Sustainability is becoming an increasing focus for individuals, investors, companies, regulators and governments around the world, and rightly so.

The leading international body for assessing the science related to climate change (known as the Intergovernmental Panel on Climate Change or the IPCC), recently released the most comprehensive report on climate change to date. The report is sobering. It confirms human influence is the dominant driver of climate change. It also looks at where the world’s carbon budget is currently sitting – a carbon budget is the cumulative amount of greenhouse gases that can be emitted over a certain period. Based on the rate of current global emissions, we have approximately 12.5 years until the 1.5 degree carbon budget is likely to be exhausted.  This means our chance of limiting warming to 1.5 degrees Celsius above pre-industrial levels is fast dwindling.

So where does New Zealand sit when it comes to contributing to a reduction in emissions?

New Zealand is one of a few countries globally to have a zero-emissions goal enshrined in law, through our Zero Carbon Act. The Act aims to achieve net-zero emissions of all long-lived greenhouse gases (carbon dioxide and nitrous oxide) by 2050.

New Zealand is also a party to the Paris Agreement – a legally binding international treaty on climate change, with a goal to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees, compared to pre-industrial levels. By 2020, parties had to submit their plans for climate action – known as their Nationally Determined Contribution (or NDC). New Zealand’s first NDC covers the period 2021-2030 and aims to reduce emissions by 30% below 2005 levels over that period. Our NDC covered both long-lived and short-lived greenhouse gases i.e., both carbon dioxide and methane.

New Zealand’s main instrument to reduce greenhouse gas emissions is the Emissions Trading Scheme (ETS). For every tonne of emissions a polluter releases in a year, they have to surrender a carbon credit back to the government. Only a certain number of credits are available to trade. Currently, the price for a New Zealand Unit (NZU) is about $50 (with a current price ceiling of $51). The government has recently outlined a change to the ETS rules that will allow the price ceiling to increase to $110 per NZU by 2026. This is important. The recent IPCC report stressed that carbon prices will be key going forward. Estimates show carbon prices of at least US$50-100 (NZ$70-140) per tonne of carbon dioxide are required by 2030 to reduce emissions to cost-effectively meet the goals of the Paris Agreement. A 2019 report on New Zealand’s emissions found that the ETS would have the single greatest impact on emissions of any policy announced to date.

However, the ETS is not a silver bullet.

One issue is that agriculture, the country’s largest greenhouse gas emitting sector, is exempt from the scheme until 2025. While reducing emissions is a huge challenge for farmers, the IPCC report demonstrates we must move faster on these emissions. Our Zero Carbon Act fails to set a goal for reducing methane emissions from agriculture and waste. Outside of the Act, New Zealand has a separate target of at least 24-47% methane reduction below 2017 levels by 2050. However, the IPCC has previously stated a 40-58% reduction on 2010 levels is required by 2030 to reach 1.5 degrees of warming.

For the first time in a major international report, the IPCC turned their focus to methane. While it’s less prevalent than carbon dioxide, it is 80x more powerful at trapping heat over the first 10-20 years in the atmosphere. Human-made methane emissions are responsible for at least a quarter of today’s warming. Reducing methane therefore has an outsized impact on near-term temperature rise even as we work to reduce carbon dioxide pollution.

This has major implications for New Zealand. We expect this to be a critical point of discussion at the upcoming COP26 – the next meeting between the parties to the Paris Agreement. It should also be a critical point of discussion for our government going forward too. New Zealand’s Climate Change Commission has recently issued their final advice and the Ministry for the Environment expects to respond to that with a draft Emissions Reduction Plan for NZ in the coming weeks.

Climate Action Tracker rates NZ’s current NDC as ‘insufficient’ and not consistent with holding warming below 2 degrees, let alone with the Paris Agreement’s stronger 1.5 degree limit. NZ needs to do more, faster.

The Sustainable Investment team at Milford work hard to be across these important reports and updates, allowing us to adjust the investment team’s engagement approach accordingly. As active managers, we can use our influence as shareholders to improve the sustainability of the companies we invest in, ensuring they are committed to reducing their emissions. Previously, emissions reduction plans in line with a 2 degree world were acceptable. With this latest IPCC update, it’s clear that individuals, investors, companies, regulators and governments must set their sights on achieving a 1.5 degree world.