The cost of climate change

How will climate initiatives shape the economy and our future

Budget 2021 includes funding for a number of initiatives designed to lay the foundation for lasting climate action. Announcements include:

  • $300 million to accelerate investment in low-carbon technology through NZ Green Investment Finance Limited;
  • $67.4 million to implement the Carbon Neutral Government Programme (this includes $19.5 million for the State Sector Decarbonisation Fund and $41.8 million for leasing low-emissions vehicles);
  • $19.7 million to support to the Government’s policy response to the Climate Change Commission’s final advice;
  • Funding to tackle on-farm emissions including $37 million towards national integrated farm planning systems; $24 million towards agricultural greenhouse gas mitigation research and development and $900,000 to collect vital statistics such as greenhouse gas emissions;
  • A commitment to hypothecate or recycle future Emissions Trading Scheme (ETS) revenue to achieve more emissions reductions from Budget 2022. This change in approach is forecast to provide more than $3 billion of investment in emissions reductions over the next five years.

As part of prioritising spending for Budget 2021, the climate impacts of some new policies will be accounted for using benefit-cost analyses (BCAs). While only a limited number of bids are expected to have their climate costs priced for Budget 2021, it is expected this will expand in the future. The budget announcement includes a commitment from Budget 2022 onwards, stating that government will look to recycle the revenue generated from the ETS into emissions reductions programmes – this could materially accelerate decarbonisation in New Zealand.

The approach will see analysis for certain budget bids include a “shadow carbon price” devised by Treasury. Under the BCA approach, a reduction in emissions will be a benefit and an increased cost. The implications of this is that taking account of climate impacts through the shadow carbon price could see a favourable tilt towards projects which reduce emissions. This is something that has been done in the private sector for a number of years. A range of private sector businesses have used internal carbon prices when making investment decisions – including in New Zealand – and it has clearly accelerated decisions.

Globally, in 2020, over 2,000 companies disclosed to the Carbon Disclosure Project that they currently use internal carbon pricing or that they anticipate doing so within the next two years. This is an increase of 80% over the last five years. We note the level of price varies widely, as does the motivations for doing so. Whatever the reasons, with an increasing number of companies committing to net-zero targets and growing investor pressure, the use of internal carbon pricing to reduce own and supply chain emissions is likely to grow in the future.

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With the date fast approaching for the Climate Change Commission’s (CCC) final report, it is not surprising to see significant additional funding committed to accelerating the decarbonisation of both the public sector and, more generally, the New Zealand economy. Funding includes $19.7 million to support the Government’s policy response to the final CCC report. From an economy wide perspective NZ Green Investment Finance Limited will see a significant increase in its funding with a $300 million to accelerate investment in low-carbon technology. This is a three fold increase on the current $100 million funding line.

In addition, over recent months there has been increasing cadence to the Government’s announcements around various funding packages for the public sector which are designed to help deliver on key election commitments to tackle climate change. To assist the public sector reach their goal of becoming carbon neutral by 2025, the State Sector Decarbonisation Fund was established. Initially a $200 million fund, it received a top up this week of a further $19.5 million1. Administered by the Energy Efficiency and Conservation Authority (EECA), the fund aims to assist the state sector in accelerating decarbonisation by funding projects that bring forward investments that reduce emissions. A last look at the fund’s reporting indicated $96.5 million had been allocated, with an estimated 10-year carbon emissions reduction of 292,000 tonnes. This will increase with new projects being funded as Budget 2021 goes to print.

The Government has established the Carbon Neutral Government Programme2, which will require public sector agencies to measure and publicly report on their emissions and to offset any they can’t cut by 2025. This plan will require an increase in capability across the public sector, starting with measuring and disclosing the carbon footprint of each entity. While there is deep experience in understanding climate change issues and emissions profiles, this is concentrated across a few public sector agencies. For the others, there is much work to be done – both in understanding respective carbon footprints, but also what they can do to reduce or offset their emissions. Pleasingly, there is a willingness to talk about what needs to be done and we are starting to see meaningful actions and are working with some public sector entities on their journey.

In addition to the carbon neutral 2025 target, there is a range of additional requirements in the pipeline for agencies to focus on. The first of these is the Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill3. This will require the financial sector to disclose the impacts of climate change on their business and explain how they will manage climate-related risks and opportunities. Reporting will be based on the Task Force on Climate-related Financial Disclosures (TCFD)4 framework which is acknowledged as being international best practice. This is relevant for a range of crown entities and financial institutions, as well as a number of local authority-owned businesses that have listed debt on the NZX.

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