Emissions Trading Scheme Review Committee
Submission by Westpac Banking Corporation
February 2009
Contact details: John Johnston
Head of Government Relations Westpac Bank
Overview
Westpac strongly supports the need to implement robust, deep and liquid emissions trading
mechanisms as the most effective means of reducing greenhouse gas emissions in a responsible and cost effective manner.
Doing nothing is not an option. Failure to implement an effective response to the challenges posed by climate change will endanger New Zealand’s future economic prosperity.
Business is understandably focused on the impact that any climate change policy response could have on the economy and on our international competitiveness. However, this must also be balanced with the economic costs engendered by ongoing policy uncertainty.
As a financial institution with a strong track record for prudent fiscal management, Westpac believes that market based mechanisms such as emissions trading are the most effective means of achieving least cost emissions reductions across the economy.
There is no doubt that the impact of the introduction of a price on carbon will be felt across industry and across the economy. There is a case for a number of adjustment support mechanisms to be established with the introduction the scheme to allow business and members of the community to transition into a carbon-constrained economy.
However, Westpac would strongly emphasise that the New Zealand Emissions Trading Scheme (NZ ETS) is fundamentally a financial market. In seeking to apply a market mechanism to achieve
greenhouse gas emission reductions across the economy, the market must be allowed to function effectively, without overt interference from buffering policy mechanisms or short term policy interventions which distort the market, undermine the intent or integrity of the scheme or which provide market participants with the means of avoiding the medium to long-term behavioural change intended by the introduction of a price on carbon.
Westpac continues to strongly support the involvement of financial markets participants in discussions around the implementation of emissions trading in New Zealand. Many of the practical aspects of the NZ ETS will follow the same or similar behavioural and price patterns of existing financial markets, thereby putting financial institutions in an excellent position to prove commentary on how the NZ ETS is likely to develop in practice following implementation.
Financial institutions have the pre-requisite knowledge and direct experience of trading in financial markets, including in international carbon markets, to comment on the practical implications of various design elements and transitional arrangements as New Zealand organisations move into a carbon constrained economy.
Westpac’s submission draws upon the bank’s considerable, market leading experience in factoring environmental and broader sustainability considerations into business policies, systems, and procedures as well as our practical participation in global environmental markets to date.
Summary of submission
This submission has not sought to comment on all of the Terms of Reference under review by the Committee, but has instead focused on the following:
• consider the impact on the New Zealand economy and New Zealand households of any climate change policies, having regard to the weak state of the economy, the need to safeguard New
Zealand’s international competitiveness, the position of trade-exposed industries, and the actions of competing countries.
• examine the relative merits of a mitigation or adaptation approach to climate change for New Zealand
• consider the case for increasing resources devoted to New Zealand-specific climate change research
• examine the relative merits of an emissions trading scheme or a tax on carbon or energy as a New Zealand response to climate change
• consider the need for any additional regulatory interventions to combat climate change if a price mechanism (an ETS or a tax) is introduced
• consider the timing of introduction of any New Zealand measures, with particular reference to the outcome of the December 2009 Copenhagen meeting, the position of the United States, and the timetable for decisions and their implementation of the New Zealand government
Westpac would be happy to provide any additional commentary or respond to any questions on the comments set out below in further dialogue with the Committee.
Detailed comments on specific terms of reference
1. Consider the impact on the New Zealand economy and New Zealand households of any climate change policies, having regard to the weak state of the economy, the need to safeguard New Zealand’s international competitiveness, the position of trade-exposed industries, and the actions of competing countries.
Westpac views climate change, and the policy and market response to climate change, as a critical business risk that warrants precautionary, prudent and early action.
New Zealand is particularly vulnerable to the impacts of climate change, given the relationship between the primary sector and the economy, and its heavy reliance upon the pricing on exports into overseas markets.
