Climate Change Leadership Forum reports

• May 2008

Climate Change Leadership Forum Minutes and Actions

28 May 2008, 11:00am - 3:00pm
Pakarunga Hunt Room, Ellerslie Event Centre
Auckland

1. Welcome, agenda setting, and objectives for the day

The meeting commenced at 11:00am.

The Chair welcomed members of the Forum, and ran through the agenda for the meeting, identifying the four main areas for discussion:

• The Parliamentary Commissioner for the Environment, Dr Jan Wright presenting the review of the Scoping report on a New Zealand ETS and closely related measures;
• The Executive Director of the Greenhouse Policy Coalition, Catherine Beard talking to the Forum on the design and implementation issues with the ETS, and potential business opportunities.
• Business opportunities and positives arising from the ETS
• Adaptation

Public release of the ten messages on 29 April

A brief discussion was held on the ten messages the Leadership Forum released on 29 April 2008. Some members identified their concerns regarding the speed at which the points were released, the lack of awareness that they were destined for release and the content of some of the messages, which meant certain members were unable to support the messages in the public arena.

The Chair suggested revision to points of concern, and subsequent to this, messages be circulated to the Forum again for an agreement to be sought.

Further discussion of the ten messages was deferred until the final agenda item, ‘Other Business’.

2. ETS update

Acting Secretary for the Environment updated the Forum on the ETS.

Finance and Expenditure Committee (FEC) update

The Forum was informed that the last public submission to the FEC was on Monday 26 May. The FEC has been given a week extension for reporting back to Parliament, and they are making good progress working through the large number of issues.

International Carbon Action Partnership (ICAP) update

ICAP is very active. Between 20-23 May, ICAP held a workshop on monitoring, reporting, and verification. An official from ETG/MoT attended, and is also on the panel writing the final report. ICAP members were interested in New Zealand’s self assessment approach and held concerns over perceived difficulties i.e. forestry.

Stationary Energy and Industrial Process Technical Advisory Group (SEIP TAG) update

The SEIP TAG last met on 6 May, and is meeting again on 4 June. Work is progressing well within the subgroups, and progress is being made on a number of issues. A more thorough report back of SEIP TAG was given in the Cluster B report back, item 3 on the agenda.

Agriculture Technical Advisory Group (AG TAG)

The Ag TAG last met on 22 April and considered a paper laying out:

• The relationship between the point of obligation and the transaction costs;
• A summary of potential mitigation options for agriculture;
• The relationship between productivity and mitigation;
• Simple models of how points of obligation could work;
• A methodology for a Cost Benefit Analysis

The main focus of the meeting was on how a farm level point of obligation might operate in practice.

Deferral of Liquid Transport Fuels into the ETS by 2 years

Secretary to the Treasury, John Whitehead talked to the Forum on the macro economic reasons for the delayed entry of liquid fossil fuels. John noted the decision to delay the entry was based on three primary reasons:

• Macro economic consideration;
• Effects on household finances;
• Already high oil prices.

John discussed the macroeconomic reasons further.
Macro economic reasons for the deferral of liquid transport fuels include inflationary pressures and revenue implications. John addresses these both: 

Inflationary pressures

Introducing liquid transport fuels into the ETS in 2009 was estimated to contribute 0.4% to annual CPI inflation. This coupled with other inflationary pressures existing at present such as the increase in world food prices, created concern that the Policy Targets Agreement would be breeched. This would cause other, damaging flow on effects. It is thought that the delay would reduce these risks.

Members of the Forum questioned why the Reserve Bank thought the introduction of liquid transport fuels would increase inflationary pressures, when previous one off economic policies such as the introduction of GST did not. John responded that the current pressures existing today i.e. high oil and food prices, did not exist to the same extent when GST was introduced, and later increased.  

Revenue implications of the ETS

The Treasury Secretary also presented on the revenue implications of the ETS. Based on a central scenario, in the medium term, net government revenue from the ETS may not go above $500 million per annum before 2022, which represents less that 0.2% of GDP. The large degree of uncertainty around these numbers means it is also possible for the government could go into deficit. Indeed, the key point is that we do not know the shape of post 2012 international agreements, so the issue is highly speculative at this stage.

