Climate Change Leadership Forum Minutes and Actions

 6 August 2008
1:00pm - 5:00pm
The Holiday Inn
Wellington

  1. Welcome, agenda setting, and objectives for the day
    The meeting commenced at 1:00pm.

    The Chair welcomed members of the Forum, and ran through the agenda for the meeting, identifying the main areas for discussion:
    • Update on the Australian Proposal for an ETS, and ETS developments in Japan, the US and the EU;
    • Cluster B leakage case study report back;
    • Business Opportunities Cluster report back;
    • Progress of international climate change negotiations;
    • WTO issues for any ETS
  2. ETS update
    No comment on the progress of the Climate Change (Emissions Trading and Renewable Preference) Bill was made. Discussion on the progress of the Bill was deferred until Minister Parker arrived at 4:00pm.

    It was noted that the executive summary of the SEIP TAG interim report was provided to the Forum. The SEIP TAG has established a number of subgroups to progress issues such as:
    • Data requirements;
    • Methodologies (regulations);
    • Eligibility;
    • Allocation;
    • Progressive obligations;
    • Electricity market price effects

Of note was that the TAG have concluded that progressive obligation would not adequately target competitive firms at risk; no further work will be done on this option.

A member of the Forum asked whether the summary paper on the trade exposure test would be made available (the interim report states it would completed in late July). It was noted that officials would circulate reports as and when they become available.

The final report from the SEIP TAG is scheduled to be completed by the end of September.

Action:
A full report back will be given to the Climate Change Leadership Forum at the next Forum meeting on 16 September.

Completed SEIP TAG reports are to be circulated to the Climate Change Leadership Forum as and when they become available.

Written updates on ICAP, Transport fuels and the Agriculture TAG were provided to the Forum. No questions were raised regarding these TAGS.

  1. Update on the Australian proposal for an ETS, and an update on ETS developments in Japan, the US and the EU
    An official gave a presentation outlining the core elements of the Australian proposal for an ETS. This included the similarities and differences between the NZ ETS and the Australian proposal; the key messages for New Zealand; and, the timeline Australia are proposing with which to complete stakeholder consultation, introduce a Bill to parliament, parliament passing the Bill and an Act entering into force. The presentation also updated the Forum on ETS developments in Japan, the US and the EU.

    The presentation was distributed to the Forum on 8 August. Please refer to this for a more comprehensive summary of the Australian proposal.

    The key messages to come from the Australian ETS are:
    • The objective of the Australian proposal is largely the same as New Zealand’s objective;
    • The differences that do exist are in the detailed elements of the design, and recognise the differences in the emissions profiles of the 2 countries;
    • The introduction of an Australian scheme should help reduce some of the competitiveness concerns for New Zealand businesses;
    • The Australian scheme proposes to bring in more of their economy earlier than New Zealand, however New Zealand ‘catches up’;
    • The Australian government has a preference for open linking if schemes are aligned in the future;

The Australian Government hope to consult on an exposure draft of the legislation between December and March, and have a Bill to introduce into parliament in March 2009. The Act would enter into force in the third quarter of 2009, enabling commencement in 2010.

A member of the Forum noted that the proposed timeframe will be difficult to achieve, as they will only have 6 months to finalise allocation plans and any regulations which sit underneath. Australia are not looking at any direct links to other schemes as they are not in Kyoto deficit, however they are favourable toward linking with New Zealand in the future.

Forum members inquired whether the Australian scheme will be more independent than ours in terms of allocation given they have proposed an independent regulator would be responsible for monitoring and enforcing compliance, run auctions for permits, allocate free permits according to rules specified by the Australian government and maintain the national registry. An official responded that it is questionable what degree of independence the regulator would have, and that the New Zealand approach .

Forum members questioned whether the launch of the Australian scheme had affected Treasury’s thinking? An official responded that they were reassured that the broad parameters of the scheme are similar.

