Climate Change Commission releases three key papers

With all three consultations closing at the end of May, those involved in international shipping/aviation, forestry, agriculture, electricity, Māori businesses and other industries particularly exposed to climate regulation may wish to consider making a submission.

This article summarises the material released by the Commission and highlights which aspects may be of particular interest to different industries. It can be navigated using the links to relevant sections below:

Table 1: key sections by industry relevance
Draft advice on the fourth emissions budget (2036-2040)
Discussion document: review of the 2050 emissions reduction target
Discussion document: review on whether emissions from international shipping and aviation should be included in the 2050 target, and if so how

Under the Climate Change Response Act 2002 (the CCRA), the Commission has various responsibilities to develop advice for the Government on key issues relating to climate change. In our previous article, we considered the Commission’s advice on the Emissions Trading Scheme unit and price control settings. Now, the Commission has released a further three documents, one piece of draft advice and two discussion documents, for consultation. These are:

The Commission’s advice on the fourth emissions budget period (2036 to 2040) and whether emissions budgets one, two and three (covering 2022 to 2035) should be revised.
A discussion document on its review of New Zealand’s 2050 emissions reduction target (the 2050 target). Currently, the 2050 target requires that by 2050 New Zealand achieve:¹
- Net zero emissions of greenhouse gases other than biogenic methane; and
- Reductions in biogenic methane emissions of 10% below 2017 levels by 2030 and between 24 and 46% below 2017 levels by 2050.
A further discussion document on its review as to whether emissions for international shipping and aviation should be included in the 2050 target.

All three papers feed into decisions the Government is required to make prior to the end of 2025. Submissions on all three consultations close on 31 May 2024, with the Commission seeking a wide range of perspectives to inform its advice. Given the potentially significant impact of the decisions flowing from this advice in the long term, as they set the trajectory for emissions reductions for a considerable period, those with an interest in, or affected by, climate regulation may wish to consider making submissions on aspects of the papers particularly relevant to them. Below are aspects of the papers different industries may wish to focus on:

Table 1: key sections by industry relevance

Paper/s	Interested parties	Key sections
Draft advice on the fourth emissions budget (2036-2040) and Discussion document: review of the 2050 emissions reduction target	· All those with an interest in, or affected by climate change regulation, but particularly:	· Particularly the level of the emissions budget and whether earlier emissions budgets should be amended.
	· Those in electricity (and electrification of transport etc.).	· The Commission’s views on the time required for, and extent of, electrification.
	· Those in agriculture.	· The Commission’s views around methane reducing technology and the extent of reductions achievable, as well as the likely impact of the emissions budgets on revenue.
	· Those in forestry.	· The Commission’s views on the trajectory of afforestation.
	· Those involved in Māori business interests.	· The Commission’s views on the likely impacts (positive and negative) on Māori economic interests.
	· Any other businesses significantly exposed to emissions reductions.	· The Commission’s views on the pace at which emissions reductions can be achieved.
Discussion document: review on whether emissions from international shipping and aviation should be included in the 2050 target, and if so how	This consultation is likely to be of particular interest to: · Those involved in international shipping.	· The Commission’s views in relation to the extent of the issues caused by international shipping, New Zealand’s role in acting on these and the best way of imposing any target.
	· Those involved in international aviation.	· The Commission’s views in relation to the extent of the issues caused by international aviation, New Zealand’s role in acting on these and the best way of imposing any target.
	· Those whose businesses have significant exposure to international transport costs.	· The Commission’s views on the relevant sector as well as how any target for it may be implemented.

Draft advice on the fourth emissions budget (2036-2040)

The CCRA provides for the setting of emissions budgets for each five-year period – these budgets set the net volume of emissions permissible, accounting both for carbon emissions and removals.² The Government published the first three emissions budgets (covering 2022-2025, 2026-2030 and 2031-2035) in May 2022, with the CCRA requiring the fourth budget, covering 2036-2040 to be in place by the end of 2025.³ The Commission is therefore preparing draft advice on that fourth emissions budget, which the Government will use in making its decision. At the same time, the Commission is considering whether changes to any of the three previous budgets are required under the CCRA. Given that these emissions budgets will set the maximum level of emissions for New Zealand in each period, and will therefore likely significantly impact both policy and practice going forward, any industry with an interest in, or exposure to, climate regulation will likely wish to consider the Commission’s proposal.

The fourth emissions budget

In setting the fourth emissions budget, the Commission describes its role as to recommend the “best buy” from New Zealand’s perspective, being the option which keeps us on track to meet the 2050 target but also maximises co-benefits/minimises negatives as far as possible.⁴ The emissions budgets are “stepping stones” towards the 2050 target, signalling the pace of change.