The Forum questioned whether the figure of $500 million net revenue included the increase in SOE revenue. An ETG official told the Forum that revenue to SOE’s from the implementation of the ETS would increase by approximately $140 million in 2012, however it is possible that much of this additional revenue would be reinvested back into the SOE and not flow to the government.

The Forum also discussed why the figure of $140 million was so low in comparison to previous revenue figures talked about in the last 6 months. An ETG official responded that the differing figures of revenue were based on assuming different prices of carbon. The figure of $140 million was derived by using a $25 dollar price of carbon. Although Hon Dr Cullen tabled a paper in Parliament assuming a $15 price of carbon would create an increase in revenue for SOE’s by 2012 of $140 million also, the change in figures reflects a tightening of the market.

A member of the group concluded that discussing a price of carbon is redundant, as it is always a guessing game. Of principle importance is what would be done with any windfall gains; which should be reinvested back into the SOE.

3. Cluster B report back

The Cluster B report back included discussion on the following topics:

• General equilibrium modelling;
• Economic regrets;
• Leakage case studies;
• SEIP TAG;
• Future direction for Cluster B

Economic modelling

Cluster B gave an overview of the differences between the NZIER models and those of Infometrics.

Primary differences were:

• NZIER models put NZ Pays at less cost to the economy than an ETS.
• Infometrics assume that aggregate investment would not decrease with the implementation of the ETS, while NZIER assumed aggregate investment would due to lower rates of returns expressed in New Zealand prices. 
• High emitting sectors were very sensitive to price.

Neither model has technological change responding the carbon price due to lack of information, additionally, neither model accounts for forestry response to carbon sequestration value, and models are unable to map the idiosyncrasies of the small New Zealand economy.

Cluster B noted it was these key differences in assumptions which were driving the different results or conclusions drawn from the models. The key issue is which set of assumptions are more reasonable, this is difficult to determine. Given this, Cluster B has concluded there is no value in doing further modelling at this time.

Economic regrets

The assumed objective of the allocation policy is to minimise economic regrets from leakage. An economic regret occurs if production leaks/a firm closes and this is privately efficient, but socially inefficient (undesirable).

If short term losses to a firm are too great to absorb, and they are unable to wait for a long term international agreement, the firm may close, or move production elsewhere. This has social impacts and spill over effects on the local community which may not be considered when the firm made its decision.

Questions need to be asked when considering which firms should receive protection:

• Would the firm maintain production with a global agreement?
• Do long term benefits from maintaining or building firm specific capital justify maintaining production despite lower short term returns?
• Does the cost of raising necessary taxes exceed the social loses if production falls?

The answers will determine whether it is worthwhile to protect, or whether the social regrets avoided do not justify protection.

Only border tax adjustments or a global agreement will completely offer a ‘level playing field’.

Leakage

Leakage case studies are still in their early stages. These case studies will provide evidence for which companies require assistance, and which companies do not. There is a meeting on 4 June to progress these case studies further.

The Chair confirmed that the Select Committee were interested in seeing these case studies. Given they report back to Parliament on 16 June, this places pressure on the consultants to gather information and report back to Cluster B.

The Forum questioned the robustness of the information being obtained. The Chair of Cluster B noted that independent consultants, CRA and NZIER have been employed to carry out the case studies.

SEIP TAG

The Eligibility sub group of the SEIP TAG is working through the criteria to determine which firms would be eligible to receive to receive a free allocation of units. Issues have been raised regarding the impact of different eligibility criteria on small and medium sized business.

The Allocation sub group is working through the technical issues associated with the various allocation options.

The TAG has noted an issue to be addressed is how the choice of allocation methodology impacts on the choice of eligibility criteria and vice versa.

Future directions for Cluster B

• Further analysis of leakage case studies;
• Reassessment of level and targeting of free allocation to inform phase-out and review;
• Analysis of the relationship between allocation methodologies and phase-out/review; and,
• Implications of the sectoral agreements for phase-out, review and methodologies.

