The Big Picture: Climate Change - Navigating the risks

THE BIG PICTURE: CLIMATE CHANGE

Navigating the risks DECEMBER

Introduction

Mandatory climate-reporting regulation has become reality for many companies, as they put the first reporting period behind them. Even as businesses grapple with the time, resource and skills needed to disclose their emissions and climate risks, the ground is shifting. New rules have been introduced in Australia, regulators are sharpening their focus on greenwashing around the world, and, on the heels of wide-impact climate-related disasters, the first glimpse of a potential adaptation framework for New Zealand has emerged.

With significant uncertainty over the international environment following the US election, and a recent decision in

a Dutch court overturning a landmark climate ruling against Shell, there will be no let-up on the need to understand and navigate climate-related risks. But there are lessons to be learned from first-hand experience and insights from other jurisdictions that can help light the path.

As the integration of climate considerations into business strategies reaches a critical stage, we take a closer look at some of the key issues impacting companies – and what’s coming up. What do companies need to know about the External Reporting Board’s decision not to delay transition planning disclosure after all? What impact is the issue of director liability having on disclosure, and is there any scope for future change?

What are the practical steps companies can take so they can safely promote their sustainability initiatives?

Economy-wide action is underway. We hope the insights in The Big Picture: Climate Change – Navigating the risks will support businesses across New Zealand as they step up to the challenge ahead.

At a glance

PART 1: Mandatory reporting

• The External Reporting Board (XRB) has provided an additional year of relief from some requirements which had been set to become mandatory during climate reporting entities’ (CREs) second reporting period – including anticipated financial impacts of climate-related risks and opportunities, scope 3 GHG emissions and assurance of scope 3 GHG emission disclosures.

• Reporting on the transition plan aspects of a CRE’s strategy has not been deferred.

• The Financial Markets Authority (FMA) has released its insights report following review of 70 climate statements.

• Australia introduced mandatory climate reporting in September. While there’s alignment between New Zealand and Australian standards, reporting in accordance with one won’t necessarily meet the requirements of the other.

• Taskforce on Nature-related Financial Disclosures (TNFD) recommendations on a risk management and disclosure framework for nature-related risks and opportunities may become the next key focus area for the International Sustainability Standards Board.

• We look at the concerns raised that director liability in connection with climate reporting disclosures may deter ambitious emissions targets.

PART 2: Greenwashing and climate litigation

• We look at recent developments and trends and recent action by the Australian Securities and Investments Commission (ASIC) against financial services firms on ESG claims, including a recent A$12.9 million penalty against Vanguard Investments.

• We offer five key lessons for New Zealand businesses to build trust with environmentally conscious stakeholders.

• Globally, governments remain the focus of climate change litigation around the world.

• Claims against corporate emitters appear to have encountered recent headwinds, with the Dutch Court of Appeal overturning a landmark ruling in Milieudefensie v Shell

• In New Zealand, we explore the landmark judgment by The Supreme Court of New Zealand I Te Kōti Mana Nui o Aotearoa in Smith v Fonterra & Ors.

• The Supreme Court’s decision raises questions around the availability of private law claims and remedies to address greenhouse gas emissions. It is one of the first times a common law court has considered the arguable possibility that judge made tort law can be used to challenge the greenhouse emissions of a private entity.

PART 3: Emissions Trading Scheme developments

• The Emissions Trading Scheme (ETS) has again been confirmed as ‘front and centre’ in the Government’s emissions reduction plans.

• Agriculture has been removed from the ETS and the He Waka Eke Noa primary sector climate action partnership disbanded, with a new Pastoral Sector Group formed to address biogenic methane.

• The Parliamentary Commissioner for the Environment found current policy settings for the ETS are driving land use change from farming to production forestry. The Government’s discussion document on the second Emissions Reduction Plan proposed limiting ETS registrations for wholefarm conversions to exotic forestry on high-quality productive land.

• The Government expressed commitment to strengthening the ETS by restoring market confidence, backed by a number of proposals.

• More recently, it reaffirmed it considers emissions pricing through the ETS “the main tool” to deliver on long-term climate strategy, and we expect further policy announcements.

PART 4: Looking ahead

• The Finance and Expenditure Select Committee released its report from a cross-party Inquiry into Climate Adaptation, the first glimpse of an adaptation framework for New Zealand.

• The committee recommended a number of objectives to guide the framework such as allowing asset prices to better reflect long-term natural hazard risk.

• It considered a method of allocating adaptation costs through a principled approach based on beneficiary pays, exacerbator pays, public pays and ability to pay.

• Any legislation needed to support the framework is expected to be introduced in early 2025.

• Meanwhile, with a long list of energy reforms initiated in response to the energy crunch in 2024 we consider whether a more comprehensive framework could be considered in New Zealand and look at the UK’s Energy Act 2023.

• We look at the consultation on Carbon Capture, Utilisation and Storage (CCUS) and where legislative change might be required to engage with CCUS activities.

CLIMATE CHANGE - NAVIGATING THE RISKS

Timeline

Supreme Court of New Zealand I Te Kōti Mana Nui o Aotearoa released its decision in Smith v Fonterra & Ors 1

JUL Government launched five-point climate strategy for New Zealand.3

Government introduced legislation to amend the Climate Change Response Act to remove agriculture from the ETS.2

11 NOV - 22 NOV

COP 29 in Baku, Azerbaijan.

He Pou a Rangi | the Climate Change Commission (Commission) to deliver advice to Government to help inform Aotearoa New Zealand’s second Nationally Determined Contribution (NDC) under the Paris Agreement5:

• Commission to provide advice on whether any changes should be made to the 2050 emissions targets.

• Commission to provide advice on whether the 2050 emission reduction target should include emissions from international shipping and aviation.

• Commission to provide advice on the maximum level of emissions for the fourth emissions budget period (2036-2040), and whether there is any need to revise emissions budgets for the prior budget periods.6

Finance and Expenditure Committee delivered report on Inquiry into Climate Adaptation.4

The Government to finalise its second Emissions Reduction Plan (for 2026-2030).7

XRB to publish guidance on transition planning, and the first in a series of guidance notes to support the reporting and assurance of GHG disclosures.8

Government to respond to report on Inquiry into Climate Adaptation.9

Government aims to introduce legislation to facilitate offshore wind development.10

Government to set the second nationally determined contribution (NDC2) by February 2025 at the latest.12

Any legislation to support the framework for climate adaptation expected to be introduced in early 2025.11

Australia has bid to host COP31 in partnership with the Pacific.

Government aims to have offshore wind regime in place.13

Commission will issue advice to Government on the Emissions Trading Scheme unit and price control settings for 2026-2030.

XRB to commence postimplementation review of New Zealand Climate Standard (NZ CS).14

Mandatory reporting - now and next

In 2021, New Zealand became the first country in the world to introduce legislation requiring mandatory climate risk reporting for the financial sector. With the first reporting period now behind us, around 200 climate reporting entities in New Zealand are now taking stock after publishing their first mandatory climate statements.

Having assisted CREs across a broad range of sectors with their climaterelated disclosure (CRD) and associated governance processes, we offer a few of our key findings for a successful reporting process. We also consider what’s on the horizon for the next reporting period and beyond.

Preparation is key

KEY LESSONS

from New Zealand's first reporting period

The first reporting period proved to be complex for many CREs. Significant time, resource and upskilling was required and, inevitably, disclosure challenges emerged that often required substantial work to resolve. CREs who began their preparations early were best placed to implement appropriate governance processes and conduct and evaluate meaningful analysis. Although we expect CRD will eventually become more streamlined as it is embedded within companies usual annual reporting processes, the regime will become increasingly complex over the coming years as adoption provisions cease to apply. As a result, early preparation will continue to be critical.

Agree approach to disclosure

Boards are being asked to approve complex and new disclosures, which carry the risk of personal liability for directors. It is critical for management, including teams that will be responsible for preparing the climate statement, to understand the board’s view on the disclosure strategy and key messaging. This will help to avoid any friction later in the process when it is often a difficult task to rework the disclosure.

Design an appropriate governance framework

Engagement with the board and senior executives should occur early in relation to the design of the governance process for preparation of the climate statement. Directors and executives need to be comfortable that the process is sufficiently robust to enable them to provide the confirmations and signoffs required of them prior to publication. Boards are required to provide an unqualified statement in relation to compliance with the New Zealand Climate Standards and senior management will often be asked to provide supporting confirmations. Confidence in the governance process is therefore critical.

Establish a robust monitoring process

CREs must establish processes for regular monitoring and assessment of the ongoing reasonableness and achievability of forward-looking statements, such as emissions targets and transition plans. Forward looking statements of this nature, once published, are continuing representations by the CRE to the public and must continue to be substantiated based on reasonable grounds. Governance structures and internal reporting lines must allow prompt escalation of adverse data and other relevant developments that may impact the achievability of a CRE’s emissions targets, transition plan or climate strategy.

Similarly, a CRE should ensure that its climate targets and transition plan are well understood by its wider business so that management have a clear understanding of how their business decisions may impact on the achievability of emissions targets or the entity’s transition plan.

Consistency across channels

CREs have invested significant time and resource in developing and implementing verification processes for key statements made in their climate statements. That same rigour should be applied across all channels, including reporting, marketing materials, website pages and social media, to ensure that all climate-related representations are consistent and align with the published climate statement.

