Issue 10: Asia Pacific climate change policy series: New Zealand - Climate Change

Introduction

The Copenhagen Accord called on Annex I countries to make their climate change pledges, and on Annex II countries to identify their nationally appropriate mitigation actions by 31 January 2010.

In this edition of the Asia Pacific climate change policy series we examine the regulatory framework and climate change investment opportunities in New Zealand.

Key points on New Zealand:

chief policy tool to reduce GHG emissions is the NZ ETS which introduces a price on GHG emissions to incentivise a reduction in those emissions and to plant forests to absorb carbon
the NZ ETS links with international markets such as the CDM and the EU ETS by making emission reduction units or allowances from those markets available for surrender or offsetting under the New Zealand scheme
has abundant natural energy resources making it amenable to a high proportion of renewable energy generation
has set a target for its energy sector of having 90 per cent of its electricity generated from renewable sources by 2025. Around two thirds of New Zealand's energy is currently generated from renewable sources, principally hydro, geothermal and wind
investment opportunities in the renewable energy sector are likely to arise principally in new wind and geothermal projects. Opportunities also exist in projects designed to increase energy efficiency in industry and buildings
if Australia, through its Climate Change Committee, decides to implement an emissions trading scheme, there may also be opportunities that arise in terms of employment, skills and technology transfer between these two closely linked economies.

Copenhagen Accord commitments

New Zealand's submission to the Executive Secretary of the UNFCCC dated 31 January 2010 reiterated its support for the Copenhagen Accord and made non-binding commitments to reduce greenhouse gas (GHG) emissions between 10 and 20 per cent below 1990 levels on the condition of there being a comprehensive global agreement under which:

the world is set on a pathway to limiting temperature rise to no more than 2° C
where developed countries make comparable efforts to those of New Zealand
where advanced and major emitting developing countries take action fully commensurate with their respective capabilities
where there is an effective set of rules for land use, land-use change and forestry (LULUCF)
where there is full recourse to a broad and efficient international carbon market.

A long-term target of a 50 per cent reduction in net greenhouse gases from 1990 levels by 2050 was also set as outlined in the Policies and Measures chapter of New Zealand's 5th National Communication to the UNFCCC.

Regulatory framework

New Zealand's chief policy tool to reduce GHG emissions is the Emissions Trading Scheme (NZ ETS) as established under the Climate Change Response Act 2002 (CCRA) (amended to include the NZ ETS provisions). The NZ ETS will ultimately bring the vast majority of the New Zealand economy and all six UNFCCC GHGs within its scope, including industrial processes, energy, industrial gases, transport and agriculture. The NZ ETS introduces a price on GHG emissions to incentivise a reduction in those emissions and to plant forests to absorb carbon. To help ease the transition, the compliance obligations are halved until 31 December 2012. In this period emitters only have to surrender one emission unit for every two tonnes of emissions and the carbon price is capped at NZ$25 per unit.

The scheme will see the progressive capture of different sectors of the economy. The forestry sector was the first to enter the scheme, doing so retrospectively in September 2008. The stationary energy, industrial processes and liquid fuels industries entered the scheme in July 2010. Industrial gases will enter the scheme in 2013 and the agriculture sector, responsible for approximately half of New Zealand's CO2 equivalent emissions, will enter the scheme in 2015 rather than 2013 as originally planned. Most allowances to emit will be auctioned, however the most emission-intensive and trade-exposed industries will receive the highest level of freely allocated allowances (either 60 or 90 per cent depending on the category) with free allocation also phasing out more slowly for these industries.

The NZ ETS links with international markets such as the CDM and the EU ETS by making emission reduction units or allowances from those markets available for surrender or offsetting under the New Zealand scheme. The scheme will be reviewed every five years, with the first review due in 2011.

New Zealand has abundant natural energy resources making it amenable to a high proportion of renewable energy generation. New Zealand has set a target for its energy sector of having 90 per cent of its electricity generated from renewable sources by 2025. This should not be difficult to achieve however, with around two thirds of New Zealand's energy already being generated from renewable sources, principally hydro, geothermal and wind. Despite such a large proportion of energy already coming from renewable sources, and ambitious goals set for future renewable energy generation, New Zealand currently offers no subsidisation for its renewable electricity industry (such as feed-in-tariffs). Rather, the government sees its role as being to reduce unnecessary regulatory barriers to renewable energy generation, such as planning and certification barriers.

