06.07.21

What the Climate Change Commission Advice means for your business

By Phil Jones

The initial advice from New Zealand’s Climate Change Commission advice to the government is complete. So how will that change your business?

The advice was released on May 31. It was relatively unchanged from the draft advice we submitted on at the end of January. But there have been some important changes as a result of the consultation process. This includes an increase in the “emission budgets” to 2035, reducing the envisaged cuts in greenhouse gas emissions. They’ve also settled on a less ambitious view of some policy areas. They forecast a slightly slower uptake of EVs. They suggest slower reductions in agricultural emissions, where the debate on the impact of biological methane from livestock continues.

The Commission remains very conservative. It bases its budgets and advice on known technologies, and a modest adoption rate for best practice. It has maintained a relatively sceptical stance on the potential for regenerative farming.

That said, the advice gives a fuller picture of how the Commission sees business in Aotearoa New Zealand changing to tackle climate change. It contains many forecasts, and has sparked many more debates about our future.

But what are the real pressures that will impact your business first?

Of course, the primary pressure is the pressure to reduce greenhouse gas emissions, and the impact of the policies aimed at doing that.

It’s now clear that greenhouse gas emissions are generating costs all across our society. They include climate disruption, damage from extreme weather event and health impacts. Up until recently the financial impact of these have been met by taxpayers, rather than the emitters. A key way to tackle this is to ensure emitters pay more to emit, to incentivise them to cut down.

The main mechanism for this in Aotearoa New Zealand, as in many countries, has been an Emissions Trading Scheme (ETS). This requires a select group of businesses to measure and report on their greenhouse gas emissions. For each tonne of emissions they have to purchase one “emissions unit”. The government issues these, and so controls how many there are. The units can be traded, which creates a going rate – the “carbon price”. The scheme also allows certain activities like tree planting, which reduce greenhouse gas emissions, to “earn” units. These can then be sold to emitters to raise funds for this work.

The NZ ETS was created in 2008. But for years the carbon price remained too low to add much in the way of cost to emitters. Key polluting industries were given discounts, and key polluting industries were exempted from it, including agriculture, which remains outside it. Consequently, until recently the ETS was almost entirely ineffective. Meanwhile, this country’s net greenhouse gas emissions increased by a further 8% between 2008 and 2019.

To help counter this trend, the Commission advises the setting of “emissions budgets”. These reduce every five years. Combined with buying carbon credits similar to the emission units from overseas, they are intended to chart a pathway for New Zealand to meet its obligations under the Paris Agreement.

One of the ways the government is likely to try to meet these budgets is by reducing the number of emissions units it releases. With continued demand, this will increase their price. This, in turn, will add to the financial cost of the relevant emitting activities.

The carbon price has already increased by about 40% in the last year. It will likely increase further. Today, all fossil fuel use in New Zealand is covered by the ETS. This will impose additional costs on the use of petrol, diesel, coal and gas.

The Climate Change Commission hasn’t specifically estimated what carbon price it expects. But it has estimated the related ‘marginal abatement costs’. Rather than the traded price, this is essentially the estimated costs of reducing or mitigating a tonne of greenhouse gas emissions. The Commission sees these rising rapidly, from $40 today, to $140 in 2030, to $250 in 2050.

It’s likely the carbon price will track this closely. This could add 34 cents to every litre of petrol by 2030, and 61 cents by 2050. These cost rises are likely to be passed on to related activities, including transport, travel and shipping.

This is combining with increased consumer concern. Together, they’re driving spending away from higher emitting goods and services towards lower emitting alternatives.

Government policies following the Commission’s Advice are likely to be designed to further accelerate this shift. The recently announced government Clean Car Programme is a good example. It offers rebates for low emitting vehicles, while imposing additional fees for higher emitting ones. The Commission also advises an increase in government support for research, development and deployment of lower emitting products and services.

Another big drive in the final Commission Advice is the aspiration for aspects of our current ‘linear’ economy, in which we tend to “take, make and waste”, to shift to a circular economy. This is one in which resources are never abandoned to become pollution or waste. As pointed out in an SBN report, this has potential to significantly cut emissions. It will also bring numerous social, environmental and economic benefits. This is something SBN has been working on for some time. It will open up many opportunities for businesses. This includes work related to the sharing economy, reuse, genuine recycling, repair and remanufacture. It will also incentivize more robust and modular design.

So, the question is, what do you need to do now to ensure your business is aligned with this reality?

Every business should now prioritise reducing its greenhouse gas emissions. One very simple way to start is to go to SBN’s free Climate Action Toolbox hosted by business.govt.nz. There you can easily build your own action plan suited to your business.

And where that’s not yet possible, voluntary offsetting can make a positive contribution. This is where businesses invest in activities in greenhouse gas emissions elsewhere to mitigate their own. There’s currently some uncertainty and confusion about how best to do this, and what businesses can say about it. But these are systems that are likely to mature rapidly.

In short, the Advice means the time is now for your business to be taking concerted action on climate change. Let’s make it business as usual.