Members of the Forum noted that the Cluster B update emphasised the impact the global process will have on the decisions New Zealand makes. Members requested guidance on the UN timeline for negotiating a post 2012 agreement. Officials indicated that Adrian Macey, New Zealand’s Climate Change Ambassador, could attend a future meeting to offer more guidance on the negotiating progress. At present, a process for clarifying rules is occurring, before moving to talking about commitments.  It was noted that a large amount of the negotiations will take place in 2009, and that an agreement is to be reached by the end of 2009, in accordance with the ‘Bali Road Map’.

4. Forestry – forest sector opportunities arising from the NZ ETS

A member of the Forum gave a presentation outlining some of the business opportunities in the forestry sector arising from the ETS.

One of the lowest cost ways to reduce emissions of CO2, and the biggest opportunity for the forestry sector is establishing new forests on non-forest land. The government has proposed a target of 250,000ha of new planting by 2020, creating big opportunities in the forestry sector, and for New Zealand, meeting this afforestation target would have a huge impact on our CP2 obligations.

Opportunities arising from this in the near term:

• Expansion of the manuka honey industry;
• Expansion of the production of genetically improved seed and of vegetative production on clonal treestocks;
• Expansion of tree forest nurseries;
• New businesses in the organisation and provisioning of housing, transport feeding and supporting large labour crews for seasonal planning and for releasing and thinning operations;
• Expansion of forestry business investment management and property management services;
• Expansion of forest measurement (inventory) and auditing services.  

Constraints to achieving the afforestation target:

• A delay in the ETS, which could result in a delay in the commencement of new planting;
• Land availability-availability of suitable land, at a price that supports a return on investment;
• Labour availability;
• Overseas Investment Office consents for purchase of farmland can be protracted. This could hinder on acquiring foreign investment required for new planting;

The key drivers to achieve the governments proposed target are:

• Efforts to reduce illegal logging internationally;
• Removing trade access barriers;
• Increased investment in roads and other infrastructure;
• Research and design into steep terrain harvesting.

Due to time constraints, there was no opportunity for the Forum to discuss this further.

5. Environment Assessment

Dr Jan Wright, Parliamentary Commissioner for the Environment presented the review of the “Scoping Report of an Environmental Assessment of the New Zealand Emissions Trading Scheme and Closely Related Measures”.

A summary of this presentation is as follows:

• The ETS will have a wide range of both positive and negative environmental impacts;
• None of the potential environmental impacts are such that the implementation of the ETS should be delayed;
• The planned National Policy Statement on renewable energy should be  developed as a priority;
• The planting on exotic forest on land with high biodiversity and landscape value is probably the most significant environmental impact;
• Earning carbon credits from forestry should be contingent on compliance with relevant environmental legislation;
• Post-1989 Kyoto forests that are indigenous will provide environmental benefits beyond carbon storage – biodiversity, erosion control, landscape;
• The international carbon market us likely to be come significantly stratified, and carbon storage in regenerating indigenous forest would be likely to command a premium;
• There may be potential in restructuring administration fees for post-1989 Kyoto forests that will encourage carbon storage in indigenous forests;
• The proposed assessment of carbon storage by indigenous forest of 3 tonne per hectare per year should be changed, probably to a set of look-up tables that vary with soil fertility, rainfall, and forest age.

The Commissioner noted that the ETS is the right framework to see reductions in greenhouse gases in the long term. However, the ETS is just one tool to reduce greenhouse gases in a suite of many, including New Zealand’s renewable energy target, and goals for afforestation.

6. Design and implementation issues with the ETS, and potential business opportunities

The Executive Director of the Greenhouse Policy Coalition (GPC) attended a portion of the meeting to discuss design and implementation issues of the ETS as seen from the GPC perspective.

The Executive Director firstly pointed out that the ten messages the Leadership Forum released publicly on 29 April were not representative of the energy intensive sector, and the submissions made to the FEC on the Bill from businesses in other sectors indicated that the messages were not reflective of their sectors either.

It was also noted that the Leadership Forum in general was not representative of the energy intensive sector and that no members of the GPC were members of the Forum. The Chair highlighted that Fonterra, and Business NZ were members of the GPC, and both their Chief Executives were members of the Forum. It was also noted the Fletcher Building, until recently was a member of GPC and was also a member of the Forum.