PART 1: MANDATORY REPORTING

What's on the horizon?

XRB – extension of adoption provisions

The XRB has recognised the challenges CREs are facing with obtaining sufficient reliable data (particularly on scope 3 GHG emissions and assurance over such disclosures), high compliance costs and difficulties in preparing disclosures in the absence of comprehensive guidance on certain topics.

In response to these concerns, the XRB consulted on proposed changes to the adoption provisions available under the Aotearoa New Zealand Climate Standard 2 (NZ CS 2) and the related XRB assurance standard. In November, it approved three of four proposals, providing an additional year of relief from some requirements which had been set to become mandatory during CREs’ second reporting period.

A proposal to delay transition planning by an additional year was not adopted.

DEFERRED A YEAR

Disclosure of:

The XRB said this was due to strong user demand for the information, with submissions singling out transition planning as a “key conversation starter”. The XRB noted the disclosure wouldn’t require a certain and finished plan, rather, it was an iterative process. It said transition plans will be an important tool to improve decision making and capital allocation.15

Many CREs who relied on the first-time adoption provision for transition planning are already well underway with the development of their transition plan. This will be particularly important for those CREs who have published GHG emissions targets and will be looking to their transition plans to substantiate the ongoing reasonableness and achievability of those targets.

The deferrals that did proceed will provide CREs with important additional

• Anticipated financial impacts of climate-related risks and opportunities

• Scope 3 GHG emissions (including comparative information and analysis of trends)

• Assurance of scope 3 GHG emissions disclosures, which will become mandatory for accounting periods ending on or after 31 December 2025

NOT DEFERRED

• Transition plan aspects of a CRE’s strategy, commencing in FY 2025

• Assurance for scope 1 and 2 emissions for financial years ending on or after 27 October 2024

preparation time before they are required to tackle some of the more complex aspects of the CRD regime. That said, the relief proposed is temporary – limited to one additional reporting period. Preparation of climate statements is time consuming and resource intensive. We expect many CREs will continue to devote significant resource to these disclosure requirements over the next 12 months, so they are well placed when the requirements become mandatory.

The FMA is currently considering class exemption relief for one year for those CREs that disclose all or part of their scope 3 GHG emissions but elect not to have them assured for reporting periods ended before 31 December 2025 (i.e. use Adoption Provision 8 but not Adoption Provision 4 in NZ CS 2). This is to provide complete certainty for CREs and to complement the newly established Adoption Provision 8 in NZ CS 2. Submissions close 28 January 2025.

New XRB guidance

The XRB intends to publish much needed guidance on transition planning (in conjunction with the Sustainable Business Council) in December 2024, when it will also publish the first of a series of guidance documents to support both the reporting and assurance of GHG disclosures, particularly scope 3 GHG emissions. The XRB also said in its October 2024 consultation document

that it intends to publish guidance on the disclosures required for anticipated financial impacts in 2025.

Insights from the FMA

On 4 December 2024, the FMA released an insights report based on its review of 70 climate statements prepared for reporting periods ended 31 December 2023, 31 January 2024 and 31 March 2024. The FMA stated that, although the quality of disclosure varied, overall the climate statements aligned with the FMA’s expectations. Among other insights, the FMA highlighted the need to:

• Strike the right balance on the amount of information disclosed – too much information may risk obscuring material information while too little may result in the omission of material information.

• Present disclosures fairly – some CREs may have emphasised positive news at the expense of balanced representation.

• Explain how climate-related processes across governance, risk management and strategy are actually undertaken or embedded across an organisation. Disclosures must go beyond solely stating that such processes exist.

You can read the FMA’s report here

PART 1: MANDATORY REPORTING

Prescription v principle

A STAGED APPROACH

Australia introduced mandatory climate reporting in September 2024.

Organisations covered by Australia’s sustainability reporting standards will need to make disclosures in accordance with Australia’s mandatory standard for climate-related disclosures (AASB S2), based on the international sustainability standard IFRS S2.

There is a strong degree of alignment between NZ CS 1 and AASB S2. Both standards incorporate and build on the framework of the Task Force on Climaterelated Financial Disclosures (TCFD). But reporting in accordance with one standard will not necessarily meet the requirements of the other.

The Australian standard adopts a more prescriptive approach – the XRB estimates AASB S2 imposes approximately 50 more disclosure requirements than NZ CS 1. The New Zealand climate standards are intended to be more flexible and adopt a principles-based approach to disclosure.

New Zealand CREs with operations or a presence in Australia should carefully consider whether the Australian mandatory reporting regime may apply to them (for example, because their Australian business is sufficiently large to be captured).

The XRB has reiterated it is aware of the importance placed on international

1 January 2025

GROUP 1 (largest emitters and corporations) must disclose from this date.

First half of 2026

First mandatory reports for Group 1 entities published.

1 July 2026

GROUP 2 (medium-sized reporting entities) phased in from mid 2026.

1 July 2027

GROUP 3 (smaller reporting entities) must disclose from this date, if they determine they have material climate-related risks and opportunities (or explain their reasoning, if not).16

alignment by New Zealand CREs. One aspect of its post-implementation review of the NZ CS will be to determine whether there is any need to modify the NZ CS to further align with any existing or forthcoming requirements adopted by other relevant jurisdictions, including Australia.

One of the downsides to New Zealand being a first-mover in relation to mandatory reporting is that we have not had the benefit of time to consider how the international climate standards would develop. The ISSB issued IFRS S2 in June 2023, six months after the XRB issued NZ CS. The ISSB was formed with a remit to improve the quality and comparability of disclosures by issuing sustainability standards that could form a global

baseline of sustainability information.

The XRB has stated that it intends to continue working closely with the Australian Accounting Standards Board on alignment. However, for the time being, it has emphasised that the NZ CS remain the mandatory climate-related disclosure standards for New Zealand.

Coming soon – Nature-related Financial Disclosures?

Recommendations from the TNFD were published in September 2023 to provide companies and financial institutions with a risk management and disclosure framework to identify, assess, manage and disclose nature-related risks and opportunities.

The recommendations recognise that nature, in addition to climate, is a key environmental risk for organisations to manage and that nature-related impacts and dependencies need to be better integrated into business and investment decisions.

The TNFD recommendations are closely modelled on the TCFD recommendations published in 2017, replicating (in a nature context) the four disclosure pillars and the 11 recommended disclosures of their climate predecessor. This is designed to encourage and support integrated climate- and nature-related reporting.

We expect that nature-related disclosure may become the next key focus area for the ISSB, which announced earlier this year that it will commence research on disclosure about risks and opportunities associated with biodiversity, ecosystems and ecosystem services (BEES) and human capital, and for international policymakers.17

There is significant alignment between the TCFD and TNFD recommendations, and global familiarity and experience with the TCFD. We anticipate voluntary adoption of the TNFD recommendations, as well as regulatory expectations in this area, may well develop faster over the coming years than the climate-related disclosure regime.

PART 1: MANDATORY REPORTING

Director liability – incentive or deterrence?

There are serious potential consequences for failing to comply with the climate-reporting disclosures framework. CREs are acutely aware of these: the framework exists within the Financial Markets Conduct Act 2013 (FMCA) and many of the potential risks are similar to those associated with public capital markets transactions. Directors can face personal liability in connection with climate-related disclosures.

The XRB acknowledged in its consultation that it has heard concerns about director liability settings in the context of climate statements. But it also noted such issues are outside its statutory remit.

Concerns have been raised that the CRD liability regime may have the unintended consequence of deterring CREs and their boards from pursuing ambitious emissions targets, particularly given the continued scrutiny from regulators, climate activists and shareholders around greenwashing.

The legal and reputational risks associated with setting stretch targets, or the disclosure of negative information, could result in what is now referred to as “green hushing”. Organisations could seek to minimise the risks associated with CRD by limiting disclosure on key risks, emissions reduction targets and/or transition plans. This outcome is at odds with the purpose of the climate standards: to drive behavioural change towards the transition to a low-emissions, climate-resilient future.

No temporary relief is currently available for CREs or their directors for potential claims under the New Zealand CRD liability regime. In contrast, in Australia a modified liability regime will provide climate-reporting entities with immunity from civil claims by private litigants in order to incentivise fulsome disclosure in areas subject to high measurement or outcome uncertainty. The modified liability regime will apply to all forwardlooking disclosures required under Australia’s AASB S2 for the first year of the regime, and to all scope 3, scenario analysis and transition planning disclosures for the first three years.18 Importantly, that immunity will not extend to any action or proceeding that is either a criminal action, or brought by ASIC, although ASIC has said that it will take a “pragmatic and proportionate approach to supervision and enforcement as industry adjusts to the new requirements”.19

The FMA has similarly stated that it will take a broadly educative and constructive approach in the first years of the CRD regime, with an initial focus on issuing high-level guidance on compliance expectations, moving to a more proactive regulatory role as the regime becomes established.20 This approach does not, however, protect CREs and their boards from the risk of claims by private claimants, and nor is it a guarantee that the FMA will not take action.

