Speech to Climate Change Iwi Leaders Group National Hui

E nga mana
E nga reo
E nga Rangatira
Tena koutou katoa

E Api, mihi mai whakatau mai

Whakatau mai ki a matau kua haramai nei i runga i te kaupapa o te ra

No reira, he huihuinga tangata, he hokinga mahara

Tena tatau i o tatau tini aitua, o tatau tini mate

Ko ratau ki a ratau, ko tatau o ratau morehu ki muri nei

No reira tena ano tatau katoa

Thank you for the invitation to address your National Hui and in particular thank you to Dr. Apirana Mahuika and his executive for hosting us here today.

The Government values greatly its close working relationship with Iwi Leaders in a number of important areas of policy but specifically in developing our international and domestic climate change policy, including the design and implementation of the Emissions Trading Scheme. We know the issues we are consulting on today are complex. We know they are important. The Iwi Leaders Group is a key to the consultations we have held in the past and will continue to be in the future.

I am very grateful for your contribution. Up until a week ago, I was familiar with that contribution only at the international level of climate change negotiations. I often sought and received valuable advice on the international negotiations from Roger Pikia and, more recently Chris Karamea-Insley. Now that I have responsibility for the even more complex domestic side of the policy, I hope to maintain that same quality of dialogue.

I would also like to add that I am acutely aware of the close cross-over these issues in Climate Change have with my other portfolio – Trade. I believe the Trade Agenda is of central importance to the people and enterprises you lead. As some of you at least will be aware from numerous private conversations I have had, I regard promotion of Maori Economic Development as an issue of significance not just for Maori but for the entire country.

Further, given the considerable size and nature of Maori business assets, you will also know my view that I see this as an integral part of the ‘Trade’ agenda. I am passionate about that agenda, having spent my entire professional career on trying to promote and protect NZ trade interests. I see no future for New Zealand that makes any sense which does not involve a better trading performance. Maori business has to be part of that agenda.
At the same time, we are not a single issue nation. And the National Party which I represent is not a single issue political party. We have to find ways to try to advance a number of different agendas and policies at the same time. Sometimes they will clash. In that event, we need to face up to that reality and try and find a reasonable accommodation.

Trying to do our ‘fair share on climate change’ while avoiding imposing too rapidly costs on households and businesses is one example. Some say it is tricky to find middle ground. I don’t agree. It is difficult to hear the ‘‘middle ground’ of New Zealand opinion on climate change but I assure you it is not difficult to find it. That, ladies and gentlemen, is the purpose of this consultation: to find a reasonable balance between interests that, at least in the short term, are not easily aligned.

Let me start by paying a tribute to my predecessor, Dr Nick Smith. I appreciate that you have had a close relationship with Nick. There can be no doubt that as Minister for Climate Change Issues Nick made an enormous contribution in our first term in government and I know that he valued his relationship with the Climate Change Iwi Leadership.

I also want to welcome warmly the appointment of Simon Bridges as my Associate Minister for Climate Change Issues. His appointment is obviously a reflection of the confidence the Prime Minister has in Simon. Simon, who is of Ngati Maniapoto descent, will play an important role in our country’s future, of that I have no doubt. I will be depending on Simon to carry a good deal of the load domestically. When you, the Iwi Leaders Group, deal with him, you are dealing with me and through us, the Cabinet.

Let me make this clear. I take this new responsibility in a very serious way. But I have no intention of slowing down the pace of my work and travel schedule on the Trade portfolio or the work I do on the international side of climate change negotiations, where I have become deeply involved in bits of the international climate change puzzle that are, frankly, rather important.

New Zealand’s reputation on climate change will certainly not be determined simply by what we do with respect to the 0.2% of global emissions that New Zealand must, and has indeed taken responsibility for, in spite of those who say we should hang back and do nothing until a truly comprehensive global response is in place. The leadership New Zealand is providing on the Global Research Alliance on Agriculture Emissions, which is about 14% of global emissions along with the leadership we are providing in coordinating a group of developed and developing countries on Fossil Fuel Subsidy Reform – some call this the ‘missing piece of climate change puzzle’ – also need to be factored into account in any balanced appraisal of New Zealand’s contribution.

Apart from that, our former Climate Change Ambassador, Dr Adrian Macey, chaired the Kyoto Protocol Negotiations in 2011, at the recent Ministerial meeting in Durban and I was invited by the South African Presidency to chair the endgame negotiations of the other track of that negotiations – the so-called LCA track in which the entire developing world and many of the largest developed country emitters led by the United States will make their commitments beyond 2012.