In its draft advice, the Commission suggests that New Zealand can reduce emissions “faster and sooner than previously projected”.⁵ It says that current policy is not on track to reach the 2050 target; while New Zealand is expected to reach net zero of greenhouse gases except biogenic methane by 2042 (including based on projected uptake of EVs and afforestation), biogenic methane is only expected to reduce by 13% as against 2017 levels, as against the minimum 24% mandated by the 2050 target.⁶ These figures are based on policies in place at 1 July 2023 and so do not account for any actions by the new Government.⁷

The Commission proposes a fourth emissions budget of 134 MtCO₂e.⁸ 55% of this figure would be contributed by biogenic methane and 31% by CO₂,⁹ with the reductions also supported by increased forestry, particularly native forestry. ¹⁰ Overall, this represents an average annual decrease in emissions of 63% below 2021 levels¹¹ (in 2021, biogenic methane totalled 43.8MtCO₂e, for that year alone¹²).

The Commission considers that this budget could be achieved, either through prioritising the application of new and emerging technology (e.g. through faster cost reductions in electric vehicles and batteries, and higher aviation electrification and biofuel use) or else through a greater focus on systems change to compensate for slower technological progress (for example, reducing stocking rates and commercial vehicle kilometres).¹³ However, its target would require:¹⁴

Further electrification of light transport and phase out of light internal combustion engine vehicle imports by 2040.
Continued growth in renewable electricity generation – the Commission says that to meet increasing demand for electricity, NZ “will need to considerably increase its capacity generate and distribute renewable electricity”, while biomass and low carbon liquid fuels become important for process heat and sectors hard to electrify.¹⁵
Further electrification of industrial processes and use of biomass.
Going further with currently available methane reducing technologies and farm management practices while also introducing new technologies.
Gradual decline in exotic afforestation from 2030 to 2050 with an increase in native afforestation over the same period.
Increases in residential, commercial and public buildings’ energy efficiency.
Increasing rates of active and public transport in cities.

The Commission notes that the ETS is unlikely to drive such structural change and that policy decisions will be needed.¹⁶

In the Commission’s view, this more aggressive target will provide benefits to New Zealand, including by giving it additional choice in future.¹⁷ It considers that the increased rate of forestry planting means less afforestation is now needed to reach net zero and there may now be no need to rely on carbon capture and storage before 2050.¹⁸ Furthermore, its economic modelling suggests that its emission budget would have only a minor impact on the level of economic activity and that this would be more than made up for by the economic benefits, with reducing transport fuel use and improving air quality saving on average NZ$2.7b a year alone.¹⁹ For agriculture, reducing emissions is not expected to significantly reduce profit, but would affect revenue growth, while fossil fuel sectors would be significantly impacted.²⁰ It does note that the impacts on particular population groups, and particularly Māori who are exposed to climate risks in a number of ways,²¹ will depend on the policy decisions adopted and that the Government has a role in ensuring an equitable transition to lower emissions.²²

The Commission further notes that the Government has choices as to the level for the fourth emissions budget and the path taken to achieve additional reductions.²³ It is confident that there would be economic and social gains associated with adopting the path proposed in the fourth budget, including through large direct cost savings and unquantified co-benefits including better health, biodiversity and soil/water quality outcomes,²⁴ while there would be risks to export markets if no action is taken.²⁵

Resetting the earlier emissions budgets

The Commission further recommends re-setting the budgets for each of the first, second and third emissions budget periods, as set out in the table below, to encourage action consistent with the proposed fourth budget:²⁶

Table 2: Recommended revisions

	Emissions budget 1 (2022-2025)	Emissions budget 2 (2026-2030)	Emissions budget 3 (2031-2035)
Current set budgets (total net emissions)	290 MtCO₂e	305 MtCO₂e	240 MtCO₂e
Recommended budgets	281 MtCO₂e	286 MtCO₂e	221 MtCO₂e
Annual average	70.3 MtCO₂e/yr	57.2 MtCO₂e/yr	44.2 MtCO₂e/yr

These changes reflect methodological changes since the emissions budgets were set, as well as a significant change/increase in afforestation rates.²⁷ The Commission does note that, since New Zealand is already in the first emissions budget period, the Minister can only revise this budget under exceptional circumstances.²⁸

The Commission further notes work being undertaken by the Government to allow emissions/removals from pre-1990 forest management to be included in emissions budgets and to include new sources of emissions/removals. It considers this needs to be done carefully to avoid setting emissions budgets which do not meaningfully reduce gross emissions.²⁹

