OPINION: The Climate Change Commission (CCC) should be commended for its efforts in providing a plan for New Zealand to reduce emissions. In saying that, there is still room for improvement.
The commission discusses strengthening market incentives to improve the Emissions Trading Scheme. I agree that the incentives for planting exotic forests need to be adjusted; there are two market mechanisms that could be useful in achieving this goal.
Firstly, we could support Permanent Forest Sink Initiatives by establishing a certificate for biodiverse (native) offsets. These could be granted for any plantations that meet the criteria, trading alongside the emissions units (NZUs).
These additional credits are similar to the Renewable Obligation Certificates in the UK energy sector, but rather than receiving a certificate for producing green energy you receive it for planting permanent and biodiverse carbon sinks (forests).
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This would allow native forest sinks to earn a premium for this more beneficial and more costly method of sequestering carbon, and help promote sustainable offsetting practices.
Another solution would be to grant relatively more carbon credits for native sequestration projects (say one NZU per tonne of carbon captured) relative to exotic forestry (say 0.75 NZU per tonne).
I would further push the Government to be more ambitious with the cost containment reserve than outlined in the CCC report. The recommendation is for a new containment reserve of $70 with an annual increase of at least 10 per cent. Research shows that the estimated social cost of carbon is US$150-200 (NZ$170-210), with some extreme estimates at US$10,000 (NZ$14,100).
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Climate Change minister James Shaw talks about the climate change report and how New Zealand will look in years to come.
It would take 11-15 years for the cost containment reserve to reach this level, which in my opinion is too slow. The Government should consider removing the cost containment reserve and let the market find its own price. This would help manage the supply of NZUs in order to keep within our emissions budgets.
We also need to make sure we avoid carbon leakage. For example, when companies move their emissions overseas to avoid emissions costs in New Zealand. To avoid this, we should account for the full emissions implications of our imports and exports.
The CCC makes recommendations on “mobilising finance for low emissions and climate-resilient investments”. It is great to see these recommendations, as I believe it’s key that we move capital away from climate change contributors to the most effective climate mitigation solutions.
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Dr Sebastian Gehricke is deputy director of the Climate and Energy Finance Group at Otago University Business School’s Department of Accountancy and Finance.
However, the wording in these recommendations is not very specific. This may be a sign of the lack of financial expertise on the commission. I fully support increasing the scope of activities, and including loans in mandatory climate disclosures – but it’s unclear what is meant by “loans” as most banks, and therefore their loans, are already captured under the new legislation.
There is also no mention of a taxonomy for defining and mandating disclosure of green and non-green activities and investments, such as the developing EU taxonomy. Such an approach would allow more funds to flow to the opportunity side rather than focussing only on the risk side through the current climate disclosures.
I would suggest two further ways to mobilise more finance to climate-resilient investments.
Many innovative climate change mitigation and transition solutions can launch at a small scale, such as community projects, transforming family farms to be regenerative (negative net emissions), or trialling new energy systems. These are currently unable to obtain any of the green capital investments or loans, as one of the main barriers is the cost and difficulty of measuring climate impacts.
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The Clean Car Discount scheme was unveiled by Transport Minister Michael Wood and Climate Change Minister James Shaw on Sunday.
For capital providers it is too costly to measure the impacts if the project is smaller than $50 million. The Government could support these small-scale solutions by providing guidance, advice, templates and funding for measuring the impacts of these projects. Once one project is successful, a second similar project is easily verified and should attract capital at less cost.
For a lot of infrastructure investments, such as renewable energy, the barrier is uncertainty around prices and therefore revenue and profit. This can be solved through financial intermediaries and new financial securitisation. For example, mitigating risk for both energy providers and buyers.
The CCC report is a great starting point for our country’s climate strategy, but it needs to be reviewed and improved continuously as new risks and opportunities arise.
Dr Sebastian Gehricke is deputy director of the Climate and Energy Finance Group at Otago University Business School’s Department of Accountancy and Finance.
