Under the Climate Change Response Act 2002 (the CCRA), the Government is required to prepare an emissions reduction plan, including sector-specific policies to reduce emissions/increase removals, a multi-sector strategy to meet emissions budgets, and strategies to mitigate the impacts of reducing emissions on various groups including regions, iwi and Māori. The Government consulted on ERP2, covering the period from 2026 to 2030, from July of this year – you can read our article considering the consultation paper here.
Now, as 2024 draws to a close, the Government has released the final plan. While largely following the themes set out in the consultation paper, the final ERP2 includes a new focus on technology and innovation, as well as the building and construction sector. As a key strategic document, ERP2 is likely to be of interest to those in the energy, transport, agriculture, forestry and construction sectors, as well as those involved in green financing and technology.
On track to meet the second emissions budget
According to ERP2, New Zealand is on track to meet its first emissions budget (for the years 2022 to 2025) and second emissions budget (2026 to 2030, being the years covered by ERP2), with the biggest reductions expected to come from the forestry, energy and agricultural sectors.1 The Government also considers that New Zealand is on track to meet its 2050 target of net zero emissions for all greenhouse gases other than biogenic methane, and reductions in biogenic methane of 24-47 per cent below 2017 levels, with its central estimate showing New Zealand meeting those targets and net zero potentially achievable as early as 2044.2 This is in contrast to projections under current policy settings, which the Climate Change Commission said in April this year were not expected to reach that 2050 target (you can read about the Climate Change Commission’s consultation on the fourth emissions budget here).
Five pillars, eight policies
ERP2 is founded on the five pillars of the Government’s climate strategy, being:
- Resilient infrastructure and well-prepared communities.
- Credible markets to support the climate transition.
- Affordable and abundant clean energy.
- World-leading climate innovation.
- Nature-based solutions.
In addition, the Government has identified eight policies within ERP2 which it expects to have the greatest potential to lower emissions (reductions of 3.2Mt CO2-e against a budget of 305Mt CO2-e):
Strengthening the NZ ETS
ERP2 relies on the NZ ETS as the main tool to reduce emissions and increase emissions removals, thereby “supporting cost-effective climate action”.3 To ensure that the NZ ETS is able to fulfil that role, the Government proposes to:
- “[restore] confidence in the NZ ETS” by:
- committing to not placing an expiry date on New Zealand Units (NZUs);
- committing to ensuring that there is no differential treatment of forestry NZUs, such that one tonne of removals is recognised as equivalent to one tonne of emissions reductions; and
- strengthening governance, to manage risks of misconduct and “clarifying market information”.
- align the supply of NZUs with the NZ ETS cap through annual updates to its settings. Specifically, the Government proposes to align the cap with projected emissions for sectors subject to the NZ ETS, with 91 Mt CO2-e allocated to those sectors from the second emissions budget. In addition, the Government is working to update industrial allocations of NZUs to emissions-intensive, trade-exposed industries and is considering how regularly the Minister should be able to review those allocations.
The Government also highlights its action to end the review of the NZ ETS as a means of “[p]roviding regulatory predictability”,4 as well as actions to reduce the number of NZUs available between 2025 and 2029 with the aim of reducing existing stockpiles of units.
Funding, financing and technology
The Government also plans a number of key actions in the funding/financing space to encourage “green” investment and remove barriers. These include:5
- developing a sustainable finance strategy and taxonomy, to provide confidence regarding which activities are “green”. Work will begin with agriculture and forestry and then expand to cover other sectors;
- supporting “credible, efficient and resilient markets”, including by looking to reduce information gaps;
- investigating the potential for a biodiversity credits market – early consultation on a biodiversity credit scheme was previously conducted in 2023 (see our article here); and
- cooperating with Australia on sustainable finance policy and aligning regulatory approaches, to position the region as a “robust green finance market”.
The Government will also work with international partners and the finance sectors to reduce barriers to investment.
In addition, ERP2 is highly focused on the technology space, with key actions including:
- removing regulatory barriers to encourage faster commercialisation of climate solutions;
- lifting the ban on gene technology outside of a laboratory – instead a new independent regulator will oversee applications to use such technology, with a view to using these technologies to help farmers and growers reduce their emissions (a new Gene Technology Bill has now been introduced into Parliament);
- encouraging technology to increase renewable energy, such as battery storage; and
- removing market barriers to allow for new technologies to be trialled in New Zealand.
Sector-specific policies
ERP2 also includes a range of sector-specific policies and actions aimed at reducing net emissions.
Energy
Energy-specific actions will focus on electrifying New Zealand via the Electrify NZ work programme, with the goal of doubling renewable energy. This includes progressing faster consenting for significant renewable energy and transmission projects through the Fast-track Approvals Bill and amendments to the Resource Management Act 1991. The Government also intends to have a new regime for offshore renewable energy in place by mid-2025 (a new Offshore Renewable Energy Bill has now been introduced to Parliament). In addition, the Government aims to encourage a smarter electricity system and promote energy efficiency.
Another key area of focus for the Government is carbon capture, utilisation and storage or CCUS. Earlier this year, the Government consulted on a draft framework to enable CCUS (see our article on that consultation here). ERP2 indicates that the Government will look to progress legislation to establish that regime through 2025, including through ensuring CCUS operators are financially incentivised through the NZ ETS.
