Govt looking at policy to restrict forestry in the ETS: Watts

Climate change minister Simon Watts says there is a land use conversion Bill in the offing that he and forestry and agriculture minister Todd McClay are working on together. “We'll be able to provide more updates quite soon, hopefully, just in terms of the timing of that.

“We have acknowledged that we will look to make some changes around land use classes for forestry, but we won't be doing that within the ETS, that will be happening outside and in line with other RMA regulation changes.”

The Climate Change Commission has repeatedly warned that the ETS in its current design is driving afforestation rather than emissions reductions.

One of the coalition government’s first climate actions was to cancel a review of the ETS, which some participants said was driving uncertainty in the market. But experts say the review was needed to solve the issue of unlimited forestry in the scheme.

And the market is currently languishing at about the $55 mark - well below this year’s auction floor price of $64 and about a third of the price needed to make industrial decarbonisation projects stack up financially.

Carbon News asked the minister whether he thinks making changes to land use classes for forestry will be enough to drive a more positive pricing path for carbon.

Watts says this was the subject of “significant” feedback while National was in opposition. “Now [we’re] in government that does need some clarification and some action on. We understand the challenge around the broader aspect around forestry, and we're working with the industry - not against it - around ensuring there's certainty.”

The government recognises that the forestry sector needs certainty around its long run position and the role it plays, Watts says. “The fungibility of removals within our overall model is absolutely a principle that we support. I think that's where you saw some volatility previously from the government with a lack of clarity around that.”

And Watts wants to provide the market with clarity. “The government supports a net-based strategy, and that means that removals are absolutely part of the way in which we will achieve our targets.”

While he’ll be looking for other areas of opportunity in conjunction with the market, Watts wants to take a slow-and-steady approach to policy. “I'm not going to be surprising you with anything completely from left-field. It is ‘steady as she goes’ in regards to policy change and the things that we will do will not be a surprise to the market.”

Climate an economic challenge

Watts says the climate portfolio is an economic one under the coalition government - one that he was keen to take on with his global banking and markets background.

“The outcome that we want to achieve as a government in regards to the ETS is having a credible market in order to support the decarbonisation required. Credible markets are absolutely fundamental, and the actions that we've taken in order to progress that journey is firstly to stop the overall review that was underway because of the volatility that was happening there.”

No significant changes to ETS

When Carbon News asked if he thought the free industrial allocations for trade exposed industries under the ETS was currently fit for purpose, Watts didn’t answer the question directly, reiterating that the government wants a “credible” carbon market to support emissions reductions.

“In regards to other changes around the overall ETS, we've said that we don't plan to make any other significant changes,” Watts says.

Watts says he is engaging with market participants to hear what they see as concerns and opportunities within the market. “I'm looking forward to continuing those dialogues and taking action where it's required.”

“No surprises”

Watts wants to make sure that the market has a clear forward view of what the government is planning in terms of policy. “What the market can expect from us, which is different to the past, is much more engagement and a 'steady as she goes' approach around policy changes that will impact the ETS.”

“When I look forward, I think 'where do we want to be in 2040?' and we need a credible market in 2040 that's helping us to achieve our mechanism to do that. There is a broad range of opportunities that we are continually assessing and scanning and getting feedback and market participants as well around areas of improvement.

“But right now the key aspect for us is just to ensure that the market understands that. We're not in the business of significant changes that will come as a surprise.”

Methane review "will have integrity"

Watts says he and agriculture minister Todd McClay are “just finishing off” the terms of reference and the composition of the scientific group set to review the country’s methane target. “It will be a credible group, which will have integrity. I've reached out to opposition parties and other parties to ask if they want to put names forward.”

They’re not too far away from locking that all down and getting on with it, Watts says. “I want that review to be done and dusted and be able to set our position around the target conversation and move on rapidly to the conversation, which I know is critical: what are the actions we need to take to reduce agricultural emissions - and work with the industry, not against it, in order to achieve that.”

Watts won’t be drawn on what other sectors will have to make cuts if the government reduces the methane target. As agriculture produces half of the country’s emissions, reducing the methane target, even by a small amount, will mean significant cuts need to come from elsewhere in the economy to meet climate targets.

“I'm not going to pre-empt the outcomes of that review. We want those findings to ensure that we have that to make an informed decision and, as and when we get that, then we'll look at those options.”

He says there are a number of scenarios. “But actually there's also the scenario that we remain with the status quo - we'll get to those conversations as and when.”

While the Climate Change Commission has recommended reducing stock numbers to stem New Zealand’s methane emissions, which mostly come from the dairy herd, Watt’s view is that agricultural innovation is the way forward.

“We're pleased to see the work that AgriZero is progressing in conjunction with the private sector around initiatives. We need to ensure that we've got options in the near term. You know, 18 months is not that far away, and we'll be wanting to work collaboratively with those agencies to ensure that we've got options in play.”

He says the government has been “very clear” that they will introduce agricultural emissions pricing by 2030. “We're going to be looking to provide an overview in terms of the market in terms of the key milestones on that journey over the next 18 months.”

International climate obligations?

To meet Aotearoa's international obligations under the Paris Agreement, the government is locked in to purchasing significant climate action offshore. Experts say New Zealand is behind other countries in forging the necessary bilateral agreements to allow those purchases.

The government made some progress towards an agreement with the Philippines as part of a recent visit to South East Asia, however Watts says it’s early days. “Look, the conversations that we had alongside the Prime Minister in Southeast Asia were firstly to establish the relationships between our two countries are a significant player in this space, and I think there's a lot of opportunity for us to work together.”

He says international cooperation over emissions reductions is not new. “Actually, in the Philippines example, it’s something that we've been working together on around providing support and fiscal support to them for a long time.

“What we reinforced in those conversations when we were over there, is that we want to continue to work together in a bilateral manner around international cooperation. At this stage we haven't made any formal commitments specifically around anything in regards to Article 6 of the international cooperation agreement, around offshore purchasing.”

Watts is focused on preparing the second emissions reduction plan. “Our priority is focused on domestic emission reduction and ensuring that we have confidence of how far that will get us, and therefore, is there a gap and if so, how big is that gap and how do we close that?

“The principle has been that international cooperation and purchasing of off-shore credits is part of the broader equation, but to date no government has made any specific commitments or put in place any specific mechanisms to actually undertake that.”

Transport policy

The government has copped criticism for removing climate considerations from transport policy and focussing on building new highways, with experts questioning how the government is going to meet its target of reducing transport emissions by 41% by 2035.

Watts says he supports the current targets. “We've got prime ministerial targets that we came out with in the last four weeks, which has a specific commitment around meeting our domestic budgets, and we are committed to meeting those.”

Watts sees electrification as the main way to decarbonise transport. “The enabler for that is obviously the roll-out of 10,000 EV chargers by 2030, which [transport] minister Brown is progressing at pace.”

The government’s plan to double renewable energy by 2050 will also be “a key enabler” to decarbonise transport through electrification. “A lot of that heavy lifting policy work in terms of the regulatory space around consenting and the frameworks is very much underway. I'm working closely with the relevant ministers on progressing that work, and we shouldn't be too far away from releasing information into the market around what that framework looks like.”

When asked about mode shift - actually getting people out of cars and using public and active transport, policy which experts say is key to decarbonising the transport sector - Watts points out $2.3 billion of public transport funding the government is planning, with busways and rapid transit planned in Auckland and key metropolitan areas.

The government will start consultation on the second Emissions Reduction Plan in June and finalise it in December.