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Nick Smith

25 August, 2009

Australia-New Zealand Climate Change and Business Conference

Can I open by commending the organisers of this conference for your initiative in helping bring New Zealand and Australian thinking together on climate change and recognising the huge role for business in tackling this challenging issue.


Can I also acknowledge Senator Penny Wong for her strong leadership on this complex issue both in Australia and internationally.


This morning I would like to give an overview of the New Zealand Government’s thinking on domestic climate change policy, and give you an update on where we are with our review of New Zealand’s emissions trading scheme.


Scale of the climate change challenge


It will come as no surprise to you that tackling climate change is the New Zealand Government’s number one environmental priority.


It has been described as a ‘diabolical policy problem’ by Australia’s climate change adviser Ross Garnaut; a description which I believe is very apt. 


The first point I wish to make is the scale of the political challenge posed by climate change.


I have been fortunate to have held many portfolios during my 20 year Parliamentary career but none get close to the complexity and difficulty posed by anthropogenic climate change.


Secondly, the science is mind-blowingly complicated. You cannot explain it in a 30-second sound bite.


The third problem is that climate change is as much an economic issue as it is an environmental one. Our modern societies are so dependent on fossil fuels that every industry will need to radically change, and that change will come at a cost.


The fourth problem is that our atmosphere knows no national boundaries. It is the global commons. Unless countries act collectively to constrain emissions, all will be adversely affected. Determining what is a fair way to share the burden of reducing emissions requires the Wisdom of Solomon.


And the fifth problem is this is a long term issue. The recession is costing jobs today, but the direct impacts effects of climate change on people’s livelihoods are decades or more away. So too are the solutions. There are no quick fixes. The challenge of climate change is going to span over several governments and generations.


So my first point is that we need to be upfront about the size of this challenge.


New Zealand’s 2020 Target


It was the policy of the previous Government for New Zealand to lead the world on climate change and to become the first carbon neutral country.


The gap between this lofty goal and our actual track record did our international reputation more harm that good.


The truth is that our emissions have been growing at one of the fastest rates among developed countries. They have grown by 24% since 1990.


The proportion of electricity produced renewably in New Zealand is high by international standards but has steadily declined in recent years. Coal generated power production has trebled in the past decade.


The reversal from five decades of impressive afforestation to significant deforestation in recent years has added to our ugly numbers.


It is just unrealistic to continue to pretend we are, or can be, world leaders in reducing emissions.


Our unique emissions profile, with 50% coming from agriculture, makes our job of reducing carbon pollution more difficult than most developed countries.


New Zealand is a developed country with a developing country’s emissions profile.


We also need to recognise that as a small open trading nation, accounting for 0.2% of global emissions, tough emission reduction policies would just export emission-intensive industries offshore.


For these reasons, the new Government’s policy goal is not about being first but ensuring New Zealand does its fair share as a developed country in constraining and reducing emissions.


On 10 August we announced an emissions reduction target range of 10% to 20% below 1990 levels by 2020.


The commitment is conditional on a global agreement being secured that limits carbon dioxide equivalent (CO2-e) to 450ppm and temperature increases to 2°C, effective rules on forestry, and New Zealand having access to international carbon markets.


This responsibility target is internationally credible and both environmentally and economically responsible.


For those concerned it is not sufficiently ambitious, I would note that with our gross emissions up 24% on 1990 levels, and the age of our forests in 2020 not providing any net benefit by 2020, this target equates to a reduction from current emissions of between 34% to 44%. Be in no doubt that this is going to be a very big ask for New Zealand over the next decade.


The 2020 target is also consistent with National’s campaign pledges of a long-term target of -50 by 2050.


The target range of 10-20% reduction from 1990 levels is comparable to Australia’s taking into account conditionality, different base years, our lower GDP, and our higher costs of abatement.


It also reflects that New Zealand is prepared to do more if other countries do likewise.


New Zealand will meet its 2020 target through a mixture of domestic emission reductions, incentivising new forest plantings, and the purchase of emission reductions from other countries. 


Emissions trading scheme review


The New Zealand Government’s main policy tool to tackle climate change is putting a price on greenhouse gas emissions.  There is a strong consensus among economists that the most efficient way to constrain and reduce emissions is via an economic instrument, either through a cap-and-trade-type system or a carbon tax.


New Zealand has been through a tedious and tumultuous path to setting policy in this area. Under National in the mid-1990’s a low level carbon tax was favoured, but in 1999 a decision was made in principle for a cap and trade scheme. Labour in 2000 reversed this and proceeded down the road of a carbon tax only to reverse the position in 2005 back to an emissions trading scheme.


