Friday, 05 November 2004

Climate Change and business

Hon Pete Hodgson - Address to Climate Change & Business, The Australia – New Zealand Conference and Trade Expo 04, Sky City Convention Centre, Auckland, 08:30, 05 November 2004.

Good morning. I am delighted that this conference is taking place. I am delighted also to have a chance to make a few remarks.

I convene a group of Ministers responsible for developing climate change policy and it has been one of my more challenging tasks for two main reasons.

First, the issues of climate change seem to cross almost every area of endeavour, almost all areas of government policy and certainly every jurisdictional boundary that exists. It is a pervasive area of policy and I'm not yet sure that I know where its outer perimeter lies.

Second, climate change is an unusual public policy challenge because if policy is going to be effective than it must be developed and implemented years or decades before the main effects of climate change are seen. Usually policy is developed in response to something; climate change policy must be developed in anticipation of the effects arriving and starting to bite. But they will arrive and they will bite.

Every five years the global scientific evidence is amassed, sifted and made available in a form that people like me can assimilate. Every five years the science continues to firm. Every five years the trend becomes clearer and the need for a response more overt. Which leads me to make a third opening observation. I don't know of another area of public policy that is so demonstrably driven by the science evidence.

A brief history illustrates the point well.

The first science report was published in 1991. In 1992 at Rio de Janeiro the United Nations Framework Convention on Climate Change came into being. In 1996 the second five yearly report arrived and the following year the Kyoto Protocol was developed and signed. In early 2001 the third report arrived. By December that year, in Marrakech, the rules of the Kyoto Protocol were finally settled. The fourth report is due in 2007. We shall see what its influence on us all might be.

For the past few years New Zealand, like countless other countries, has been designing, consulting upon, announcing and implementing a domestic policy response. Throughout that time we have been determined not only to acknowledge the threat that climate change poses to New Zealand and to the world, but also to view this change as a series of opportunities.

We have been determined to ensure that our policy allows for and promotes opportunity. We have certainly used rules and regulations, and education, and research, and will continue to do so. But always we have had a focus on securing business opportunities.

The reason is simple. Climate change might well be the largest global environmental threat we have all faced, but it will not be resolved or ameliorated unless it becomes an economic issue. Unless industry and commerce can play their parts, unless leading businesses can lead, unless the private sector can make a buck, or save a buck.

Blame will not work nor judgementalism. Nor occupation of the high moral ground. Nor punishment for hedonism or profligacy. These approaches are the enemy of effective progress. These approaches amount to nothing more than elaborate finger pointing, at an industry, at an activity, at someone else.

That is why the negotiations on the Kyoto Protocol's so-called flexibility mechanisms mattered so much. That's why being able to trade emissions units mattered so much, and it is why the discovery of a price for carbon dioxide emissions mattered so much. If we got these things right they would enable progress at least cost and they would enable business to participate freely.

We now know that we have got these things right. The Clean Development Mechanism, Joint Implementation projects, and emissions trading are arriving. We now know also that the Protocol will enter into force and that a price for carbon will firm. We know that all those who took a commercial bet on that outcome, who moved early, will be rewarded for their prescience, as they should be.

And now this conference moves us to the next stage, a discussion on what those opportunities are.

This conference is a first for New Zealand. So I shall pause briefly to acknowledge and thank those whose idea this conference was. It was first a New Zealand idea but it almost instantly became a trans-Tasman partnership. So I shall thank the Australian public and private sector leadership in the same breath that I thank New Zealand's.
My thanks too to the sponsorship that accompanies the leadership, again, trans-Tasman and again public and private sector. My thanks also to the speakers, some illustrious, including some illustrious offshore speakers. In all this is an important event, and an important inaugural event.

But now to return to business opportunities and to explore the myriad of them that exist. For me the starting point is both the least newsworthy and the most obvious climate change opportunity for business. It is the most direct way to improve the bottom line with certainty. It is to approach energy efficiency through precisely the same lens that all other input costs are approached. The same lens that the cost of money is viewed through, or the cost of inputs. Energy efficiency gains are, for many businesses, easily overlooked. The reason is that the market is opaque, compared, say, with the supply side of energy. Information is harder to come by, the inefficiency is hard to see, the investments needed are often specialised or eclectic. These are surmountable problems but they are not sufficiently surmounted.

Of course these remarks are less true, or down right untrue, for many businesses here. Many New Zealand businesses have made serious or even spectacular gains, which further highlights that others can too, but have not.

Another opportunity, also less obvious, is in predicting and providing for the goods and services needed, not for mitigation, but for adaptation. Consultancy advice, water harvesting technologies, new planning software, technologies to handle higher winds, or hotter days, or storm surges. This year in New Zealand, towers carrying electricity on the South to North Island link blew over, fortunately during a period of lower demand. Gas to the east coast of the North Island was cut when a bridge washed out. New land data technology helped farmers assess the flood damage in the back blocks. Some home owners were paid to put their houses on stilts, and sewage overflowed into water bodies frequently. This in a country which didn’t suffer the ravages of Japan, the Caribbean, Florida or Bangladesh that this year's weather has offered up so far. And this in a period that is thought to be a curtain raiser for climate change, rather than climate change proper.

And then there are the more obvious opportunities; renewable electricity production, biofuels, new materials, energy efficient appliances, better architecture, advanced public transport systems, smart homes and the like.

Two or three years ago the government and the New Zealand Business Council for Sustainable Development funded a study that sought to scope the climate change business opportunities landscape. It turned up an extensive array of opportunity. Climate change technologies appear to be quite rapidly changing. They will probably continue to change rapidly because the idea of a carbon constrained economy is novel. People's heads are moving into spaces that they haven't occupied until now. Innovation is therefore inevitable. It is also great fun to watch.

