Background - ERP 1 and ERP2
ERP1 was published in May 2022 and covers the first emissions budget period 2022 to 2025. Since its publication, the current and former Governments decided to cease work on various actions set out in that plan. In order to maintain an up-to-date ERP1, and reflect decisions already made, as well as the Government’s revised approach to reducing emissions, the Government is consulting on formally amending ERP1 using the statutory process set out in the Climate Change Response Act 2002 (the CCRA).
ERP2 will then outline the intended actions for reducing emissions in New Zealand during the second half of this decade, to meet New Zealand’s emissions budget and reach the 2050 net zero target.
The draft proposals for ERP2 have been guided by principles requiring a ‘least cost’ transition and a ‘net-based’ approach, meaning that the focus is on activities that benefit both the climate and the economy, and that allow New Zealand to meet its targets by a mixture of activities that reduce overall emissions and remove greenhouse gases from the atmosphere.
There is a focus on five key sectors driving emissions:
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- energy,
- transport,
- agriculture,
- forestry and wood processing, and
- waste.
The discussion document also considers other policy areas including non-forestry removals, sustainable finance, and adaptation. We summarise key proposed policies in the sections that follow.
Sector based strategies
Energy
The Government’s proposal highlights enabling electrification as the main way in which to support the New Zealand Emissions Trading Scheme (NZ ETS) to incentivise emissions reductions from energy use, with delivering the Government’s Electrify NZ work programme described as a pillar of ERP2. The Government considers this would help achieve its goal of doubling renewable energy by 2050, by reducing the consenting burden to enable faster and cheaper consents for renewable electricity generation and support greater investment in renewable electricity capacity and grid infrastructure. Legislation to establish a regulatory framework for offshore renewable energy is also expected by the end of 2024. The Government is particularly interested to hear from electricity generators on how Electrify NZ could affect the build of projects already in the pipeline and lead to additional projects not currently in the pipeline being investigated.
Actions to enable uptake of low-emissions fuels (such as hydrogen and sustainable aviation fuels) and carbon capture technology are also proposed. Work is underway to investigate carbon capture, utilisation and storage (CCUS) as an opportunity to reduce net emissions, including by reducing barriers to CCUS, by establishing a monitoring and liability regime, and by exploring treatment of CCUS in the NZ ETS. See our recent publication here, for further information on proposed CCUS in New Zealand.
Transport
Electric vehicle charging infrastructure is described as the pillar of transport decarbonisation for ERP2. The Government’s key proposal is to facilitate private investment in electric vehicle charging infrastructure, and review its co-investment approach to ensure it is fit for purpose and in areas where market barriers exist, in order to target 10,000 electric vehicle chargers by 2030.
As supporting actions, the Government is considering revising the light vehicle importer standard, regulatory barriers and incentives to heavy vehicle decarbonisation (noting that it confirmed a NZ$30 million grant scheme for hybrid or zero-emissions heavy vehicles as part of Budget 2024 announcements), aviation and maritime decarbonisation (such as sustainable aviation fuels and low- and zero-carbon shipping on trade routes by 2035) and planned public transport projects. These include the Auckland City Rail Link, Northwest Rapid Transit, Airport to Botany busway, completion of the Eastern Busway, as well as improvements to increase capacity and reliability on lower North Island train services for passengers and freight. The Government has also reconfirmed NZ$44.721 million in spending over four years to help decarbonise the public transport bus fleet.
Agriculture
The central proposals for lowering agricultural emissions involve giving farmers the tools to reduce emissions, and implementation of a fair and sustainable pricing of on-farm agricultural emissions from 2030 to incentivise the reduction of on-farm emissions.
With a structured research and development programme already underway to develop and commercialise emissions-reduction tools and technologies, the Government is seeking to streamline the process for regulatory approval of these. The discussion document also records opportunities for potential abatement to explore before publishing ERP2. These include potential for further agricultural emissions reductions by supporting the uptake of EcoPondTM (an effluent treatment system) for dairy farms, spreading low-methane genetics through a flock by low-methane rams, and supporting development and uptake of methane inhibitors in dairy, sheep and beef.
As for the proposed pricing system, the Government has committed to keeping agriculture out of the NZ ETS and introducing fair and sustainable pricing of on-farm emissions no later than 2030. Primary legislation must be passed before 1 January 2025 to avoid activating NZ ETS surrender obligations for agriculture.
Forestry and Wood Processing
The ERP2 policies proposed in relation to forestry and wood processing are intended to build confidence in this sector, with the Government intending to consult in detail on the impacts and benefits of each policy as it is developed. Specifically, it proposes the following policies:
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- Restoring price stability and confidence in the NZ ETS to give certainty to forestry – see below for further discussion around the Government’s proposals in relation to the NZ ETS.
- Introducing limits on the number of NZ ETS registrations for whole-farm conversions to exotic forestry on high-quality productive land.
- Exploring opportunities to partner with the private sector to plant trees, including native afforestation on Crown land (other than national parks) that is unsuitable for farming and has low conservation value. This would be expected to also have co-benefits for biodiversity and the achievement of related environmental goals.
The proposed policy limiting whole-farm conversions is further explained in the technical annex to the discussion document as the placement of a three-year moratorium on whole-farm conversions to exotic forestry registering for the NZ ETS from land-use classes (LUC) 1–5; a 15,000 ha per year limit for LUC 6; and no limit on LUC 7.