The Forum questioned whether officials had done further competitive analysis on the impact of an ETS on the agriculture and fishing industries since the launch of the Australian proposal. It was noted that no further analysis had been done since the launch of the Australian proposal.

A member of the Forum commented on what Australia were doing to assist SMEs adjust and prepare for an ETS or a carbon constrained world, and is interested in what more could be done to assist New Zealand SMEs. Business New Zealand is engaging with EECA to discuss this and would like the Climate Change Leadership Forum to endorse further work being done to establish a fund to assist SMEs. The Climate Change Leadership Forum endorsed the work Business New Zealand was doing with EECA and supported further work being done in this area. To date EECA’s programmes have targeted assisting large companies in reducing their carbon emissions and be more efficient. It was noted that once there is a price on carbon, large companies will have great incentives to reduce their emissions, however SMEs do not have points of obligation, and therefore the ETS is similar to an additional tax. Engaging SMEs and highlighting measures that could be implemented to reduce their costs would be well received.

The presentation also included an update on the Japanese ETS developments, US ETS developments, and EU ETS developments.

Japanese ETS developments

On Monday 4 August, the Japanese Minister for the Environment announced that they would bring forward the ETS to enter the economy in 2011/12. The scheme, in principle will cover all sectors, all gases. The official noted that some industry players are already buying emissions units internationally, in preparation that they will face a price of carbon in the future.

US Federal Cap and Trade Legislation

It was noted that both presidential candidates: Barack Obama and John McCain are supportive of an ETS, and that legislation will be introduced after a new congress and President take office on 2009. Any proposal is likely to include energy and industry, but cover forestry and agriculture via offsets.

ETS development at a state level is occurring. The Regional Greenhouse Gas Initiative currently includes 10 North-Eastern and Mid-Atlantic states, and is due to commence on 1 January 2009. This initiative includes fossil fuel plants for electricity generation, allows for forestry and other offsets, and extensive auctioning.

In addition, the Western Climate Initiative (WCI) released its proposal for an emissions trading scheme on 23 July. There are 11 Western and Canadian states participating in the initiative. Coverage includes 6 GHGs; electricity generation; commercial and industrial combustion and industrial processes emissions (above 25kton threshold) from 2012; residential, commercial and industrial fuel combustion (below threshold) from the start of the second compliance period from 2015; transport fuel combustion from 2015; and, limited use of offsets from within WCI or other schemes. This initiative is expected to contribute to a regional goal of reducing emission to 15% below 2005 levels by 2015.

EU ETS developments

The EU ETS is a classic cap and trade system, but with a decentralised structure which is implemented at a country level. The scheme has only partial coverage as it only covers 40% of the EUs total GHG emissions (CO2 equivalent) in phase 2 (2008 – 2012), coverage is a little broader in phase 3 (2013 – 2020). There is a limit of 10% of imported Kyoto Units (CERs and ERUs only). The EU prices for carbon are trending at 40 – 50% higher than world emissions price (and therefore New Zealand’s price).

The PEW Center (MIT) recently completed a review making the following observations:

  • The European economy has not been negatively effected by the implementation of an ETS;
  • Although not all the details of the scheme were perfect from the outset, this did not hamper the schemes overall effectiveness;
  • There was no evidence of carbon leakage through trade, however there may be some effects on long term investment;
  • There was not a significant amount of leakage despite predictions that there would be prior to implementation of the scheme;

This was positive from a New Zealand perspective.

  1. Cluster B report back
    The Chair of Cluster B reported the progress of the leakage case studies. It was noted that the Pacific Steel, Bluescope and Fonterra case studies were still in the process of being finalised and were not discussed at Cluster Bs most recent meeting on 4 August. The recent Cluster B meeting on 4 August discussed the completed case studies of Golden Bay Cement; Glasswool; and Pan Pac Forest Products. The Chair of the Cluster gave a general report back on these case studies.

