# New Zealand’s net position under the Kyoto Protocol

The net position is a forecast of New Zealand's greenhouse gas emissions over the first commitment period of the Kyoto Protocol. It is reported as a surplus if New Zealand's net emissions are projected to be below our commitment under the Kyoto Protocol and as a deficit if emissions are projected to be above the commitment. The number, in millions of units, refers to the number of Kyoto Units that New Zealand will have to spare (surplus), or need to purchase (deficit) to meet our obligations under the Kyoto Protocol.

The latest projection of New Zealand's net position under the Kyoto Protocol is a surplus of 73.9 million units. New Zealand's Kyoto Protocol financial position is NZ\$62.7 million. This uses the exchange rate as at October 2013 and an international carbon price of Euro 0.51 per tonne. The increase in the net position since the May update is due to the surrender under the NZ ETS of international units.

The Ministry updates the net position twice a year – once in April to include the latest estimates of emissions, and again in August to include additional Kyoto Units surrendered through the NZ ETS. There are, however, monthly changes to the net position due to transfers to and from New Zealand's assigned amount from trading in emission units.

Financial Statements Period Ended Net position in million units Carbon Price in Euro Exchange Rate NZ\$ buys Euros Carbon Price in NZ\$ Value of the Net Asset/(Liability) in NZ\$m
A X Y Z=X/Y A × Z
October 2013 73.9 0.51 0.60090 0.85 63
September 2013 71.9 0.61 0.61265 1.00 72
August 2013 67.2 0.58 0.58645 0.99 67
July 2013 64.0 0.56 0.60165 0.93 60
June 2013 64.0 0.49 0.5963 0.82 53
May 2013 29.0 0.41 0.62005 0.66 19
April 2013 29.1 0.01 0.65300 0.02 0

Note: Transfers of units from the Government account are now set out in Table 2.

## How is the net position calculated?

The net position is calculated as the difference between the emission units New Zealand will have available (assigned amount units (AAUs), forecast forestry removal units, and other Kyoto Units) and forecast total emissions over 2008–2012. Because New Zealand’s assigned amount units  are fixed, a small forecast change in either total emissions or in forestry removals, can have a large effect on the size of the net position.

Figure 1 sets out this equation graphically.

### Figure 1 The net position for 2008 – 2012

Figure 1 graphically represents the compliance equation for the Kyoto Protocol. To comply with the Kyoto Protocol New Zealand must surrender units equal to its emissions over 2008–2012. Kyoto Units include Assigned Amount Units, removal units from article 3.3 forests and Kyoto flexibility units generated or purchased by New Zealand (Certified Emission Reductions and Emission Reduction Units). Kyoto Units surrendered under the New Zealand Emissions Trading Scheme (NZ ETS) can also be used by the Government to meet its Kyoto commitment and are included when calculating the net position.

## What is New Zealand’s commitment under the Kyoto Protocol?

New Zealand’s commitment under the Kyoto Protocol is to return emissions to 1990 levels on average over the commitment period (2008 – 2012) or otherwise take responsibility for the excess.

The Kyoto Protocol works like an international emissions trading scheme. New Zealand received emission units (assigned amount units – AAUs) equal to our target level, and we must surrender units equal to our total emissions over the period. If our emissions are below our target we will have a surplus of emission units to sell. Conversely, if our emissions are over the target, we will have to buy emission units to cover the deficit.

## What are the projections of emissions for each sector?

The following table shows a breakdown of emissions for each sector. Emissions for 2008–2010 are taken from the National Greenhouse Gas inventory. Emissions for 2011 and 2012 are projected. For further information see the reports on each sector, accessible via the links at the right-hand side of this page.

Table 1: Projections of emissions and removals by sector and by year for 2008–2012

Emissions (millions of tonnes of CO2 equivalent)

2008
2009
2010
2011
2012
Total
Energy
34.3
31.6
31.3
31.0
31.7
159.9
Industrial processes and Solvents
4.3
4.3
4.8
5.5
4.4
23.3
Agriculture
33.3
33.5
33.7
34.4
35.2
170.2
Waste
2.1
2.0
2.0
2.0
2.0
10.1
Forestry
Net removals
-15.3 -15.5 -15.9 -15.6 -14.9 -77.2
Gross removals
-18.1
–18.2
–18.3
–18.4
–18.4
–91.5
Deforestation
2.8
2.7
2.5
2.8
3.5
14.3
Total
58.8
56.0
56.0
57.2
58.4
286.3

Note: Forestry figures in this table refer to net emissions and removals under Article 3.3 of the Kyoto Protocol. Positive numbers refer to emissions of greenhouse gases, and negative numbers refer to removals/sequestration of greenhouse gases. Note that all numbers have been rounded to one decimal place. Estimates of net removals for 2008–2011 here are different to those presented in New Zealand’s Greenhouse Gas Inventory: 199 –2011. These differences are explained below.