In relation to listings on the New Zealand stock exchange, Minister of Commerce Andrew Bayly recently commented that the coalition government is planning to drop what it calls a “huge layering of personal liabilities for directors” to encourage more listings on the NZX and that this could include removing personal liability for climate-related disclosures.21 It is possible that we may therefore see adjustments to the director liability settings in connection with the CRD regime in the future. We will continue to monitor developments in this area both here and internationally.

CLIMATE CHANGE - NAVIGATING THE RISKS

PART 2: GREENWASHING AND CLIMATE LITIGATION

The rising tide of greenwashing claims

Greenwashing, or the practice of overstating the environmental benefits of a business’s activities, has become a topic of increasing regulatory focus worldwide. As demand for sustainable products and services grows, businesses in various industries are under heightened pressure to promote their environmental, social, and governance standards in a way that maximises goodwill while remaining accurate and legitimate. We consider below some recent developments and trends in New Zealand and overseas which offer insights for businesses navigating this evolving regulatory landscape.

Update from Australia

ASIC has taken various recent actions against financial services firms in relation to misleading ESG claims. For example, ASIC brought greenwashing proceedings against:

• Vanguard Investments, in relation to misrepresentations regarding environmental screening applied to its “ethically conscious” investment fund. The court found that Vanguard had overstated its ESG screening processes, failing to disclose important limitations. In September, the Federal Court ordered Vanguard to pay an AU$12.9 million penalty.

• Active Super, regarding claims by the superannuation fund about excluding investments in various industries including coal mining. Despite advertising itself as avoiding such investments, Active Super held both direct and indirect interests in companies involved in coal mining.

• Mercer Superannuation, regarding its "Sustainable Plus" investment options which falsely claimed to exclude fossil fuel-related investments. In August, the Federal Court ordered Mercer to pay an AU$11.3 million penalty after it admitted its statements about the sustainable nature and characteristics of its investment products were misleading.

In addition to the above proceedings, ASIC also recently published a report highlighting its greenwashing enforcement efforts. The report outlined key areas of concern, including inconsistent ESG investment claims, sustainability-related statements made without sufficient grounds, and vague disclosures about ESG criteria.

These measures highlight the growing regulatory focus on greenwashing in the context of managed funds and the need for clear, accurate disclosures regarding the limitations of ESG screening processes.

New Zealand's growing focus on Greenwashing

New Zealand’s regulators have not been as active as their Australian counterparts regarding greenwashing. However, the Commerce Commission has issued Environmental Claims Guidelines, and the FMA also indicated last year that it is “sharpening its focus” on greenwashing. The FMA regulates the FMCA, which contains similar “fair dealing” provisions to those relied on in the three ASIC proceedings discussed in the three recent ASIC proceedings. The FMA has been active in its enforcement of the “fair dealing” provisions, although it is yet to take a specific greenwashing case.

New Zealand has also seen an increasing number of complaints filed with the Advertising Standards Authority (ASA) regarding misleading green claims. The ASA provides a simpler pathway for individuals and groups to raise concerns about greenwashing and create an additional risk for businesses to consider (given that ASA decisions often attract media attention notwithstanding the absence of a formal court proceeding).

In addition to the regulatory risk, the ongoing greenwashing litigation against Z Energy highlights the risk of private proceedings pursuing allegations of misleading environmental claims. The plaintiffs in that proceeding (Consumer NZ, the Environmental Law Initiative and Lawyers for Climate Action) are challenging the accuracy of Z Energy's advertisements about its emissions reduction initiatives, after initially escalating their concerns to the Commerce Commission in 2022. After the Commission declined to investigate, the claimants filed the current proceeding. The proceeding seeks declaratory relief and corrective orders rather than damages, which will simplify aspects of the proceeding and may reflect a broader goal of establishing precedent rather than seeking compensation.

Key lessons for New Zealand businesses

The trends summarised on page 10 highlight that greenwashing is becoming a broader concern for businesses than some traditional regulatory risks, and engages a wider range of potential plaintiffs and avenues for challenge. That highlights the need for businesses to take care to avoid misleading representations about their environmental impact. That includes ensuring:

Clear disclosures

Ensure all ESG claims, investment screens, and methodologies are clear, specific, and free from ambiguous terms.

Ensure consistency

Whenever making ESG statements in one marketing channel – such as websites, social media, print, etc. – ensure that related statements in other channels are aligned and consistent.

KEY LESSONS

Substantiation

Back all sustainability-related statements with reasonable grounds and verifiable data.

Ensure each representation is accurate on its own terms

Don’t rely on extraneous materials or links to other materials to correct the meaning of a statement that is otherwise likely to be misunderstood.

Monitor regulatory guidance

Review updates from the FMA, the Commerce Commission and overseas regulators for new guidance. Conduct regular compliance checks to ensure ESGrelated marketing aligns with current regulatory expectations.

By adopting these measures and adhering closely to evolving regulatory guidelines, businesses can protect themselves from the growing risks of greenwashing while also building trust with environmentally conscious stakeholders.

Climate litigation – global developments

International

Governments remain the focus of climate change litigation around the world, as action continues to be primarily directed at state and regional actors and challenge policy decisions (or inaction) that engage climate change concerns. Claimants have had some recent success where they have been able to demonstrate the climate policy is inconsistent with fundamental human rights. Claims against corporate emitters appear to have encountered recent headwinds.

KlimaSeniorinnen v Switzerland22

The European Court of Human Rights (ECHR) ruled that the Swiss Government had failed to protect the human rights of its citizens by not implementing adequate measures to mitigate and adapt to climate change. The ECHR upheld Switzerland had a positive obligation to provide protection from the serious adverse effects of climate change and, with reference to the steps taken to date, the Swiss government had failed to provide this protection.

Held v Montana

Plaintiffs successfully challenged a provision within the Montana Environmental Policy Act, called the “MEPA Limitation”, which prevented the State from considering the impacts of greenhouse gas emissions during environmental reviews, including reviews of proposals for the extraction or combustion of fossil fuels. The plaintiffs successfully argued that the MEP Limitation was unconstitutional and infringed upon their right to a “clean and healthful environment”. The decision marks the first time an American court has intervened in climate policy by striking down legislation as unconstitutional. As a result, the State of Montana and its agencies can (but are not required to) consider the climate impacts of proposed projects going forward.

In New Zealand, courts can declare a law or part of a law to be an unjustifiable limitation on a protected right but cannot strike down laws. More generally, it remains to be seen how, if at all, these decision impact climate change policy.

States’ international obligations

For the first time, an international tribunal has issued guidance on states’ obligations in respect of climate change. The International Tribunal on the Law of the Sea (ITLOS) issued a unanimous advisory opinion in May this year. ITLOS clarified that all greenhouse gas emissions constitute marine pollution and that states are obligated to protect the marine environment against the impact of climate change by taking necessary measures to prevent, reduce and control emissions. It further determined that states have obligations deriving from the UN Convention on the Law of the Sea to adopt a regulatory framework to reduce emissions, enforce that framework effectively, conduct Environmental Impact Assessments, cooperate with other states and to provide scientific and technical assistance to other states. The ITLOS opinion is non-binding but could frame how states think of their international obligations and impact policy decisions.

Corporates challenged

The Netherlands

Milieudefensie v Shell: The Dutch Court of Appeal has overturned the landmark ruling of the Dutch District Court in Milieudefensie v Shell. The District Court had concluded that Shell owed a social duty of care to Dutch residents (and the inhabitants of the Wadden Sea region) that required Shell to reduce its Scope 1, 2, and 3 emissions, across its entire energy portfolio, by 45% by 2030, relative to 2019.

In its judgment of 12 November 2024, the Dutch Court of Appeal found that companies like Shell have an obligation to restrict their emissions even if this was not made explicit in applicable regulations. However, the Court of Appeal found that:

• the 45% emissions reduction sought by Milieudefensie, which is based on the latest scientific consensus from the IPCC, could not apply to every country and sector individually. Different sectors would have different transition pathways and no appropriate sectorial standard of reduction had been established for oil and gas. For this reason, the Court of Appeal found that a "social standard of care" did not require Shell to reduce its emissions by 45% or any other amount.

• even if Shell did reduce its emissions in the manner sought, it would not necessarily lead to any reduction in global CO2 emissions (because other suppliers would step in to meet demand). On that basis, the claim was considered legally ineffective.

Milieudefensie v ING: In 2021, Milieudefensie issued a public letter to 29 Dutch incorporated companies23 asking them to produce a climate transition plan in line with the Paris Agreement. On January 19, 2024, Milieudefensie signalled its intention to bring proceedings against recipient Dutch bank ING, on the basis that, ING has taken insufficient climate action and is in breach of its legal societal standard of care under Article 6:162 of the Dutch Civil Code. Milieudefensie has demanded ING falls in line with the Paris Agreement by reducing its emissions by at least 48% CO2 and at least 43% CO2e in 2030 compared to 2019. In doing so, Milieudefensie has focused on ING’s “scope 3 emissions”, in the bank’s value chain. That is, the emissions generated by the clients that ING finances. In practical terms, Milieudefensie is calling for ING to cease financing large corporate emitters and fossil fuel clients who continue fossil fuel expansion. However, the future of this claim is now unclear, as it relies on the same legal framework that was recently rejected by the Dutch Court of Appeal in Milieudefensie v Shell (see above).