    It was noted that free allocation needs to be targeted at the level within a firm that is at risk, i.e. the processing level, the plant level, or the firm. It was recognised that at times this separation is difficult to make. It was noted that the SEIP TAG have been actively discussing this.  The case studies found that some activities would rapidly become unprofitable under an ETS if they received no protection, and that to protect, free allocation must be linked to the activity at risk, and withdrawn if it is closed.

    Clinker production was used as an example of a process, which under an ETS would no longer be profitable, and significant free allocation would be required. The present high oil prices and high New Zealand dollar were considered in drawing this conclusion. It was noted that with high oil prices and the high New Zealand dollar it is more attractive to import clinker than to produce it in New Zealand. It was assumed that the clinker would be imported from Asia.

    A member of the Forum suggested that it would be beneficial for New Zealand to model what Australia is proposing regarding intensity, or at minimum ensure that any policy is sensitive to the form of the Australian policy. It was noted that Australia are targeting assistance at the activity level, and not the firm level, and that whatever the rules, they need to be fair, and any anomalies have to be worked through.

    At the next Climate Change Leadership Forum meeting on 16 September a full report of all the case studies will be given. In the interim, Cluster B will meet again to discuss the case studies which have not yet been completed.
Action:
A full report of all the case studies will be made at the next Climate Change Leadership Forum meeting on 16 September.
  1. Business Opportunities Cluster report back

    The Business Opportunities Cluster met on 3 July and 5 August to progress an education and communication strategy with the aim of getting the public and businesses to better understand the ETS and the implications for them.

    It is widely felt that the market place has very little understanding of having a price on carbon and its implications. New Zealand businesses are moving into a carbon constrained environment and it is crucial they understand how they will be affected. Both government and leading businesses have a role to play in educating businesses. 

    The Business Opportunities Cluster sought agreement from the Climate Change Leadership Forum on an education initiative. The proposed education initiative lays out the 2 drivers for changing behaviour: Compliance (to the legislation of an ETS) and carbon neutrality. The Chair of the Cluster noted that the current design of the NZ ETS will not stimulate innovation and behaviour change, however the market cannot deal with the full cost of carbon on its own.

    The initiative put forward 10 easy steps for any business, identified opportunities in different sectors, and key information was included referencing sites an individual or business could visit if they wanted more information and advice.

    Members of the Forum discussed the possibility of an education strategy. There was general agreement that an education strategy necessary if the market is to understand the price of carbon and the obligations they will face. There were differences of opinion over the goal of the education strategy – should it be generic, with reference points for various sectors to locate more specific, targeted information, or should there be a suite of sector specific documents right from the outset? Business New Zealand noted that business do not think monolithically, a one size fits all approach would not be effective in educating the market.

    It was suggested that there be one generic document that could be followed by a suite of more sector specific documents.

    Issues were raised about timeframes for the production of any brochure? Should/can something be created in the coming 3 months or is it more realistic to work towards December and January? The difficulty is that people want information now. It was noted that any document would need to be fine tuned and consumer tested which would take a minimum of 2 months. A question was raised around the cost of producing such a document. Where would the costs lie?

    Members of the Forum noted that documents such as these are always less effective taken in isolation. It was noted that the Forum needs to think about what the key messages would be for any document. If one looks at successful societal ‘change’ campaigns (such as the road safety campaign, or the anti smoking campaign) one needs to identify what has this campaign successful? These campaigns were long term campaigns with high visibility. Over the coming decades businesses will pay billions of dollars on adhering to climate change policies, one, ad hoc brochure will not be effective in changing behaviours and educating businesses. A whole communications strategy was needed, before one document is discussed.

    The forum also discussed the focus of any document. Should the document be focused on the carbon market only or on adaptation also? It was noted that NIWA are about to finalise a 4 page document which will be distributed at the Climate Change and Business Conference.

    Forum members noted that most people do not understand the difference between a voluntary and compliance market, and, given this, the messages need to be more high level. It was noted that by the time a business has completed its daily functions there is very little time left to read and understand brochures and documents. The steps for change need to be very simple and practical.

