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CLIMATE CHANGE: NZ VOLUNTARY AGREEMENTS WITH INDUSTRY AND ENERGY EFFICIENCY 1995-1999

From Chapter 14 of the memoir Compass Points


One day in 1994 John Belgrave, the Secretary of Commerce, asked if I’d be interested in a new job as the ministry’s International and Environmental Policy Co-ordinator. He noted that many of the branches of the ministry — energy, business, consumer affairs, tourism and others — were dealing with environmental matters and sustainable development, and had international dimensions. He wanted a neutral sort of person to ensure it was all coherent and co-ordinated. It sounded good to me.

I convened a couple of ministry-wide meetings and found there was real depth in the ministry’s engagement with environmental issues. One branch, for example, had played a prominent role in policy concerning the hole in the ozone layer, while the energy division was becoming interested in greenhouse gas emissions and climate change. We set up some ongoing co-ordination mechanisms.

I concluded early on that it would be advantageous to have some national measures of environmental performance to apply to other agencies as well as Commerce, and arranged an initial call on a deputy secretary of the Treasury to take a sounding on this. He was firmly opposed: Treasury regards Gross Domestic Product as a surrogate measure of sustainability, he intoned, and we’ll stick with that … as they do.

The idea was overtaken by two developments, both related to climate change. One was cabinet’s approval, driven by a farsighted Minister for the Environment Simon Upton, of a set of policies to reduce greenhouse gas emissions to 1990 levels by year 2000. There were three components. One was electricity market reform, the idea being that by opening electricity generation and distribution to competition, New Zealand’s electricity needs could be met more efficiently. I was glad that I was not involved in trying to implement that. The second was the establishment of a new body, the Energy Efficiency and Conservation Authority, to promote energy efficiency and conservation. That happened and was, and is still, reasonably effective. The third policy was to negotiate voluntary agreements with major emitting businesses to reduce their CO2 emissions. I was asked to be the government’s negotiator on this.

The second development was the international agreement to establish a ‘Framework Convention’ on climate change, to be known as the FCCC. There was much to be done in preparing New Zealand’s policy positions for that.

A study of existing voluntary agreements in other countries showed that there were a few that were well regarded, mainly in Europe, and specifically in the Netherlands. I sought approval to study these and in October 1995 visited The Hague, Brussels and London for talks with officials and to attend a weekend conference in Bonn related to emissions agreements. At home there were intensive meetings with companies concerned about the implications of agreements for them, environmental lobby groups, other government agencies, scientists and others. The decision most popular with business and least popular with the environmentalists was that the emission reductions to be measured in the voluntary agreements would be relative to a ‘business-as usual’ (i.e. a projection of emission volumes if no changes were made) line rather than an absolute reduction.

We developed as straightforward a model agreement as possible, but with full reporting and monitoring requirements, and I was given the support of an energy engineer from EECA to undertake the technical evaluation of company proposals. We identified 12 businesses as New Zealand’s biggest emitters and I was off around the country to see each chief executive and seek agreement to negotiate an agreement, a slow process that took two or three years.

The initial response was varied. Some had hardly heard of climate change and the need to reduce greenhouse gas emissions, but were willing to give it a go once convinced. Others were very hard-nosed and wanted to know clearly the advantages to them of signing up to a reductions programme, and the penalties if they did not. There was not much to go on here, but they could all accept that reducing their fossil fuel consumption was a useful contribution to their bottom line and I didn’t mind if they regarded their contribution to slowing climate change as a by-product of that. We offered them full government recognition of their green credentials if they signed up, and invited them over time to a series of events in Wellington with the Minister of Energy to co-sign and receive their certification.

As the decade wore on, policy began to focus on what might replace voluntary agreements after 2000. The push for either a carbon tax or a tradable permits scheme, neither of which would be remotely voluntary, enabled me to say that the companies that were signatories to a voluntary agreement would be more likely to be listened to in those debates than the companies that declined.

Slowly the New Zealand Refining Company at Whangarei, BHP NZ Steel, and a dozen companies involved in building materials, aluminium smelting and other industries agreed in principle, worked through what reductions they could make, negotiated these with us, and settled on the text of an agreement. The toughest was the New Zealand Dairy Group. Its CEO, Pryme Footner, would not have a bar of the idea and threatened that if the government tried to get tougher with any penalties on emissions, he would move the Dairy Group’s head office from Hamilton to Australia. One could only take that as an opening position. It was a long wait before one of his senior staff rang to say they had reviewed the situation, would come to Wellington in two days to show me what they would do, and to sign an agreement. I explained that it was bit more complicated than that, and no doubt they thought they were dealing with just another glide-time public servant. But they came and handed over their data, which I passed on to my EECA colleague for technical evaluation, and eventually we reached an agreement that both parties were happy with.

