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Review of Climate Change Policies

1 Background to the review

2 International context

3 New Zealand domestic context

4 Policy choices

5 New Zealand's strategic climate change goal

6 International setting, New Zealand position and strategy for UNFCCC COP11

7 Conclusions

References

Annex 1: Background on forestry and rules

Annex 2: The role of non-climate policies in a sustainable forestry framework

Annex 3: Policy criteria

Annex 4: The European Union Emissions Trading Scheme

Annex 5: Computable General Equilibrium Model

Glossary of terms

RELEASED UNDER THE OFFICIAL INFORMATION ACT

4.5 Transport sector

As noted earlier in Section 4.1.3, transport-sector emissions have been growing strongly, with emissions currently tied closely to economic growth. There are no obvious “big hit’’ actions available for large emissions reductions in the short term, but a number of actions were identified that could have beneficial effects. These actions were categorised under three areas of change as:

1. improve energy efficiency of the transport task
2. change to lower-CO₂-emitting energy sources
3. reduce travel (either the rate of growth or in absolute terms) (passenger kilometres or tonne kilometres).

This section discusses the effectiveness of current policy settings and outlines options for further emissions reductions.

4.5.1 Framework for policy consideration

For the purpose of policy consideration, the framework of actions identified in Table 10 (Section 4.1.3) has been refocused into a more meaningful policy framework. This is because some policy measures apply across all three of the change areas identified, while other policies tend to be sector or mode focused.

The policy framework used here categorises policies under four generic headings:

• pricing of transport activities and fuels
• networks and transport infrastructure (covering all modes)
• energysources (including fuels)
• vehicle technologies/efficiency.

The CO₂ effect of policies is a product of the influence of the policy (ie, how broadly across the transport sector the policy applies) and the impact of the policy (ie, how deeply the policy impacts on the emissions of the policy area targeted). This distinction is useful when considering the likely short-term and longer-term effect of policies (Table 21). For example, in the short term, only transport/fuel pricing is considered to have a high influence on CO 2 emissions across the sector. Shifting to low energy modes (part of networks and infrastructure) can provide high CO₂- emission impacts (eg, switching from a car trip to a zero-emission walking trip), but the short-term influence is likely to be quite low because only a small proportion of people are likely to change their transport behaviour, and for only a proportion of their trips. Policies directed at influencing the efficiency of the vehicle fleet will have a low influence in the short term but, over time, the influence will increase as a greater number of new vehicles entering the fleet will be covered by the policy.

An important aspect is the sequencing of policies so that, over time, there is a movement from predominately low influence/low impact policies towards moderate-to-high influence/impact policies (ie, moving from the lower left box to the upper right box in Figure 40 below).

Table 21 - Matrix of Transport CO₂ Likely Policy Effect

Figure 40 - Desire Lines of Policy Effects, Short Term into the Longer Term

4.5.2 Current Government policies – likely impacts on CO₂ emissions

An overview of the policy setting for transport is detailed in Section 3.2.6.

Most of the current work programmes and policies derive from the NEECS, and flow-on actions from the NZTS and Land Transport Management Act 2003. Actions are primarily focused on reducing emissions from road transport. Note that these actions are not factored into the modelling projections shown earlier (Figure 34 in Section 4.1.3).

The impact of cross-sectoral measures, such as the announced carbon tax, and specific transport sector-focused measures, are discussed below (using the four sub-headings introduced in Section 4.5.1). To the extent possible, conclusions are drawn about their ability to reduce transport greenhouse gas emissions.

Pricing of transport activity and fuels

Announced $15/t carbon charge: The tax will add approximately 3.5 cents to a litre of petrol (excluding GST), and 4 cents to a litre of diesel, aviation kerosene and marine fuels. This would increase petrol prices by about 2.5% and diesel prices by about 4% based on current retail prices (October 2005). These price increases are relatively small compared with the increases caused by the recent oil market instability. Overall, the announced carbon tax at its current level is expected to have only a minor effect on fuel demand – approximately 132kt CO₂ saving by 2020 (<1% of sector emissions).

Despite the anticipated lack of responsiveness from a carbon tax at its announced level, the benefit of an across-the-board price signal is that it is non-discriminatory. A price signal impacts on all three of the change areas discussed in Section 4.1.3, but leaves it to individual consumers and market suppliers to respond in ways appropriate to their circumstances. For example, some consumers might choose to purchase a more fuel-efficient vehicle; others might choose to change their travel patterns; entrepreneurs might be incentivised to develop and market new products and fuels.

In the aviation and coastal shipping industries, there is a potential for the tax to be inconsistently applied. In aviation, it may be possible that some international airlines that have air service agreements with New Zealand could seek to operate domestic services in New Zealand and not pay the carbon tax. For coastal shipping, visiting ships that carry domestic cargo while in transit are likely to avoid paying the announced carbon tax on the fuel oil used in that trip. They will either purchase fuel outside New Zealand or they will seek a rebate because they are en route to leaving New Zealand. According to the MOT the proportion of domestic cargo carried by visiting ships is around 15% (by tonnage) (New Zealand, Ministry of Transport, 2005f).

Associated measures: These include NGAs and PRE. Some transport activities are included in at least two NGAs, but the overall effect on sector-wide emissions by 2020 will be insignificant. Transport-related proposals focused on biofuels have not been successful in the Projects rounds to date.

Other influences on price: Changes to fuel excise or the road user charge [See Glossary] affect the relative price of fuels and the overall cost of transport, and hence the demand for transport and fuel use. Recent decisions include:

• not subjecting fuel ethanol to excise (CAB Min (03) 30/5)
• a 5 cents per litre petrol increase (and road user charge equivalent) from April 2005 to cover infrastructure costs
• linking the road user charge and excise on petrol to inflation from April 2006.