    Some Forum members felt strongly that industry and sector leaders (such as the members of Climate Change Leadership Forum) need to talk with their constituencies and show leadership in communicating and disseminating information. If messages need to be targeted to various groups then the leaders of those groups would be the best people to do so.

    It was agreed by the Forum that the bones of a communications strategy would be put together by the Business Opportunities Cluster, and that a report back at the coming Climate Change Leadership Forum meeting on 16 September would be given.
Action:
The Business Opportunities Cluster would pull together the bones of a communications strategy and report back to the Climate Change Leadership Forum at the meeting on 16 September.
  1. Other business
    It was noted that Prime Minister Helen Clark and Australian Prime Minister Kevin Rudd is speaking at the Climate Change and Business Conference taking place on 18-19 August. A number of Climate Change Leadership Forum members are also speaking at the conference

    An Adaptation Cluster group meeting will take place before the next Climate Change Leadership Forum meeting on 16 September. It was noted that DPMC, TSY, MAF, NIWA and MFE should be involved. It was requested that time be given on the next Climate Change Leadership Forum meeting agenda for this.

    A member of the Forum noted that guidance on sea level rise would be released in the next 10 days.
  2. Update on international negotiations

    Refer to paper 8: “Update on International Climate Change Issues for New Zealand”

    The New Zealand Climate Change Ambassador gave the Forum an update on the progress of the international negotiations in shaping a post 2012 agreement. The negotiations in Bali in December 2007, produced a Bali Plan of Action laying out a process for concluding negotiations on a post 2012 agreement by 2009. A two track negotiation process was laid out, one track focused on negotiating further commitments for Annex 1 countries (Ad Hoc Working Group on Further Commitments for Annex 1 Parties under the Kyoto Protocol (AWG-KP) and another track (Ad Hoc Working Group on Long Term Cooperative Action under the Convention (AWG-LCA) to bring in those countries which have not ratified the Kyoto Protocol and developing countries, such as China, India and Brazil.

    It was noted that the AWG-KP is progressing more quickly than the AWG-LCA which is putting a constraint on the negotiating process. One of the biggest obstacles in making progress in the negotiations is the US being unwilling to participate in negotiations. Developing countries are then reluctant to commitment to anything given the US is not. A member of the Forum noted that there is a challenge to keep America involved and participating in the negotiating process given they will not ratify any agreement until after a change in administration in 2009. It was noted that meetings such as the Major Economies meeting and the G8 meeting in Japan earlier this year have been useful for getting issues on the table.

    The first part of the sixth session of the AWG-KP will be held from 21-27 August in Accra, Ghana, in conjunction with the third session of the AWG-LCA. The work programme for the AWG-KP for the session in Accra is to adopt conclusions on:
  • Analysis of means to reach reduction targets and identification of ways to enhance their effectiveness and contribution to sustainable development:
    1. Emissions trading and project based emissions;
    2. Land use, land-use change and forestry;
    3. Greenhouse gases, sectors and source categories;
    4. Possible approaches targeting sectoral emissions
  • Consideration of relevant methodological issues

    The New Zealand Climate Change Ambassador felt that adapting conclusions on these issues is not realistic or achievable at this stage. issues.

    The third session on the AWG-LCA, which will be held in Accra, in conjunction the sixth session of the AWG-KP. Sessions will cover:
    • Policy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation in developing countries and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing counties;
    • Cooperative sectoral approaches and sector specific actions, in order to enhance implementation of Article 4, paragraph 1(c)2 of the convention.

It was noted that the workshop sessions which sit alongside the primary meetings have been valuable forums for raising issues of importance to New Zealand, such as LULUCF issues, and agricultural

A member of the Forum asked about New Zealand’s position regarding aviation and maritime issues. It was noted that New Zealand is behind in its policy development in this area, however New Zealand’s position internationally is that international aviation emissions need to form part of a post 2012 agreement.