New Zealand, in short, ended up with 100% of the responsibility for the mitigation equation – the core point of the UN Framework Convention. Quite extraordinary in terms of my experience of international negotiations and New Zealand’s contribution. So the next time you read some loose and flamboyant comment about “New Zealand’s international reputation” on climate change because this Government will not endorse some extreme response on our ETS domestic legislation, I suggest you reflect on that. We will not take a step backwards politically on this point.

Reflections on the Consultations:

Let us be clear, the consultations we are launching on proposed changes to our ETS are not starting today. In 2008 the incoming National led Government signalled that the full impact of the ETS needed to be moderated while New Zealand navigated its way through the domestic impacts of the global economic crisis

Accordingly, after an earlier set of intensive consultations, the Government legislated for a series of ‘transitional measures’ to soften the impact for businesses and households. In addition, last year we commissioned an independent panel chaired by Hon David Caygill to review the ETS and provide advice on how to ensure the scheme remained fit for purpose while continuing to deliver long term benefits.

The Panel did a very thorough job, engaging one-on-one with as many stakeholders and interested parties as possible following the receipt of written submissions, before submitting their report to Government mid way through last year. This is another phase of that on-going consultation process over recent years.

This latest phase of consultations will give you a clear sense of the direction we think we need to move the ETS in some areas and, in other areas, an indication of where our thinking is actually very flexible.

Some of the options are extremely technical and Simon and I have talked quite openly between us about the need to reflect deeply on these issues. In terms of our past careers we are both used to dealing with highly technical issues – but in other fields. Perhaps because of that, we are both very mindful of the challenge ahead of us as we seek to deepen our own understanding of the way technical design elements interact with each other.

There are three general points I would like to make:

• First, I would be most grateful if you, and other groups we will consult, take some time and care in coming to a firm view that you wish to convey to Government. There are some very sensitive issues around, for example, Treaty Settlements. We understand this, and we will work through those issues very carefully with you.
• Second, your preferences for tweaking, or changing a little more fundamentally, areas of the policy will vary a lot depending on what assumptions you use about the future carbon price. If you think it will remain at the current low levels, you will reach one set of conclusions. Take a different view of the trajectory of the carbon price – and above all, this is a long game we are playing - and you may reach quite different conclusions. It would be helpful to a good outcome if we all agree at the outset that some of the design choices are not straightforward.
• Third and finally, we are approaching this consultation with an overriding need to continue to manage the economy through the worst global recession the world has seen for 70 years, and manage the enormous challenge of the Canterbury rebuild. We are on track – we have had positive growth in eight of the last nine quarters – but there is more to do. In that context, maintaining fiscal discipline is vital, as country after country that, like us, depends on international capital inflow to maintain their standard of living and employment levels is currently finding out. You do not have to speak Greek to get the point.

There is, at least in my view, no higher responsibility in these difficult times internationally than getting your country’s economic fundamentals right. Everything else depends on that. So that limits certain soft political choices. The days when money poured in through the Government’s front door and exited through the backdoor to scratch every political itch are gone – at least as far as we are concerned. This will influence the Government’s final choices once the results of our consultations are in. Please do not be surprised.

The International Setting

In climate change policy, everything flows from the international framework down to the domestic. We would not have an ETS if it were not for the UNFCCC and the Kyoto Protocol that evolved from the Convention. So it is important to understand where the negotiations have got to and the choices they pose for domestic policy.

My view, shared by a few deep insiders such as Christina Figueres, the Executive Secretary of the UNFCCC, is that the Durban outcome, building on the unexpected success of the 2010 Ministerial meeting in Cancun, represents considerable progress. This is not intended as a speech on the international negotiations so I shall just outline the key outcomes, both generally and with respect to Land Use Flexibility, which is of great importance to you and to New Zealand:

First, we agreed internationally there will be a second Kyoto Commitment. This is important because it consolidates a model on which our own ETS has been constructed and which, for all its critics, has produced the beginning of a broader international response. There is uncertainty about its length – an issue which I believe can have only one result – and there is a question as to whether it will be just Europe or Europe plus New Zealand and Australia that uses this legal vehicle for inscribing a second set of commitments from 2013 to 2020.