Also, although there was no decision to incentivise LPG, current excise levels advantage LPG in relation to other fuels.

The Land Transport Management Act 2003 also provides for road tolling to be implemented. Depending on the circumstances, tolls could affect travel behaviour patterns (and, by implication, CO₂ emissions) in specific locations.

Networks and infrastructure

Funding for alternative modes and travel-demand management (TDM) [See Glossary]: In 1999/2000, central government funding for alternative modes and TDM amounted to $42 million out of a national programme expenditure of $940 million (4.5%). In the current year (2005/06), Land Transport New Zealand expects to spend $265 million in this category out of a total programme spend of $1,783 million (ie, 15% of expenditure), and the expectation for next year is higher still. A large part of the current increased investment is capital expenditure for passenger transport infrastructure in Auckland. In addition, local government has been increasing expenditure on other modes, especially public transport. While only small CO₂ emissions reductions are likely in the short term, over time, modal shifts and changed travel patterns can be expected to be locked in, as long as service levels are maintained and enhanced.

Rail: The Government repurchased the national rail network in 2004 and has committed $200 million to restore and upgrade the network, in line with the National Rail Strategy 2005. The aim is to reposition rail so that commercially viable freight services can be developed as attractive alternatives to road transport, and to enable a sound infrastructure base for urban rail services to be developed in major urban areas. The energy requirements of rail are typically one-quarter to three-quarters those of road-based alternatives. However, at this stage, it is too early to predict the level of trip diversion to rail that will occur, or the consequent CO₂ benefits.

Urban design: Land-use planning and the design of our towns affects our transport patterns, in both mode and distance travelled. The links between good urban form and transport are recognised in the New Zealand Urban Design Protocol (2005). At the local level, current measures include the regional land transport strategies, and regional anddistrict plans under the RMA, which requires consideration of energy efficiency. A number of the main urban areas are now considering new urban-design approaches that more explicitly link land-use planning decisions and transport infrastructure. There are several reasons: reducing urban sprawl, improving access and reducing congestion, providing for more cost-effective alternative transport modes, and improving energy efficiency. These policies are expected to produce CO₂ emissions reductions as a co-benefit, although the CO₂ benefits will generally be incremental and long term, especially where the fundamental urban form is already established.

Other measures: Small CO₂-emission reduction co-benefits are associated with police vehicle-speed enforcement (for safety management) and managing traffic flows (congestion management).

Construction of roads is also a recognised government policy, supported by targeted funding. New and realigned roads can provide relief from congestion, particularly in the short term. Fuel savings per vehicle could be as much as 6% [Vehicle manufacturers give different fuel consumption estimates for city urban and highway driving, recognising stop-start driving and congestion; eg, a 2003 Ford Falcon sedan uses 12 litres/100km in city driving and 8 litres/100km on the highway. < http://www.greenhouse.gov.au/fuelguide/search.html >] for the stretch of road relieved of congestion. However, overall CO₂ savings are achieved only if the total kilometres travelled does not change. There is significant evidence, both here and overseas, that new roads relieve congestion only temporarily and the total kilometres travelled tends to increase as individuals absorb the benefit of reduced trip time. Therefore, CO₂ benefits are marginal at best.

Energy sources

Biofuels: The NEECS established an indicative transport renewable energy target of 2 PJ [2 PJ is approximately 1% of the current total energy consumed per annum by transport in New Zealand.] by 2012 (New Zealand, EECA, 2002g). In August 2005, the Government confirmed that it would develop and introduce a mandatory biofuels sales target (CAB Min(05) 29/4). This policy recognised benefits to climate change, as well as benefits to air quality and security of energy supply. If, at a minimum, the NEECS 2 PJ target is achieved, transport CO₂ emissions in 2012 would be reduced by about 0.7%. The mandatory sales target is expected to drive the necessary investment in manufacturing plant. In addition to the target, the current work programme is committed to investigating risks and liability issues and developing legislation to provide for appropriate fuel quality standards. One outcome may be ensuring that vehicle imports are compatible with likely biofuel blends. Changes to supply infrastructure, such as double-skinned tanks at service stations (and tank farms) are beginning to occur concurrently.

Fuel specifications: The 50 mg/l sulphur standard for diesel will be in place by early 2006 and will bring diesel fuel specifications into line with overseas best practice. The emissions-reduction potential will rest largely with flow-on impacts. To date, a number of high specification, very efficient diesel vehicle options have not been sold in New Zealand because low-sulphur diesel was not available.Although this may not be the sole reason – the smallness of the New Zealand market may also be a factor – removal of this barrier enables a wider range of fuel-efficient vehicles to be sold. It is not possible to predict CO₂ emissions reductions at this time but some indication of market trends should be apparent by the end of 2006.

While, in theory, a diesel engine will reduce CO₂ emissions typically by some 15% to 20% compared with an equivalent-sized petrol engine, there may also be some “takeback” if buyers choose larger-sized diesel engine options (or turbo-charging) or drive further because they are using a cheaper fuel.

Current policy also includes further reducing sulphur levels to between 10 mg/l and 15 mg/l by January 2009. However, t he fuel-efficient vehicle technologies that can make the most of this ultra-low sulphur fuel are only just emerging and will take a while to penetrate the market.

LPG: Currently, LPG use is incentivised through the much lower rates of tax and levies applied compared with petrol. [Total excise on petrol is 47.7 cents per litre compared with 10.4 cents per litre for LPG.] While the reasons for the pricing differential are related more to administrative complexities around LPG than to deliberate pricing policy, it nevertheless provides some advantages for a locally produced fuel with energy-security benefits. CO₂ emissions from LPG are about 10% less than petrol on an energy basis, so the current pricing regime also supports a slightly lower-carbon fuel choice. There are some vehicle limitations. LPG vehicles currently available (as new) in New Zealand are typically large (equivalent to 3.5 litre petrol vehicles) and our importing provisions make it difficult to bring in LPG vehicles from Europe. As technology for smaller LPG engines develops, wider use may occur naturally. The recent oil price increases have seen an increase in LPG conversions.