Belgium

TotalEnergies is the subject of the first ever climate claim brought against a multinational in Belgium. In March 2024, in the commercial court of Tournai, a farmer has brought proceedings against TotalEnergies under the civil law code. The plaintiff seeks compensation for lost income due to heat waves and droughts caused by climate change. He also seeks a reduction in TotalEnergies’ future emissions to a level that would limit global warming to 1.5°C.24 The oil company’s board of directors are also under scrutiny in France, where a criminal complaint has been made against them in the Paris Criminal Court. The complaint, filed by a group of NGOs25 and eight individuals on 21 May 2024, alleges that the board of directors of TotalEnergies has caused danger to the lives of others and has failed to prevent disaster by adopting a path that is incompatible with the Paris Agreement. The prosecutor is set to decide whether to open a judicial investigation.

Poland

In February 2024, the shareholders of Polish power company Enea approved a claim against the company’s former directors for breaching their directors duties by inadequately due diligencing a coal power plant investment which caused the company losses of approximately NZ$270 million.26 It remains to be seen how the Polish court’s analysis compares to the English High Court’s rejection of the directors duties claim that was brought against Shell’s directors in 2023 discussed in our 2023 Big Picture: Climate Change here

A landmark judgment (Smith v Fonterra & Ors)

In a case that has attracted worldwide interest, The Supreme Court of New Zealand I Te Kōti Mana Nui o Aotearoa released its decision in Smith v Fonterra & Ors early in 2024. In allowing novel climate change claims against seven corporate defendants to proceed to trial, New Zealand’s highest court remains the forum for one of the most significant climate change related cases in the common law world – those jurisdictions where judges’ rulings set precedents that create a body of law.

The Supreme Court’s decision raises questions around the availability of private law claims and remedies to address greenhouse gas emissions. It is one of the first times a court has considered the arguable possibility that tort law, where a person uses civil law to seek compensation for harm, can be used to challenge the greenhouse emissions of a private entity.

Mr Smith brought his claims on the basis that the defendants are each involved in an industry which releases greenhouse gases into the atmosphere or manufactures and supplies products which release greenhouse gases when they are used.

MARCH 2020

The High Court struck out Mr Smith’s claims in public nuisance and negligence but declined to strike out his claim of breach of a proposed new duty to cease contributing to “climate system damage”. Mr Smith appealed and the defendants cross-appealed.

AUGUST 2022

Mr Smith appealed the decision to the Supreme Court and the appeal was heard over three days.

FEBRUARY 2024

In its unanimous judgment, the Supreme Court overturned the Court of Appeal’s earlier decision and ruled that all three of Mr Smith’s claims should be reinstated and allowed to proceed to trial. In its view, courts should lean towards full consideration of claims that involve seriously arguable non-trivial harm, even if individual attribution to defendants remains difficult.

OCTOBER 2021

The Court of Appeal concluded that all claims should be struck out. It held that the response to climate change was best left to other branches of government with “a sophisticated regulatory response at a national level supported by international co-ordination”.

By its decision, the Supreme Court has tested the prevailing orthodoxy that climate change cannot be adequately addressed by common law tort claims, or that the response to climate change is more appropriately addressed by regulation through other branches of government. The trial will be closely watched for answers to the questions it raises about the viability and scope of claims against private emitters, how the courts will assess them and the potential for them to succeed.

Climate litigation in New Zealand

Student challenges

In Students for Climate Solutions Inc

v Minister of Energy and Resources, the plaintiff organisation argued that the Minister of Energy and Resources, in granting petroleum exploration permits under the Crown Minerals Act 1991, had failed to adequately consider the effects of the exploration on climate change. The High Court found that the Minster’s discretionary power had been exercised lawfully. It found that the Crown Minerals Act did not require

the Minister to consider climate change factors, given the scheme and purpose of the Crown Minerals Act, which operates to facilitate exploration and secure a return for the Crown.

In its judgment of 7 May 2024, the Court of Appeal dismissed the appeal.

The Court of Appeal unanimously ruled that climate change was not a mandatory consideration under the Crown Minerals Act when

deciding whether to grant petroleum exploration permits. Although not determinative of the outcome, the panel of three judges differed as to the relevance of section 5ZN of the Climate Change Response Act 2002. That section provides that a person or body may, in exercising or performing a public function, consider the 2050 target, emissions budget or emissions reductions plan.

Justices French and Gilbert preferred

not to reach a concluded view on whether it was a permissive relevant consideration. However, Justice Mallon voiced her view that the broad framing of section 5ZN meant it was open to the Minister to take climate change issues into account when considering whether to grant the permit. It is yet to be seen how the provision may influence the future performance of public functions.

PART 3: EMISSIONS TRADING SCHEME DEVELOPMENTS

Emissions Trading Scheme – changes for NZ's key climate tool

Akey part of New Zealand’s climate response since 2008, the ETS has again been confirmed as ‘front and centre’ in the Government’s emissions reduction plans this year.27 A new hand on the tiller has seen a number of significant announcements affecting the scheme emerge. But with just one in the past seven auctions selling any New Zealand Units (NZUs)28, despite fresh plans to address oversupply, questions remain. What will these changes ultimately mean for NZUs? Will they address the issues seen in the market?

Agriculture out

At a policy level, the key announcement this year has been that the Government will deliver on its election promise and remove agriculture from the ETS.

Under the Climate Change Response Act 2002 (CCRA), agriculture would have effectively entered the ETS on 1 January 2025. However, in June, the Government

introduced legislation to amend the CCRA to remove agriculture, animal processors and fertiliser companies from the ETS before 1 January 2025. That Act has now been passed as the Climate Change Response (Emissions Trading Scheme Agricultural Obligations) Amendment Act 2024. It also disbanded He Waka Eke Noa (the Primary Sector Climate Action Partnership between the Government and primary sector established under the previous Government). Instead, the Government proposed to form a new Pastoral Sector Group which aims to “constructively tackle biogenic methane”.29

Since then, the Government has appointed a panel to consider the methane portion of New Zealand’s climate target.30 Its discussion document on the second Emissions Reduction Plan (to have effect between 2026 and 2030) further noted its intention to implement a “fair and sustainable” pricing system for on-farm emissions by 2030.31

Forestry – changes announced

There have been proposals for significant changes to the role of forestry in the ETS. In a report released mid-year, Going with the grain, the Parliamentary Commissioner for the Environment, Simon Upton, found that current policy settings for the ETS are driving land use change from farming to production forestry.32

According to the Commissioner’s report, the ETS was the main commercial driver of land use change regarding agricultural land in the case studies he considered and, while afforestation is necessary in some parts of the country, the scale of change had the potential to create unintended consequences.33 In particular, unlimited forestry offsets would depress the NZU price which in turn would lessen the incentive to reduce gross emissions, resulting in a need to plant even more forest.34 The Commissioner recommended the Government consider progressively phasing down the right to use forestry as an offset in the ETS to the point that it is

eventually removed completely. This would then allow the Government to auction more NZUs at a higher price to fund naturebased solutions that sequester carbon amongst other things.35

While not responding directly to the Commission’s report, the Government’s discussion document on the second Emissions Reduction Plan proposed to introduce limits on the number of ETS registrations for whole-farm conversions to exotic forestry on high-quality productive land. This was followed by an announcement in December 2024 of intentions to impose a moratorium on exotic forestry registrations for actively farmed land with certain classifications.36

Otherwise, the Government’s focus has been on the costs to forestry of the ETS regime, with it announcing the establishment of a Forestry Sector Reference Group in October, following the results of an independent review of the operational costs of the forestry ETS Register.37

The second Emissions Reduction Plan

The Government’s discussion document on the second Emissions Reduction Plan revealed its thinking on the ETS more generally, particularly its commitment to strengthening the ETS by restoring market confidence (backed by a number of proposals outlined below). In its view, a credible ETS provides the best way of driving investment in emissions reductions at least cost to the economy.

STRENGTHEN MARKET PREDICTABILITY

• continuing policy work underway to inform Cabinet decisions on next steps

CLEAR SIGNALS ON CLIMATE AND ETS POLICY

• committing to / aligning with climate targets and emissions budgets

• committing to the ETS as the main tool, plus a coherent role of complementary policies

• communicating why credibility is important and that protecting credibility is a priority

• communicating a credible risk management strategy

• consistent and coherent positions on forestry, agriculture, other removals technologies besides forestry, and the NZU stockpile

• ruling out policies that threaten ETS credibility

PROVIDE REGULATORY PREDICTABILITY

• no expiry date on New Zealand Units (NZUs)

• no differential treatment of forestry NZUs in the ETS

STRENGTHENING THE ETS +

More recently, the Government has reaffirmed its focus on a “price-led, net-based and least-cost” approach to emissions reductions, with emissions pricing through the ETS considered “the main tool” to deliver on long-term climate strategy.38 We expect to see further policy announcements in the ETS space in the coming months.

PART 3: EMISSIONS TRADING SCHEME DEVELOPMENTS

1 Climate Change Commission – budgets and targets

The Climate Change Commission has also been active. In March, the Commission issued its third round of annual advice into NZU and price control settings. Against a backdrop of significant volatility in the price of NZUs, low market confidence and significant volumes of NZUs already in the market, the Commission recommended “a significant reduction” in the NZUs made available at future government auctions.39 The Commission also called upon the Government to clarify its approach to emissions reductions and to how New Zealand will achieve its NDC under the Paris Agreement.