The Executive Director questioned the Forum on the perceived dual process occurring between FEC and the status of the Leadership Forum, and suggested that the Forum was providing opinion based advice and not evidence based advice.

Members of the Forum responded by stating the object of the Forum was to act as a sounding board for Ministers, and the FEC was the law making body. Members noted that they provided more questions than answers and the amount of work the Forum had commissioned, and the amount of time discussing issues has been enormous, and had perhaps been underestimated by the GPC.

GPC raise several issues that they feel require addressing to make the ETS work:

• Hold off on a New Zealand ETS until Australia has announced its proposals;
• Revive the NGA process;
• Any phase out of allocation should be contingent on what other countries are doing, not an automatic allocation or withdrawal on allocation;
• Price cap or Safety value to protect the economy from price shocks and volatility;
• Allocation of 90% of 2005 levels is arbitrary and rigid, and does not prevent leakage;
• AAU’s- don’t rule out any credits or just adding to cost/risks;
• Liquid fuels should be included in the scheme;
• Need for better data and institutional arrangements;
• Need to be prepared to allocate free units from UN to NZ trade exposed sectors;
• Need to take heed of the NZIER economic analysis.

The GPC stated that if New Zealand operates at world’s best practice, why must we move to a low carbon economy, which would harm our international competitiveness? The Forum responded that the global and domestic trends are pushing tight emissions reductions, and that an ETS is the best way to drive change. How are we going to achieve a 50% reduction in emissions by 2050 without an ETS?

The Forum highlighted the phase-out had been discussed in the Forum and they had agreed that there should be regular reviews of phase-out based on international developments.

The Forum wanted to respond to the points GPC raised however it was noted that there was not enough time during this meeting to do so comprehensively. Brief responses (above) were given, and it was agreed that the Leadership Forum would formally respond to the Greenhouse Policy Coalition in writing shortly.  

Action:

The Leadership Forum is to formally respond to the issues the Greenhouse Policy Coalition raised.

7. Business opportunities and positives arising from the ETS

 

A meeting to discuss business opportunities was held on 9 May. This will be known as the Business Opportunities Cluster. Several key areas were discussed and require further work and consideration:

• Gap in the voluntary market;
• Carbon Neutrality;
• Need for a type of Projects to Reduce Emissions (“PRE”) initiative;
• Carbon development fund;
• Removal activities;
• Traceability of units;
• Responding to how the world responds to climate change;
• Investment planning;
• General business awareness;
• CDM facilitation

Four work streams were established

• Focus on supply side;
• Legal barriers including enabling registration, Henry VIII type clauses for alternative mechanisms for the voluntary markets and future required legislative changes;
• Pure opportunities work stream;
• CDM opportunities: initially MAF / MFE will do a paper on these points.

Before the next Forum meeting (on 24 June) the issue of business opportunities will be progressed through the above work streams and in the wider Cluster. Those members interested in being involved should contact ETG. A report back will be given at the next Forum meeting on 24 June.

Forum members noted it was very positive that MAF are doing work in this area. Members wished to know whether small business opportunities were discussed at the meeting on 9 May. It was noted that business opportunities were not discussed at the micro-level, future revenue streams were discussed at a high level; however a specific work stream looking at micro level initiatives and how to get them off the ground is needed.

The Cluster felt that the only way to develop/drive voluntary change was to devolve AAU’s.

Action:

If members are interested in being involved please contact ETG and you will be put in touch with the chair of the Cluster.

A progress report will be given at the next Forum meeting on 24 June.  

8. Adaptation

The Adaptation Cluster met for the first time on 1 May 2008. A member gave a presentation to the Forum, noting that tools for both mitigation and adaptation were required to respond to climate change.

The newly released Ministry of Agriculture and Forestry guidelines “The EcoClimate report, Costs and Benefits of Climate Change and Adaptation to Climate Change in New Zealand. Agriculture: What do we know so far?” was applauded as offering important tools and tips that could be implemented in the agricultural sector to help farmers adapt to climate change

The report is available at http://www.maf.govt.nz/climatechange/slm/ag-production/

The presentation pointed out that the decisions New Zealand makes now will effect us years to come. If a bridge built today is designed to last 100 years, engineers need to be thinking about the conditions the bridge will be subjected to in the future given the impacts of climate change such as, a greater number of more extreme weather events such as floods and storms.