Vehicle technologies/efficiency

Vehicle economy information: To date, EECA’s EnergyWise Rally [See Glossary] has been very successful in promoting energy efficiency and involving a number of the major motor vehicle suppliers (at least four of which are now using the EnergyWise Rally information regularly in their advertisements). The influence at this stage is still relatively low because it is relevant to new car buyers only (and only a certain proportion of them). Over time, the influence should increase as the event is repeated and awareness of fuel economy grows, although its effectiveness may be overtaken by other forms of information (see below).

Other initiatives to provide vehicle fuel economy information to consumers have included: recording data on fuel economy of vehicles entering the fleet (established in March 2005); developing a fuel-economy website, expected to be on line in early 2006; and a commitment to provide point-of-sale labelling, starting initially with new vehicles. Overseas experience suggests around 1% improvement in fuel efficiency is brought about by targeted information to consumers, although much depends on the other forms of information available to consumers and the overall level of awareness (BTRE 2001).

Vehicle fleets: This measure relates to procurement and supporting measures. The Govt³ and EECA FleetCheck programmes, by targeting large users of vehicles, have the potential to affect overall emissions, in addition to providing leadership. Emission reductions are not quantified at this stage. Recent changes to the Income Tax Act 1994 create an immediate tax deduction for costs incurred in investigating and testing options for avoiding discharge of contaminants. This improves the feasibility of fleet checks and creates incentives for research on efficient vehicles for businesses.

Summary

Overall, a reduction of about 2% of CO₂ emissions from transport over the period 2012 to 2020 (ie, 2% lower than the projections outlined in Section 4.1.3) seems achievable on the basis of current Government policy. This is in addition to reductions attributed to the announced carbon tax and projected in Figure 34 (Section 4.1.3). The policies having the most effect on emissions are assessed to be the increase in the excise/road user charge (the price effect on petrol is larger than the announced carbon tax) and the anticipated 2 PJ contribution from biofuels. A conservative approach was taken to assessing the emissions implications of modal policies and road tolling because many implementation details are unknown at this stage. However, the policies provide a platform from which further emissions reductions may occur, especially if high fuel prices continue and people choose alternative modes of transport.

An estimate of the impact of existing policies in CP1 is that an average of 1.5% savings of transport emissions could occur. This is equivalent to around 1.3Mt of CO₂.

4.5.3 Options for further policy

Further policy choices and work programmes are outlined based on building on the foundation of current initiatives and a cross-economy economic instrument. Recommendations are provided for the different policy areas.

Options have been categorised as follows.

Further initiatives: Generally, these are extensions of policy covered in Section 4.5.2 above. Further consideration of these areas is generally desirable because of the ability of these policies to meet multiple objectives for transport or because, long term, they imbed a change in technology or behaviour that will assist reductions in CO₂.

Overall, they provide opportunities for:

• additional CO₂ emissions reductions, in the short or long term
• overall net benefits to society
• policy alignments with existing policies and structures.

However, for some activities, implementing and evaluating current policy is required before committing to further actions. Information gaps, lack of evidence, or societal implications may need to be addressed in order to develop the policy or confirm its appropriateness.

Unlikely/Costly: These are policies for which there is not a strong case to proceed at this stage. They are characterised by:

• presumed, but unclear, CO₂ reductions
• net benefits that have not been assessed or are uncertain
• significant information gaps on assessing or implementing the policy
• costs to particular groups, individuals or industries that are likely to be significant and require additional policies to allow them to meet access and mobility needs.

While these policies are not a high priority for further investigation now, they may still be relevant and viewed more favourably if circumstances change or if they are driven by other transport objectives such as safety or air quality.

Discounted policies: These are policies that were considered and discounted because:

• the CO₂ benefits were unlikely or minimal, or
• the social implications were considered unacceptable.

Further initiatives

Pricing of transport activities and fuels

Realigning road transport pricing/charging regime: Many of the desired lower-CO₂ outcomes identified in this report, and the broader sustainable transport outcomes identified in the NZTS, will be supported and reinforced by an improved system of pricing and charging for transport use.

The main issues with the current system are:

• transport users are not paying for the costs they impose on society (Ministry of Transport, 2005a). Note: that climate change costs are relatively small proportion of these costs
• current methods of charging do not signal costs accurately and appropriately by time, place or vehicle type (ie, they are “blunt instruments”)
• fuel excise is not consistently charged across vehicle types and is subject to future distortions as fuel types and power sources change
• there is a growing risk that the different charging regimes for light diesel vehicles (covered by the road user charge) and petrol vehicles (fuel excise) will lead to inconsistent treatment as vehicle technologies change over time.

This review anticipates that, in order to meet long-term objectives for sustainable transport, the Government will need to consider a move to a system of comprehensive electronic road pricing. Such a system would charge for both time-of-use/place-of-use by kilometre to cover the cost of infrastructure construction and maintenance, and respond to localised congestion concerns. In addition, the environmental and social costs of the choice of motive power would be internalised in the cost of the fuel. At present this system, while technically possible, will require development of a staged approach, supported by impact assessments, consultation and trials. The work in Auckland on the feasibility and desirability of road pricing and congestion-management options is relevant in this respect. A report on this work is due with the Government in December 2005.