As for wood processing, domestic wood processing is proposed to be boosted by actions to improve the consenting framework, support commercial investments, and address regulatory barriers to support building with wood.
Waste
The focus of emissions reduction for waste in the proposed ERP2 is on biogenic methane. The Government is taking actions to incentivise efficient landfill gas capture through the NZ ETS, and to invest a portion of the waste disposal levy into New Zealand’s waste infrastructure, targeting infrastructure projects and systems that reduce organic waste and emissions. Additional proposals are to target further investment in resource recovery infrastructure and systems (including construction and demolition waste) and to investigate improvements to organic waste disposal and landfill gas capture.
Other policies
Strengthening the NZ ETS
The Government notes that it is committed to strengthening the NZ ETS by restoring market confidence. In its view, a credible NZ ETS with a cap that progressively tightens over time will help drive investment across the economy in emissions reductions and carbon removals, at least cost to households and businesses. In this regard, the Government is proposing to:
- Provide regulatory predictability, including by committing to not putting an expiry date on New Zealand Units (NZUs) and to no differential treatment of forestry NZUs in the NZ ETS;
- Send clear signals on climate and NZ ETS policy, including by:
- committing to and aligning with climate targets and emissions budgets;
- committing to the NZ ETS as the main tool and to a coherent role of complementary policies;
- communicating that the Government understands why credibility is important and that protecting credibility is a priority;
- communicating a credible risk management strategy;
- taking consistent and coherent positions on forestry, agriculture, other removals technologies besides forestry, and the NZU stockpile; and
- ruling out policies that threaten NZ ETS credibility;
- Strengthen market governance – policy work is underway to inform Cabinet decisions on next steps.
The Government further recognises that upcoming decisions on NZ ETS settings are a key vehicle for the Government to manage potential risks and deliver budgets and targets in a way that protects the credibility of the NZ ETS. Consultation on options for NZ ETS settings for 2025-29 took place earlier this year. Our article ‘Climate Change Commission recommends removal of excess ETS units as soon as possible’ considers the Climate Change Commission’s advice regarding these settings.
Work is also underway to update industrial allocation settings last set in 2010.
Non-forestry removals
It is proposed that ERP2 also recognises other (non-forestry) forms of carbon sequestration, such as wetland and peatland restoration, on-farm vegetation and coastal vegetation management (blue carbon), noting these could offer more options for landowners and businesses, create incentives to change land use, and have potential co-benefits, such as better water quality, biodiversity and climate resilience. The discussion document records that the Government aims to include non-forestry removals in the NZ ETS, and will consider all forms of non-forestry removals, but in practice will prioritise the most promising technologies based on affordability, scalability, scientific validation and overseas acceptance.
Sustainable finance: How we fund and finance climate mitigation
The discussion document notes that work is underway to understand the barriers to green investment in New Zealand and identify options to address them. Addressing investment barriers is a priority for the Government which is working to enable greater private investment in climate mitigation, including by working in partnership with the finance sector and industry to develop a sustainable finance taxonomy, bringing in the mandatory climate-related disclosures regime, and exploring collaboration with the Australian Government on coherent and aligned regulatory frameworks for sustainable finance. The discussion document notes the Government wants to better understand barriers to investment, what it can do to remove them, and test which barriers are a priority to address through ERP2 and in the next 18 months for optimal impact on the flow of private investment.
Adaptation: Helping sectors adapt to the impacts of a changing climate
The CCRA requires emissions reduction plans to include a multi-sector strategy to meet emissions budgets and improve the ability of those sectors to adapt to the effects of climate change. Climate risks facing sectors include extreme weather, sea-level rise, longer-term trends in weather patterns, flooding, erosion, landslides, wildfire, drought, pests and disease. These risks are uneven across different sectors so require different approaches to manage impacts.
While there are existing initiatives underway to support the management of climate risks, sectors will also need to consider how their own emissions reduction policies can also reduce these climate risks, now and in the future. To help sectors adapt to the impacts of climate change, the Government proposes that sector policies for ERP2 consider:
- addressing climate risks during planning and policy development, to understand potential impacts;
- integrating adaptation to avoid undesirable outcomes or to deliver adaptation co-benefits; and
- supporting resilience initiatives at the sector level that flow down to businesses, communities and households.
Interim Emissions projections – are we on track?
The discussion document notes that with the key policies outlined, New Zealand is on track to achieve the first and second emissions budgets, but there is greater uncertainty about meeting the third budget (2031 – 2035). Based on current assumptions, the interim projections show that both the ‘net zero’ target for long-lived gases and the 2050 methane target fall within the range of uncertainty, but the ‘central estimate’, being the value believed to be most likely based on current understanding of relevant assumptions including new ERP2 measures, falls 3 Mt CO2-e short of New Zealand’s 2050 long-lived gas target.
Next steps
Consultation on the draft proposals for the ERP2 closes on 21 August 2024. There are several events and hui being held during the consultation period, including workshops on energy, agriculture, forestry and Māori, and webinars on the ETS, transport and waste. You can register for these events/hui here.
On the close of the consultation period, Government agencies working on the ERP2 will review submissions and include their findings in advice to Ministers. A summary of submissions will support Cabinet decisions on the ERP2 to be published at the end of 2024.
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.