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Executive Summary

Background

In early December 2007, the Government introduced into Parliament the Climate Change (Emissions Trading and Renewable Preference) Bill (“the Bill”) to provide the statutory framework for a New Zealand Emissions Trading Scheme (ETS). The Bill has been referred to the Finance and Expenditure Committee.

In addition to the ETS, the Government has announced a range of other climate change-related measures. These include provision in the Bill for a statutory preference for renewable energy for electricity generation, a separate Biofuels Bill that implements a Biofuel Sales Obligation, the Afforestation Grants Scheme, the New Zealand Energy Strategy and the New Zealand Energy Efficiency and Conservation Strategy. In order to better define the scope of this study, the project has identified a subset of measures from within this broad package that are closely related to the ETS.1 This set of closely-related measures, together with the ETS, is collectively referred to in this report as “the ETS-plus”.

Through the use of price signals and other mechanisms in the closely related measures, the ETS-plus is intended to result in changes to land and natural resource use, patterns of economic activity and operational practices, in order to find the least cost ways of reducing emissions and meeting New Zealand’s international obligations.

In addition to promoting a transition to a lower-emission economy, however, these changes in economic activity have the potential to affect the natural and physical environment in a variety of other ways that can be both positive and negative.

The ETS-plus is designed to operate in conjunction with pre-existing environmental legislation and policies, such as the Resource Management Act 1991 (RMA) and the New Zealand Biodiversity Strategy (NZBS). In many cases, existing policies will be sufficient to address the potential environmental effects of the ETS-plus. In some cases, however, additional policy responses might be required.

Purpose of this scoping report

This scoping report aims to identify potential environmental effects of the ETS-plus at a high level over the period 2008 to 2020, identify possible response measures to address these effects, and identify areas where further environmental assessment is warranted. However, it is not a detailed environmental assessment that attempts to quantify all potential impacts.

The purpose of assessing environmental effects is, in this case, not to assess whether or not to implement an ETS. In the absence of an ETS, the Government would likely implement alternative regulatory and policy measures to accomplish its policy objectives, including meeting New Zealand’s commitments under the Kyoto Protocol (and any successor agreement) and its objectives under the New Zealand Energy Strategy. Any such alternative policies would also be expected to have some flow-on environmental effects, both positive and negative.

New Zealand entities with emissions obligations under the ETS can satisfy these obligations by choosing the least costly combination of directly reducing emissions or purchasing domestic or international emission units (where doing so is consistent with supporting and encouraging global efforts to reduce emissions). For instance energy suppliers will purchase emission units, domestically or offshore, to account for the emission obligations associated with energy consumption that continues after energy efficiency and conservation efforts.

Complementary measures can help to reduce the reliance on international units, because relying on such units could lead firms and households to embed long-lived high emission technology and infrastructure into the economy and defeat the long term objective. For example, given that agriculture does not enter the ETS until 2013, it is important that changes start being made now to avoid embedding a land use pattern that is unsustainable and costly to reverse. Similar considerations apply to transport and to buildings. In some cases, the current price signal cannot be relied upon to alter decisions that have significant long term consequences, eg, capital investments and patterns of land use that last for decades rather than a few years. Complementary measures can help address this.

The report assesses the potential environmental effects of the ETS-plus against a base case scenario of policies that were in place on 1 January 2008. It does not, therefore, attempt to assess the ETS-plus against possible alternative designs of the ETS and/or the closely related measures, except to comment on where alternative settings or additional measures might be necessary to reduce the potential for adverse effects or to secure beneficial effects of the ETS-plus.

Potential environmental effects identified in this report should be interpreted as increased or decreased “pressures” on the environment; whether they become actual effects depends on how those pressures are managed.

This report is neither a strategic environmental assessment nor a comprehensive environmental impact assessment – rather, this scoping study identifies where further environmental assessment is warranted.

Sources of uncertainty

The environmental effects that arise from implementation of the ETS-plus are subject to a number of significant sources of uncertainty, including:

  • the stringency of international commitments post 2012 and hence the price of emission units (ie, carbon) on the international market that will be transmitted to New Zealand’s ETS

  • the extent to which governments in other countries expose their industries to this price of carbon

  • the price of oil, gas and other forms of energy, both renewable and fossil fuel-based

  • the rate at which climate change occurs and how it affects New Zealand

  • the emergence of new low-emission technologies and management practices in response to the ETS price signal

plus two factors that can be influenced more directly by the Government:

  • the final design of the ETS-plus, for example the point of obligation for the agriculture sector

  • the behavioural response of individuals and organisations to the ETS-plus policies.

