Climate change update - Key business issues for general counsel

Simon Watt, Partner | Tuesday 19 June 2007

With global warming dominating the headlines, corporate counsel seeking to remain at the leading edge of business are considering what climate change means for their company.

Irrespective of individual views on climate change, in recent months the issue has passed a “tipping-point” in the public and business arena. Political parties have yet to agree on the way forward, but they agree action is needed. Climate change-related issues are already impacting Government policy and this will likely continue in the long-term.

Recent business activity

The corporate sector now routinely addresses climate change issues. Heightened awareness is evident in recent media reports which feature an array of initiatives including:

• New Zealand tourism transport operator Intercity pledged to make its operations carbon neutral by 2010, as did media giant News Corporation of its businesses worldwide;

• The Australasian businesses of ABN Amro announced plans to go carbon neutral by the end of 2007;

• Contact Energy challenged the electricity generation sector to target a 40% reduction in greenhouse gas emissions from electricity generation within seven years, adopting the target as a company goal and also pledging to assist customers to reduce their emissions by a million tonnes by 2014;

• Australian energy company AGL said it would join the Chicago Climate Exchange in order to profit from cuts to its greenhouse gas emissions in Australia and fellow Australian corporate Origin Energy launched a carbon reduction scheme to allow companies and their customers to reduce their environmental footprint; and

• National Australia Bank and Bank of New Zealand announced plans to reduce their greenhouse gas impact to zero by 2010.

Many more leading businesses have considered the implications of climate change and begun implementing policies.

At a national level, as a signatory to the Kyoto Protocol, New Zealand faces legally binding commitments to reduce greenhouse gas emissions to 1990 levels, from 1 January 2008 to 31 December 2012. With that looking unachievable, Treasury has estimated New Zealand’s financial liability at NZ$567 million. The National Party claims that significantly underestimates the true liability, which it believes could be as high as NZ$1.7 billion. The most common objection to New Zealand’s participation in the Kyoto Protocol is that Australia did not ratify the agreement, resulting in concerns that adopting measures to meet Kyoto obligations will reduce our relative competitiveness.

Could climate change impact your company?

A number of climate change-related proposals are being considered by the Government that will impact specific industries. They are:

• the draft New Zealand Energy Strategy to 2050, due to be finalised this year;

• related discussion documents - Transition Measures: Options to move towards low emission electricity and stationary energy supply, and to facilitate a transition to greenhouse gas pricing in the future; and Measures to reduce greenhouse gas emissions in New Zealand post-2012;

• the draft New Zealand Energy Efficiency and Conservation Strategy; and

• the Sustainable Land Management and Climate Change discussion document, to be considered by the Government shortly.

Proposals for the period through to 2012 are aimed at increasing sustainability in the energy sector, including reducing greenhouse gas emissions from electricity generation. After 2012, measures proposed will affect key economic sectors including transport, agriculture and forestry.

The outcomes of these proposals will have far-reaching economic effects. For example, the cost of electricity is likely to increase as the price of emitting greenhouse gases is factored in. The cost of procuring a range of other business inputs, including steel and oil-based products, may also rise if a cost of carbon is factored in.

There are also opportunities. Businesses may well be able to benefit from efficiency gains won in the pursuit of lower emissions, as well as from the sale of any reductions they can make, which could be sold as “offsets” for emissions made by other businesses.

Industry-specific effects of climate change

Exports

The export industry is affected by the “food miles” campaign, which encourages consumers to consider the distance their food has travelled and resulting carbon emissions. Perishable goods which require air-freighting are natural targets. To counter perceptions, New Zealand food producers may encourage comparison of their overall carbon footprint compared with the footprint of less efficient local producers. NZ Winegrowers, for example, have pointed out that New Zealand wines are exported by sea, not air, along with the fact that New Zealand does not subsidise the production and distillation of wine for which there is no market, as happens in Europe at a significant carbon cost.

Manufacturing

Manufacturing may also be subject to concerns about the distance a product has travelled to reach the market and is likely to be directly affected by post-2012 Government measures, including the possibility of mandatory emissions reporting. Manufacturers may eventually be subject to commercial impacts, such as carbon taxation, or labelling or certification of carbon neutral status. Changes to competitive advantage linked to carbon costs may result in lost investment or see production move to cheaper markets.

Tourism

New Zealand tourism may experience changes in demand linked to any rise in transport costs to reflect associated carbon emissions. Long-haul flights have been criticised for high carbon emissions. Tourism Norway is currently running advertisements in the UK that note Norway is “closer than New Zealand”. Tourism, in the mid to long-term, may suffer from more direct effects such as coastal erosion and changing conditions. An Intergovernmental Panel on Climate Change (IPCC) report notes development from Northland to the Bay of Plenty coast may exacerbate the risks from sea-level rise and increase the severity and frequency of storms and coastal flooding.

