Legal questions raised over climate conflict of $200 million fossil fuel fund

One of New Zealand’s trading partners is investigating whether the creation of an investment fund for gas producers breaches a “sustainable” free trade agreement that explicitly blocks new fossil fuel subsidies, the deputy leader of the Greens says.

Last week the New Zealand Greens released legal advice suggesting that the government’s $200m (AUD$185.49) investment fund to encourage domestic gas exploration violated the terms of the Agreement on Climate Change, Trade and Sustainability (ACCTS) signed with Costa Rica, Iceland and Switzerland.

Signed in November 2024, the “sustainable” free trade deal removed tariffs on wood and wool products, two significant sectors in New Zealand’s export-dependent economy, and was presented as a win for the new government.

A legal opinion by Barrister Nura Taefi KC finding that the $200m fund “falls within the definition of a prohibited fossil fuel subsidy” of the Agreement on Climate Change, Trade and Sustainability (ACCTS) as “it involves a financial contribution by the government targeting the exploration, extraction, refining and/or processing of a fossil fuel, which will confer a benefit by way of a cost reduction for co-investors.”

The government rejected claims the decision compromised New Zealand’s reputation internationally or violated the terms of its trade agreements last week. Trade Minister Todd McClay insisted the country was compliant with the agreement and dismissed concerns raised by the Greens as “scare-onomics”.

However, Deputy Greens leader and climate change spokesperson Chlöe Swarbrick said on Wednesday an the embassy of the country’s affected had contacted her to discuss the matter.

She would not say which country, as a meeting had not yet taken place, but said it was a sign that New Zealand’s international reputation was at risk.

“It is quite clear the government did not get any advice, do any due diligence or just didn’t do the work,” Swarbrick said. “The same week we released that legal advice, Prime Minister Christopher Luxon was offshore talking about the importance of our international reputation and the relationships we were building.”

“All the while, at home, he’s undermining domestic climate policy.”

Taefi’s advice to the New Zealand Greens noted that the ACCTS agreement was not yet in force and that though New Zealand had an obligation “not to undermine the agreement”, there are currently no legal mechanisms to enforce it.

“If the ACCTS was in force, New Zealand would be required to notify the other parties of the Investment,” Taefi said. “There would also be a risk that a breach could trigger the dispute resolution process culminating in suspension of cooperation measures, including the reinstatement of tariffs and the suspension of the other trade benefits to New Zealand.”

Since the election the government has axed at least 35 climate policies and sought to introduce measures to support major resource developments – including scrapping regional councils over their opposition to new coal mines and other large resource projects.

This has included efforts to overturn a decade-old ban on new oil and gas exploration in the country, leading the government to confirm last week that it had quietly pulled out of the Beyond Oil and Gas Alliance.

The group represents a coalition of governments working for a managed phase-out of oil and gas production and its membership includes Denmark, Costa Rica, France, Ireland, Portugal, Spain, Sweden, Samoa, Tuvalu and Vanuatu. New Zealand joined at the Glasgow climate summit in 2021.

The four-year $200m fund was announced by New Zealand Minister Shane Jones, who belongs to New Zealand First, a junior partner in the current coalition government, in May citing concerns over energy shortages.

“Natural gas will continue to be critical in delivering secure and affordable energy for New Zealanders for at least the next 20 years,” Jones said.

Environment and climate groups say the decision will not do anything to address New Zealand’s energy situation as it will be a decade before the first will come online and any new coal or gas projects will be geared for export.

Even as it has repealed policies to help with emissions reduction, the government has promoted tree planting as its premier climate policy. This relies on planting vast tracts of pine trees – a non-native species – to offset fossil fuel use.

Two groups, Lawyers for Climate Action NZ and the Environmental Law Initiative, filed a lawsuit against the government in June alleging that the government’s actions on climate change since the election are illegal.