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Harbour Navigator: Lukewarm Plan for Global Warming

JW
Jorge Waayman | Posted on May 18, 2022
  • The New Zealand Government has announced their emissions reduction plan for de-carbonising the economy through several policy initiatives
  • Transport will play a key role in driving change through new light fleet and freight targets, supported by a ‘scrap and replace’ scheme
  • Energy and agriculture sectors will receive significant funding to help de-carbonise and accelerate research into clean technology solutions
  • Regulation and Government incentives will provide both positive and negative financial impacts to companies

The New Zealand Government released its first emissions reduction plan this week, outlining how the country can meet its initial emissions budgets in line with the legislated net zero target by 2050. The plan covers policy initiatives and sub-targets for multiple sectors such as transport, energy and agriculture, and incorporates issues beyond climate such as an equitable transition, the role of Māori, biodiversity and wider environmental outcomes. Overall, the plan represents a useful roadmap for de-carbonising the economy; however, some policy areas remain vague and the Government’s ambition by itself will not be enough to enact the transformative changes needed with proactive contributions from businesses, investors and consumers also required to lead the transition.

Transport

Transport will play a significant part in driving the emissions reduction needed with the sector expected to deliver a 41% reduction by 2035 from 2019 levels according to the plan. The key new policy announcement in the transport space is the introduction of a ‘scrap and replace’ scheme that will be designed to help low-middle income New Zealanders replace their old higher-emitting vehicles for low emitting alternatives. This policy aims to help drive the uptake in hybrid and electric vehicles and attempts to tackle the problem of inequity where lower income households would usually bear the cost of this transition given the higher capital costs of electric vehicles. This will complement the Clean Car fee-bate scheme the Government already introduced last year to incentivise the purchase of low emitting vehicles supporting their target of 30% zero emissions vehicles in the light fleet by 2035.

The Government has also established a target to reduce freight emissions 35% by 2035 through providing funding to the sector to buy zero- and low-emitting trucks as well as setting up a ‘freight decarbonisation unit’ to investigate the regulation of heavy vehicle imports and coordinate Government investment into enabling infrastructure.

Energy

On energy, the Government plans to facilitate emissions reduction in industry by providing significant funding to support initiatives focused on improving energy efficiency and costs associated with switching from fossil fuels to low emissions alternatives through its Government Investment in Decarbonising Industry (GIDI) Fund. They also announced that any new low and medium temperature coal boilers and fossil fuel baseload generation would be banned with the phasing down of existing fossil fuel boilers/generation expected over time.

Regarding target setting, the Government has decided to adopt a goal of 50% final energy consumption from renewable sources by 2035, rather than focusing on moving to 100% renewable electricity generation, which they recognised as aspirational. They acknowledge there needs to be an appropriate transition away from the reliance on fossil fuels and part of this will involve setting a gas transition plan by the end of 2023. Work currently underway assessing the feasibility of further renewable energy sources, like hydrogen and pumped hydro, will continue and regulatory settings to enable investment in offshore options will also be developed within the next couple of years.

Agriculture

The agriculture sector represents half of the country’s gross emissions and therefore plays a key role in New Zealand’s de-carbonisation pathway. One of the main policy announcements from the plan includes the allocation of funding towards the establishment of a ‘Centre for Climate Action on Agricultural Emissions’ intended to develop and commercialise products to help farmers reduce their emissions.

Although the sector is not captured under the Emissions Trading Scheme, it will become subject to its own pricing mechanism by 2025. This will help drive emissions reduction at the farm level and is supported by an initiative to have all farms measuring their emissions and having a mitigation plan in place by the time the emissions pricing mechanism is introduced.

Investment implications

Although detail is lacking on some long-term policy initiatives, it is clear that there will be higher costs for some companies facing more stringent regulation, but also benefits from government funding for climate-related opportunities. Examples include regulation to ban new coal-fired boilers and baseload fossil fuel generation, agricultural emissions pricing, and possible regulation of heavy vehicle imports which would have both capital and operating expenditure implications for the agriculture, electricity generation and freight companies listed on the New Zealand market.

The net impact for these sectors will be difficult to judge given tailwinds coming from government funding towards climate solutions such as methane inhibitors/vaccines and low emissions vehicles plus the higher expected electricity demand that would result.  Company level impacts will largely depend on those able to best capitalise on clean technology innovation and government incentives as part of their climate strategies.

The role of finance was also emphasised in the plan with the Government intending to issue Sovereign Green Bonds from later this year and to collaborate with the sector via engagement with Toitū Tahua: Centre for Sustainable Finance and the Sustainable Agriculture Finance Initiative to accelerate the shift towards sustainable agriculture and the wider financial system. For context, while New Zealand has seen an increase in sustainable bond issuance, this still lags relative to the growth in other developed markets, highlighting a gap where investors can support a faster transition.

At Harbour, we will continue to assess company and sector level exposure to climate change risks and opportunities and seek to engage and invest in companies that will be part of the solution in meeting our net zero target and limiting global warming to 1.5˚C. We believe this will improve the quality of long-term returns for investors.

 

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