That was followed by three separate consultation papers in April 2024.

The first paper consulted on presented draft advice on the fourth emissions budget (for 2036 to 2040) and whether existing budgets should be revised. These emissions budgets set the maximum level of New Zealand’s emissions for the relevant period, so have significant impacts on the ETS and policy. The Commission’s draft advice was that New Zealand could reduce emissions “faster and sooner than previously projected”,40 proposing a fourth emissions budget of 134 MtCO2e (55% contributed by biogenic methane, 31% by CO2).41 This would represent an average annual decrease of 64% below 2021 levels. The Commission was clear the ETS is unlikely to drive such change: policy decisions will be needed.

3The Commission’s third paper concerned whether emissions from international shipping and aviation should be included in the 2050 target. The Commission concluded that they should, and considered various options for doing so.43

2The second paper consulted on was the first review of New Zealand’s 2050 emissions reduction target,42 which must be reviewed every five years. The Commission’s initial view was that there may be reason to strengthen the 2050 target, noting the current target is not consistent with “international burden sharing perspectives”, that the impacts of climate change are increasingly being felt and that it is clear actions to date have not been sufficient. If the target were strengthened, this could be done without changing the current approach of addressing methane separately from other greenhouse gases. Instead, the Government could consider creating additional waypoints with more stringent requirements ahead of 2050, changing permitted emissions levels for methane or else providing for negative emissions of other greenhouse gases, or changing one or both targets to gross targets.

The Commission will provide its advice to Government on the consultations by the end of 2024, for decisions by the end of 2025. For more see our article here

PART 3: EMISSIONS TRADING SCHEME DEVELOPMENTS

ETS limits, price control settings

Following the Commission’s March consultation, the Ministry for the Environment (MfE) released its own consultation on ETS unit limits and price control settings.44 Significantly, where the Commission recommended no change to price control limits on ETS auctions, MfE’s consultation included an alternative option of lowering price corridor trigger prices (i.e. a lower trigger for the auction price floor). It noted this approach would reduce the ability to reduce supply of NZUs, risk increasing stockpiles of surplus NZUs and would result in NZU prices being in the low range of forecast international emissions prices. But it would potentially allow lower prices which might reduce the cost impact on households.

The Government’s decision was ultimately announced on 20 August 2024. The suggestion that there could have been a lower auction floor price wasn’t repeated, instead the Commission’s auction floor price recommendation of NZ$68 figure for 2025 was preferred. The unit limits adopted were also very similar to those proposed by the Commission, with the number of units available reducing from 19.1 million in 2025 to 12.6 million in 2029.

NZU trajectory

So what does all of this mean for NZUs going forward? The price of NZUs has been relatively low this year, falling to a 10-month low in May. Some industry commentators suggested the prospect of lowering minimum carbon prices in MfE’s consultation contributed to “shakiness” in the market, given it hadn’t been among the Climate Change Commission’s recommendations.45

As a result, while March’s NZU auction did manage to sell NZ$190 million of NZUs (at NZ$64 a tonne),46 no units were sold in the June 2024 auction.47 The Government’s August announcement on ETS settings was intended to restore market confidence and provide certainty, removing the suggestion of a lower auction floor for unit prices. But no units were sold in September either.

The outlook remains uncertain. While prices were generally low over autumn and winter, they have increased more recently to above the NZ$60 mark. The general theme of advice from the Climate Change Commission has been a need to tighten the supply of NZUs, which should drive that price up, with the Government signalling that it intends to do this, at least to some extent. But what this will do to NZU prices long term is yet to be seen.

A climate change adaptation model for New Zealand

Last year saw a record-breaking number of climate-related disasters in New Zealand, with more than twice the number of states of emergency than any other year, and insurance payouts totalling more than the combined total of the previous 14 years.48 Events such as the Auckland Anniversary floods and Cyclone Gabrielle had major social and economic impacts. They brought home the need for New Zealand to focus efforts on adapting to the effects of climate change – from extreme weather events and rising sea levels, to changes in temperature.

But difficult decisions are still to be made as to who is going to pay for vital adaptation measures. It is promising that work is now underway to develop an adaptation framework for New Zealand, and in October the first glimpse of what might come emerged when the Finance and Expenditure Select Committee released its report from a cross-party Inquiry into Climate Adaptation.

Aimed at developing and recommending high-level objectives and principles for the design of a climate change adaptation model for New Zealand, and to support the development of policy and legislation to address climate adaptation, the framework is intended to deliver a fair and enduring system to help ready New Zealand for climate change and provide clarity on costs.

Objectives and principles

The committee considered several aspects of a potential framework including government input, societal costs, fairness, Te Tiriti o Waitangi, funding and compensation.

It recommended a number of objectives to guide the framework.49

10

System clarity and continuity

1

Minimising expected long-term costs

2

Ensuring that responses and funding support to property owners, if any, are predictable, principled, fair, and rules-based wherever possible

THE

OBJECTIVES

To achieve these objectives, the committee recommended a set of eleven guiding principles which (among others) included fairness and equity, national consistency, local flexibility, accountability, transparency and evidencebased decisions.

8 9

Allowing asset prices to better reflect long-term natural hazards risk

Upholding te Tiriti o Waitangi

6

3

Improving information flows about climate change risks and responses

4

Addressing market failures and supporting market efficiency

5

Achieving a balance between central government leadership and community-led approaches

Ensuring people have the incentive and the ability to manage risk

7

Reducing hardship and supporting an equitable approach

PART 4: LOOKING

An adaptation model – who is responsible?

The report also considered many practical aspects of the new framework, including the roles and responsibilities that would be required in the climate adaptation system.

Currently, the responsibility for addressing the impacts of climate change is shared among groups of society, local government, central government and insurers. They are expected to stay informed about adaptation hazards relevant to them and protect themselves against it. They are also responsible for bearing the costs of climate change risks including investing into and protecting their own assets, meeting the costs of relocating or retreating (if required) and obtaining insurance.

Local government has a preventative role and must produce regional plans and district plans, invest in asset protection and resilience, and deal with emergency situations. Central government sets legislation, regulations and national standards, but is not obligated to invest in protective measures to support councils or highly exposed properties. However, in some circumstances, this has occurred on a discretionary basis.

The committee found that the current system lacks a clear mandate to plan for adaptation. It does not require any one group or level of government to manage its effects. A clear directive on who must

assess risk and address hazard exposure is needed. It recommended:

• Implementing legislation that sets out the roles and responsibilities of local and central government including directions about adaptation planning, resourcing, investment, and financing.

• Making climate adaptation a mandatory consideration when the Government makes decisions about infrastructure, planning and development.

• Establishing a lead agency on climate change to support and interact with the Government, public, key stakeholders and iwi/Māori, which would also be responsible for reporting on the framework’s performance and climate adaptation progress.

Who should pay?

The report acknowledged increased hazard risk and significant financial costs will be an outcome of ongoing climate change – so the adaptation framework will need to clarify who should invest in climate adaptation.

The current approach to investment in risk reduction and resilience is driven by a desire for self-sufficiency. Individuals are responsible for investing in their own assets, financial institutions can consider climate change risks when managing capital, and central government contributes to the cost of repairing

essential infrastructure under the emergency management system. More onerous obligations fall on local councils. They are responsible for managing natural hazard risk and investing in protection of infrastructure and services. But their investment can be restricted by financial capacity, political constraints, and actual needs of any given community. These limits have resulted in varying and inconsistent levels of investment across the country.

While the scale and exact cost of adaptation is uncertain, the committee considered a method of allocating adaptation costs through a principled approach.

Exacerbator pays

Beneficiary pays the costs of adaptation should fall on those who benefit directly. those who exacerbate risks should bear the costs of adaptation (i.e., emissions pricing).

PRINCIPLES

Ability to pay

wealthier agents to bear more costs and duties than those less able. distribute the costs across the public generally. Public pays

Assessing the viability of these principles by applying them to different scenarios, it found allocating costs using a single principle would likely result in social discord, impose unfair burdens, and create regulatory uncertainty. A combination of different principles to achieve a more balanced approach still wasn’t free from trade-offs or political contestation.

It recommended more research to determine the current and potential costs of adaptation, and that any investment framework should apply the four principles. It was also clear that the full allocation of costs should not fall on any one sector of society.

An adaptation model – residential property retreat

Owners of residential properties typically bear the costs of hazard damage at present, usually by taking out insurance. When insurance cover is exceeded, the financial burden falls on various levels of government who share costs through residential property buyouts. This approach has generally been inconsistent and reactive, posing concerns that people will be disincentivised to manage their own risks and expect buyouts. As climate change events increase, local and central government may also be exposed to significantly higher financial costs.

Retreat involves strategically moving assets away from hazardous locations and preventing development in high-risk areas. The committee considered the cost sharing framework for residential property retreat, including what the retreat policy (if any) should cover, how to structure funding, and the objectives of such a funding scheme.

The committee’s opinion was that the adaptation framework should enable future planning with a consistent approach to cost sharing.