Governments have an important role to play. Not just in preserving business opportunities, but in creating them.

For example we offer Negotiated Greenhouse Agreements to high-energy intensive exporting or import substituting enterprises. New Zealand is not about to allow the current patchy coverage of the Kyoto Protocol to damage our competitiveness.

Under these agreements, businesses move to world's best practice in emissions management in return for exemptions from emissions charges. The criterion of world's best practice is both hard to measure and challenging. But many of the companies with whom we are talking are already well attuned to emissions management and to the development of new technologies or management systems to achieve them. They are attuned to both the need and the way to take the next steps. Their energy bills reduce and they foot it with their most efficient global competitors.

Again, emissions reductions and increased competitiveness go hand in hand. It is anticipated that working closely in business in this way will achieve efficiency gains and emissions reductions in excess of those one might expect through an emissions charge alone. We are currently in talks with twelve major New Zealand businesses that collectively account for around 55 per cent of industrial electricity usage.

One opportunity, managing methane and nitrous oxide emissions from agriculture, is uniquely important to New Zealand. These emissions are half our total emissions, giving New Zealand a greenhouse gas profile unlike any other country. The neo-liberal response of dropping an emissions tax on agriculture was never going to work and was never part of our policy design. Instead we chose research as the appropriate starting point, and we also determined that such research should be jointly funded, rather than publicly funded.

This gave rise to the bizarre fart tax campaign which sent ripples of giggling around the globe and secured for Federated Farmers the membership increase they had been seeking. However their campaign came and went and cool heads prevailed. The result is a research portfolio of consequence, jointly funded, and managed ably through a research consortium.

It is of course far too early to know where that research will lead. But there are already some startling possibilities, some which are necessarily not public. The opportunity from this research is rather obvious. Methane is energy. Its emission is a loss from the system. Nitrous oxide is not energy, but the local environmental effects of nitrogen are well acknowledged. So already an economic and a local environmental benefit can be identified. In addition the research may uncover intellectual property, from which further commercial gain may flow.

As with most countries, New Zealand enjoys several international climate change research agreements, and in this area of research we have useful and growing alliances with Australia and the United States. The Australian agreement was expanded only yesterday.

Research plays a role, globally, in the quest for a bunch of holy grails, ranging from nuclear fusion, hydrogen storage to carbon sequestration, new biotechnologies for new biofuels, and the like. New Zealand, like many other countries is a participant in that quest. Business opportunities in these areas are prospective, rather than imminent, but if any of those holy grails is approached, significant wealth creation awaits.

Returning to the present. A New Zealand policy that offers material opportunity here and now is the so-called Projects to Reduce Emissions programme. The Prime Minister spoke of it yesterday.

By the end of this year about $150 million worth of emissions units will have been won by tender. These can be sold into the global market. The tendering process has been instructive. The New Zealand private sector reacted strongly and innovatively to the first round of four million tonnes or emissions units and the bid was significantly oversubscribed. This despite the fact that we asked tenderers to take the risk on whether President Putin might or might not reach for his pen. The second round of six million units has just closed and should highlight the innovative thinking that's about.

Projects come in many sizes. Big projects, like the two that saw New Zealand's wind generation quadruple this calendar year. Small projects like the capsicum exporter just north of here who switched from gas to forest waste or the water company that reckons on getting electricity out of pressure reduction valves just south of here.

Buyers for emissions units are emerging. There are government buyers like the Dutch, with whom we have signed a bi-lateral arrangement to facilitate business access to the European carbon market, and others with whom we are developing similar understandings. There are also private sector buyers participating in emissions trading schemes in the EU and Norway, or buying to comply with voluntary emissions reduction agreements as in Japan.

From about 2007 we will introduce an emissions charge in New Zealand. We anticipate it will be a precursor to a full emissions trading scheme sometime in the future when markets have sufficient liquidity, depth and stability. The charge will approximate the global price of carbon dioxide, but with a cap of NZ$25/tonne. It will be fiscally neutral. The revenue will be recycled back into the economy, through, for example, the tax system. The advent of a price for emissions in our economy will drive change in investment behaviour and in the way people think. It will underpin business opportunities throughout the domestic economy.

But what of international business opportunities? One of the many reasons New Zealand ratified the Kyoto Protocol is that ratification gives our business community an edge not directly available to companies from non-ratifying countries. It gives kiwi businesses the potential to earn emissions units in 125 other ratifying nations.

New Zealand businesses can participate directly in the Kyoto Protocol's flexibility mechanisms such as Joint Implementation projects and have started to already. New Zealand businesses can also participate in Clean Development Mechanism projects. Companies in Australia and the United States can too, but they need to partner with a company from a ratifying nation like New Zealand. That presents New Zealand with an excellent opportunity.

It is this area of endeavour, the international business opportunity, where the door has been spotted yet barely opened. That is all pretty much in front of us.

So there you have it. Climate change is a global challenge and it presents global business opportunities. My government is certain that climate change mitigation and adaptation needs business. We are certain that the business leaders in our economy, such as those here today, will seek out and seize those opportunities. We are certain smart businesses will find ways of improving their efficiency, bottom lines and competitiveness as a result. And we are certain that international business partnerships will develop and flourish.

I trust this conference will be the first of many. There is much learning by doing ahead of us. The size and scope of events such as this can only expand as we find new ways of realising the business opportunities that climate change presents. Thank you for the leadership you are showing.

ENDS

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