Pivotal research, has looked at the economic costs of action or inaction on climate change and the impact of specific policy responses including investment in clean innovation. Broadly speaking, the common theme to emerge is that delaying an effective policy response to climate change results in costs being substantially greater and concentrated over a much shorter period, leading to a major disruptive shock to the economy. This was reflected in both the Stern Review conducted in the U.K as well as detailed economic modelling conducted by Treasury in Australia.
Westpac supports the early introduction of a robust emissions trading scheme with the option of scaling up New Zealand’s response over time in line with global policy developments and the ability of New Zealand’s economy to absorb cost impacts. Global carbon markets are emerging as a key tool for allowing businesses the flexibility to transition into a carbon constrained economy.
Westpac believes that New Zealand should maintain its commitment to the Kyoto Protocol and its successor agreements, since this is the least-cost and most effective contribution New Zealand can make to global efforts to mitigate climate change.
Westpac supports active engagement with the policy dialogue internationally to ensure that an international agreement is reached within a reasonable timeframe and that New Zealand’s best interests are well-represented. New Zealand has a role to play in ensuring that market mechanisms, such as the Clean Development Mechanism, which are so important to economic growth in our region, are rolled into the post-2012 agreement. International market mechanisms also have a valuable role to play in helping New Zealand businesses achieve least-cost emission reductions across their entire portfolio of operations.
Westpac supports the implementation of an effective global carbon market to achieve least cost emissions reductions at a global scale. At the same time, we also recognise that absence of a
comprehensive global agreement in the short term may result in the imposition of additional costs on trade-exposed New Zealand industry sectors, such as agriculture, thereby negatively impacting on New Zealand’s international competitiveness.
Westpac would strongly support a policy response which recognises both the benefits of a flexible market response while also acting to assist trade exposed New Zealand industry sectors in the short term.
Westpac believes that the provisions set out in the current NZ ETS design support this objective, particularly for the agricultural sector. Inclusion of the agricultural sector in the NZ ETS establishes a carbon price signal to incentivise emission reduction across the sector. In the transitional period where a comprehensive global carbon market is still emerging, the potential for New Zealand farmers to face higher costs than international competitors is best mitigated by issuing farmers with gratis permits, rather than excluding agriculture from any emissions trading scheme all together. This will preserve a price on carbon without penalising New Zealand farmers relative to overseas competitors. There is also scope for the government to further subsidise some forms of emissions by issuing more permits if it wishes to overlay further price impact protections.
Similarly, provisions to respond to current economic conditions should not be integrated into fundamental design aspects of the ETS and should not be cause for any delay in introducing the emissions trading scheme as the most cost effective means of achieving emissions reductions across the economy.
Westpac does not see current economic conditions as an irrevocable impediment to establishing the appropriate policy and market frameworks to transition to a carbon constrained economy. Indeed, market mechanisms are naturally amenable to taking account of changing economic conditions. Reduced growth across the economy has the potential to act as a natural limit to emissions growth, which would tend to lower the price of emissions under an Emissions Trading Scheme. A carbon tax would not have this flexibility.
Westpac would also argue that permits should be allocated on the basis of past emissions, to prevent “permit maximising” behaviour. We support the current scheme which allocates free permits based on 2005 emissions for most industries.
Westpac also recognises that there is a strong need to take into consideration the social and household implications of climate change regulatory frameworks, particularly for low income and vulnerable
members of the community. The introduction of a carbon price across the economy will have cost implications for households, primarily through increased energy prices.
Energy consumption makes up a large proportion of household expenditure. Therefore expected price increases in these relatively price inelastic areas as a direct and indirect result of climate change will have a greater financial impact. This is further compounded by the expense of adaptation options to avoid these higher prices. Low income and disadvantaged households are less likely to be able to move or make other changes to their lifestyles. Energy and water efficiency options such as housing insulation, rain water tanks and energy efficient appliances may simply be unaffordable options for this group.
