectors of the New Zealand economy and all greenhouse gases. There is a reason for NZ going down this track.

Methane and nitrous oxide emissions from our agricultural sector account for almost half of our total emissions. This is an unusually high proportion compared with other developed countries that tend to have a greater proportion of their emissions from electricity generation or industrial activities. Around two-thirds of our electricity comes from renewable sources.

With that unusual emissions profile in mind, we knew that we had to take a lead in the agricultural sector. As a result New Zealand is the first country in the world to include agricultural emissions as part of an Emissions Trading Scheme. The sector is due to enter the Scheme in 2013.

I am again not going to pretend that there hasn’t been rigorous debate about this decision. It is our view that a scheme, which excluded agriculture, would have been more expensive for the economy as a whole, because it would have excluded low cost emission reduction opportunities that exist in agriculture. It would be unfair to other sectors like forestry, unfair to other industry (which would have to do more than its fair share), and unfair to taxpayers (who would carry the whole cost of agricultural emissions).

In this context I should mention that we are already taking a lead in research into mitigating methane and nitrous oxide emissions from pastoral agriculture. New Zealand has a long history of significant research and development in pastoral farming, and we have world leading scientific expertise. We have initiated a Livestock Emissions and Abatement Research Network (LEARN) in collaboration with international partners in order to bring together from across the world research, policy and industry people who are working on the challenge of mitigating methane and nitrous oxide emissions from animal agriculture.

It therefore makes sense to incentivise this effort through including agriculture in the NZETS. It enables NZ to play to its strengths (and act in its own interests), while at the same time contributing to the global effort.

Forestry is also included in the NZETS, which is another world first. This sector was included to encourage new planting and discourage the shift from plantation forest to alternative land uses. The very substantial decrease in deforestation forecast this year indicates that the decision to include forestry has already begun to have an effect. And the same is true of other sectors that will be joining the scheme.

In the energy sector, significant new investment is taking place in renewable energy generation across windfarms, geothermal energy, and in entirely new sectors such as tidal generation. Presently, more than 5000 megawatts of renewable energy is proposed, consented or under construction, compared to only around a thousand megawatts of gas or coal-fired generation. One of our major State Owned enterprises has just announced its intention to invest in a New Zealand wind power turbine design, development and manufacturing company that has taken on the challenge of designing a turbine that confronts the uneven nature of wind gusts.

In the transport sector, Air New Zealand has announced a trial of biofuels in its fleet, and has committed to investing $2.6 billion in modernising its aircraft. And in the retail electricity sector, innovative utility companies are using technology to enable domestic consumers to choose cheaper off-peak electricity.

The NZ government, like the UK government, has directed the public service to become carbon neutral. This directive has had influence beyond the public sector already, including, for example, changing the way commercial buildings, renovations and upgrades are being designed in our capital city to meet Green Star Ratings. As we see here in the UK and more recently in New Zealand, governments have become aware that they can contribute considerably to the development of innovative solutions through procurement policies, given the size and the scale of the government procurement spend.

With respect to transport emissions, which make up approximately 19 per cent of our greenhouse gas emissions, the steep climb we have experienced over the years has now been halted. There are a number of reasons for this including investments in public transport, increased support for rail, and various efficiency initiatives. However it is the effect of increased petrol prices which has probably become one of the most powerful influences in terms of behaviour change, which has seen hundreds of extra people get out of their cars and into buses and onto passenger trains. If anyone needs evidence of price signals affecting behaviour, then this is surely it. New Zealand’s transport emissions are now projected to remain stable, notwithstanding both population and economic growth, which is why we have deferred its entry into the scheme until 2011.