It would be amusing were it not so serious. I fear a forest has been lost in official papers on the topic. Some industry players, desperate to delay any decision, have one day derided a carbon tax only to, in the next moment, advocate it. The Select Committee review needs to draw this debate to a close so New Zealand can move forward.


The committee has spent many hours reading and listening to submissions from interested people and are in the final stages of their deliberations.  Its report is due within the next week.  I expect it to be closely aligned with broader government policy directions on climate change. 


As I told that committee earlier this year, National’s preference remains an emissions trading scheme.  Among other things, it has the advantage of being able to recognise carbon sinks like forests that are so important in the context of New Zealand’s emissions profile. 


An emissions trading scheme in which the price of carbon varies has the advantage of automatically responding to the ebb and flow of the economic cycle, as we have seen in Europe in response to the recession.  It makes sense that we should take more pain with a higher carbon price in the good times and a lower price when the economy is struggling.


I must also note that even if we in New Zealand theoretically thought that a carbon tax was the better instrument it would be obstinate for us to ignore that emissions trading has become the tool of choice in Europe, North America and now Australia in tackling climate change.


So concluding that an emissions trading scheme is the right way forward for New Zealand will be a substantive step forward but the contentiousness of the all important detail cannot be understated.


I view this debate today over emissions trading as analogous to that which raged over GST on both sides of the Tasman a decade or two ago. They are both economic reforms of similar complexity and significance. As with GST we can expect a few political bumps along the way in getting the policy and law settled.


While the New Zealand Parliament has passed emissions trading into law, the challenge we face in getting it into a workable form requires the passing of an amendment Bill between now and Copenhagen. The political challenges of this strike an uncanny resemblance to the issues here in Australia.


The existing New Zealand scheme was passed in a rush in the white hot environment prior to the 2008 election.  It is no surprise that officials have identified 34 technical amendments that are required.  Nor was the timetable for the introduction of the stationary energy and industrial sectors realistic with the complex process for transitional allocations.  Even if National had pushed the go button last December, the timelines were unachievable and of course the Select Committee Review has condensed this timeline further.


There are three broad objectives driving the Government’s intent to amend the existing legislation.  The first is to make it workable and set to a realistic timeframe.  This is not about grand gestures of being world leaders but writing pragmatic law that will work in practise. Our second objective is to recalibrate the scheme in line with the drastic turnaround in economic circumstance since the scheme was conceived.  Enough New Zealanders are losing their jobs without an overly ambitious ETS adding to the problem. Our third objective is to realign the scheme where possible to harmonise with Australia.


Harmonisation with Australia


There are already many similarities between the New Zealand Emissions Trading Scheme and the proposed Carbon Pollution Reduction Scheme, but there are also opportunities to further harmonise the design of both schemes.


The New Zealand Government sees four significant advantages to harmonisation.


First, as I mentioned before, we recognise that climate change is a global issue.  Success is only possible when countries work together.  Australia is our nearest neighbour, with deep political, social and economic ties between our countries.  It makes sense for such close cousins to work together for the betterment of both.


Secondly, harmonisation of carbon pollution reduction schemes, just as with the advantages of trade, benefits both countries by ensuring the lowest-cost means for reducing emissions.


Thirdly, harmonisation reduces the compliance costs on both sides.  There will be considerable public and private expense in measuring, reporting and ensuring compliance with emissions trading regimes, and these can best be minimised through a common approach.


Finally, harmonisation reduces trans-Tasman competitiveness issues.  We don’t want investment decisions being made on either side of the Tasman on the basis of who has the softest climate change policies.  That could do harm to both economies.


That said, New Zealand and Australia are similar, but they’re not identical.  While harmonising our carbon pollution reduction schemes, we must be mindful of our different circumstances.


New Zealand’s emissions profile is unique for a developed country with half its greenhouse gas emissions coming from farm animals.  Farming is significant in the Australian economy, but much less so than in New Zealand.  Conversely, Australia has a larger proportion of its emissions coming from coal-fired power stations.  New Zealand’s energy emissions are much less of a problem than in Australia as we have a high percentage of renewable power generation.  Any harmonisation work must recognise these differences.


It is going to be challenging enough getting domestic legislation passed through both Parliaments in a timely way without the complexity of attempting full harmonisation at this stage. Our approach to this should be one of sharing information on policy development and taking opportunities where possible to align. Our initial priority should be to get our respective schemes up and running and then over time formally linking the schemes.