As the debate over a successor arrangement heated up, some environmentalists, distrustful of business and certain that industry would only reduce emissions sufficiently through legislated impositions, launched strong attacks on the voluntary arrangements, centred on the argument that since New Zealand was clearly not going to reach its 2000 target the agreements had obviously failed. They were wrong. The agreements were only one of the three prongs in the government’s policy, and it was probable they were attaining their share of the target. The agreements also achieved a useful psychological impact by greatly raising industry awareness of the need to reduce emissions and preparing industry leaders for tougher future policies.

I became interested in two variants to the direction of government policy thinking. One was about measures that targeted different sectors in different ways. For example it became clear during the 1990s that the fastest-growing contributor to the country’s greenhouse gas emissions was the transport sector, and it appeared that the economy-wide measures under consideration — a carbon or emissions tax or a permits system — would not impede this growth. The effect of such measures on the price of a litre of petrol at the pump, which in any case fluctuated widely with exchange rates and other factors, would not influence consumption nor impact on transport emissions. But the effect of a tax on carbon dioxide, at the time popularly called a coal tax, would be severe on industries based on burning coal and force the closure of some, probably NZ Steel, which would have substantial regional social effects as well as national economic effects. It was a separate issue whether closing these factories was necessary for our climate change objectives — their emissions at least were static — but in my view it was totally ineffective to have policies that let transport off the hook.

We debated price elasticities and related factors, but my arguments were never a starter. I took home some economic journals and found that the detailed research confirmed the prevailing theory, that economy-wide measures like a carbon tax were indeed the most efficient method of reductions, but the difficulty the government had subsequently in actually introducing such measures gives some support that alternatives might have been better in practice. I knew the effect of imposing emission standards on imported motor vehicles would increase the price of these, but not hugely, and with the burden widely spread, and that has always seemed to me to be one of the simpler and more effective routes.

Then there was the Dutch model of having a second round of much more stringent voluntary agreements. For these the government would set high requirements for reductions but companies that signed up to them would get specific benefits. But again there was no support in the New Zealand policy departments for examining these further. Some may find it ironic that purist economists and the most passionate greenies were for different reasons aligned in wanting a tax or permit system in a way that ruled out other options.

My work on greenhouse gas agreements led me to being assigned to the New Zealand delegation to the First Conference of Parties (COP 1 in the jargon) to the FCCC held in Berlin in early 1995, in the depths of the northern winter. Oh, it was cold. The conference took two weeks, with the usual late-night last-minute dramas to get an agreed text as the outcome. But the big picture was fixed early on when a group of developing countries led by China passionately argued that restrictions on emissions could not apply to them. The West had had a century or two of unimpeded emissions, and was the cause of most of the problem; the developing countries needed time to do the same so that their economies could catch up. It was an understandable attitude at one level, but we all knew that the atmosphere could not tell from which countries the emissions came, nor distinguish between moral and immoral emissions. The meeting set the world on a sad track for climate instability and global warming, but at least it approved the Berlin Mandate which identified that developed countries would do something and permitted further negotiations leading to the 1997 Kyoto Agreement. Incidentally I briefly met with the German Minister for the Environment who opened the conference, Angela Merkel.
This field of work also led me to get involved in wider areas of New Zealand energy policies, which in turn led to some other stimulating and adventuresome overseas assignments. Perhaps the most challenging was a visit to Paris to a meeting of the OECD/ International Energy Agency on energy policy. The background was that OECD members submitted to five-yearly reviews by an international team, which did a report on which the member country was then questioned. New Zealand’s turn in the energy field had come up, the OECD team had visited, drafts of the report had gone back and forth, and it was now time to face the music before a large meeting of representatives of all member states. What a privilege to be chosen for this — drawing the short straw, it is often called! The central theme was New Zealand’s commitment to market forces to manage its energy needs. We had no mechanism, like the arrangement under the old Ministry of Works, for the government to assess the country’s future needs and meet these by building dams or other means. The clear policy was that if shortages loomed then there would be profits to be made and businesses would step in to fill the need. I found there was not another single country out of the 25 or so around the table who believed this. They found our policy generally incredulous, but specifically so in respect of a geographically isolated country like New Zealand. They delighted in pointing out that if their country miscalculated, or some national disaster struck their generating capacity, they could always buy electricity from their neighbours … but New Zealand? I can only say that I read my brief several times on the plane going over, and knew the answers off by heart, and presented them with apparent conviction even if my audience remained sceptical.