The primary benefits from realigning pricing and charging would be on the grounds of economic efficiency, congestion relief, fairness to users etc. However, to the extent that road users might, over time, be exposed to the full costs of their transport system use, it is anticipated that there will be useful CO₂ emissions-reduction co-benefits. “Proper” [“Proper” in this sense means a system whereby the costs are allocated appropriately – ie, costs lie where they fall.] road pricing is an essential underpinning element for a sustainable transport system.

A first step could involve restructuring the ratepayer roading contribution. In the current year, local authority rates funding for roading is estimated to be at least $386 million. [Information from Land Transport New Zealand based on estimates of the “local share” required to meet local roading-funding commitments of the National Programme in 2005/06.] Some level of current local rates could be retained as an “access charge” but the balance is effectively a subsidy for road users that could be restructured into variable user charges (ie, through the fuel excise and road user charge [There might be concern that putting the charge onto RUC for diesel vehicles would blunt the price signal, and that it would be better to variabilise the costs into the diesel price. One difficulty is that this adds a transport-only charge onto all diesel use and would probably require non-transport users of diesel to be rebated (thus adding an administrative complexity).]). A further step could be to (further) variabilise the ACC levy component of vehicle registration (re-licensing). The administrative aspects of these changes are straightforward and the overall effect would be fiscally neutral. Overall, while still not ideal, variabilising these charges would transfer these current fixed charges to use-of-system charges, thus signalling more realistic costs at the margin.

Until further analysis is undertaken on the extent to which the proposed realignment is justified, it is not possible to specify a CO₂ outcome. However, to give an example: in 2004, two-thirds of roading rates plus the ACC vehicle licence fee levy amounted to about $450 million. If this were variabilised and spread across all road transport fuel, it would add about 9 cents per litre. [In reality, the charge would likely be added to RUC for diesel vehicle users rather than added to the fuel price.] For petrol, this level of price increase should lead to a reduction in long-run fuel demand of 1.5% to 2%.

Key issues to resolve include:

• the levels of charge to be re-distributed
• distributional impacts across society (including the possible need for transitional arrangements)
• the ability to have distributional impacts across the wide range of vehicles currently covered by the road user charge, particularly light diesel vehicles
• institutional arrangements with local government as a result of reducing local rates
• the timeframe over which a change could occur, minimising administrative costs.

The review considers that a work programme be developed to investigate the impact and process of taking a proportion of the rates contribution to roading and the ACC charge currently associated with vehicle ownership and apportioning it to road vehicles through the excise and road user charge.

Networks and Infrastructure

This section covers both urban matters and other modes: (rail and aviation).

Urban policies: modal shifting, TDM and urban design: Current funding commitments made by the Government in this area, have increased significantly. For example, Auckland’s preferred transport strategy, recently outlined in the draft Regional Land Transport Strategies (ARC, 2005), has signalled a more than doubling of expenditure on public transport, walking/cycling and a range of TDM measures over the next 10 years ($4,100 million) compared with the expected transport funding available under current arrangements.

The main drivers for these policies are congestion relief, urban access and mobility, and achievement of a more person-friendly “sustainable” urban form. Over time, these policies, including decisions on the layout and size of towns, siting of key services and relationship of public transport corridors to residences and destinations, are expected to have a small but growing effect on fuel use and emissions (largely as a co-benefit of other outcomes). For example, under Auckland’s preferred strategy, CO₂ emissions in the morning peak time are expected to be about 1.51Mt by 2016, about 0.04Mt lower than the 1.55Mt estimated for the “do minimum” strategy (ie, the expected growth in emissions to 2016 reduces from a 21% increase to an 18% increase).

Under the road charging regime recommended above, the ratepayer contribution to roading would be reduced, thus providing the potential to transfer rates funding to increase support for modal/TDM measures, particularly in urban areas. However, there is a risk that increased levels of central government funding will also be required. While the short-term CO₂ benefits might be modest, support for these options is important as part of an integrated, sustainable transport approach, especially where user pays and road pricing are the primary policy tools for signalling costs and charges for road users. As road users are required to meet more of the costs they impose on society, means of transport other than the car (particularly within and around urban areas) will be needed.

Associated with decisions on local transport and infrastructure is consideration of access and mobility needs when land-use decisions are made. There is also a need for regional strategic planning covering the wider issues of urban form, consolidation and the siting of essential services (schools, hospitals, shops), and related issues such as parking policies.

Progress in this area will depend heavily on commitments made by local government through the Long Term Community Plan process, Regional Land Transport Strategies, urban-growth strategies and RMA plans and policies. A key challenge will be developing an integrated approach, in particular ensuring that land-use decisions support long-term sustainable transport outcomes. This will be particularly important in the main urban areas of Auckland, Wellington and Christchurch, and in other areas where strong population growth is projected.

For sustainable transport reasons (rather than CO₂ emissions reduction goals), central government funding will continue to be required over the long term and integration of land-use planning with transport concerns is critical.

Rail: A study of electrification of the Auckland urban network was completed in August 2005 (New Zealand, ARTA, 2005). It concluded that electrification was desired. However, the main benefits were for heath, and resilience in the face of possible future oil-supply concerns, rather than CO₂ benefits. The National Rail Strategy (2005) notes that the key benefit of electrification is reduced toxic emissions from passenger trains. Electrification of other parts of the network may also be beneficial, and agencies involved in developing regional and national rail systems (including ARTA, Toll NZ and OnTrack) are expected to consider electrification options.

Electrification will provide net CO₂ benefits so long as marginal new electricity production and distribution has lower emissions per unit of energy required compared with diesel engines. At present, overall CO₂ emissions reductions might be expected from electrification because a large proportion of new electricity is being derived from renewable resources such as wind and geothermal. For Auckland (and perhaps some other North Island locations), however, it is recognised that a large proportion of electricity may be generated from fossil fuel-based thermal generation in the short-to-medium term and there may be little net CO₂ advantage.

