New Zealand's second ERP unlikely to address NDC shortfall amid Q4 Action Plan release: sources

The New Zealand government on Oct. 1 released its fourth quarterly Action Plan, which aims to finalize policies related to the Emissions Trading Scheme, including the second emissions reduction plan and the treatment of agricultural emissions once removed from the ETS. However, sources say the plan is unlikely to address the shortfall of Nationally Determined Contributions.

The country’s updated NDC covering all sectors and greenhouse gases aims to reduce net emissions by 50% below gross 2005 levels by 2030. New Zealand also targeted net-zero emissions for long-lived greenhouse gases, mainly CO2 and nitrous oxide, by 2050 and reduce biogenic methane emissions by 10% below 2017 levels by 2030.

The legislation to remove agriculture is already in parliament, a New Zealand-based climate change policy expert told S&P Global Commodity Insights, as the government intends to pass the legislation to complete this removal in this quarter. Additionally, the government plans to announce policy direction to limit farm conversions to forestry on high-quality land to protect food production in this quarter.

Under the Climate Change Response Act 2002, the absence of an agricultural pricing system would have triggered a provision that would bring the sector within the country's ETS scheme.

However, there were no updates on the actual timeline for when these policies and legislations will be finalized, a NZU trader said, although the government has previously stated that the pricing of agricultural emissions will begin by no later than 2030.

“The government has not provided any detail or modelling yet for the forestry limitations proposal, so it is unclear what impact that may have on [NZU] supply,” the expert said.

Agricultural emissions

Agriculture makes up roughly 50% of New Zealand’s greenhouse gas emissions and 90% of biogenic methane production, while also contributing to 11% of domestic GDP and 81% of goods exports.

Due to this, the government believes it would be short-sighted to reduce net emissions by shrinking the agriculture sector, or by converting its most productive agricultural land into forestry under the ETS.

Even so, the government is confident it can deliver on its NDC and net-zero promises by putting an emphasis on technological means such as methane inhibitors, animal vaccines, gene-edited grasses, and advanced animal feed to reduce farm emissions instead.

Commodity Insights previously reported July 12 that the decision to remove agriculture from the ETS could deter New Zealand in meeting its climate goals, as a number of local experts raised concerns on the timeline for a restart of the planning process as well as an over-reliance on unproven technology-based reductions.

These experts also highlighted potential difficulties posed by the EU's upcoming Carbon Border Adjustment Mechanism in 2026 that will put a carbon tax on emission-intensive commodities exported to the region, identical to its internal carbon price under the ETS.

Final Second ERP

In the draft for its second emissions reduction plan July 17, the government pledged continued support to the ETS while suggesting a reliance on carbon capture technology, renewables and the forestry sector under its plan to reduce emissions through 2030 while keeping carbon prices low to soften the impact on industry and consumers.

New Zealand Unit prices hit a one-month low one week after this consultation was released, due to lingering policy uncertainty following the release of the second ERP draft as it lacked details on how it would restore confidence in the emissions trading scheme.

“I don’t expect the final second ERP to address the NDC shortfall as its role in legislation is to meet the domestic emissions budgets which are less ambitious,” the first expert said on the government’s intention to publish the plan to deliver the first two emissions budgets by the end of the quarter.

In fact, the Climate Change Commission previously stressed the need for clear climate policy support for the country to meet its emissions budget, Commodity Insights reported July 30, amid uncertainties and risks that could potentially lead to the country falling short of its second emissions budget and those going forward.

Reducing on-farm emissions was among the areas listed as having the greatest impact for driving down emissions.

The NZU market will therefore look to these policy and legislative updates for more clarity on price direction and trends, as outlook remains cloudy ahead of the next and final 2024 auction Dec. 4, according to market participants.

Platts, part of Commodity insights, assessed NZUs at NZ$62.90/mtCO2e ($38.50/mtCO2e) Oct. 8, unchanged on the day.