Discussion document: review of the 2050 emissions reduction target

In addition to setting emissions budgets, the Commission must also review the 2050 target every five years, with this being the first such review.³⁰ However, it may only recommend a change to the target where there has been a significant change in one or more factors identified in the CCRA and the Commission considers this justifies a change to the target.³¹ The Minister must, within 12 months of receiving the Commission’s recommendations, advise it of the Government’s response, including the reasons for any departure from the recommendation.³²

The Commission’s discussion document sets out its initial analysis of the factors the Government needs to consider in deciding whether there has been a significant change warranting amendment to the 2050 target and, if so, how any amendment should be done.³³ It will then reach a final judgement as to the appropriate recommendation in light of submissions. As with the emissions budget, the 2050 target is a key input into New Zealand’s climate regulation and so any parties with a particular interest in, or exposure to, climate regulation will wish to consider making submissions.

The Commission’s initial view is that there may be reason to strengthen the 2050 target.³⁴ It commences its analysis by noting that the impacts of climate change are increasingly being felt and that it is clear actions to date have not been sufficient with global emissions yet to peak.³⁵ It also considers that the current target is not consistent with “international burden sharing perspectives”; i.e., perspectives on how responsibility for emissions reductions should be divided, including based on equality, capacity to pay, responsibility for warming and the right to sustainable development.³⁶ In terms of the statutory test, it considers that there have been significant changes which may warrant reconsidering the 2050 target, including in relation to:³⁷

Global action – when the 2050 target was set, New Zealand was (relatively) a global leader, but since then other countries including Australia, Canada, the EU, and the US have set more ambitious targets, including requiring net zero of all greenhouse gases. The time available to prevent overrunning 1.5 degrees of warming has also decreased.³⁸ The Commission’s view is that the relative ambition of New Zealand’s target compared to those of its peers and competitors is a significant change.³⁹
Scientific understanding - risks from climate change are greater than previously known, with adverse impacts, including extreme weather, occurring at lower temperatures than was expected in 2019. While changes in understanding the physical science of greenhouse gases have been limited, the Commission considers changes in understanding the impacts and risks of warming are significant.⁴⁰
Technological developments – the Commission considers that the availability of methane inhibitors (i.e. technology capable of reducing methane emissions from cows and sheep) overseas increases the likelihood that similar technology could be developed/used domestically.⁴¹
Principal risks and uncertainties associated with emissions reductions and removals – the Commission considers that there has been a significant change in the level of concerns over forests as carbon storage, including as a result of negative experiences of slash and erosion during extreme weather events.⁴²

The Commission notes that, under the current 2050 target, New Zealand would continue to contribute to warming after 2050 since methane does not have to reach net zero. The Commission further warns that proposals to focus on “no additional warming from agricultural methane” would mean higher emissions and increased warming relative to the current 2050 target, necessitating faster reductions in emissions of other greenhouse gases and/or greater reliance on forestry to make up the shortfall.⁴³

If the target were to be amended, the Commission considers that it could be strengthened without changing the current approach of addressing methane separately from other greenhouse gases. In particular, it considers options would include:⁴⁴

Creating additional waypoints with more stringent requirements ahead of 2050.
Changing the permitted emissions level for methane or else providing for negative emissions of other greenhouse gases.
Changing one or both of the targets to gross targets.
Amending a broad range of rules so as to introduce targets for forestry removals, other removals, impose rules on eligible offshore mitigation and on the inclusion of sinks and sources.

The Commission considers that there is a clear direction towards a more stringent target, and that even under such a strengthened target, the economy could be expected to grow.⁴⁵

Discussion document: review on whether emissions from international shipping and aviation should be included in the 2050 target, and if so how

The CCRA was amended in 2019 to require the Commission to provide advice on whether international shipping and aviation should be included within New Zealand’s emissions targets.⁴⁶ This discussion document represents the Commission’s initial analysis on the subject. Ultimately, the Commission considers that they should be included and suggests some approaches for doing so. Those in the international shipping and aviation industries, but also those likely to be significantly exposed to changed regulation of those industries, may wish to consider submitting on this consultation.