The government is also targeting reductions in transport emissions for example by legislating for mandatory use of sustainable bio-fuels and introducing vehicle fuel-efficiency labelling. We have also adopted the objective of New Zealand to be one of the first countries to widely deploy plug-in hybrid and purely electric vehicles, using our clean, green electricity. I should mention here that the government has set a target for 90 per cent of electricity to be generated from renewable sources by 2025

In New Zealand, over 70 per cent of our gross emissions are associated with trade-exposed business. Because some of our major trading competitors and partners do not yet have a price on carbon, we are concerned about the potential loss of emissions-intensive parts of the New Zealand economy to countries with less stringent climate change policies. This could harm our economy while providing no benefit to the environment. To manage this risk, the proposed scheme provides generous assistance to trade-exposed sectors during a transition period. The assistance package is designed to avoid a loss of capacity in the economy, while still providing a strong incentive to reduce emissions. There will be no free allocation of emission units to firms that can pass on the costs of accounting for their emissions to consumers. The phase out of free units will run from 2019 to 2029.

One allocation plan per sector will be issued in each commitment period and there are consultation requirements in the Bill, as well as a list of general principles the Minister must have regard to when preparing draft and final plans.

Initially, the most obvious impact of emissions trading will be on the price of electricity and petrol when those sectors enter the scheme (2010 for energy and 2011 for transport). Over time, there will also be an emissions price embedded in all the other goods and services we purchase, because of the energy required in production and transportation.

Although the emissions trading scheme is designed to encourage households and firms to adopt more energy-efficient practices there are enormous investment opportunities in the research and development that now drives us towards the low-carbon future the NZETS is designed to bring. And that is happening even though the legislation has not yet passed.

In terms of how the scheme will work, we don’t intend to prescribe how trades of units should occur. But, as the scheme develops, we would expect to see secondary traders entering the market.

In New Zealand, we are witnessing the development of multilateral trading services to support the development of both the NZETS and the voluntary carbon market. I mention the voluntary carbon market in this context because voluntary emission reduction initiatives are complementary to a regulated market. The voluntary carbon market encourages innovation and can be a valuable testing ground for new emissions reduction measures

Only last week a New Zealand company, called TZ1, (which reflects that NZ is the first time zone that the markets awake to each day), received a contract to provide a global registry for the Voluntary Carbon Standard. A number of companies including our only registered exchange, NZX, have invested in this innovative environmental market registry.

The successful bid to become an authorised VCS Registry indicates the increasing importance that is being placed on credible, financial markets-based registries for the voluntary carbon market. I mention this as an aside because robust regulatory frameworks and trusted eco-verification tools are critical to the development of these markets.

The obligation to account for emissions will be imposed on a relatively small number of participants in each sector – typically, operators high in the supply or production chains. For example, in the transport sector, involvement is proposed to be limited to the major oil companies and a few other large companies. Outside of forestry and agriculture, around 200 large industrial firms will be participants in the emissions trading scheme.

The type of emission unit that will be traded in New Zealand will be called a New Zealand Unit or NZU. This is equivalent to one Kyoto unit on the international market.

New Zealand is pleased to be part of a leading group of countries – including the UK, the European Union, Japan, Australia and some states in the US – that have, or are developing, emissions trading schemes. We have had more than an eye to the international market in the design of our own scheme, because we know that by linking internationally we should be able to broaden the range of mitigation options that are available to market participants, thereby lowering their overall costs of compliance, as well as ensuring the cost of emissions in New Zealand does not rise above the world price. In addition New Zealanders would be able to access emission reduction opportunities offshore and international players would be able to purchase New Zealand Units or invest in New Zealand emission reductions. There is further work being undertaken on the linking options.

However, as I have indicated the scheme is not only about facilitating the international exchange of emissions reductions units, it is a market mechanism designed to encourage New Zealanders to change their behaviour so there is a shift to low-carbon lifestyles.

The NZETS is the cornerstone of an approach that utilises the market to send price signals, not only to influence that behaviour, but also to lead business investment into new ways of doing things that will enable New Zealand enterprises and entrepreneurs and the investors that back them to benefit at the same time as contributing to the wider public good.

I listened to a speaker at a conference recently, who didn’t talk of a low carbon future – he spoke of a post-carbon future. This will require all nations to work together; New Zealand is determined to work closely with the UK and other like-minded countries to achieve this challenge.

Thank you for the opportunity to address you today.