The Ambassador noted that the negotiation environment has improved since Australia ratified the Kyoto Protocol. Australia has been a valuable ally for New Zealand particularly when negotiating with the EU.
There are risks to be managed with the 2 speed negotiation track. New Zealand has been particularly clear about ensuring there are rules in place before any commitments are made, or signed.

A member of the Forum asked whether New Zealand would follow in line with the EU regarding burden sharing. It was noted that New Zealand has no fixed position on this, however there will be discussion on burden sharing at the winter glacial negotiations in Sweden in the coming year.

A member of the Forum asked about the likelihood of achieving fairness between developed and developing countries in any agreements that are reached. An official commented that New Zealand is able to rely on work done in previous years and that we have key negotiators (in MFE, MAF and MFAT) in influential positions, this is an advantage in achieving fairness.

An official noted that business opportunities such as a partnership with the US to increase sources of renewable energy in Pacific Islands which are heavily reliant on fossil fuels are positive for New Zealand as our expertise and knowledge in wind farm and geothermal technology is acknowledged.

Minister Parker arrived at the meeting at 4:00pm.

The Chair asked if the Minister could update the Forum on the progress of the Bill in gaining the support required to pass. The Minister said there was very little to report accept to say that negotiations were continuing behind the scenes.
The Minister noted that the launch of the Australian scheme is positive for New Zealand as it reduces the competitive risk for New Zealand businesses. The biggest difference between the 2 schemes is their restriction of the import of AAUs. This may increase the price of carbon within Australia.

A member of the Forum asked about what pre-1990 forest owners should do with their land if the Bill does not pass. Officials responded that if the Bill does not pass then Labour is likely to go into the election campaigning for the Bill in its present form, if land owners deforest then they may face penalties. The Minister noted that a new Parliament has the choice to carry a Bill over, or to drop a Bill altogether. If National form a new government they have signalled they want an ETS so it is unlikely the Bill will be dropped.

 

  1. World Trade Organisation Issues for any Emissions Trading SchemeRefer to paper 9: “World Trade Organisation Issues for any Emissions Trading Scheme”

    A member of the Forum gave a presentation on WTO issues and the implications for any ETS. In particular he noted that the world, and developing nations are watching to ensure WTO obligations are not breached. New Zealand need to be conscious of WTO rules in what our ETS is proposing. The member sited imposing border tax adjustments as an example. Imposing charges on imported products equivalent to those faced by domestically produced goods as a result of the emissions trading regime, could breech tariff commitments. This could have flow on effects for our FTAs, and New Zealand could face penalties.  

    The New Zealand Climate Change Ambassador suggested that these issues are not a key priority for New Zealand at present, especially given there is disagreement as the application of WTO rules on emissions trading schemes. The Ambassador noted that the Minister of Trade, Hon Phil Goff has been involved in the negotiation process and has been involved in looking at the intersection between WTO issues and the Kyoto Protocol process.

    The WTO has some acceptance of preserved breeches when dealing with issues such as sustainability i.e. biofuels vs food crops.

    It was noted that of course the design of an ETS must keep in mind WTO rules, and when there are a suite of options available to a country, then the government should choose the option which has the least implications. The Ambassador noted that there have been issues in the past which have raised bigger issues in terms of breeching WTO issues, such as the meat industry restructuring, during which New Zealand faced a real risk of international legal action.

    The Chair noted that a formal written response to this issue would be provided for the next meeting
Action:
Officials are to provide a written response to the Climate Change Leadership Forum on the issue of WTO issues for any ETS.

 Close of meeting: 5:00pm

It was confirmed that the next Climate Change Leadership Forum meeting would take place on 16 September in Wellington, from 2:00pm – 5:00pm. Issues to be discussed would be the Business Opportunities Cluster Group education strategy; adaptation; and the Cluster B leakage case studies report back.