In reaching its view that international shipping and aviation should be included, the Commission notes that:

Action on these emissions is increasingly being taken by international bodies (including the International Maritime Organization and International Civil Aviation Organization (ICAO), which have set net zero targets by or around 2050⁴⁷), overseas markets and overseas customers.⁴⁸ Major economies such as the UK, EU and US have already created domestic targets and policies for such emissions.⁴⁹ In the Commission’s view, global action will cause change to these industries regardless of New Zealand’s approach and so the question is more the extent to which NZ wishes to play an active role in that change,⁵⁰ noting that a 2019 estimate suggested that these sectors amounted to about 9% of New Zealand’s total greenhouse gas emissions that year.⁵¹
The evidence is that increasing efficiency will not be enough and there needs to be a move to alternative fuels (green methanol or ammonia for shipping, and sustainable aviation fuels generated from biological material or electricity).⁵² Even then, there is likely to still be a need for offsetting emissions.
Including such emissions in the emissions budget would impose a legal requirement to account for them, and would likely prompt faster action accompanied by government policy to encourage alternative fuels.⁵³ While there is a risk that reliance on alternative fuels will increase prices for tourism and exports (although this impact could be reduced through greater efficiency),⁵⁴ not taking action could result in emissions reducing on New Zealand routes slower than for elsewhere which could also impact New Zealand’s market access.⁵⁵

The Commission’s initial assessment is therefore that such emissions should be included in the 2050 target, that this is consistent with the purpose of the CCRA, global efforts under the Paris agreement and action being taken by international organisations. It considers that combining strong international and domestic action is likely to be in New Zealand’s best interests.⁵⁶

Given this assessment, the Commission also considers the options for counting such emissions for inclusion in the target. Specifically, it identifies six options, being to calculate emissions based on:⁵⁷

Refuelling, that is based on fuel sold in New Zealand;
Fuel use to/from next port, that is based on emissions for the specific travel leg;
Fuel use to/from final port, that is based on emissions for the whole journey;
Fuel use within New Zealand’s Exclusive Economic Zone; or
As a share of global emissions; or
Fuel used by operators based in New Zealand.

The Commission also identifies different options for incorporating targets for such emissions into the 2050 target, including:

Including them in the net zero component of the target;
Adding one new component seeking gross reductions for both the international shipping and international aviation sectors combined;
Adding two new components seeking gross reductions for each sector individually; or
Adding wo new components but allowing offsetting of emissions.

The Commission’s initial analysis suggests fuel use to/from next port, and either providing a net zero target or separate gross components of the broader target for each sector, are likely to be the preferred approaches.⁵⁸ However, it considers that the question of how other impacts on the atmosphere from these industries should be addressed should be considered at a later time.⁵⁹ As for the level of emissions reductions targeted, the Commission considers that global pathways modelled by ICAO and the International Energy Agency set out credible levels of gross emissions reductions.⁶⁰

Where to from here?

The Commission is consulting on the three papers with submissions due by 31 May 2024. From there, it will finalise its draft advice and recommendations on the decision documents. These will then be provided to the Government by the end of 2024 for decisions by the end of 2025.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.

^{[1] CCRA, s 5Q.}^{[2] He Pou Rangi | Climate Change Commission “Draft advice on the fourth budget (2036-2040)” at 33.}^{[3] CCRA, s 5X.}^{[4] At 20.}^{[5] At 18.}^{[6] At 61-62.}^{[7] At 61.}^{[8] At 22.}^{[9] At 45.}^{[10] At 46.}^{[11] At 25.}^{[12] At 60.}^{[13] At 51-52.}^{[14] At 54-55.}^{[15] At 85.}^{[16] At 106.}^{[17] At 18.}^{[18] At 25.}^{[19] At 26.}^{[20] At 27.}^{[21] At 127.}^{[22] At 27.}^{[23] At 24.}^{[24] At 109 and 112.}^{[25] At 114.}^{[26] At 18, 139.}^{[27] At 136.}^{[28] At 25.}^{[29] At 28.}^{[30] He Pou Rangi | Climate Change Commission “Discussion document: review of the 2050 emissions reduction target” at 19.}^{[31] CCRA, s 5T.}^{[32] Section 5U.}^{[33] At 20-21.}^{[34] At 26.}^{[35] At 17.}^{[36] At 24-25.}^{[37] At 26.}^{[38] At 53.}^{[39] At 54.}^{[40] At 56.}^{[41] At 58.}^{[42] At 60.}^{[43] At 48.}^{[44] At 73.}^{[45] At 28 and 74.}^{[46] CCRA, s 5R.}^{[47] He Pou Rangi | Climate Change Commission “Discussion document: review on whether emissions from international shipping and aviation should be included in the 2050 target, and if so how” at 22.}^{[48] At 17.}^{[49] At 18.}^{[50] At 19.}^{[51] At 20.}^{[52] At 22.}^{[53] At 23 and 58.}^{[54] At 23.}^{[55] At 23.}^{[56] At 23.}^{[57] At 24.}^{[58] At 24.}^{[59] At 24.}^{[60] At 84.}

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.