Most of these factors are not “discoverable” through further research in advance of ETS implementation, which therefore constrains the nature of any environmental assessment, in particular the degree of detailed investigation that can usefully be undertaken. Nevertheless, a qualitative assessment can serve to identify likely directions of change and to highlight areas where there is significant potential for environmental effects, positive or negative, to arise as a result of the ETS-plus. Further investigation can also help to inform the final design of the ETS-plus.

The conclusions presented in this report are based on information collected from stakeholders and officials at a workshop on 25 January 2008 and in subsequent discussions, a number of reports on the ETS and on New Zealand’s environmental management more generally, and the experience and expertise of the authors.

The remainder of this summary briefly describes the most significant potential environmental effects of the ETS-plus and priority policy measures to address them, and then summarises further priority investigations and monitoring that could be carried out to improve understanding of likely effects and inform further policy development.

Greenhouse gas emissions

Overview

Apart from avoided deforestation and new afforestation (discussed below), and notwithstanding any contribution of the ETS to a reduction in global emissions through the purchase of emission units internationally, the overall impact of the ETS-plus on New Zealand’s domestic GHG reductions is expected to be limited until 2013. This is largely because the demand for transport fuels is likely to be insensitive to price in the short term, there is likely to be a time lag before renewable electricity displaces fossil-fuel based generation, and because agriculture does not enter the ETS until 2013.

Over the period to 2020, the ETS-plus can be expected to drive some reductions in net domestic emissions relative to the base case in all sectors, thus contributing to the objectives for the ETS. Gross domestic emissions are, however, expected to grow relative to 2008 emissions.

Changes in emissions are difficult if not impossible to predict with any accuracy, as they depend on factors such as the price of emission units and the behavioural response to the price signal and related measures, prices for energy, pastoral products and for products of other major New Zealand industries, and the emergence of new technology in response to these price signals.

To maximise the domestic environmental benefits of the ETS-plus, and to promote absolute domestic emission reductions as part of a long-term transition to a lower-carbon economy, the Government could consider significantly strengthening demand-side response measures in the areas of transport and stationary energy use by households and small to medium enterprises.

The more significant expected sectoral effects on greenhouse gas emissions are as follows.

GHGs from stationary energy: supply and demand

Over the period to 2020, the ETS-plus is expected to lead to increased development of renewable sources of energy relative to the base case, and this effect is expected to increase as the cost of carbon rises. New baseload electricity generation is expected to be geothermal, and new peaking capacity is likely be either hydro or combined cycle gas, with wind expected to provide a significant but variable proportion of mid-range capacity. Around 90% of electricity is likely to be generated from renewable sources by 2025. This notably contrasts with the base case scenario where coal features as a generation option in the longer term.

Thus, greenhouse gas emissions from electricity supply and industrial process heat are expected to decline relative to the base case. This effect is expected to increase over time. In the short term, emissions from direct coal use are expected to fall and emissions from gas use and electricity generation are likely to increase.

Improving energy efficiency and demand-side management are important in both the long and the short term. In the short term, while thermal electricity is on the margin for peak electricity demand, these measures can make a useful contribution to reducing greenhouse gas emissions. Energy-efficient homes also help to address health concerns from rising electricity prices. In the medium to longer term, energy efficiency and demand-side management serve to reduce the pressure on the environment from renewable electricity supply.

That such measures might be necessary does not indicate that the ETS is misguided or that its design is faulty. Rather, the ETS is likely to meet the objectives the Government set for it, but it will need to be complemented by other measures to incentivise the range of behavioural changes that will move New Zealand more quickly on to a downward long term emissions trajectory.

GHGs from transport

The transport sector – both the fleet and the nation’s transport infrastructure – will have a major influence on how New Zealand meets its emissions targets. The ETS price signal alone cannot be relied upon to alter decisions that have significant long term consequences, and hence complementary measures are crucial in this sector. In the short-term, complementary measures within ETS-plus are likely to exert as much if not more downward pressure on emissions as the carbon price signal in diesel and petrol prices. Suggestions are made to strengthen aspects of the ETS-related measures in order to maximise the synergy between the price signal and the other measures.