To bring property owners within the scope of the funding system, it proposed the Government should distinguish between situations where insurance is or isn’t available, damage to land and buildings, and damage to different classes of buildings.

Eligibility for funding wasn’t addressed, nor was how any potential payments could be calculated. But the committee did make several recommendations on how to structure an appropriate funding system including:

• Ensuring the framework caters to affected renters and those who do not own property.

• Investigating the idea of proactive financing instruments to meet the costs of relocation.

• Amending legislation and regulations to enable residential property retreat.

Kaupapa Māori

The Committee received a range of information from the public which highlighted the needs and rights of Māori in the context of climate adaptation. Key submissions were that:

• The adaptation framework, funding policies and cost sharing should be fit for purpose for Māori and should give effect to te Tiriti o Waitangi.

• Some indigenous communities were at heightened risk of climate change impacts such as risks to marae, urupā, mahinga kai and places of historical significance.

• Mātauranga is traditional Māori knowledge that is unique to each iwi and hapū but local mātauranga could be included in the methodology for risk assessments.

The Ministry for the Environment also made submissions noting that the need to consider Māori interests is set out in other statutory provisions and will be relevant to climate adaptation. These include:

• limitations and protections on the use, administration and alienation of Māori land (Te Ture Whenua Māori Act);

• challenges for decision making given the unique ownership structure; and

• the requirement to consider tikanga when interpreting and applying New Zealand law.

Considering these submissions, the committee recommended that the adaptation framework should include bespoke arrangements for whenua Māori, recognising the Māori models of ownership and the effects of climate change on that land. The Committee also recommended the adaptation framework should include a role for mātauranga Māori.

…avoiding hardship by structuring funding so as to provide adequate housing to those who must relocate was a key consideration. Based on the outcomes and principles for planned relocation and funding, we did not consider that preserving people’s wealth or protecting property owners from the risks of property ownership were legitimate objectives of the funding system.”

The Expert Working Group on Managed Retreat – October 2024

An adaptation model – wide-ranging implications

The report confirmed the need for a comprehensive national framework and stated that framework needs to minimise long term social and fiscal impacts, while addressing wellbeing, fairness and transition. It should also address Māori needs, enable adaptation, reduce risk and be flexible enough to respond to an ever-changing environment.

If the committee’s recommendations are followed, all decisions about infrastructure, planning and development will have to consider climate adaptation. This

approach would span major infrastructure policy workstreams including, among others, regional deals, the infrastructure pipeline, the Regional Infrastructure Fund, and the replacement for the RMA.

Along with the recommendation of a lead agency on climate adaptation that can support an all-of-Government approach, the committee recommended prioritising the funding of research to improve data on natural hazards and climate risk and inform government decisions.

While it didn’t form a detailed view about the source of funding or how

compensation decisions should be made, it did recommend the government address these details when developing the adaptation framework.

What’s next?

Following the inquiry, the committee requested a special debate in Parliament. The Government is expected to respond to the committee’s report by the end of December 2024. An independent reference group to support development of policy advice for the adaptation

framework has already been established by the Government, and the inquiry recommended further work to identify what amendments to legislation and regulations would be needed to enable residential property retreat.

Any legislation needed to support the framework is expected to be introduced in early 2025.50

With critical decisions still to come, including where the Government lands on compensation and funding, it will be prudent to watch this space.

Renewable energy: could an Energy Security Act be in the wind?

Competing demands are buffeting the energy sector this year, with a government commitment to doubling renewable energy generation by 2050 being put in sharp focus by an energy supply crunch which resulted in a number of industrial operators cutting production and closing facilities.

With fresh work programmes initiated in response to the energy crunch, the list of energy reforms grows ever longer – and captures the tension between the energy transition and security of supply.

Work has been underway for over two years on the development and implementation of a regime for the regulation of offshore wind developments. The Government aims to introduce legislation to facilitate offshore wind development in December 2024, with a regime in place by mid-2025, a first feasibility permit round in late 2025, and first feasibility permits granted in 2026.51

That same month, the Government confirmed it will ensure access for gentailers to hydro contingency – the

ability to access water storage to manage risks and ensure reliable energy supply if needed.52 This will be a key area of focus for the sector before next winter.

Other enabling policy work that has been completed, or is underway, ranges from the use of grid-scale battery storage systems to the role of hydrogen. The first grid-scale battery began discharging into the grid in 2024, with more on the way.53 The first network of hydrogen refuelling stations opened in New Zealand this year,54 and in July

KEY ENERGY PROPOSALS

Removing legislative and consenting barriers to LNG importation

Electrify NZ plan

Offshore renewable energy regime

OIO Ministerial Directive

Letter and streamlining energy sector investment

Carbon capture, utilisation and storage (CCUS)

Ensuring gentailers can access hydro contingency

Energy Competition Task Force to review electricity market operations

Changes to upstream legislation and settings

Improved infrastructure delivery

New Zealand and Australian Ministers issued a joint statement after climate and finance talks in which they committed to collaborate on the development of a Guarantee of Origin scheme for green hydrogen and sustainable fuels.55

Easing restrictions on electricity lines companies owning generation assets

Formation of Gas Security Response Group

Renewable energy: certainty the key

Developers and investors in renewables may take heart from the conclusion of the Tiwai Point smelter electricity negotiations earlier in the year, which clarified the status of a material portion of New Zealand’s electricity demand profile. The end of feasibility work on the proposed Lake Onslow scheme, while a disappointment for some, did remove the execution/ timing uncertainties associated with a significant pumped-hydro scheme at the feasibility stage for others.

In October the Government confirmed 22 renewable electricity projects would be listed for the Fast-track Approvals Bill – including seven wind farms, 10 solar farms, five hydro schemes (including reconsenting of existing generation) and two energy infrastructure projects.56 Shortly after publication of the list, which also included a seabed mining project, offshore wind developer BlueFloat Energy said it would not progress its New Zealand feasibility work. It pointed to uncertainty over allocation of the seabed as one reason.57

RENEWABLES IN ELECTRICITY GENERATION, ENERGY SUPPLY, AND ENERGY CONSUMPTION

REWEWABLES IN ELECTRICITY GENERATION, ENERGY SUPPLY, AND ENERGY CONSUMPTION

A further nuance?

While there many factors at play, it is worth considering whether overarching energy legislation offers a way to bring these various reforms and initiatives together as an integrated whole. Were an Energy Security Act to be considered, the UK’s Energy Act could be a point of reference. The Energy Act 2023, which passed into law under the previous UK Government, was launched with the aim of strengthening energy security, ensuring long-term affordability of household energy bills – and to support the delivery of net zero.

Toward net zero with energy legislation?

To support the delivery of net zero, the UK’s Energy Act 2023 meant the relevant regulator’s remit was updated to consider net zero targets as part of its everyday decisions, a licensing framework was introduced for CO2 transport and storage to help deliver the UK’s first carbon capture sites and the UK became the first country to legislate for fusion regulation.

Long seen as a ‘clean fuel’ just out of reach, this year the UK Government launched a project to build a nuclear fusion energy plant in Nottinghamshire58 that backers expect to be constructed by 2040, and the UK’s ‘fusion cluster’ in Oxfordshire now boasts a growing list of partners – over 200 companies.59

Whether a more comprehensive framework could be considered for New Zealand, or policy developments progress individually, one thing is certain. Rapid and ongoing change will continue for the energy sector.

PART 4: LOOKING AHEAD

Carbon capture, utilisation and storage - will it capture NZ's attention?

As net zero targets increasingly draw close, the heady promise of capturing carbon and locking it away has seen carbon capture and storage projects gain increasing attention overseas. In October, the UK Government announced plans to invest almost GBP22 billion over 25 years to fund such projects, in a bid to drive thousands of new clean energy jobs while supporting acceleration to net zero.60 Earlier this year, the New Zealand Government released its own consultation on CCUS. But despite the growing embrace of CCUS, questions remain over the role it may play in reducing New Zealand’s emissions.

What is CCUS?

CCUS involves capturing carbon dioxide, often from power stations, industrial facilities and other point of origin sources. The carbon dioxide is then either used onsite, transported elsewhere for use or else injected into the earth, often into depleted oil and gas reservoirs or certain aquifers, so that it does not enter the atmosphere.

New Zealand doesn’t currently have a regulatory regime that specifically addresses CCUS. Any attempt to engage in CCUS would need to account for:

• Environment and planning legislation.

• The status of CCUS under the ETS.

Capture

Capturing CO2 from an industrial facility

Transport

The compressed CO2 is moved by ship, truck or pipeline from the point of capture to the point of utilisation or storage

Utilisation

Captured CO2 is used as a resource or feedstock to create products and services

Storage

Storing CO2 permanently in onshore and offshore geological formations

Environment and planning legislation

As it stands, New Zealand’s existing environment and planning regime is not well-suited to addressing CCUS.

A 2013 Waikato University study commissioned by the Ministry of Business, Innovation and Employment concluded that CCUS, and particularly the injection of carbon dioxide into storage formations underground, would likely be regulated by New Zealand’s Resource Management Act 1991 (RMA), with such activities requiring an authorisation or permit. The paper concluded that without legislative amendment, CCUS activities would be restricted under the current regime, with no clear pathway to allow such projects to proceed.

