Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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NO HOT AIR HERE

The recent introduction of the Climate Change Response (Zero Carbon) Amendment Bill to Parliament has brought increased scrutiny on our greenhouse gas emissions and to the broader climate change issue, which has implications for New Zealand business.

In 2017 New Zealand’s gross greenhouse gas emissions totalled 81 mt CO2-e (million tonnes of carbon dioxide equivalent), a +23% increase since 1990. In contrast New Zealand’s net emissions have increased +65% over the same timeframe.

Net emissions are gross emissions less any carbon sinks (the only net carbon sink in New Zealand is from land use, particularly forestry, which removed -24 mt CO2-e or -30% of New Zealand’s gross emissions in 2017).

The increase in New Zealand’s gross emissions over time has primarily been driven by (1) an increase in agricultural emissions, largely due to a doubling of the dairy herd, and (2) an increase in CO2 emissions from road transport. In Figure 1 we highlight the largest sector emitters; agriculture, energy and road transport.

Figure 1. Emissions profile by sector - 2017

Source: Ministry for the Environment, Forsyth Barr analysis

The Government’s primary tool for reducing greenhouse gas emissions is the New Zealand Emissions Trading Scheme (NZ ETS). The NZ ETS requires most sectors to purchase and surrender emissions units (NZU) to offset their emissions profile. Biological methane emissions from agriculture are excluded. Simply put, the NZ ETS places a price on greenhouse gas emissions. Under the current ETS the price of emissions is capped at $25/NZU. However, with the Government’s net zero emissions goal, excluding biological methane, it seems likely that the price of NZUs will rise to reflect the true cost of emissions.

In response to the rising social and potential financial pressures, a number of domestically listed companies have started enacting strategies to reduce or offset their emissions. In March 2019 Air NZ, Contact Energy, Genesis Energy and Z Energy announced the formation of Drylandcarbon, a partnership between the four companies that will see them invest in the establishment of a forestry portfolio. The portfolio aims to produce a steady stream of NZUs to help the partners offset their emissions and meet their requirements under the NZ ETS. Whilst this is only one example, it is pleasing to see companies both mitigating potential financial risks but also doing their bit for our environment, in our opinion.

We believe the listed NZX companies under our coverage most exposed to a carbon price increase include those in the dairy sector (Synlait and Fonterra) particularly if biological methane is included in the ETS, oil and gas sector (Z Energy and Refining NZ), transport sector (Air NZ, Mainfreight and Freightways) and utilities with thermal generation exposure (Contact Energy and Genesis Energy). Z Energy recently highlighted any unexpected changes to the NZ ETS as presenting downside earnings risk in its FY19 results announcement.

 

Andy Bowley
Head of Investment Research

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