The Paris climate change negotiations concluded recently, with 195 countries signing up to a new global agreement to tackle climate change. It is notoriously difficult to get agreement from multiple governments on global issues, so the fact the negotiations resulted in a consensus is a massive achievement in itself.
In the end, this is all about money and New Zealand businesses will not be immune from the impacts of this agreement. The global economy is largely powered by oil and coal with China and the US burning more than anyone else. Agriculture is also important because we need to produce enough food to feed a growing global population. The problem being that these activities, which are so important to the New Zealand and global economy, are also altering the climate, which will have the effect of making us all worse off in decades to come.
What does all this mean for New Zealand? It means we have to make hard decisions to meet the targets we have signed up to, without costing us too much money. New Zealand’s climate change policy has set fairly modest goals in recent years. Our target is an 11% reduction of our greenhouse gas emissions in 1990 by 2030. This is significantly less ambitious than the targets of China, the EU, and the US.
It tends to be forgotten but most of us are already paying money to assist New Zealand to reach our past emissions targets under the previous climate change agreement, the Kyoto Protocol. The New Zealand Emissions Trading Scheme has been in place since 2008. It puts a price on our emissions and affects how much we all pay for petrol, coal, electricity, food, transport and some manufactured goods. The problem is that the Emissions Trading Scheme doesn’t work very well. It has been very successful at increasing prices for consumers but spectacularly unsuccessful at reducing our emissions.
The New Zealand Emissions Trading Scheme is undergoing a much needed review. The new global agreement reached in Paris will place more pressure on the New Zealand government to ensure the Emissions Trading Scheme works properly. This will affect some of our largest industries.
New Zealand’s challenge is that agriculture is our single largest source of emissions, but it is also our largest export. We have very few options for reducing emissions from dairy and red meat farms short of cutting back production, which is economically and politically unpalatable. Because of this, agriculture currently has no direct costs under the New Zealand Emissions Trading Scheme. What does affect farmers is the cost of their inputs such as fuel, electricity and fertiliser. If New Zealand is to meet our international obligations then the cost of inputs for farmers may rise. The average farmer can do very little to reduce emissions, yet may still have to pay more to operate. But it’s not all bad news, as some farmers may have the opportunity to profit from using their land for forestry.
The forestry industry can play an important part in New Zealand’s climate change policy. Trees soak up carbon dioxide, so are recognised as a method to offset emissions from other sectors. From 2009 to 2011 New Zealand foresters took the opportunity to earn a lot of money from the sale of carbon credits. They planted more trees and were rewarded in turn. Since then, New Zealand’s carbon market has been subject to unpredictable policy changes and low prices. Because of this forestry has largely abandoned the New Zealand Emissions Trading Scheme. The new international agreement may force the government to reset the Emissions Trading Scheme to again present opportunities for forest owners to profit from planting more trees.
Major industrial sites like the Tiwai Point aluminum smelter and the Glenbrook steel mill have direct costs under the New Zealand Emissions Trading Scheme, as does Fonterra as a large user of coal. Current low prices for carbon credits means companies like this sometimes spend more in compliance costs than actually paying for the right to emit. This may all change if the review of the New Zealand Emissions Trading Scheme results in an increase in the price large industry is required to pay for their emissions.
In 2008 New Zealand was considered a leader in climate change policy. This has changed, and now we are being dragged along by the rest of the world. What remains to be seen is which businesses will be winners or losers as result of the policy changes New Zealand will be required to make to meet our new commitments.