Westpac supports the establishment of the proposed Household Fund to promote household energy efficiency and access to local renewable energy, as well as additional assistance to families in receipt of benefits, superannuation or Working for Families tax credits.
This does not simply mean that households should be exempt from the behavioural change signal provided by the introduction of a price on carbon. Rather it signifies that some form of transitional assistance could legitimately be provided to those low income and vulnerable households not able to easily absorb the cost impacts of transitioning to a low carbon society.
Removing or providing excessive buffering from the price impacts of appropriately pricing carbon right across the supply chain would simply remove both the incentive for behavioural change and, significantly, would remove the incentive for consumer services and goods companies to innovate more efficient means of production and use to meet burgeoning consumer demand.
2. Examine the relative merits of a mitigation or adaptation approach to climate change for New Zealand
Westpac would support the implementation of a ‘long, loud and legal’ integrated policy framework in response to climate change, incorporating both mitigation and adaptation measures.
While there is no doubt that the establishment of an effective emissions trading scheme is the
cornerstone of any effective national policy response, complementary measures must also be instituted to accelerate the uptake of low emission technologies and promote the behavioural change required to effectively and efficiently respond to all aspects of the carbon challenge. Innovation, flexibility,
appropriate pricing signals and long-term policy commitments are critical to providing the business and investment community with the long term certainty required to make significant investment in fixed assets, energy efficiency measures and structural adjustments to a low carbon economy. Westpac supports an integrated policy response to climate change incorporating five key elements:
• Active participation in an effective and comprehensive global agreement; • A deep, liquid and efficient emissions trading scheme;
• Complementary policy measures promoting behavioural change and investment in deploying clean technology at commercial scale;
• Strong, efficient and effective partnerships between business and government aimed at driving transformational technological change; and
Establishing the policy frameworks to promote a market response is critical. But government also has an important role to play in limiting exposure to weather damage and the ensuing costs, by explicitly incorporating climate change considerations into buildings standards and codes, by working with local governments to identify and address areas of particular vulnerability to changing weather conditions and to examine the provision of funding for mitigating measures, such as coastal protection
infrastructure, in zones subject to rising sea levels or increasing storm surge.
This will also serve to address concerns in the wider financial services sector around ensuring long life fixed assets are protected from changing weather conditions and potential earning impairments for lending and investment in impacted sectors.
3. Consider the case for increasing resources devoted to New Zealand-specific climate change research
In line with our response above, Westpac strongly supports an integrated approach to climate change which establishes appropriate frameworks and encourages a partnership approach between business, government and the wider community in responding to the challenges of climate change.
Detailed research on projected localised impacts of a changing climate, and the secondary impacts of markets and policy responses both domestically and internationally, are critical to providing the foundation upon which to make sensible and practical policy decisions.
Localised research on the projected impacts of changing climatic conditions would assist the financial services sector in making accurate and appropriate risk management decisions in incorporating physical risk considerations into credit decisions, particularly in industry sectors vulnerable to weather conditions, such as infrastructure, the agricultural or energy sector for example.
It is also important to ensure that resources and additional research are conducted and allocated efficiently. Westpac would support a ‘business-as-usual’ approach to the incorporation of carbon considerations into mainstream policy and business decision-making processes rather than an
additional or parallel process. We believe this would serve to mainstream management of current and future carbon considerations smoothly, rapidly and effectively.
By way of example, New Zealand is already a world leader in agricultural research while almost half of New Zealand’s greenhouse gas emissions are produced in the agricultural sector, a situation unique among industrialised countries. It is therefore both practical and expedient for New Zealand to lead the way in researching greenhouse gas abatement technologies for agriculture. There are strong
externalities associated with such research, creating a powerful case for increasing government revenue and support.
In most other industry sectors, New Zealand can most probably rely upon being as ‘fast-follower’ to international technological advancements in emissions abatement. However, the government does have a role to play in ensuring that incentives are in place for New Zealand firms to deploy any such technologies commercially. An emissions trading scheme, which places a price on carbon, is the most effective method for delivering such an incentive.