Second, we have agreed that the period between 2013 and 2020 is a ‘transition’ to a single and probably legally binding Agreement that will end the Kyoto distinction between developed (Annex 1) and developing countries.

Third, we have made substantial progress in defining the structure for commitments that all the developing world and several of the major non-EU developed countries will use for their commitments in that transition period. More needs to be done to flesh that out – one of several reasons why you should not expect this Government to get ahead of the play and make any final decisions on (a) how much we will commit to in reducing our emissions beyond 2012 and (b) whether we will inscribe those commitments in a second Kyoto Commitment or the alternative and emerging structure which will govern 85% of the world’s emissions, a share that will only grow in time.

As I have argued extensively and in public before, the issue is not whether New Zealand will make a further contribution – of course we will; we would not be having this consultation on the future of our ETS if our effort to control our emissions was going to come to a close in 8 months time! The issue is how much we will commit to, and whether we make that commitment in concert politically and legally with the EU or the non-EU world. We will be watching Australia’s response very closely.

Fourth, Durban made decisive progress on Land Use Flexibility. Decisions were taken there which the review led by David Caygill could not, by definition, take into account. I will come to forestry presently, but first let me describe some general changes we propose and on which we seek your and other interested parties’ views.

General: the Pace of Adjustment

The first significant change addresses the levels to which businesses and households are impacted by the ETS placing a price on carbon.

The impact on Māori households was an important issue for submitters to the Review Panel. Obviously, this concern is not limited to Māori households, but submitters drew attention to the fact rural Māori were particularly vulnerable to increases in the price of electricity and petrol. We have listened and have crafted proposals to act on this.

The 2009 transition measures, including the surrender of one unit for every two tonnes of carbon, effectively halving the cost of the ETS to businesses and households, combined with the twenty five dollar fixed price option, designed to cap the price of carbon, expire on 31 December this year causing a step change in the costs imposed through the ETS.

While the economy is still in recovery mode and details of a new comprehensive international agreement have yet to be negotiated, the Government agrees with the Panel that there is a strong case to more gradually phase out these transition measures between 2013 and 2015 even though this may impose additional cost on the Government. We will get there – just a little more slowly.

There is still potential for volatility in international carbon markets and so the Government is proposing to maintain the $25 fixed price option until at least 2015.

The effect of these changes will be to ease the financial impact on all businesses and households while providing a clear signal about when they will eventually face the full price of carbon. I will now pass to forestry.

Forestry Rules Moving Forward

At the outset, my comments on the rules to apply to Forestry relate to the future beyond 2012. We will abide by the Kyoto rules in their entirety for our first commitment and the scientific advice we are receiving suggests we will meet those commitments. We will not get the precise answer until the so-called ‘True-up’ in 2014 but we look to be in good shape. We need now to reflect on the rules beyond 2012.

The contribution by the forestry sector is essential as New Zealand adjusts to a lower carbon economy and Māori interests have a significant investment in forestry. In particular Māori are major stakeholders in pre-1990 forests with 439,000 hectares or 36% of all pre-1990 exotic forest land, currently estimated to be owned by Māori.

Under the present rules landowners face emissions costs when trees are permanently cleared from pre-1990 forest land. These deforestation liabilities mean that it may be uneconomical for some land to be converted to a higher value use.

In recognition that there was no way to avoid the deforestation liability under the international rules existing in 2008 the Government provided some compensation to all pre-1990 forest landowners through an allocation of NZUs.

Iwi/Māori forest land owners have maintained through a number of consultations that there should be some land-use flexibility and that this could be achieved through ‘offsetting’. Once again this was signalled during the Review Panel’s consultation as being a continuing issue. It is significant therefore that one of the main areas where New Zealand made progress in negotiations at Durban was on the rules that govern how countries account for their emissions from forestry.

The changes made at Durban introduced an 'offsetting' rule for pre-1990 forests which, if adopted domestically, would allow deforestation liabilities for pre-1990 forests to be waived, so long as a carbon equivalent area of new forest is planted elsewhere. This would significantly reduce the deforestation cost to pre-1990 forest land owners and the impact that has on land value.

Properly designed (and I am very comfortable with the detailed rules negotiated around this), offsetting will have complete environmental integrity. I acknowledge that there is an extreme view that is opposed in principle to the use of carbon sinks per se. I understand that view, but I do not share it, we can never accommodate that view, and the entire international system of climate change rules has been set up on the basis that carbon sinks are a vital part of easing the very long-term transition to a vastly decarbonised world economy.