In regard to rail taking a stronger role in moving freight, it is not possible to identify specific policy for CO₂ benefits. The amount of freight that can change modes from road to rail, and the relevant CO₂ gains, are uncertain. However, long term, future land-use decisions such as on the siting of industry and services could benefit from the consideration of rail.

The agencies involved in developing regional and national rail systems are expected to consider electrification of parts of the rail network. This is consistent with the National Rail Strategy and will have some climate change benefits.

Aviation: There is currently no focused work programme that engages with the aviation industry on desired technology and behavioural changes to support climate change objectives. Discussions to date have been around the ability of domestic airlines to have NGAs and general liaison with Air New Zealand on wider sustainable business practice such as waste and energy management. Developing issues include the relationship between climate change and tourism objectives, decisions in Europe about including aviation in their emissions-trading scheme, assigning responsibility for “international” emissions and a need to understand the potential for reducing greenhouse gas emissions from aviation.

This review considers that a future work programme should be developed to focus specifically on aviation in recognition that it is one of the fastest-growing elements of the transport sector.

In addition to the areas outlined above, there are some opportunities that have a lower priority but have merit and many will be developed, driven by safety, congestion, or other pressures. They are summarised as:

• further consideration of fuel economy in road network design and construction
• better inter-modal integration between road, rail and coastal shipping.

Energy sources

Additional biofuels: The biofuels contribution could be extended beyond the current 2 PJ NEECS target and an associated mandatory sales target. Overall, 10 PJ of biofuels is assessed as being available from current waste/by-product streams (an additional 8 PJ above the NEECS target).

Production costs are highly dependent on feedstock costs; in particular, the price paid for tallow, which can fluctuate according to international market factors. Commercial risk factors may also require an additional margin. However, studies suggest that most of this tranche of biofuels could be produced at a cost of about 70 cents per litre. [Information from EECA.] This is equivalent to an oil price of about $50 to $60 per barrel [At the current exchange rate of around $US0.70: $NZ1.00.].

Any increase in the target would need to be evaluated in light of changes in the price of oil and feedstock, and any infrastructure limitations.

There is a promising long-term potential for biofuels sourced from other materials, such as forest wood matter, but further research and product development is required. New Zealand’s natural resource advantages and intellectual capability in agriculture and forestry have promised a strong biofuels capability for some time. Much will depend on longer-term oil prices and the technology-development pathway(s) taken by the international motor vehicle industry.

A target above 2 PJ by 2012 is to be evaluated within the work programme to confirm a mandatory biofuels sales target by 2008 (CAB Min(05) 29/4)

The review considers that future work to assess the priority and funding given to biofuels research and associated land use as part of wider consideration of research and development (see Section 4.3.4). is desirable.

Vehicle technologies/efficiency (road vehicles)

New Zealand is a technology taker with respect to vehicles.

New Zealand’s main vehicle suppliers ( Japan, Europe and Australia ) have varying domestic sales-weighted efficiency-improvement or CO₂-emission reduction targets. They equate to approximately 15% to 25% improvement by 2010.

Potentially, New Zealand’s fleet performance could reflect this ongoing improvement, but it may not if:

• the buying patterns over the last few years towards larger, more powerful vehicles are sustained
• New Zealand distributors do not supply some of the more efficient models
• there is a time lag in technology arriving because of the predominance of second-hand imports from the Japanese domestic market.

In terms of policy development, there is a potential difficulty in determining the most cost-effective policies, because we do not clearly know the response to provision of information nor how recent buying trends relate to fuel price increases. Our modelling capacity, in terms of policy options, is also weak. Nevertheless, there are opportunities to improve the vehicle fleet, including working with importers and purchasers overtime to optimise introduction of technologies and fuel efficient vehicles.

Vehicle fuel-economy information: Increased priority needs to be given to getting fuel-economy and vehicle CO₂-emission information that is currently being developed into the public domain and, in particular, into the hands of individual vehicle purchasers and fleet buyers. The current programme has limited resources and could be fast-tracked with additional personnel and funding through reprioritisation. The benefit of this work is that, in addition to direct fuel savings through people considering fuel economy at the time of purchase, recording and providing fuel-economy information is a prerequisite to additional policy focused on the vehicle fleet. This might include identifying the desired average fuel economy for new entrants, and developing targets with importers. The MOT is currently leading this work, but additional support can come from other agencies. This would recognise the operational aspects of the programme: collection of data, support for the website and public awareness of the information.

The value of putting more effort in this area is shown by the variation in fuel consumption within one engine size. Figure 41 suggests there is considerable scope for fuel savings through encouraging purchase of the more efficient models.

Figure 41 - Engine Size and Fuel Consumption for New Vehicles in Australia 2005

Source: Australian Greenhouse Office, 2005a

Fleet purchases: The main vehicle-fleet purchasers are lease and rental companies, businesses, and government. There is a flow-on benefit to focusing on fleet purchases, since vehicles often end up in the New Zealand second-hand market within two or three years.

For any one vehicle type, such as commercial van, four-door saloon or three-door hatchback, the fuel economy of different makes and models varies substantially. The informed purchaser can purchase the optimal vehicle without compromising the task required. There may also be savings through careful consideration of the size of vehicle required, fuel-economy features, the fuel used and the optimal mix of vehicles in a fleet.

The focus for policy is twofold:

• review of the fringe benefit tax for opportunities to encourage uptake of more eco-efficient travel choices
• Government leadership role through its own decisions on vehicle fleet purchase and use, and influencing fleets in general.

This work builds on fleet check audits available through EECA and the Govt³ programme.

The Fringe Benefit Tax (FBT) affects vehicles that are available for an employee to use privately. The employer must pay FBT on the private use of such vehicles. A desired outcome might be a scheme that encouraged employers to purchase more fuel-efficient vehicles for their employees.