Building and construction
Building and construction contributes approximately 12 per cent of gross domestic greenhouse gas emissions. While omitted from the ERP2 consultation paper, the Government has therefore added a focus on this sector to the final plan, with efforts to target operational emissions (from the energy used to operate buildings) and embodied emissions (from the materials used in construction). Key actions/initiatives to reduce these emissions will include:
- expanding voluntary performance ratings for non-residential buildings (e.g. shopping malls and hotels) to provide verified and credible sustainability data to building owners and users;
- making it easier to retrofit buildings to improve energy efficiency;
- continuing work to reduce embodied emissions by making it easier to build smaller buildings, improving access to innovative and sustainable materials by enabling use of overseas building products/standards and developing a methodology for consistently and credibly measuring embodied emissions; and
- improving emissions data for building products, materials and buildings.
Transport
The Government has also set targets for reducing emissions from the transport sector. Consistent with its consultation paper, its primary targets involve increasing public charging points for EVs from the current 1,250 to 10,000 by 2030 and thereby address concerns about ‘range anxiety’. In addition, it would seek to facilitate private investment in charging points, including through changes to the RMA, and to review its co-investment model with the aim of scaling up the network. It will also work to reduce regulatory barriers to decarbonising heavy vehicles, promote innovation through the Low Emissions Heavy Vehicle Fund, continue to support decarbonisation of aviation and promote public transport in major cities.
Agriculture
With the agricultural sector accounting for half of New Zealand’s total emissions and exports, the Government is focusing on reducing emissions without undermining its global competitiveness. Key strategies for this sector include:
- Investment to accelerate the development and commercialisation of tools and technologies. Initiatives including targeted government investments, Global Research Alliance on Agricultural Greenhouse Gases, New Zealand Agricultural Greenhouse Gas Research Centre and AgriZero are intended to support producers in integrating new tools into their operations. A consistent method for on-farm emissions measurement is also being developed.
- Reviewing the science behind methane reduction targets to clarify long-term goals and reduce uncertainty for farmers.
- Introducing a fair and sustainable pricing system for agricultural emissions by 2030, separate from the NZETS which encourages the uptake of mitigation technologies and emission reductions.
Forestry and other carbon removals
Forestry is currently the only form of carbon removal recognised as contributing to New Zealand’s climate targets. ERP2 proposes various initiatives to continue to develop the forestry sector, while seeking to avoid loss of economically important farmland:
- Balancing land use and incentivising afforestation: The Government is aiming to incentivise afforestation by restoring price stability and confidence in the NZ ETS, while at the same time limiting whole-farm conversions and NZ ETS registrations to balance meeting emissions targets cost-effectively with protecting highly productive farmland. The Government is further reviewing potential partnerships with the private sector to afforest Crown-owned land. Such afforestation will contribute to achieving the 2050 net-zero target.
- Supporting wood processing and low-emission materials: The Government is looking to bolster domestic wood processing and substituting emission-intensive materials with engineered wood products by providing NZ ETS credits based on embedded carbon captured in the timber and Wood Processing Growth Fund.
- Improving environmental regulations and resilience: The Government is also seeking to refine regulatory settings (including under the National Environmental Standards for Commercial Forestry and the RMA) to better manage the environmental impacts of forestry.
In addition, the Government is looking to develop a framework to recognise non-forestry carbon removals, including on-farm vegetation, wetlands/peatlands, blue carbon and CCUS. As a first step, it aims to invest in research to improve understanding around non-forestry carbon removals and the amount of carbon they store. It would also look to establish which non-forestry removals are scientifically and technically ready to be recognised as a means of contributing to climate targets, both via the NZ ETS and as part of assessment against New Zealand’s Nationally Determined Contribution.
Waste
ERP2 also aims to reduce emissions from waste through increased investment in the Waste Minimisation Fund, developing systems to capture gases from organic waste disposal and landfill and implementing a stewardship scheme to prevent unnecessary emissions of refrigerant gases.
Impacts of the transition
ERP2 also considers the impacts of the proposed policies on groups such as households (particularly lower-income households), regions, youth, different sectors and Māori. In particular, the Government has indicated that it will look to minimise the costs of climate action for New Zealanders including through existing financial support as well as providing data to assist with informed decision-making. It will also seek to foster partnerships with Māori, including by investing in Māori-led climate solutions and maintaining programmes which prioritise Māori participation and leadership.
Next steps
The ERP2 recognises that there is still significant work to be done. To that end, the Government has indicated that, in 2025, it will seek to (amongst other things):
- deliver legislation and policies for biotech, CCSU and refrigerant gases;
- explore opportunities to partner with the private sector on decarbonisation efforts;
- strengthen NZ ETS market governance;
- progress work on an adaptation framework; and
- update NZ ETS settings and set a fourth emissions budget for the period 2036-40.
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.
Thanks to Chloe Kim for her assistance in preparing this article.
[1] At 16.[2] The ERP2 provides a central estimate of 303.1Mt CO2-e against a budget of 305 Mt CO2-e, with uncertainties of ±5.5%.[3] At 23.[4] At 23.[5] At pages 27-28.