Even with an ETS New Zealand will experience a 1-4 degree change in temperature. How this change will effect New Zealand is as much a determinate of whether our businesses stay in New Zealand, move off shore or close as an ETS. 

One of the biggest issues for New Zealand will be capturing and managing water. With all our hydro lakes on the East Coast, and rain fall patterns shifting, New Zealand will have to manage this change. By thinking about these issues now, points of vulnerability will be identified, and New Zealand will be better prepared to manage risks and uncertainties.

Members pointed out, local governments are worried about stock bank security as most of the countries stock banks were built in an era when local councils were given subsidies to build them.

Officials noted that Ministry for the Environment are due to release a Water National Policy Statement shortly.   

Officials from MAF also pointed out that the ‘Fast Forward’ programme has been established to get initiatives off the ground and getting business and households adapting to the changing environment.

The Forum highlighted that stakeholder engagement around adaptation will be different than that for the ETS, which has been very rapid. Although there is still an urgency to address issues, the engagement process will be slower, and there is not one body responsible for driving adaptation. It was also noted that short term (3 year decision making) will not be adequate to create a long term road map. Educating people is essential.

The Chair noted that adaptation should be placed on the agenda for GIAB’s next meeting.

The Forum was interested in hearing about the adaptation response being taken by some of our trading partners, for example Australia, and more generally what will climate change mean for the way we trade. In addition, it was noted that a member of the forum would table and present a paper on sea level rise at the next Forum meeting on 24 June.

Action:

MfE to provide information on the adaptation responses being taken by some of our trading partners, for example Australia, and more generally what will climate change mean for the way we trade. This will be reported back at the next Forum meeting.

A discussion on sea level rise will take place at the Forum meeting on 24 June.

9. Other Business

Given the Finance and Expenditure Committee report back to Parliament on 16 June, the Chair raised the issue of the future role of the Forum, regardless of whether the Climate Change (Emissions Trading and Renewable Preference) Bill passes or not.

The Chair asked for a show of hands as to whether the Forum should continue despite whether the Bill passes or not. There was agreement from all the members that the Forum should continue. 

The Chair requested that those who have not filled in the questionnaire regarding the future direction of the Forum do so, a further discussion will take place at the Forum meting on 24 June on how the forum should be structured going forward, whether there should be additional members etc.

The Chair mentioned that some members of the public seemed to have the perception that the Forum was operating under a veil of secrecy (GPC felt this was the case). The Chair queried whether there were ways of more actively disseminating information so that this perception is dispelled. 

Further discussion was held on the 10 messages. Those members that had disassociated themselves noted that their organisations do agree with most of the 10 messages. Those members highlighted that once Parliament had made a decision on the Bill their organisations would be supportive, and constructive in seeking and realising the business opportunities rising from the ETS, however there was concern that implementation of the rules and regulations in haste may mean, after the election those same rules and regulations are unpicked.

The 10 messages would be re-circulated to the Forum members who distanced themselves publicly from the messages for further comment.

Action:

An official from the ETG will re-circulate the ten messages to the Forum members who were unhappy with their content. Comments to be made to ETG. Once comments have been received a discussion on how to incorporate any changes will be held.

The Chair mentioned recent discussions he has had with Tecso (in the UK) regarding their newly launched trail of a carbon labelling programme. This trial involves 20 products, and, depending on EU / international standards coming into force, Tesco intends to label all of their products. The forum had several questions. The Chair offered to raise the questions with the appropriate people at Tesco and inform the Forum.

Action:

The Chair is to contact Tesco and table the questions the Leadership Forum has in regards to their carbon labelling programme.

The Chair is to get back to the Forum with the response from Tesco.

It was confirmed that the next Climate Change Leadership Forum meeting would be held on 24 June 2008. Ministers Parker and Cullen were able to attend for 1 hour, therefore the meeting will be held in Wellington. The venue is still to be arranged; however the meeting will take place from 9:00am - 12:00pm.

Next meeting: Tuesday 24 June
9:00am - 12:00pm
Wellington, venue TBC