However, key issues to resolve for FBT include:

• incentive mechanisms are typically costly, and difficult to monitor over time
• a deadweight loss would result if the tax advantages to company employers purchasing new vehicles are restricted
• FBTs are less transparent than direct subsidies and there could be high fiscal costs
• FBTs have the potential to be very costly for only minor effects on decision-making
• a tax incentive could distort investment decisions in respect of capital purchases (perverse incentives for companies to buy more vehicles).

The review recommends that high consideration be given to these two areas and in particular:

• continue to support the Govt³ initiative in regard to influencing government fleet purchases
• investigate the extent to which the FBT system can be used to influence business-vehicle purchases for employees.

Supporting driver training: There are opportunities through training and publicity to maximise fuel savings from appropriate driver technique and ongoing vehicle servicing. In particular, there are gains available in the heavy fleet.

The number of heavy vehicles (trucks and trailers) increased by around 2.9% per annum between 1997 and 2004, but the distance they travelled grew by 1.5 times the rate of change in GDP, or about 4.5% per annum. The greatest increase in distance travelled has been with the larger four-axle trucks and four-axle trailers. Energy savings of at least 10% or 6.1 PJ per annum are estimated to be available from a targeted programme, given that differences in driver behaviour alone can result in variations of up to 35% in the amount of fuel used (New Zealand, CRL, 2005hh). A typical heavy vehicle might consume 30,000 litres a year, travelling 500,000 km (New Zealand, TERNZ 2004b). A 10% saving is equivalent to 8 tonnes of CO₂ a year. There are around 13,500 trucks over 3.5 tonnes and 1,460 passenger coaches in the fleet.

Industry support in this area would assist in making programmes cost-effective. To be successful, any programmes would need to have ongoing management support.

EECA has only limited funds under its EIB [See Glossary] programme for a demonstration project for driver training.

There are potential CO₂ savings available through targeting heavy freight vehicles and support programmes focused in this area.

Cleaner vehicle technology: Policy options to address toxic vehicle emissions (eg, CO, NO_x, particulates) are currently under development, with the MOT reporting back to the Government by 30 October 2005. Toxic emissions are primarily a function of the efficiency of the combustion process and fuel used, and the extent to which post-combustion emission-control technologies such as catalytic converters are used. Because vehicle toxic emissions and CO₂ emissions emanate from the same fuel/combustion process, there is a potential policy synergy available.

This review has identified the need for a strategic approach to this area of policy, seeking to achieve synergy from policy approaches that offer the potential for both CO₂ and toxic-emission outcomes. Several policy options being considered to control toxic emissions would likely have CO₂-emission benefits. These include requirements for optimum maintenance and vehicle entry restrictions.

a) Optimal vehicle maintenance: Analysis suggests there are likely to be some fuel-economy improvements for some vehicles for which servicing is required to meet any emissions standard set for air-quality reasons. However, it is likely to be small, in the order of 0% to 1% over the whole fleet.

b) Vehicle entry restrictions: Stronger regulation at the border, requiring vehicles to have the latest emission technologies, is being considered. This could benefit fuel economy by preventing older, less efficient vehicles from entering the fleet. There might be useful CO₂ benefits from such policies because the average age of used imports is increasing, thus increasing the gap between these vehicles’ and current technology. Overseas, fuel-economy technology is improving, so there is potentially an increasing time lag between the New Zealand fleet and best available technology. A challenge for New Zealand will be determining the extent to which we become a “fast follower” in new vehicle technologies, given the lag created by the age and turnover of the current fleet. However, further analysis is required to determine the likely effect on vehicle purchase and retention patterns. A possible perverse effect is that vehicle owners retain their existing vehicles for longer (these vehicles might be older, less fuel efficient and have no emission controls). Also, reducing the availability of second-hand vehicles may affect some people’s access and mobility.

The work programmes focused on increasing vehicle maintenance and restricting vehicle entry to obtain enhanced emissions-control technology in the fleet may have co-benefits for CO₂ emissions.

Vehicle fuel economy/CO₂ incentives/disincentives: As noted in Section 4.1.3, a number of countries provide incentive/disincentive mechanisms (such as differential taxes) that encourage purchase of fuel-efficient vehicles. The benefits are seen as b etter reflecting, if coarsely, the different environment costs the vehicle imposes; an ability to send a price signal that is tax neutral; and encouraging buyer behaviour towards more environmentally friendly vehicles for those who are price sensitive.

Ideally, if a full carbon price signal is operating in the economy, an additional incentive/disincentive should not be necessary. As a transition measure, however, there may be benefit in introducing incentive/disincentive mechanisms such as differential annual fees for vehicles of varying fuel economy, with the overall scheme being fiscally neutral (a “feebate” system). A preliminary analysis suggests that, overseas, differential pricing has not been as successful as other measures.(Covec 2005a). Further investigations analysing new vehicle purchases in relation to the current higher fuel prices and New Zealand’s circumstances are recommended.

This review recommends investigation of opportunities around a differential registration (re-licensing) charge based on fuel economy, including assessment of current purchasing patterns during this time of increasing fuel prices.

Table 22 - Summary of Potential Further Initiatives

Unlikely or costly

The following policy options are not seen as high priorities to pursue at this stage, primarily because CO₂ reductions are unclear or the net benefits to society have not been assessed or are uncertain.

Accelerated scrapping of old vehicles: Early retirement is not expected to produce significant emissions reductions for the effort. The impact of scrappage policies is likely be short-lived and may be overtaken by increases in future emissions, as early retirement leads to the early introduction of a new (or second-hand) vehicle rather than the later introduction of a vehicle that is more fuel efficient (due to ongoing improvements in vehicle technology). Also, older vehicles generally do not travel high annual kilometres, hence the gains for CO₂ benefits are potentially minor.

