Time to double down on climate measures

Pre-Budget insights from Deloitte’s Rikki Stancich

This year’s Budget announcements – financial and carbon alike – will be made against a backdrop of on-going international conflict, climate change-related supply chain and fuel price shocks, financial sector instability, global inflation, and climate change recovery efforts. Combined, these factors compound the current cost of living crisis. As the impacts of climate change take hold, the proportion of population defined as ‘vulnerable’ threatens to rapidly scale.

The inherent conflict between keeping a lid on the cost of living and tackling climate change is proving to be a growing challenge for New Zealand’s policy makers. This is evidenced both in the wording of the 2023 Budget Policy Statement, and by recent policy responses – namely, Government’s Emissions Trading Scheme (ETS) adjustments made last December (the effects which were realised in March), and the last-minute revisions to the National Land Transport Plan (NLTP) in the wake of this year’s flood and storm events. While both ETS and NLTP represent powerful levers for addressing climate change; Government’s response reflects the degree to which New Zealand’s decarbonisation and climate resilience objectives are at risk of being eroded by efforts to keep the economy’s engine running.

Where are we headed?

In terms of decarbonisation, it is helpful to take stock of where we currently stand: New Zealand’s emissions performance (according to MfE’s GHG emissions inventory published in April 2023), is still riding on the tailwind of COVID-19, which saw a 2.6kt reduction from 2019 to 2020. The downward trend was propelled further in 2021 by the closure of the Methanex plant and ramping chemical fertiliser costs, which significantly scaled back fertiliser use by the agricultural sector (ref figure 1). This, along with reduced dairy herd sizes, played a large part in the agricultural sector’s 1.5% emissions reduction. Another driver of the emissions reduction trend in 2021 was the level of offset provided by forest canopy, which sequestered 27.4% of New Zealand’s emissions in 2021.

Figure 1

These offset gains, however, may well be short-lived. With a combination of unexpectedly low carbon prices, a significant swathe of forest canopy approaching harvestable age in the next five years, and a Log price index currently $11 above the five year average, it may prove difficult to compel forest owners to keep trees in the ground, and the carbon sink intact. Consequently, the Climate Change Commission is pushing the Government to go harder and faster on proposed emissions reductions in its latest advice.

Cabinet’s rationale for adjusting the ETS setting (against the Climate Change Commission’s previous and current advice), was to avoid higher costs being passed onto households already hurting from consumer price inflation, and to counter RBNZ’s quantitative easing measures. The results of Cabinet’s decision to intervene in the ETS settings played out on 8th March when the quarterly carbon auction failed. The signal sent by the Government’s adjustment to the ETS created market uncertainty and sent the unit price tumbling down from over $86 per unit to $66.50 – a carbon price that will likely result in decarbonisation investments being put on hold; for as long as the carbon price is low, larger emitters will opt to continue to pay to pollute. For comparison, at the same time in Europe, carbon was trading at around $170 per unit.

The proceeds of the ETS also fund the Government’s Climate Emergency Response Fund (CERF) – a fund that will not be adjusted given “high inflation and strong wage pressures driving up the cost of delivering government services,” according to the 2023 Budget Policy Statement. The $2.9 billion climate change package introduced in Budget 2022, was an important first step toward implementing New Zealand’s Emissions Reduction Plan and meeting the first emissions budget - the investments made through the CERF in Budget 2022 were estimated to drive 52 – 70% of the required emissions abatement across the three emissions budget periods, out to 2050. In the first emissions budget period, ERP policies and measures were estimated to deliver 5.4Mt – 11.9Mt of emissions abatement of which funding from the CERF in Budget 2022 was estimated to support 21 – 34%. It is looking unlikely that these reductions will have been achieved, in light of the reported project implementation delays and project underspend.

In a pre-Budget announcement on 9th May, the Government revealed a $300 million boost for New Zealand Green Investment Finance (NZGIF). Set up in 2019 as New Zealand’s “green bank”, NZGIF has proven their value to the climate finance market, now being one of the largest direct investors in New Zealand focused on emissions reduction and climate resilience. While we accept that their $700m fund is only a drop in the ocean needed to invest in climate change, we welcome the support this additional $300m provides to sustaining NZGIFs momentum and their important role in developing the New Zealand climate finance market.

Delaying the inevitable

In the aftermath of the Auckland Anniversary floods and Cyclone Gabrielle, despite commitments made in the National Adaptation Plan (NAP), Government made the call to shift the focus of the Land Transport Government Policy Statement from the overarching goal of emissions reduction, to a post-cyclone clean up and rebuild effort. While the pressing and immediate need to reconnect remote rural communities cannot be downplayed, the diversion of funds from climate change mitigation to climate change damage remediation reflects the growing challenge that policy makers face. Government’s most recent decision on funding reallocation only threatens to derail transport emissions reduction initiatives; it also risks future governments having to face even larger investments further down the road, when the costs of countering climate change and building in resilience start ramping due to climate-related resource scarcity.

With large local government bodies like Auckland Council planning to lock in the post-COVID-19, scaled-back level of public transport services as a means of freeing up funding, with the NLTP funding earmarked for fleet electrification and growth of bus and cycle lane networks now being diverted into road building recovery projects (which runs counter to CERF funding allocation objectives), and with the ETS rendered impotent by government intervention, Government’s armoury of climate change tools appears to be heavily depleted.

In terms of strategic priorities, with energy comprising the second-largest source of Aotearoa’s emissions, stronger commitment to renewable energy infrastructure build will prove crucial to meeting the emissions reduction targets over the next two emissions budgets. However, consenting complexity and other policy settings are creating investment uncertainty and delaying build. As the Climate Change Commission notes in its most recent advice to government, if policy uncertainty and barriers within the consenting system are not addressed, it may be difficult to meet emissions budgets because renewable generation build will be delayed and electrification could be more expensive than it otherwise would be.

While the Government’s short-term objective might be achieved (namely easing the cost-of-living crisis and financing the climate impact repair jobs), these will only serve to build New Zealand back to status quo. When weather events of the scale we have seen in the last twelve months continue to build in intensity and frequency, not only will the coffers rapidly run dry; the nature of the types of resilience measures brought into play after Cyclone Gabrielle – namely, helicoptering in tanks of fuel to power diesel generators in remote, cut off communities - will quickly be recognised for what they are: unsustainable. In this regard, long-term funding commitments and policy signals that support investment into renewable energy infrastructure and distributed renewable energy will prove crucial. It’s also vital that the voice of affected communities is heard, listened to, and is at the foundation of the response. Building resilience should not only address how communities can adapt for the increasing impacts of climate change, but it should also ensure the solutions are contributing to reducing our emissions into the future and are co-designed and co-delivered by the community. A tough ask to achieve all three, especially at a time of crisis. But this must not stop us being bold and ambitious and take the time to support communities to come together and discuss not only the current impacts but to also to prepare for the future.

It appears that Budget 2023 will continue to focus on economic recovery from COVID-19, with climate change referenced as an example of laying a foundation for the future, bundled in with other fundamental issues such as housing affordability and child poverty – the latter of which will be acutely exacerbated by the former. Rather than folding climate change resilience measures neatly into the NAP and the CERF, we hope to see the Budget applying a climate change lens across all planned investments and funding allocations.