The bulk of transport emissions are from land transport, particularly road transport. Decisions in this area are driven by a complex mix of local and national transport planning and funding practices that interact with fuel prices, broader urban planning, availability of alternative technologies such as electric vehicles, and social values. Existing policies, such as the pattern of infrastructure investment, influence transport choices and hence emissions.

The Transport Strategy process provides an opportunity to review and integrate existing policies and practices with the need for long term reductions in emissions. Transport emissions are slow to change but vary significantly in response to policy over the longer term. Decisions to fund infrastructure that facilitates increased use of emission-intensive modes of transport (eg, private motor vehicles), such as new roads, will also facilitate increased greenhouse gas emissions. Alternatively, funding measures to encourage more efficient modes of transport, eg, improving the rail network, will help to reduce emissions.

Improving the range of transport choices available, good urban design and more transparent pricing of roads can all deliver significant benefits, even without considering emissions. Although benefits of these changes will emerge only slowly, they are essential for achieving long term reductions in GHG emissions from transport.

GHGs (non-CO2) from agriculture

In addition to transport, pastoral agriculture is the other major source of emissions for which little if any absolute reduction can be expected in the short term, at least for non-CO2 emissions. Under the base case scenario, further intensification of land use is likely prior to the sector’s entry to the ETS in 2013. The ETS-plus is expected to slow this trend and the corresponding increase in emissions to some extent, although the large investments behind this land use change will make the emissions growth more difficult to reverse despite the ETS price signal that is proposed to apply to agriculture starting in 2013. That is, there is a risk that some of the potential benefits of the ETS-plus will not be realised.

There is a programme of research underway to identify technologies to reduce on-farm emissions, and the ETS design enables the sector to meet its emissions obligations by purchasing units offshore if that is less costly. However, it is possible that it would be more cost-effective in the long term, and be better for the environment generally, if these costs were more directly factored into land use change decisions from 2008 and some unsustainable land use change avoided. The extent of adjustment in pastoral sector emissions prior to 2013 depends critically on how the price signal will be transmitted to the farm level and farmer expectations about how the cost of emissions will be borne. Thus, confirming the point of obligation for agriculture sooner rather than later would help to secure the environmental benefits of the ETS-plus, in terms of both GHG emissions and other environmental effects.

The government should also investigate the extent to which the delay in agriculture entering the ETS puts at risk the benefits of the ETS-plus. Such a study should aim to determine the extent to which behaviour, emissions and adverse effects are likely to diverge from “optimal”, ie, from a situation in which future policy settings are known with certainty and fully factored into investment decisions, and consider policy options to reduce any such divergence.

GHGs from forestry

The anticipated introduction of the proposed ETS, which would place obligations on the forestry sector as of 1 January 2008, has resulted in two significant effects. Actual deforestation was higher in 2007 than had been forecast in 20062 and the 2007 deforestation survey indicates that deforestation will be lower over the study period than had been forecast in 2006.

In the short term, this delivers an absolute increase in emissions, due to recently cleared land being added to pastoral production. Further additions to New Zealand’s emissions from deforestation and conversion will then decline rapidly, both through avoided deforestation and, avoided methane and nitrous oxide emissions from conversions to pastoral farming. This is expected to be the largest effect of the proposed ETS-plus on net emissions, at least in the short to medium term.

Afforestation is also encouraged by the ETS-plus. New forest establishment is expected to be significantly ahead of the base case over the study period, resulting in increased carbon sequestration, especially in new exotic forests.

Other environmental effects

This report identifies numerous environmental effects that are likely to arise from implementation of the ETS-plus, some positive effects and some negative. In many cases, the timing and significance of these effects will reflect the extent of domestic behaviour change in response to the ETS-plus, which depends on a range of factors as discussed above. Appendix 5 presents a summary of environmental effects by environmental resource. The most significant of these are briefly summarised in the remaining section of this chapter.

Potential positive effects of ETS-plus

Among the likely significant positive effects are the following:

  • An increase in afforestation and a reduction in deforestation and conversion to intensive land use (after an initial increase embedded from land use changes prior to 2008), due to the new deforestation liability in the ETS, with an initial large emission reduction and benefits in reduced soil erosion and sediment yield, gains in biodiversity in some areas, and better water quality.