As you will be aware, in 2009, Government had signalled during the Pre-1990 Forest Allocation Plan consultation process that the second tranche would be subject to review if deforestation liabilities changed.

The National Party’s 2011 Election Manifesto also stated that, if elected, a National led Government would introduce offsetting in 2013 and as a result would review the level of the second tranche of allocation.

Given the significantly reduced impact on land value through the ability to offset deforestation liabilities the Government is now consulting on the extent to which the second tranche of compensation should be adjusted.

Feedback is being sought on three options for adjusting the second tranche: cancel the entire second tranche for everyone; reduce the second tranche for everyone; or remove the second tranche only for those who take up offsetting.

We are seeking your views on which approach is most appropriate, taking into account the benefits provided by offsetting and the need to find an approach which is fair and equitable to landowners and taxpayers.

In proposing the options for introducing offsetting the Government is mindful of the need to balance economic growth with environmental integrity and recognises that while certain areas of land are more suitable for productive pastoral farming other less productive and erosion prone areas will benefit greatly from the planting of trees.

I understand that any adjustment to the second tranche raises significant issues for all pre-1990 forest land owners and I am also particularly mindful of the specific reference to allocation of units in some Treaty Settlements. I am convinced however that the introduction of offsetting as proposed will provide long term economic and environmental benefits for New Zealand.

In addition to the two significant proposed changes I have outlined, the Government has been considering how the ETS should evolve over the coming years. In particular, how to ensure it is flexible and responsive to international carbon markets while taking account of our domestic circumstances and our desire to encourage net afforestation.

The NZ ETS is linked to international carbon markets and participants can buy eligible international units to meet their obligations while post-1989 forest owners or pre-1990 forest landowners can sell their units on the domestic or international markets.

Other domestic trading schemes plan to manage the level of international units purchased by offering additional domestic units through an auction process. These schemes also propose setting a cap on the total number of domestic units supplied through auction and free allocation to trade exposed industries.

The Government is therefore proposing to provide in legislation for the introduction of a mechanism to enable the auctioning of NZUs. The number of NZUs auctioned, combined with the NZUs allocated to trade-exposed, emissions-intensive businesses would not exceed an agreed target level of emissions in any one year.

The Government also proposes to enable in legislation the introduction of a mechanism that would place a restriction on the proportion of international units a participant can surrender to meet their ETS obligations. Under current settings, there is a serious danger of NZ essentially exporting capital for no good reason resulting in a loss of economic welfare.

This consultation is seeking your feedback on these options. Specifics design details, including the level of any cap and detailed auction settings, would be subject to further consultation before implementation.

Under the current legislation the agricultural sector will face obligations under the ETS from 1 January 2015. The National led Government has consistently maintained that the obligation for agricultural emissions under the scheme is subject to two conditions: that there are technologies available to reduce these emissions and our international competitors are taking sufficient action on their emissions in general.

We are not just sitting on our hands here, waiting for abatement technologies to arrive on the front door. That is the whole point of the Global Alliance on Agriculture Emissions – an international initiative that I think is astonishingly successful. It will take time but do not bet against our scientists and the scientists of the more than 30 major agriculture countries that have joined our Alliance to find solutions that can produce more food with lower emissions.

Government has already signalled that it intends to undertake a review in 2014, on whether these conditions have been met. In order to enable the results of this review to be implemented we are proposing to include in legislation a mechanism to defer the obligation for some or all of these agricultural gases by up to three years.

We are also seeking feedback on a number of other issues including: the ability for our ETS to link with the Australian scheme should this be appropriate; an update of the accounting methods the scheme uses for gases other than CO2 and the removal of the Government’s obligation to ‘back’ New Zealand units with AAU’s.

As a signatory to the Kyoto Protocol, New Zealand took on an obligation to reduce our net emission levels to equal our gross1990 level for each year in the period 2008 to 2012 or purchase an equivalent number of carbon credits for any excess.

Following the introduction of the ETS, New Zealand is well on its way to meeting this obligation. The ETS is also driving the positive changes we wanted in forest planting and renewable electricity generation

However we remain conscious of the very real effect the scheme could potentially have in what are still challenging economic times.

The Government believes the proposed amendments outlined today strike the right balance between doing our fair share while ensuring the ETS does not impact unreasonably on any one sector of our economy.

I look forward to your feedback on whether we have got this balance right.