Westpac would also support the provision of increased resources for understanding the economic impacts of market and regulatory response to climate change at both a macro and industry-specific level. This would allow industry sectors to identify emerging commercial opportunities and risks, capability gaps and investment requirements to achieve emissions reductions at least cost.
4. Examine the relative merits of an emissions trading scheme or a tax on carbon or energy as a New Zealand response to climate change
Westpac believes that the most cost-effective market mechanism for meeting New Zealand’s obligations under the Kyoto Protocol is the implementation of a cap and trade emissions trading scheme that is fully compatible with international Kyoto-compliant emissions trading schemes. By placing a price on carbon emissions in New Zealand that is equal to the international price of carbon, the ETS would provide the correct level of incentive for New Zealanders to reduce their emissions. In contrast, a carbon tax risks setting the domestic price of carbon either too high or too low relative to the world price of carbon, with adverse consequences for the New Zealand economy. Westpac supports the proposition that, far from being feared, the price volatility experienced in a market scenario is precisely why trading is the preferred option over a flat tax, as it automatically adjusts to the wider developments in the market and provides the most appropriate signals at any given time.
Westpac believes that there are few benefits to be had for New Zealand business in applying a compliance-based flat price penalty through a carbon tax. This applies all of the cost and regulatory burden of a carbon price, without providing any of the flexibility or upside of a market mechanism – essentially all stick and no carrot.
In addition, it also limits the ability of the New Zealand government, and consequently New Zealand business, to respond to price variability in international markets generated through ongoing policy negotiations at both the regional and international level as well as underlying market fundamentals. While climate change is a global problem which requires a global policy response and ultimately the introduction of global carbon pricing market mechanisms, the transitional path to this requires national and regional schemes with built-in capacity for international linkages.
For the financial market to deliver appropriate levels of emissions reductions, the global financial community needs to be able to trust global climate policies. Investors require planning security and transparency. Rules and procedures must be credible, transparent and applied consistently.
Without certainty around carbon pricing, investment in long-term assets is increasingly hampered by an inability to effectively determine the future cost implications arising from climate change and there is little commercial incentive to support higher risk innovation around cleaner technology. Further, uncertainty impacting existing investments may add to volatility and uncertainty in current investment markets.
Investment risks associated with climate change are often categorised as physical, regulatory, legal, competitive or reputational. Each of these has the potential to negatively impact investment value, future earnings or liabilities. Ongoing uncertainty around climate policy and carbon pricing further heightens the risks associated with investment, thereby reducing and delaying investment which is critically required to maintain and grow infrastructure.
The market is already responding to the demand for certainty, and effectively incorporating a shadow carbon cost consideration for long-term investments in carbon-intensive industries likely to be
impacted by future regulation. These assessments are necessarily arbitrary based upon a high degree of variability in potential cost impacts.
For those investments pursued in the current climate of uncertainty, companies will seek a higher return on their invested capital, thereby increasing the end-cost to consumers and the economy as a whole. Alternatively, they may (and have) sought indemnities from governments in relation to the future uncertain carbon costs.
It is highly likely that the provision of such indemnities will be an untenable position for governments in the longer term, in which case long-term clarity on the policy framework is required to facilitate ongoing economic growth.
Without a clearly articulated policy response to the issues associated with climate change, the nature or quantifiable impact of ‘climate risk exposure’ remains highly variable between companies and across industries. This is delaying or hampering required investment in next generation assets and increasing costs to the economy due to the higher risk premium required by investors in the absence of a policy setting.
The challenges inherent in technology deployment and commercialisation are further amplified without appropriate price signals which incorporate externalities into operating and investment decisions.
Clearly, a robust emissions trading system provides the most cost effective means of achieving
greenhouse gas emission reductions across the economy while allowing both business and government the flexibility and nimbleness to achieve abatement while maintaining economic and industry
competitiveness.