Subsequent amendments to the RMA have improved matters. An August 2023 report released by Waikato University’s Centre for Environmental, Resources and Energy Law61 noted that a 2022 amendment enabled decision-makers to have regard to the effects of discharges into the environment on climate change. This means the positive effects of potential CCUS activities can be considered by decision-makers, removing a “potentially insurmountable barrier for CCUS projects”.62 But without regulatory reform, a resource consent under the RMA will still be necessary to implement CCUS, as it involves the discharge of a contaminant to land (currently prohibited by section 15 of the RMA).63 Given the novelty of CCUS in New Zealand, it is not clear how councils would process such applications.

The 2023 report recommends reform of a number of regulatory tools in addition to the RMA and Exclusive Economic Zone and Continental Shelf (Environmental Effects) Act 2012 in order to accommodate CCUS activity in New Zealand. Among the ‘priority’ changes, the report recommends the development of a national policy statement for CCUS be made to recognise CCUS’ advantages at a national level alongside changes to regional policy statements, regional plans, and district plans be developed under the RMA to recognise CCUS. Whether such matters will become a priority for national and regional policymakers remains to be seen.

PART 4: LOOKING AHEAD

CCUS and the ETS

New Zealand’s ETS does not expressly address CCUS activities.

The Climate Change Response Act 2002 (CCRA) which underpins the ETS recognises ‘removal activities’ – activities which cause a reduction in gases causing global warming in the atmosphere. Forestry receives NZUs for the emissions it removes, while geothermal fluid users can apply for approval to use a unique emissions factor allowing them to subtract CO2 reinjected into geothermal fields from their liability. The CCRA further

recognises as a removal activity where a person stores carbon dioxide after capture where:

1. the person is required to surrender units under the CCRA in respect of the emissions that would result if the carbon dioxide was not captured and stored; and

2. the result of the carbon dioxide being captured and stored is a reduction from emissions reported

in any emissions report provided by New Zealand under its international climate change obligations; and

3. any prescribed threshold is met.

However, this provision only applies once brought into effect by an Order in Council. As yet, this has not been made. Even if it was brought into effect, NZUs would only be available for CCUS where this is undertaken by entities already required to surrender NZUs.

A 2018 Productivity Commission report recommended amending the CCRA so that CCUS could be recognised as a removal activity, regardless of the source of the emissions captured. To date, nothing has been done in this space.

The consultation

The Government released a muchanticipated consultation paper on a draft framework for enabling CCUS in New Zealand which closed in August.

The ETS

PROPOSED REGULATORY CHANGES FOR CCUS

Amending the ETS to provide for participants to subtract emissions they stored from their emissions liabilities, or else to receive NZUs (similar to the way in which NZUs are granted for forestry) for carbon sequestered.

Monitoring

A new regime to include regulations requiring operators of CCUS to monitor their storage sites and collect information on CO2 captured, sequestered and leaked during transportation, injection and storage. Regulations would also include an audit and compliance regime, with operators required to surrender NZUs or store additional CO2 to compensate for any leakage.

Consenting and permitting

The consultation paper suggested that New Zealand currently has “a neutral policy environment for consenting”, and while there are inconsistencies, there is insufficient evidence that they inhibit investment. The Government therefore did not propose any changes to consenting at this time.

Long-term liability

A framework for requiring operators of storage sites to obtain permits and approvals for monitoring plans, monitor for leakage and pay compensation if needed. Closure plans would be required before closure of a storage site and evidence may be required of operators’ financial capability to maintain/remediate the site. Operators would remain responsible for the site for a set period after closure.

Is CCUS realistic in New Zealand?

Regardless of the extent to which regulatory reform is required, there remains the question of how realistic CCUS is in a practical sense in New Zealand. Concerns raised include that New Zealand is geologically active, with the potential for earthquakes to rupture any underground storage facilities, while CCUS activities may themselves trigger seismic activity.64

That said, the Climate Change Commission’s April 2024 advice on the fourth emissions budget (2036-2040) noted that there had recently been successful trials at three geothermal fields of CCUS technologies, reinjecting carbon dioxide from geothermal fluids back into geothermal reservoirs. However, while there may be a role for CCUS in addressing hard-to-abate residual emissions in the medium term (and moving to net negative emissions in the long term), it considered that it may be premature to expand the scope of New Zealand’s ETS to accommodate greater renewals until decisions are made on the ETS’s role in driving emissions reductions.65

Our climate change practice

Our team brings expertise and adaptability drawn from our role at the forefront of climate change action in New Zealand for more than 20 years. What we’ve learned is embedded across the broad range of the practice areas needed to meet today’s challenges, and we deliver clear commercial and strategic advice on mandatory reporting requirements, greenwashing, climate litigation, and directors’ duties to consider climate-related risks.

Having advised on core climate change legislation and the development of New Zealand’s

Emissions Trading Scheme, the world’s first avoided deforestation project and pioneering emissions trading activity, we now look ahead to climate adaptation, the energy transition and the opportunities that are arising alongside the challenges.

We can provide you with advice on:

• Substantiating environmental claims and avoiding ‘greenwashing’.

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• Contentious regulatory issues and climate related litigation.

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• New Zealand ETS, NZU trading and related derivatives.

• Sustainable finance.

Our climate change practice is recognised internationally. We are the only New Zealand legal team ranked among

market leaders for the region by Chambers Asia Pacific 2024. We are also named in the Asia Pacific regional edition of the Legal 500 Green Guide Asia Pacific 2025, which highlights the work of partners Richard Massey and Zac KedgleyFoot, along with environment practice leader Natasha Garvan, convenor of the New Zealand Law Society’s Climate Change Law Committee. Natasha is also named as a ‘Next Generation Partner’ in projects and resource management (including environment) by the Legal 500 Asia Pacific 2024.

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Acknowledgements

Our thanks to Bell Gully lawyer Gloria Rapoto for her assistance in preparing this report.

Keown, B., & Shiels, T. (2024, February 7). Supreme Court releases Smith v Fonterra & Ors decision on novel climate change claims Bell Gully. Retrieved from https://www. bellgully.com/insights/supreme-court-releases-smith-vfonterra-ors-decision-on-novel-climate-change-claims/

2 New Zealand Parliament. (2024, June 25). Climate Change Response (Emissions Trading Scheme Agricultural Obligations) Amendment Bill — First Reading. Retrieved from https://www.parliament.nz/en/pb/hansard-debates/rhr/ combined/HansDeb_20240625_20240626_40

3 Ministry for the Environment. (2024, July). Responding to a changing climate – The Government’s climate strategy. New Zealand Government. Retrieved from J001281-MfE-Climatestrategy-brochure-FF_webV2.pdf

The Ministry for the Environment (2024, 10 July). The Government’s climate strategy. Retrieved from The Government’s climate strategy | Ministry for the Environment

4 Ministry for the Environment. (2024, 10 May). Cabinet papers and regulatory impact statements – Progressing an adaptation framework. Retrieved from Progressing an adaptation framework | Ministry for the Environment New Zealand Parliament. (2024, 29 May). Inquiry into climate adaptation. Retrieved from Inquiry into climate adaptationNew Zealand Parliament

5 He Pou a Rangi/Climate Change Commission. (2024). Our upcoming work. Retrieved from Our upcoming work » Climate Change Commission

6 He Pou a Rangi/Climate Change Commission. (2024). Advice on emissions budgets. Retrieved from Advice on emissions budgets » Climate Change Commission

7 Watts, S. (2024, 18 July). Consultation opens for the Emissions Reduction Plan. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Consultation opens for the Emissions Reduction Plan | Beehive.govt.nz

8 XRB – External Reporting Board. (2024, 13 November). Latest News. 2024 Climate and Assurance Proposals announced. Retrieved from Latest News » XRB

9 New Zealand Parliament. (2024, 1 October). Climate adaptation inquiry completed. Retrieved from Climate adaptation inquiry completed - New Zealand Parliament

10 Ministry of Business, Innovation & Employment. (2024, 4 November). Offshore renewable energy. Retrieved from Offshore renewable energy | Ministry of Business, Innovation & Employment

11 Watts, S. (2024, 10 May). Climate change – mitigating the risks and costs. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Climate change –mitigating the risks and costs | Beehive.govt.nz

12 He Pou a Rangi/Climate Change Commission. (2024, 7 November). Commission report released on domestic contribution to the second nationally determined contribution. Retrieved from Commission report released on domestic contribution to the second nationally determined contribution » Climate Change Commission

13 Ministry of Business, Innovation & Employment. Brown, S. (2024, 26 August). Cabinet paper: Offshore Renewable Energy Regulatory Regime: Policy Decisions. Retrieved from Offshore renewable energy regulatory regime policy decisions

14 XRB – External Reporting Board. (2022, July). Aotearoa New Zealand Climate Standards: Climate-related Disclosures: Climate-related Disclosure Framework Consultation Document. Retrieved from xrb.govt.nz/dmsdocument/4569/

15 XRB – External Reporting Board. (2024, 13 November). Latest News. 2024 Climate and Assurance Proposals announced. Retrieved from Latest News » XRB

16 Gudkov, A. (2024, 22 August). Climate reporting legislation passes Senate - reporting to commence from 1 January 2025 Australian Institute of Company Directors. Retrieved from Climate reporting legislation passes Senate - reporting to commence from 1 January 2025

