A Level Playing Field

The Devon View, written by Alice Jones, ESG Analyst at Devon Funds.

Our discussions with the management teams of portfolio companies during the February reporting season highlighted a couple of areas where the New Zealand government’s approach to decarbonisation is possibly doing us a disservice, as shareholders and New Zealanders. We think it’s important that our portfolio companies and our country operate on a level playing field versus the rest of the world.

The first example was Fletcher Building, a company currently restructuring under a new management team with the goal of improving their return on capital and, ultimately, shareholder returns. At the same time, they continue to look to invest in growth in better-performing parts of their business.

Golden Bay Cement, a Fletcher Building subsidiary, operates New Zealand’s only domestic cement manufacturing plant. The business started its decarbonisation journey in the early 2000’s and has reduced the volume of coal it requires by switching to biomass fuel. The biomass is sourced from sawdust, woodchips, laminated veneer lumber (LVL) offcuts, and construction and demolition waste. This has enabled the plant to reduce coal usage by 60%, reducing annual CO₂ emissions, and producing cement with a 25% lower Global Warming Potential than international benchmarks. It also diverts significant volumes of waste from landfills. Compared to imported cement, Golden Bay Cement’s EcoSure cement is approximately 20% lower in carbon and roughly 27% lower in embodied carbon than the industry benchmark. The plant directly and indirectly employs over 550 people.

Golden Bay Cement has plans to invest $70-80 million over the coming years in initiatives to continue to decarbonise its product. However, Fletcher Building management have shared their concerns both in public reporting, and in our recent meeting, that changes to NZ Emissions Trading Scheme (ETS) legislation have created ambiguity regarding the future level of free allocation of New Zealand Units (carbon credits), which may jeopardise this investment. Fletcher’s primary concern is that the changes may disincentivise investment in accelerated decarbonisation, given that the baseline could change in five years. Their other concern is that importers do not pay a carbon cost like local manufacturers do, which has direct implications for Golden Bay. The absence of stable and predictable policy settings constrains their ability to deploy the significant capital required for domestic low-carbon manufacturing, and without favourable policy settings, risks Golden Bay Cement making the decision to import cement that is not subject to the same carbon costs.

The solution to these concerns might be a Carbon Border Adjustment Mechanism (CBAM), which is currently under development in Australia and has been in place in the EU since 2023. Functionally, it is a tariff on carbon and would mean that importers must buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under domestic carbon pricing rules. However, at this stage, the New Zealand government are not looking to implement a CBAM. Fletcher has stated that their current investment plan retains the flexibility to either remain a domestic manufacturer or transition to an import model, increasing the possibility of emission leakage.

Another example of a company being held back by a lack of regulatory support arose in our meeting with Channel Infrastructure management. In recent years, Channel Infrastructure has transformed itself from a refinery operator into a dedicated fuel import and storage infrastructure business. The company stores 80% of New Zealand’s jet fuel demand.

Channel Infrastructure now has an opportunity to support the aviation industry transition to lower carbon fuels, having entered an agreement with Seadra Energy and partners (Qantas, Renova, Kent, ANZ, and now Air New Zealand) to repurpose parts of its decommissioned refinery site at Marsden Point into a biorefinery. The facility would produce biofuels, including sustainable aviation fuel (SAF), using biological feedstock. Separate from the biorefinery, Channel is also exploring synthetic SAF (eSAF) production with its partner Fortescue. Channel would provide infrastructure within its Marsden Point Energy Precinct.

What was evident from our meeting was the discrepancy between the level of support the Australian government is offering for the transition to low-carbon fuels, as compared to the New Zealand government. The Australian government has committed $1.1 billion to their Cleaner Fuels Program, which would provide production-linked incentives, over 10 years, toward low-carbon liquid fuels projects. This is in recognition of the economic opportunity of developing a local low-carbon liquid fuel industry in Australia, calculated to be worth $36 billion by 2050 according to the Clean Energy Finance Corporation (CEFC). To date, the New Zealand government has helped fund a feasibility study with Air New Zealand to explore domestic supply chains of alternative jet fuel, and a feasibility study with Channel Infrastructure and Fortescue on producing SAF from green hydrogen. As Channel put it, there is a danger the Australians ‘cut our lunch’ in this space, and while this discrepancy became evident from our meeting with Channel Infrastructure, other NZX-listed beneficiaries of regulatory certainty with regard to low carbon fuels would include Air New Zealand and Auckland Airport. 

We acknowledge that New Zealand is operating within a tight fiscal environment. However, from both a financial and environmental perspective, we believe there is a lack of regulatory stability and long-term infrastructure planning. Without clear and consistent policy settings, New Zealand risks becoming an importer of cement instead of maintaining our leadership in low-carbon cement manufacturing and being disincentivised to pursue a sustainable aviation fuel industry that could deliver long-term benefits to New Zealand.