The Government should be pretty happy with the Productivity Commission's draft report, released today, on the transition to a low-carbon economy.

The commission concludes that a long-term target of net zero emissions of greenhouse gases by mid-century is feasible, though challenging.

It supports the adoption of a British-style architecture for climate policy. That involves a statutory long-term target for emissions (or targets, in our case, since it favours a separate target for methane as a short-lived gas), with medium-term carbon budgets recommended by an independent Climate Change Commission en route to the long-term goal.

Such a framework, if well designed and adapted to New Zealand circumstances, ought to provide the right combination of policy stability, flexibility and accountability, it believes.

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The commission favours the inclusion of agriculture in the emissions trading scheme (ETS), on a similar basis to other emissions-intensive, trade-exposed industries.

It calls for significant reforms to the ETS, along the lines advocated by the Wellington think tank Motu, including rolling five-year forward caps and a wide band between floor and ceiling prices.

While it sees emission pricing as the central policy lever, the commission accepts the need for supplementary measures.

One example would be introducing a "feebate" scheme, through which vehicle importers would either pay a fee or receive a rebate, depending on the emissions intensity or fuel efficiency of the vehicle.

However, it does not support setting the hard target of 100 per cent renewable electricity generation by 2035, arguing that it could prove counter-productive to the broader climate change agenda if it drove electricity prices to levels that discouraged the uptake of electric vehicles or the electrification (through heat pump technology perhaps) of some industrial demand currently met by fossil fuels.

It warns that far higher carbon prices than we have now will be required over time. So will a lot of land-use change, principally out of sheep and beef farming and into forestry.

It commissioned modelling which considered two different long-term targets: net emissions of 25 million tonnes of carbon dioxide equivalent by 2050 (from 56 million tonnes now) or the more ambitious net zero the Government talks about.

The commission concludes that a long-term target of net zero emissions of greenhouse gases by mid-century is feasible, though challenging.
The commission concludes that a long-term target of net zero emissions of greenhouse gases by mid-century is feasible, though challenging.

For both targets it considered three different rates of technological progress over the coming decades: disappointingly modest, radically disruptive or something in between.

"A pathway relying on a combination of three key drivers — the expansion of forestry, the electrification of transport, and changes to the structure and methods of agricultural production — could see New Zealand reduce its emissions to 25 million tonnes of CO2e at an emissions price rising to between $75 and $152 a tonne by 2050," it found.

"New Zealand could reach net-zero emissions by 2050, with emissions prices rising to between $157 and $250 a tonne by 2050."

While such carbon prices might look gulp-inducingly high compared with $21 now, they fall within the range of such projections internationally, though only just in the case of the net zero, least technological tailwind scenario.

"My guess is even when you get up to the $75 a tonne range you have got a few people's attention and you are likely to see interesting things happening, on everything from land use to investment," commission chairman Murray Sherwin said.

The modelling also indicates that land planted in forests will need to increase by between 1.3 million and 2.8 million hectares, mostly converted from marginally profitable beef and sheep farms. Growth in horticulture, from a relatively small base, is also likely to play a significant role in reducing agricultural emissions, the commission says.

But the needed rate of land-use change is comparable to the rate at which, over the last 30 years, beef and sheep farming converted to forestry, dairying and other uses.

The electrification of transport can help New Zealand reduce its emissions. Picture / Alan Gibson
The electrification of transport can help New Zealand reduce its emissions. Picture / Alan Gibson

The transition pathways modelled will require an average of between 44,000 and 90,000ha a year of new forests to be planted over the next 32 years. This is far higher than the average net 18,000ha that was planted each year between 1990 and 2015. The availability of suitable land for planting and the relative economics of afforestation and other land uses will be crucial.

Under all the scenarios, sheep and beef farming remains much the largest land use, however. This is not a future where New Zealand is covered with pine trees.

The extensive consultation the commission has conducted so far found strong support for a framework modelled on the British Climate Change Act. That model has a legislated long-term objective, medium-term targets consistent with that goal and an independent and expert body to advise and monitor progress towards it.

It is a model which has been advocated for some time by Generation Zero and is supported by the Parliamentary Commissioner for the Environment Simon Upton and his predecessor Jan Wright. It is the model envisaged by the Government's planned Zero Carbon Bill.

Sherwin says it goes without saying that both major political parties need to be on board for such a structure to work.

"Unless there is some sort of consistency, at least in broad direction, you won't have the investment in long-lived assets. They don't need to be signed up on every point but there needs to be some sort of consistency that, yeah, that's where we need to go and these are the sorts of mechanisms we would like to use."

So one of the draft report's recommendations is that the Government should seek a high level of political support and consensus for new climate change legislation, with an aim of enacting legislation that has a strong prospect of policy and legislative durability regardless of the make-up of the government.

The commission accepts, of course, that decisions about New Zealand's transition to a low-emissions economy, including the setting of carbon budgets, are highly political and go to the heart of a Government's development strategy and political priorities.

But it says an independent Climate Commission could be highly influential and play a valuable role without having the decision-making powers which properly belong to an elected Government.

The 508-page draft report is open for submissions until June 8. The commission's final report is expected by the end of August.