Transitional Allocations


A significant area of concern for the Government is the differing approaches to transitional allocation for industry. The New Zealand ETS provides for a capped allocation on the basis of historic emissions and an aggressive complete phase out from 2018 – 2030. In contrast the Australian CPRS provides an intensity approach based on industry average emissions which are then phased out at a rate of 1.3% per annum. Left unaligned this will provide a very strong disincentive for investment in New Zealand and is an aspect of the NZ ETS where the Government wishes to make changes.


Forestry


A critical part of design of the NZ ETS is its approach to forestry. It is well known that the significant forest plantings in the 1990s are currently offsetting the growth in emissions. I have been very nervous of New Zealand’s Kyoto balance with the wild fluctuations in estimates of our post 1989 forests. I was pleased to announce last month the release of the first data from the Land Use and Carbon Analysis System, better known as LUCAS.  This programme involves extensive use of satellite imagery, aerial photography and other spatial data to map New Zealand’s land use at 1990, now, and in the future. The LUCAS programme is giving us real and accurate data on our progress towards meeting our obligations under the first commitment period of the Kyoto Protocol. 


The Government is very mindful in amending the New Zealand ETS of the importance of the investment signals being sent to the forest industry.  A real problem currently is that while they are eligible for credits since January 2008, there is no market without buyers. We have a difficult balancing job of getting emitting sectors into the ETS in a timely way, not imposing excessive costs on them, while providing a robust market for the forest sector to sell their credits.


Other climate change policy


While an economic instrument is the primary policy tool to drive reductions in greenhouse gas emissions, this will be complemented by other important climate change policies in New Zealand.


Our policies include providing incentives for building more renewable electricity production.  A significant barrier to building new renewable energy plants has been the Resource Management Act. 


The irony over recent decision-making under the Act is that it has been easier to get consent for new coal, oil or gas-powered electricity generation than for renewable geothermal, wind or hydro-electric development.


Two significant things are being done to change this.  The first is to streamline and simplify the consenting process.  We want an end to long-drawn-out consent procedures with a crisp Board of Inquiry process that incorporates both local and country-wide considerations for nationally significant projects.


Secondly, we are pursuing a national policy statement on renewable energy to give a clear signal to decision-makers of the importance of expanding New Zealand’s renewable energy base.


Encouraging people to use energy more efficiently is also part of our programme.  We favour an approach of financial incentives over excessive regulation. Initiatives to insulate state houses have already been announced, and a new initiative was launched on 1 July with substantial grants available to better insulate and heat 180,000 privately owned, older homes.


Our broader approach is well illustrated by the changes we have made in biofuels policy.  We have repealed the compulsory biofuels quota that had question marks over its sustainability requirements and which provided perverse advantages for ethanol over biodiesel.  The replacement grants scheme provides a consistent 42c per litre incentive and has been well received by the biofuels industry.


Other policies, like the grants scheme for solar heating is proving popular with a huge increase in uptake this year. A policy I have a particular interest in is the exemption from road user charges for full electric cars that comes into effect on 1 October.  I must acknowledge here in Melbourne that my Blade all electric plug-in Getz at home in Nelson is a product of Australian innovation.


Science


The final issue I wish to canvass in this speech is the crucial role new technologies will play in finding affordable ways to constrain and reduce emissions.


The great dilemma for New Zealand is the very limited scope to reduce greenhouse gas emissions from our cows, sheep, cattle, deer and other livestock. That is why the government has put additional emphasis on ramping up investment in this area through the Primary Growth Partnership.


I note the very important initiative by Australia in the area of carbon capture and storage that has the potential to address the major emissions from coal fired power stations. I commend Australia for taking the initiative of forming a global research alliance on this front of which New Zealand is keen to be a part.


New Zealand sees a similar role around the emissions from ruminant animals, and is exploring how we might contribute to greater collaboration on this front.


It seems eminently logical that in research and development on climate change mitigation that we enable and support countries to play to their strengths.


Conclusion


I conclude by noting:


First, that New Zealand is determined to work constructively to help secure a robust and effective post 2012 agreement to combat climate change.


That the New Zealand Government’s ambition is to go to Copenhagen with the policy and legislation for our emissions trading scheme settled.


That we have a wide range of complementary policies in train to help New Zealand make the transition to a low-carbon economy,


And finally, that it is our ambition to make a global contribution in our research efforts to reduce agricultural greenhouse gas emissions.


Nearly a century ago, New Zealand and Australian soldiers proudly stood shoulder to shoulder against tough odds to confront a threat of a very different kind to climate change.


We should take the lead from our respective Prime Ministers, and keep that ANZAC spirit of partnership alive as we work together to play our part in addressing this global environmental challenge.

  • Nick Smith
  • Climate Change Issues