  • Improvements in air quality and human health, gradually over the longer term, due to decreased use of fossil fuels in industry, stationary energy and transport, and relative increases in both walking and cycling.

  • The increased price of electricity is likely to have some dampening effect on demand for irrigation, with in-stream values benefiting from more natural flow regimes and less pollution from intensive farming runoff.

  • The increased price of fuel is likely to lead to a reduction in energy-intensive fishing methods, eg, seabed trawling, which have relatively more adverse effects than other fishing methods.

  • The ETS-plus is likely to slow the trend of land use intensification and thereby reduce GHG emissions as well as other adverse effects on the environment; however, some of these benefits are at risk due to the delayed entry of agriculture to the ETS in 2013.

Potential adverse effects of ETS-plus

Because it is so far-reaching, covering all sectors and all gases, the ETS-plus could also cause a range of unintended adverse environmental consequences unless response measures are put in place to address them. To reduce the likelihood that adverse effects will occur while policy responses are devised and implemented, and to increase certainty for business, climate change and complementary measures should be implemented concurrently where possible, rather than introducing measures in any one policy context in isolation or out of phase.

The current climate change and energy policy concurrence is a good start. Similarly, the work in progress on the Sustainable Water Programme of Action offers an opportunity for climate change policy to proceed concurrently with freshwater policy. Without these types of integrations, resource management in New Zealand will move in unsustainable directions that are likely to be damaging for New Zealand’s future prospects.

The scoping review has identified the following as the most significant potential adverse environmental consequences of the ETS-plus as currently designed:

  • Loss of some areas of indigenous ecosystem types with high biodiversity values, such as regenerating forest, scrubland and tussock grasslands that are eligible to be cleared and afforested to gain forestry sink credits.

  • Increased pressure to dam or divert rivers for generation of electricity with consequent impacts on ecosystems, natural character and alternative uses.

  • Increased pressure on natural character and some landscapes, and potential land use and resource conflicts generally, arising from both afforestation and the accelerated development of renewable energy sources, notably hydro and wind, but also possibly marine energy.

These are discussed in turn below.

Increased pressure on biodiversity

The ETS-plus will provide strong signals for forestry planting on post-1989 regenerating indigenous forest, scrubland and tussock grassland on private land, with adverse effects in some areas on indigenous plant and animal species and ecosystems. The protection offered to these areas through national instruments or local plans is variable, and indeed poor in many regions, and therefore significant areas are at risk from the ETS-plus.

However, changes could be made to the design of the ETS-plus to minimise this risk by making land with high biodiversity value ineligible for gaining emission units or afforestation grants by clearing indigenous species. The long-term benefits of retaining indigenous biodiversity (including its potential for more permanent carbon sinks) more than outweigh the slightly more rapid short-term carbon sequestration rates of exotic trees. To enable implementation of such changes to the ETS, and to protect biodiversity values more generally, it is important to complete the identification of high biodiversity areas as a matter of urgency, as well as mapping of land use in 1990 at sufficient resolution to inform land owners of eligibility and to identify indigenous vegetation. The interaction of the ETS-plus with biodiversity needs attention in the design of both the ETS and the AGS, with specific incentives implemented for protection of indigenous biodiversity.

The key proposed response measures are:

  • provide criteria in the AGS and ETS to ensure that grants and NZUs are not awarded for planting exotic forestry on areas of high biodiversity value, eg, significant post-1989 regeneration

  • provide additional incentives for indigenous afforestation to avoid adverse biodiversity outcomes from the ETS-plus

  • ensure that biodiversity mapping is completed across New Zealand as a matter of urgency

  • complete the base map of “land use at 1990” as soon as possible, at sufficient resolution to identify significant indigenous vegetation and to enable owners to see whether or not their land is “Kyoto forest” (post-1989)

  • undertake further environmental assessment if pre-1990 indigenous forests are included in the ETS, or if the ETS-plus is amended to create more flexibility for land use change for pre-1990 forests.

Increased pressure on rivers

The ETS price signal and the renewable energy preference are expected to significantly increase pressure to dam or divert more of New Zealand’s rivers. A significant move to electric vehicle technology could further increase this pressure. One possible response measure is to give preference for expansion of capacity on existing facilities or on rivers already dammed or diverted rather than exploitation of new river systems.

More generally, this highlights the need to integrate development and issuance of guidance under the RMA and the Sustainable Water Programme of Action with climate change and energy policy, ensuring that none gets too far ahead of the others.