17 International Financial Reporting Standards Foundation (IFRS). (2024, 23 April). ISSB to commence research projects about risks and opportunities related to nature and human capital Retrieved from IFRS - ISSB to commence research projects about risks and opportunities related to nature and human capital

18 Australian Institute of Company Directors. (2024, September). A director’s guide to mandatory climate reporting. Retrieved from directors-guide-to-mandatory-climate-reporting-web

19 Australian Securities & Investments Commission. (2024, 18 September). ASIC’s administration of the sustainability reporting regime. Retrieved from ASIC’s administration of the sustainability reporting regime | ASIC

20 XRB – External Reporting Board., FMA - Financial Markets Authority. (2024, June). Climate-related Disclosures Regime: What you need to know. Page 18. Retrieved from Climaterelated Disclosures Regime: What you need to know

21 Bradley, A., Dann, C. (2024, 16 September). Government planning regulations reform for NZX-listed companies: 'We're going to remove those rules' Radio New Zealand. Retrieved from Government planning regulations reform for NZX-listed companies: 'We're going to remove those rules' | RNZ News

22 Sabin Center for Climate Change Law. (2024). KlimaSeniorinnen v Switzerland (ECtHR). Climate Change Litigation Databases. Retrieved from: KlimaSeniorinnen v Switzerland (ECtHR) - Climate Change Litigation

23 Milieudefensie. (2022, 13 January). Letter to CEO. Retrieved from Microsoft Word - Brief met rand.docx

24 Sabin Center for Climate Change Law. (2024). Hugues Falys, FIAN, Greenpeace, Ligue des droits humains v. TotalEnergies (The Farmer Case). Climate Change Litigation Databases. Retrieved from Hugues Falys, FIAN, Greenpeace, Ligue des droits humains v. TotalEnergies (The Farmer Case) - Climate Change Litigation

25 Sabin Center for Climate Change Law. (2024). BLOOM and Others v. TotalEnergies. Climate Change Litigation Databases. Retrieved from BLOOM and Others v. TotalEnergies - Climate Change Litigation

26 ClientEarth. (2024, 1 February). Polish energy giant sues former directors and insurer over failed coal power plant investment Retrieved from Polish energy giant sues former directors and insurer over failed coal power plant investment ClientEarth

27 Watts, S. (2024, 30 May). Budget supports practical climate action. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Budget supports practical climate action | Beehive.govt.nz

28 Gibson, E. (2024, 4 September). Risk of carbon credits going on scrap heap after auction fails to attract any bidders Radio New Zealand. Retrieved from Risk of carbon credits going on scrap heap after auction fails to attract any bidders | RNZ News

29 Mcclay, T., Watts, S., Hoggard, A., Patterson, M. (2024, 11 June). Agriculture to come out of the ETS Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Agriculture to come out of the ETS | Beehive.govt.nz

30 Ministry for the Environment. (2024, 26 June). Panel appointed for independent review of biogenic methane science and target. Retrieved from Panel appointed for independent review of biogenic methane science and target | Ministry for the Environment

31 Ministry for the Environment. (2024, July). New Zealand’s second emissions reduction plan (2026-30): Discussion document. Retrieved from New-Zealands-second-emissionsreduction-plan-Discussion-document.pdf

32 Parliamentary Commissioner for the Environment. (2024, May). Going with the grain: Changing land uses to fit a changing landscape. At 44. Retrieved from going-with-the-grainchanging-land-uses-to-fit-a-changing-landscape.pdf

33 At 53.

34 At 54.

35 At 55.

36 Mcclay, T., Watts, S. (2024, 4 December). Protecting NZ food production and ETS credibility. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Protecting NZ food production and ETS credibility | Beehive. govt.nz

37 Mcclay, T. (2024, 14 October). Government and sector to improve Forestry ETS Registry. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Government and sector to improve Forestry ETS Registry | Beehive.govt.nz

38 New Zealand Parliament. (2024, 16 October). Paper: Government response to the Climate Change Commission report: Monitoring report: Emissions reduction 2024 J.23 Retrieved from Government response to the Climate Change Commission report: Monitoring report: Emissions reduction 2024 J.23

39 He Pou a Rangi/Climate Change Commission. (2024, February). Advice on NZ ETS unit limits and price control settings for 2025-2029. At 10. Retrieved from CCC_2024-advice-on-NZ-ETSunit-limit-and-price-control-settings-2025-2029.pdf

40 He Pou a Rangi/Climate Change Commission. (2024, April). Draft advice on Aotearoa New Zealand’s fourth emissions budget. At 18. Retrieved from 20240403-EB4-draft-advice-P05V01-compressed.pdf

41 At 22 and 45.

42 He Pou a Rangi/Climate Change Commission. (2024, April). Discussion document: Review of the 2050 emissions reduction target. Retrieved from 20240404-target-consultation-1.1.pdf

43 He Pou a Rangi/Climate Change Commission. (2024, April). Review on whether emissions from international shipping and aviation should be included in the 2050 target, and if so how Retrieved from 20240403_ISA-Discussion.pdf

44 Ministry for the Environment. (2024). Annual updates to New Zealand Emissions Trading Scheme limits and price control settings for units 2024: Consultation document. Retrieved from annual-updates-to-nzets-limits-and-settings-consultation.pdf

45 Gibson, E. (2024, 17 June). National promised a 'strong and stable' carbon market - then it crashed. Radio New Zealand. Retrieved from National promised a 'strong and stable' carbon market - then it crashed | RNZ News

46 Gibson, E. (2024, 20 March). Government earns $190m from first carbon auction of the year. Radio New Zealand. Retrieved from Government earns $190m from first carbon auction of the year | RNZ News

47 Ministry for the Environment., NZX., EEX. (2024, 19 June). NZ ETS Carbon Auctions 2024. Retrieved from https://www. etsauctions.govt.nz/

48 CarbonNews. (2023, 19 October). NZ climate-related disasters hit record high in 2023. Retrieved from NZ climate-related disasters hit record high in 2023 - Carbon News

49 New Zealand Parliament. (2024, 1 October). Climate adaptation inquiry completed. Retrieved from Climate adaptation inquiry completed - New Zealand Parliament

50 Watts, S. (2024, 10 May). Climate change – mitigating the risks and costs. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Climate change –mitigating the risks and costs | Beehive.govt.nz

51 Brown, Simeon. (2024, 26 August). Cabinet paper: Offshore Renewable Energy Regulatory Regime: Policy Decisions. Ministry of Business, Innovation & Employment. Retrieved from Offshore renewable energy regulatory regime policy decisions

52 Brown, Simeon., Jones, S. (2024, 26 August). Urgent action taken to bolster energy security. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Urgent action taken to bolster energy security | Beehive.govt. nz

53 Electricity Authority. (2024, 16 April). Unlocking the potential for batteries to contribute to security of supply. Retrieved from Unlocking the potential for batteries to contribute to security of supply | Electricity Authority

54 Brown, Simeon. (2024, 23 April). Minister welcomes hydrogen milestone Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Minister welcomes hydrogen milestone | Beehive.govt.nz

55 Willis, N., Watts, S. (2024, 30 July). Joint statement: AustraliaNew Zealand 2+2 Climate and Finance Dialogue. Beehive. govt.nz. The official website of the New Zealand Government. Retrieved from Joint statement: Australia-New Zealand 2+2 Climate and Finance Dialogue | Beehive.govt.nz

56 Brown, S. (2024, 6 October). Fast-track to boost renewable electricity. Beehive.govt.nz. The official website of the New Zealand Government. Retrieved from Fast-track to boost renewable electricity | Beehive.govt.nz

57 Daalder, M. (2024, 24 October). Offshore wind developer pulls out of NZ amid seabed mining concerns. Newsroom. Retrieved from Offshore wind developer pulls out of NZ amid seabed mining concerns - Newsroom

58 UK Atomic Energy Authority. (2024, 8 May). UK launches search for industry partners to develop fusion plant. Retrieved from UK launches search for industry partners to develop fusion plant - GOV.UK

59 The Fusion Cluster. (2024). About us. Retrieved from About UsThe Fusion Cluster

60 Department for Energy Security and Net Zero., Starmer, K., Reeves, R., Miliband, E. (2024, 4 October). Government reignites industrial heartlands 10 days out from the International Investment Summit. Retrieved from Government reignites industrial heartlands 10 days out from the International Investment Summit - GOV.UK

61 Barton, B. (2023, August). Carbon Capture and Storage: Taking Action under the Present Law. (Centre for Environmental, Resources and Energy Law Te Piringa Faculty of LawUniversity of Waikato). Retrieved from Carbon-Capture-andStorage-Taking-Action-Barton-Aug-2023.pdf

62 At page 16.

63 At page 14.

64 Mandow, N. (2023, 22 May). Polarising carbon capture tech back on NZ radar. Newsroom. Retrieved from Polarising carbon capture tech back on NZ radar

65 He Pou a Rangi/Climate Change Commission. (2023, April). 2023 Draft advice to inform the strategic direction of the Government’s second emissions reduction plan. At 125. Retrieved from CCC4940_Draft-ERP-Advice-2023-P02-V02web.pdf

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