5. Consider the need for any additional regulatory interventions to combat climate change if a price mechanism (an ETS or a tax) is introduced
Westpac strongly supports and promotes flexible, market-based policy instruments as the most effective way for New Zealand to meet its obligations under the Kyoto Protocol.
However, we also believe that emissions trading alone will not deliver a sufficient volume of
greenhouse gas reductions across New Zealand. As discussed previously, Westpac supports a broad policy framework to support structural transition to a low carbon economy. To achieve the
environmental outcomes required without unduly compromising national economic competitiveness, Westpac supports a suite of complementary policy responses within a clearly articulated framework. This essentially requires five core elements:
1. The establishment of a long-term aspirational goal to reduce greenhouse gas emissions, supported by a short term binding target aligned to international policy requirements.
2. A national emissions trading scheme, incorporating appropriate international linkages.
3. A practical strategy supporting the investment in the development and deployment of low-emission technology.
4. Demand management and behavioural change, facilitated through appropriate education and awareness raising across the community.
5. A strategic response to adaptation requirements across impacted communities, natural habitats and industry sectors.
Binding long term emission reduction targets, coupled with strong policy signals can make markets move and business respond accordingly. Carbon market mechanisms have to be supplemented with complementary policies which promote investment in clean technology and renewable energy assets. To be effective, they must have medium to long term signposts and they must be adhered to and be transparent and stable. Westpac would caution, however, against the imposition of inflexible and expensive ‘command-and control’ measures which may carry the risk of unintended consequences within industry sectors. In this context, Westpac would support the Government’s recent decision to repeal the ban on thermal power generation.
6. Consider the timing of introduction of any New Zealand measures, with particular reference to the outcome of the December 2009 Copenhagen meeting, the position of the United States, and the timetable for decisions and their implementation of the New Zealand government
Westpac supports the current timeline for the implementation of the NZ ETS. As discussed above, Westpac does not see any benefit, economic or environmental, to delaying the start of the scheme Under the current timeline for the NZ ETS, the bulk of industry sectors do not come online until after 2010 with the final industry sector not entering the scheme until 2013. This is broadly in line with the start date for the Australian Carbon Pollution Reduction Scheme (2010), is after the Copenhagen round of negotiations (Dec 2009) for the post-2012 period and, if market expectations are correct, will be well after the Obama Administration has signalled when it intends to institute market mechanisms in America.
While we recognise that there may have been some benefits for New Zealand business in allowing international markets to be ‘first movers’ in this space, we believe that New Zealand needs to move towards alignment with international markets to ensure ongoing global competitiveness. This
necessitates the development of expertise, supporting systems and processes and the prerequisite skills and capabilities resulting from direct experience in market mechanisms. The longer this is delayed, the more advantage overseas businesses will garner in the global market.
Finally, delaying the start of the scheme will only increase market uncertainty and delay vital
investment in low and zero emissions technology and energy resources. Practically speaking, business responds to issues when they need to. If the Government delays the introduction of the ETS, business will delay implementing an effective response, and New Zealand’s emission reductions targets will become more difficult to achieve in the longer term.
Therefore, Westpac continues to support the timetable currently in place for the implementation of the NZ ETS.
Westpac carbon markets and sustainability credentials
Westpac is well known in the market for adopting strong risk management practices and a forward looking progressive approach to identifying emerging material risks and opportunities for our business. We recognised a number of years ago that climate change is ultimately a business issue requiring the same approach.
As markets and policy frameworks develop as a means of taking greenhouse gas emissions out of everyday lives, financial institutions have a critical role to play in partnering with customers across all areas of our business to help transition to a low-carbon future.
Consumers increasingly expect the companies they deal with to have a position on climate change and to translate this into meaningful action on their behalf - most obviously by managing the emissions from their products and services.