A more comprehensive investigation is proposed to consider the role of additional large hydroelectric plants in New Zealand’s energy future, so that appropriate guidance can be provided to local authorities.

The key proposed response measures are:

  • strengthen measures to enhance energy efficiency and demand side management in the energy sector, especially but not exclusively in relation to electricity

  • consider undertaking a strategic environmental assessment of the role of further hydroelectric generation in a sustainable energy system

  • provide guidance on the potential use of freshwater resources for hydroelectric generation via the Sustainable Water Programme of Action.

Increased pressure on natural character and landscape

There are expected to be significant environmental effects – potential loss of natural character and landscape values – from afforestation and from increased renewable energy generation, both hydro and wind. This could potentially affect seascapes in future, depending on the type of marine energy development. Some areas potentially affected by biodiversity loss are also notable and valued landscapes, such as the North Island central plateau and parts of Otago. Among the risks to these is increased afforestation, including through wilding conifers spreading into indigenous ecosystems. While it is not possible to anticipate where these pressures will be greatest, at the least it will be a large and contentious issue for local government to manage.

This is an area where local engagement and clear central government guidance are needed. Proposed response measures include development of a national instrument to guide identification and recording of high value landscapes. In addition, wind and marine energy development should be addressed in the review of the New Zealand Coastal Policy Statement, and the scope of the proposed National Policy Statement on renewable energy could be expanded to address potential adverse environmental effects.

The key proposed response measures are:

  • develop a national instrument to guide identification, recording and protection of high value landscapes

  • address wind and marine energy development in the Coastal Policy Statement review.

Other issues

Pressure on air quality could temporarily increase in some areas due to fuel-switching to wood by both households and industry; these issues need to be managed through stronger co-operation between central and local government.

Effects on human health from changes in fuel prices are also potentially significant, especially for lower income households, but the Government has signalled that a response package will be announced. The overall effect of the ETS-plus on human health needs to be reassessed once that is announced.

The proposed response measures are:

  • address air quality and domestic heating through improved co-ordination between central and local government

  • provide assistance to lower income households to minimise the effect of the ETS in exacerbating New Zealand’s “cold home” problem.

These and other proposed response measures are described in Chapter 5 and summarised in Chapter 7.

Further investigations

Further work will be needed to consider and design policy response measures to address the issues identified above, including the more strategic assessment of the role of additional hydroelectric generation and an investigation of the risk that some benefits of the ETS-plus will not be realised due to the delay in agriculture entering the ETS.

In addition, the report proposes further investigation of the following issues:

  • Biofuels – Review the likely effects of increased domestic use of biofuels on New Zealand and global CO2 emissions and on domestic air and water quality, and assess pressures on the environment arising from increased domestic production of biofuels.

  • Electric vehicles – Assess the most appropriate roles and technology for electric vehicles in the New Zealand transport sector, the potential for their widespread adoption, and the implications for New Zealand’s energy and waste systems.

  • Transport demand – Assess the factors influencing the responsiveness of demand in New Zealand to price changes from for various transport modes and functions, and for different groups of users.

  • Investigate the effects of nitrification inhibitors on the nitrogen cycle, water quality of streams and wetlands – Complete current work now underway, fill gaps in knowledge and scale up to consider effects at a whole catchments level where there are stream systems and wetlands at risk.

Monitoring

In some cases, possible adverse effects are too uncertain to warrant an immediate policy response, and more indepth assessment seems unlikely to yield policy-relevant information. In such cases, the appropriate response is to monitor the situation closely so that any problems can be detected early and a policy response devised as quickly as possible. Problems can and do arise unexpectedly, and if good monitoring data is available, policy measures are more likely to be implemented in a timely manner.

A robust monitoring framework will also provide essential data to inform the review of the ETS, which the Bill specifies will occur in 2013 and at regular intervals thereafter. These reviews offer the opportunity to re-assess the environmental effects of the ETS as well as its effectiveness in relation to greenhouse gas emissions.

Chapter 6 of this report provides some specific suggestions where monitoring should be improved, and where analytical capacity to utilise monitoring data also needs to be enhanced.

1 A full description of the suite of measures included in “ETS plus” is included in Appendix 1 of the main report.

2 Manley 2008 (19,000ha cf 13,000 ha).

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