Limit the open road speed limit to 90 kmh: It is estimated that reducing the open road speed limit to 90 km h could reduce annual fuel consumption by 1.42% (3.53 PJ) (Covec, 2005b). There would be significant associated costs related to time lost in travel, in addition to enforcement and signage. This probably makes this option unpalatable, unless it can be supported on safety grounds.

More aggressive policies generally: W hat measures could achieve a much stronger response, such as a reduction in transport emissions in 2020 by at least 20% on business-as-usual, and a continuing downward trend?

This could occur from a significant change in any one of the three generic change areas: energy efficiency of the transport task; lower CO₂ emissions per unit of energy; or reduction in travel demand. But, it is most likely that a combination of all three would be needed. Action will need to focus on policies that broaden the influence of moderate- to high-impact actions (Table 21 previously).

Much will depend on the future of the world oil price – continued high oil prices will maintain price pressure on consumers to consider energy reductions and alternatives, but declining prices could see a continuation of current trends and behaviours.

Modelling is required of the policy options, but it is most likely to involve a more aggressive implementation of policies already signalled in this report; ie:

• remove roading subsidies and increase transport charges
• substantially increase investment in supportive networks and services, such as public transport, provision for cycling and walking, and alternatives to travel
• increase investment in alternative energy sources
• improve vehicle efficiency (over and above oil price and other drivers).

Such measures would require an environment where there was a high level of awareness and relevant information for transport users. Ideally, the community would need to be accepting of, and generally willing participants in, the change process.

Aggressively increasing the price of travel based on fossil fuels will have a cost, particularly if imposed rapidly before alternative means of transport are developed. Without low-cost alternatives, those most vulnerable to such policies are low-income households and those who rely on vehicles for their ongoing participation in work and other activities. Rural areas might be particularly affected, as well as the young, old, disabled, those of Maori and Pacific descent, solo parents and large families (where a number of people are affected by a loss of vehicle or a larger vehicle is required). The loss of a car can exclude households from many activities, including health visits, work, shopping, visiting friends and recreation. Access to centralised facilities such as hospitals, educational facilities and supermarkets would be affected. Supporting polices would be required.

Table 23 - No Strong Case at This Stage – Summary

Discounted measures

These are policies that were considered and discounted. Either the CO₂ benefits were unlikely or minimal, or the social implications were considered unacceptable.

Differential acquisition fees: Acquisition fees apply to vehicles on first entry to the market. They could apply to new and second-hand vehicles and be based on vehicle type, such as model or engine size. A number of countries have different fees depending on these factors. CO₂ produced per kilometre could also determine the fee.

The policy can increase the relative purchase price of fuel-inefficient vehicles. This can lead to substitution by more fuel-efficient vehicles – a positive CO₂ outcome. However, a perverse outcome can be that the purchaser instead opts for a second-hand vehicle already on the market, regardless of its fuel economy, because that vehicle is not subject to the fee. The result is that second-hand vehicles already in the market have increased market value and their time in the fleet is likely to be extended. Many of these second-hand vehicles are likely to be not fuel efficient and a differential acquisition fee does not discriminate between vehicles of different fuel economies once they are already in the fleet. Hence, there is a risk that vehicles already in the fleet, which ideally should be replaced by more fuel-efficient vehicles, will instead have a longer life.

Incentives for hybrid vehicles: The main difficulty of this measure is that it is not technology neutral – if such an incentive is justifiable, it should be on the basis of CO₂ emission outcomes, not a specific technology. Some other technologies are capable of achieving similar efficiency and CO₂ outcomes (eg, high-efficiency diesel vehicles) for some particular drive cycles. Also, hybrid technologies (ie, combined petrol engine and electric motor) can be used to give more power to a vehicle rather than reduce fuel use.

Banning certain types of vehicles: (eg, SUVs) At the moment, information on the annual emissions from certain vehicle types is not available. Overall CO₂ emissions might be low, as might be kilometres travelled. To pick on specific vehicle types does not address the core CO₂-emission problem.

Blanket age ban on vehicles: Age is not necessarily a reflection of fuel economy. The main difficulty is that fuel consumption improvement by age is relatively small compared with differences between classes of vehicles, and between vehicles in the same class (PWC et al, 2001). Previous modelling suggests only minor overall CO₂ benefits, with the potential downside of affecting affordability and values in the second-hand car market. Note, however, this measure could be a coarse means of achieving other policy objectives, such as increased emissions-control technology for air-quality reasons or safety objectives.

Table 24 - Discounted Measures at This Stage – Summary

4.5.4 Conclusions

The drivers for ongoing CO₂ emissions growth in the transport sector

For around the last two decades, New Zealand has experienced a period of low oil prices and/or relatively high economic growth. Transport patterns have been heavily reinforced by the low oil prices, while key growth areas in the economy are heavily transport-dependent (eg, tourism and freight movement). Overall, this has provided the platform for continued and ongoing growth in transport demand and CO₂ emissions. The use of oil by the road fleet – both heavy and light vehicles – is both the largest use within the transport sector and the fastest growing. Use in aviation is also growing steadily, but from a smaller base. Coastal shipping and rail combined, contribute less than 5% of transport emissions. To date, fuel demand (and, by implication, CO₂ emissions) has been very inelastic to price (ie, demand does not move much with price), with current elasticities for petrol and diesel suggesting only a 2% to 2.5% long-run reduction in demand for a 10% increase in price.