Construction

Construction will be affected by a review of the New Zealand Building Code, due for completion by November 2007. The review is set to be shaped by the desire for sustainability and energy efficiency. Green Buildings – a concept embracing efficiencies in energy, water use and building materials, as well as a building’s impact on health and the environment – are currently more expensive to build than those meeting the minimum requirements of the current building code. Conversely, the “green” aspects of properties are advertised more prominently now, with real estate agents noting that buyers are highly interested in water and energy saving measures.

Transport

As a major consumer of energy and a visible source of carbon emissions, the sector is currently the subject of campaigns to reduce the pollution levels of vehicles. Proposals advocate the use of biofuels and other alternative fuels, improving the quality of New Zealand’s vehicle fleet and a push for public transport.

Agriculture

Agriculture has benefited from a 2002 Government decision to shield it from price-based measures on the grounds it has limited opportunities to reduce emissions. As a major contributor to the nation’s emissions, that position could come under scrutiny. Price-based and non-price-based measures, along with technology solutions, are being explored.

Forestry

The sector is affected by one of the more controversial policies – a standardised deforestation charge where forestry land is converted to another use. Forestry will also be impacted by the Permanent Forest Sink Initiative, to take effect 1 January 2008. This involves awarding Kyoto Protocol compliant and internationally tradeable carbon credits to those who plant new permanent forests. The Climate Change Response Amendment Act 2006 allows credits to be vested in private entities, ending exclusive ownership of forestry carbon credits by the Crown. The IPCC report notes climate change may lead to a decline in agricultural and forestry production over eastern New Zealand due to increased drought and fire. However, initial benefits are projected in western and southern areas due to a longer growing season with less frost and more rain.

Energy

Energy companies are already feeling the effects of climate change concerns. A 2006 High Court decision, related to Mighty River Power’s (since withdrawn) consent for the recommissioning of the Marsden B power station, ruled that climate change must be taken into account when considering resource consent applications under the Resource Management Act. The ruling is currently under appeal by Genesis.

Corporations

Corporates may face increasing pressure from stakeholders to have a stated position on climate change. Downstream effects of the supply of goods and/or services to clients who are affected by carbon and environmental requirements and the addition of carbon or “green” considerations in a contract negotiation process are examples of how climate change may affect the bottom line. Companies may find capital raising and securing insurance more difficult if they fail to address climate change issues.

What does this mean for general counsel?

Businesses may soon notice the economic impact of climate change, if they haven’t already. For general counsel this may mean not just keeping abreast of the effects of climate change on policy and the business landscape, but actively engaging senior management on the issues.

Key considerations include:

• the review of existing contracts where the risk of carbon pricing was not consciously allocated or the price of carbon not correctly foreseen;

• adopting processes to ensure risk is correctly allocated in future long-term contracts where price could be affected by a future carbon price (such as contracts for electricity or gas supply) and ensure robust review mechanisms are in place;

• secure the benefits that may arise from reductions in carbon emissions or investment in renewable energy projects;

• document transactions to purchase carbon offsets or participate in emissions trading;

• being aware of the impact on transactions where representations are made about potential carbon liabilities, or on long-term capital investment where the return on investment could be affected by the price of carbon and document them accordingly;

• being heard on climate change policies; and

• advising on the legal aspects of business opportunities that may arise, such as claiming carbon neutrality or the sale of carbon offsets.

For companies who have already contemplated their approach to climate change there are still legal issues. Businesses will have to consider whether they might still be liable for emissions (even if they have achieved “carbon neutrality”) if the carbon offsets they purchase are not legally recognised under the Kyoto Protocol regime. Those who reduce emissions now will have to protect themselves against having less to offer the Government under any future scheme which offers exemptions from carbon costs in return for reduced emissions.

Getting advice
Bell Gully has long been involved in advising on climate change issues in New Zealand, from drafting parts of the Climate Change Response Act, New Zealand’s core climate change legislation, to work on the design of the legal framework for an emissions trading market, as well as on numerous other aspects including carbon emission transactions on the Chicago Climate Exchange, implications of the Kyoto Protocol on commercial contracts, greenhouse agreements between business and the Crown, and the allocation of liabilities and carbon benefits associated with forestry, renewable energy projects and sustainability policies.

Our climate change practice is led by partner Simon Watt who has specialised in this area for over a decade. The group draws together knowledge of carbon trading, climate-related policy and legislation, with related expertise in commercial law, taxation and litigation, among others. We are committed to keeping clients informed of legislative change and issues as they develop.

For further information, please contact your usual Bell Gully advisor or:

AUCKLAND

Garry Downs
Partner

Ian Gault
Partner

Willy Sussman
Partner

Clive Taylor
Partner

Marija Batistich
Senior Associate

Josh McBride
Senior Associate

WELLINGTON

Simon Watt
Partner

David Craig
Partner

Damian Stone
Senior Associate