New Zealand does offer however a number of schemes designed to promote the development of new low-carbon technologies, including in energy generation. In 2007 the government established its Marine Energy Deployment Fund that is designed to deploy NZ$8 million over four years in projects such as tidal turbine and wave power demonstration projects.

One program providing support at the planning stage of renewable energy projects is the Distributed Generation Fund. Under this fund, the Energy Efficiency and Conservation Authority (EECA) provides part-funding (up to NZ$20,000 or 75 per cent) for eligible feasibility studies for smaller renewable energy generation projects typically between three and 10,000 KW. Eligible technologies include wind, solar, hydro, geothermal, bio-energy, cogeneration and diesel or gas turbines.

New Zealand has a number of schemes dealing with energy efficiency across its economy. New Zealand collaborates with Australia in the setting of minimum efficiency standards for some products and also in the mandatory disclosure of efficiency ratings for classes of products. Currently 13 classes of product are covered, ranging from white goods through to entertainment equipment, with a further 12 classes expected to be included by the end of 2012.

The EECA runs several programs that support businesses to become more energy efficient, in particular for energy intensive business (businesses that spend more than NZ$500,000 on energy per year). Grants are available for energy audits, design audits and new or under-utilised technology improvements. Energy audits examine a business's current energy use and sets out where energy savings can be made, whereas design audits examine the energy efficiency of facilities or premises yet to be constructed and consider design changes that could be made to make them more energy efficient. New and under-utilised technologies that may be supported include but are not limited to fans, boiler-controls, bio-digesters and heat recovery systems. Grant funding is available for up to 40 per cent of the project cost (to a maximum of NZ$100,000) or up to 75 per cent of the cost of a feasibility study (up to NZ$10,000).

Investment opportunities

Investment opportunities in the renewable energy sector in New Zealand are likely to arise principally in new wind and geothermal projects. These resources are considered lowest cost due principally to the abundance of those resources throughout the country. It will be important for project developers to take advantage of planning stage public grants, if available, to reduce the planning hurdles and start-up costs of their projects.

Opportunities also exist in projects designed to increase energy efficiency in industry and buildings. Due to New Zealand's already large proportion of renewable energy in its stationary energy sector, it will have to rely heavily on energy efficiency measures to reach its Copenhagen Accord emission reduction targets. This is reflected in the wide range of public grants available for planning and carrying out energy efficiency projects.

The NZ ETS will be a significant driver of opportunity. Opportunities to date have been largely in the forestry sector, and particularly for farmers looking to take advantage of the forestation of otherwise marginally productive lands. There have been some opportunities open up in the trading and service industries as exchanges open platforms for emissions allowances and offsets. However, the most significant opportunities will be in emissions reducing and offsetting projects, such as energy efficiency projects, and in the development of low-carbon technologies, in particular for the agriculture sector due to come within the scope of the NZ ETS in 2015.

Going forward it will be critical for New Zealand to reduce emissions in the agriculture sector, with 50 per cent of New Zealand's emissions coming from that sector. The development of low-carbon agricultural technologies also represents a significant export opportunity with rapidly developing countries such as China, India and Brazil also requiring significant improvements in agricultural carbon efficiency to meet their emission reduction goals.

If Australia, through its Climate Change Committee, decides to implement an emissions trading scheme, there may also be opportunities that arise in terms of employment, skills and technology transfer between these two closely linked economies.

Experience

Norton Rose Group has significant experience advising on climate change matters in New Zealand. We have advised on AAU transactions and a JI forestry project. We have also worked on a number of matters with leading New Zealand legal practices. Recent experience includes:

advised one of New Zealand's largest energy generators on the purchase of AAUs from the Republic of Hungary. Our role was to review, advise on, help negotiate and provide drafting changes for the AAU Purchase Agreement and related documentation. Following the amendments to the emissions trading scheme legislation in New Zealand, this deal is now on hold
advised a New Zealand compliance buyer on the potential purchase of AAUs from the Republic of Slovakia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.