The review has looked at the circumstances in New Zealand. We have a relatively small population spread over two main islands with young geology and an agricultural base. There is a very strong culture of mobility, with a number of self-reinforcing aspects. New Zealanders are travellers, with the ability to travel being a defining part of the Kiwi lifestyle: both overseas, and between rural and city environments. Cities have largely developed within the motor car era and have tended to reinforce a private motor vehicle culture; the costs of transport to date have been relatively low and some transport costs are not paid for by users. Transport usage is further increased by the demand for just-in-time delivery and the availability of relatively cheap vehicle imports from the domestic Japanese market.

The effect of CO₂ policies to date

In general, policies that aim to reduce CO₂ emissions from transport have not had much “bite”:

• the signalling of the announced carbon tax has not had much effect. At the proposed level ($15 per tonne of CO₂), it is expected to have little effect on behaviour. The price increase will be largely invisible within the overall movement in fuel prices caused by volatility in international oil markets
• while quite a number of Government activities have been initiated that directly or indirectly promote reduced emissions, most policies are still largely “in the pipeline” and at best only partly implemented. (Examples are the focus on travel-demand management, provision of information on vehicle fuel economy, and biofuels – incentives and research.)

It is estimated that, overall, a reduction of about 2% of CO₂ emissions from transport between 2012 to 2020 seems achievable on the basis of current policy, with an average saving of around 1.5% savings of transport emissions (1.3Mt of CO₂) in CP1.

Looking to the future, further activities are committed to building on current work programmes. There are also new policy initiatives that could start to make an impact on emissions. But, generally, these developments provide small, incremental CO₂ gains, rather than anything that will provide a big “hit”. This is a current reality of the transport sector.

Many of the activities focused on transport to date have occurred because of health, safety, congestion and urban-form benefits. Reduction in fuel use and, hence, CO₂ benefits has been a co-benefit.

International drivers – fuel price and technology

Fuel price and vehicle technology are two key international drivers over which New Zealand has very little control. The recent fuel price increases to around $US60 per barrel have prompted some behaviour change from transport users. Although the precise impacts are still unclear, continued high oil prices will maintain price pressure on consumers to consider energy reductions and alternatives, and a number of lower CO₂ options will be incentivised. The overall effects of this level of oil price may be more influential in reducing CO₂ emissions than the current range of policies. But, declining prices could see a continuation of current trends and behaviours.

A second issue is the current lack of cost-effective technological alternatives that provide significant CO₂ reductions. Unlike the electricity sector, for instance, where relatively low price signals can cause a switch between high emission generation (gas/coal) and low-emission alternatives (renewables), there are few comparable opportunities at this stage in transport. Future vehicle technologies are largely out of New Zealand’s hands, as we are essentially technology takers from the global vehicle industry. There are some fuel-switching opportunities, and the recent oil price increases have put the first tranche of biofuels (about 10 PJ) now within the range of potential cost-effectiveness (albeit with the need for a range of supportive Government policies). However, this represents less than 5% of current transport energy demand, and even lower CO₂ emissions-reduction potential.

Much stronger intervention policies designed to change the composition of the vehicle fleet in New Zealand could be contemplated. However, at this stage, it is unclear to what extent this might have lasting, effective outcomes. There are also questions about whether this would be the best way of addressing the issue, and whether potential perverse effects can be addressed. There is a range of options and some of these require further analysis.

Summary of recommended measures

The proposed measures, outlined in Section 4.5.3 and summarised in Table 22, include:

• more efficient distribution of costs to road users by transferring a proportion of the rates contribution and ACC charges across the fuel excise and road user charge
• ongoing financial support for travel-demand initiatives and public transport
• opportunities around electrification of parts of the rail track
• a work programme to engage with the aviation industry on climate change matters
• for biofuels, evaluating a sales target above 2 PJ per annum and prioritisation of research effort
• increased priority to vehicle fuel-economy information
• for road vehicle fleets, a leadership role for the Government in purchasing and investigating opportunities under the FBT system
• targeting drivers of heavy fleets for information and training
• support for programmes for vehicle maintenance and fleet entry requirements, because of the co-benefits for CO₂ that could be available
• creating incentives for the purchase of vehicles with high fuel economy/low CO₂ emissions through price differential on annual vehicle charges.

Indicatively, these policies could reduce CO₂ emissions by a further 5%, with around 3.0Mt savings in CP1. Identifying the most cost-effective measures is, however, limited by the lack of empirical evidence in New Zealand about the effectiveness of policies in moving from the status quo. Most policy initiatives that have a CO₂ focus (or co-benefits) have been around supply-side investment in alternatives to motor vehicles (eg, passenger transport funding, rail re-investment). There have been few disincentive-type policies (such as pricing measures). There is also a lack of knowledge about preferences or behaviours of transport users, especially factoring in the change in the current environment, triggered by oil price rises and publicity around “peak oil”. These factors suggest that pilot programmes and evaluation mechanisms may be useful in this area.

Many actions that have CO₂ benefits do, however, also have co-benefits for other Government objectives, including: improved air quality, health, urban form, access and mobility through public transport; reduced congestion; and oil security. So, even though CO₂ reductions are assessed as small for some work programmes, there can be clear net benefits to society.

More aggressive CO₂ reductions?

If a stronger response to CO₂ emissions reductions from the transport sector is sought, aggressive policies will be required. The future oil price may, by itself, lead to dramatic changes in the way we think about transport. However, this is uncertain. Although we do not have accurate modelling capacity at the moment to show CO₂ benefits, it is most likely that an aggressive policy package would require:

• increasing the cost of fossil fuel use and transport charges
• substantial increased investment in supportive networks and services to provide alternatives as personal car travel becomes expensive
• increase investment in alternative energy sources such as biofuels
• improved vehicle efficiency (over and above oil price and other effects)
• education programmes and appropriate pricing signals to reinforce the importance of fuel economy and appropriate choice of mode, as well as the co-benefits of such behaviour.