Climate Regulation

Aotearoa New Zealand has a legally binding target to achieve net -zero greenhouse gas emissions by 2050. This is enshrined in the Climate Change Response (Zero Carbon) Amendment Act of 2019, which established a framework for the development and implementation of transparent and consistent climate change policies for Aotearoa New Zealand that:

1. Contributes to the global effort under the Paris Agreement to limit the global average temperature increase to 1.5° Celsius above pre-industrial levels.
2. Allows Aotearoa New Zealand to prepare for, and adapt to, the effects of climate change.

The ERP sets out the actions we will take to meet our first emissions budget (2022 – 2025) and set New Zealand on the path to meet the second (2026 – 2030) and third (2031 – 2035) emissions budgets. It establishes expectations for regulation and investment across various sectors to facilitate the decarbonisation of each industry. This approach will enable New Zealand to transition to a low-emissions future in a manner that is both achievable and affordable.

Alongside the establishment of the net zero goal, the Climate Change Response Act 2020 has introduced a framework of emissions budgets to serve as stepping stones towards the long-term national net zero target for New Zealand. The initial three emissions budgets, each based on a five-year time horizon, have been provisionally set. The first emissions reduction plan details the policies that the New Zealand Government intends to implement (or explore) to meet the first emissions budget while keeping the subsequent two budgets in mind.

The emissions budgets are relatively conservative, relying on existing technologies and a modest rate of adoption for best practice. However, with the implementation of a more significant cap on the NZU inventory (being the emissions units under the Emissions Trading Scheme), the NZU price has increased significantly, rising from below $2 in 2013 to nearly $70 NZD per tonne of CO₂ today.

Through the plan, sector specific sub-targets have also been set to help track progress across key sectors over each emissions budget period. While these are a useful tool for checking progress, they are not intended to lock New Zealand into a single pathway to meeting emissions budgets.

The New Zealand ETS creates a price signal by setting a “cap” – or limit – on greenhouse gas emissions. Under the ETS, participants can purchase, earn, and trade permits for the right to emit. Participants can earn NZUs by removing greenhouse gases through certain activities. Over time, the cap will decrease in line with emissions budgets, reducing the supply of NZUs available for auction and driving up the incentive for emissions abatement. The ETS has a flexible cap that enables the volume of emissions within the scheme to be aligned with our emissions budgets. This alignment is primarily achieved through adjustments to the units available for auctioning.

The Minister of Climate Change is required to update the overall limit, sub-limits, and price control settings every year, providing a five-year look ahead period. For example, the Government has recently introduced stricter controls on price and unit settings - with a view of preventing the ‘vintaging’ and ‘stockpiling’ of NZUs. 

The Government is also required to set annual price controls for ETS auctions: a “price floor” and a “price ceiling”. These controls signal the bounds of acceptable NZU prices at auction and act as a safety valve if an auction’s clearing price deviates outside these bounds. They also provide some certainty to businesses and investors on the future trajectory of NZU prices to aid the forecasting of emissions obligations, or to help with investment planning. NZUs are tradable assets. Accordingly, investors may buy and sell them on secondary markets, and it is possible to take security over NZUs. The Environmental Protection Agency manages a register of holding accounts to record holdings of NZUs.

The ETS covers all sectors of New Zealand’s economy. Different sectors participate in different ways and the obligation around reporting and pricing of emissions is generally set as far up the supply chain as possible.

Agriculture

The agricultural sector is a significant contributor to New Zealand’s emissions (approximately half of gross emissions), dairy being the largest single contributor. Participants in the agricultural sector are not currently included in the ETS. The Government is actively working with the primary sector, Māori, farmers, and growers to manage emissions and will be implementing an agricultural emissions pricing scheme outside the ETS by 2030.

Forestry

Those who own or have rights to forest land can earn NZUs under the ETS for forests planted after 31 December 1989, and in turn, surrender NZUs for emissions released. The emissions impact of planting, forest management, harvesting, deforestation and natural events (such as fire or flood) are all covered. Owners of pre-1990 forest land can harvest and re-plant without liability, but the landowner (or the third party who had  deforestation rights) must surrender NZUs for deforestation. The Government also plans on introducing policies limiting the conversion of farmland into ETS-earning forestry blocks early this year. 

To support the “allocation of capital towards activities that are consistent with a transition to a low-emissions climate-resilient future”¹, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 was introduced. This Act amends the Financial Markets Conduct Act 2013 (FMCA), the Financial Reporting Act 2013, and the Public Audit Act 2001. 

This new law mandates around 200 large financial institutions covered by the Act to publish climate-related disclosures every financial year. The requirements are based on standards published by the External Reporting Board (XRB), underpinned by principles and concepts from the Task Force on Climate-related Financial Disclosures (TCFD). New Zealand is one of the first countries in the world to require companies to make climate-related disclosures under these new regulations. The Standard aims to support the “allocation of capital towards activities that are consistent with a transition to a low-emissions climate-resilient future.”²

Entities required to make climate disclosures include:

• All registered banks, credit unions, and building societies with total assets of more than NZ$1 billion.
• All managers of registered investment schemes (other than restricted schemes) with greater than NZ$1 billion in total assets under management.
• All licensed insurers with greater than NZ$1 billion in total assets or annual premium income greater than NZ$250 million.
• Listed issuers of quoted equity securities with a combined market price exceeding NZ$60 million.
• Listed issuers of quoted debt securities with a combined face value of quoted debt exceeding NZ$60 million.

Under the NZCS guidance, climate reporting entities (CREs) are mandated to report their scope 1 and 2 greenhouse gas emissions for the first year of reporting, and scope 3 emissions for the second reporting period and every year thereafter.

The NZCS requires organisations to use the Greenhouse Gas (GHG) Protocol or International Organisation for Standardisation (ISO) standards to calculate greenhouse gas emissions. The standard methodology allows for comparability and consistency in reporting across captured CREs.

Those organisations captured will be challenged to account and mitigate material emission sources. Non-CREs involved in CRE supply chains may be asked to provide relevant information to report on associated emissions in their organisation’s value chain.

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