Our international carbon trading experience started in 2002 with Renewable Energy Certificates in Australia. We began trading the European Union Emissions Trading Scheme (EU ETS) in 2006 and made the first trade of permits to be issued under the forthcoming Australian Carbon Pollution Reduction Scheme in May 2008, beginning the process of price discovery.
Westpac has recently increased our commitment to trading these markets by forming a new business division Commodities, Carbon and Energy (CCE), with trading capabilities and resources in London, Sydney and Wellington.
Westpac is also committed to contributing to the development of clean technology, energy efficiency and renewable energy sources - and will continue to support clients in the fossil fuel based energy sector for the immediate term, working with them to identify emerging carbon risks as well as the opportunities to reduce their carbon intensity and improve environmental outcomes.
More broadly, sustainability is a core component of Westpac’s culture and corporate strategy. This includes our commitment to managing our environmental impacts and dealing with critical issues such as climate change. It forms a key part of who we are, how we do business and what our customers and employees can expect from us.
In December last year Westpac New Zealand launched a comprehensive four year sustainability plan ‘Our Tomorrow Project’ to communicate more clearly our sustainability objectives.
The plan incorporates ten specific goals, five for Our Land (the New Zealand environment) and five for Our People (the New Zealand community). The goals include a 20% reduction in greenhouse gas emissions per active customer, championing the Sir Peter Blake Trust’s ‘Care for Our Coast’
programme and picking up 1 million pieces of rubbish from New Zealand beaches. Our financial literacy programme, Managing Your Money, plays an important part of this sustainability plan with a goal of 45,000 New Zealanders experiencing our programme. We also want to increase staff using their paid volunteer day to 75% of full time staff and support staff in creating their own sustainability plans.
Good progress has been made on a number of these initiatives already. In 2008 Westpac converted our vehicle fleet to more environmentally efficient models. We estimate the change in fleet will reduce emissions by 600 tonnes of CO2 per annum (35%) once the programme has been fully implemented. In December last year Westpac was the first bank globally to be awarded Landcare’s Certified
Emissions Measurement and Reduction Scheme (CEMARS) certification. CEMARS certification is part of Landcare’s Carbon Zero programme and is a rigorous assessment standard. Westpac elected to pursue the CEMARS certification because our focus is first on reducing emissions before offsetting. At the same time, the Westpac Ecoshop was launched, an online shopping site for a wide range of eco products, with exclusive discounts to customers who use our most sustainable banking channel, online banking. The site is a first for a bank globally and has been built in partnership with Westpac’s credit card rewards programme partner. All the suppliers or their products have strong eco credentials and
have been approved against criteria developed using the government's Environmental Choice as a basis. The site has been developed to replace the paper based Green Home book of vouchers. The Westpac Group is recognised globally for its leadership in sustainability. In 2008, Westpac were included in the global leadership index by the Carbon Disclosure Project for the fifth year in a row. The Dow Jones Sustainability Index has recognised Westpac a leader in the global banking sector from 2002 – 2009.
Concluding comments
There is now broad consensus that climate change is real, the impacts will potentially be significant and the need to reduce greenhouse gas emissions and adapt to projected long-term physical risk implications is critical.
Westpac believes that climate change will have significant economic, social and environmental impacts in all the regions where we operate. This means managing our own environmental footprint and ensuring that our investment, lending and financial market trading decisions take these impacts into account.
We also recognise that establishing a new financial market, in any form, is inevitably a difficult undertaking. This is particularly so with the carbon market, as it involves the complex interaction of financial trading tools and processes, international and domestic politics, broad impacts on economic interests fundamental to New Zealand’s future economic growth and future focused climatic
modelling.
However, Westpac continues to strongly support emissions trading and related market mechanisms as fundamental to achieving the positive environmental outcomes required and ensuring New Zealand’s ongoing economic competitiveness.
Ultimately, all parts of the economy will need to collaborate to effectively address climate change. Westpac would be happy to discuss any aspect of this submission in greater detail with the Committee.