## Why has the net position changed since the last update in 2012?

The 2013 net position projection is a surplus of 29.6 million units at the end of the first commitment period of the Kyoto Protocol (CP1). This is 5.8 million units lower than the net position projected in August 2012 (35.4 million units).

The net position surplus has dropped due to a likely increase in deforestation (+7.9 Mt CO2-e). This has been offset slightly as provisional data shows that energy emissions were lower in 2012 than projected last year (–1.9 Mt CO2-e).

### Emissions from deforestation

Emissions from deforestation over CP1 are now projected to be 14.3 Mt CO2-e, 7.9 Mt CO2-e higher than projected in 2012. This is due to a combination of very low carbon prices and favourable prices for dairy products. World carbon prices have fallen from NZ\$13 per tonne CO2-e in late 2011 to NZ\$0.19 per tonne in January 2013. This has made conversion of pre-1990 planted forest to other land uses more economically viable. In late 2012, the Ministry for Primary Industries (MPI) conducted the annual survey of forest owners' intentions to deforest (the Deforestation Intentions Survey). The latest survey reports that forest owners intend to deforest 32,000 hectares of planted production forest over CP1, up from the intended 13,000 hectares reported at the end of 2011.

Historically however, actual deforestation as measured in the national greenhouse gas inventory has been less than that forecast in the Deforestation Intentions Survey. This is because while foresters may intend to deforest an area, not all land that foresters intend to deforest is actually deforested. Only land confirmed as deforested in the 2014 inventory submission will be accounted for under CP1 of the Kyoto Protocol.

Using the survey data and data from the inventory, the Ministries for the Environment (MfE) and for Primary Industries (MPI) project that total deforestation over CP1 is likely to be around 26,000 hectares. More information on projected deforestation can be found in the 2013 LULUCF net position report.

### Energy emissions

Energy emissions over CP1 are now estimated to be 159.9 Mt CO2-e, 1.9 Mt CO2-e lower than projected in 2012. The main reason for the drop in energy emissions from the 2012 net position was revisions due to actual (but still provisional) data being available for the 2012 calendar year. Emissions from transport and electricity generation were both much lower than was projected in the 2012 net position.

The following table sets out the detailed changes in the net position since the last major update in August 2012. More detail on the reasons for these changes can be found in the sector reports linked to at the right-hand side of this page.

Table 2. Breakdown of the changes to the net position estimate between August 2012 and April 2013 (million tonnes/units)

Apr-13
Change 12-13
Aug-12
Emissions
Energy
159.9
-1.9
161.8
Industrial processes
23.2
+0.1
23.1
Solvent and other product use
0.1
-0.0
0.2
Agriculture
170.2
-0.3
170.5
Waste
10.1
+0.0
10.0
Projected gross emissions
363.5
-2.1
365.6
Removals
Removals via forests (article 3.3)
91.5
-0.7
92.2
Deforestation emissions
14.3
+7.9
6.4
Projected net removals via forests
77.2
-8.6
85.8
Projected net emissions
286.3
+6.5
279.8
Current and projected assigned amount balance (Million units)

Apr-13
Change 12-13
Aug-12
Initial Assigned Amount Units
309.6
309.6
Purchases
0.1
0.0
0.1
Surrendered international units
13.0
+0.7
12.3
Net transfers of Assigned Amount Units PRE
3.2
+0.4
2.8
NZUs converted to AAUs
1.2
0.0
1.2
Permanent Forestry Sinks Initiative
0.7
+0.2
0.5
Current assigned amount balance
317.6
+0.2
317.4
Kyoto Protocol Units projected to remaining PRE projects
1.7
-0.5
2.2
Projected assigned amount balance
315.9
+0.7
315.2
New Zealand's projected net position
29.6
-5.8
35.4

(1) The current and projected assigned amount balance is adjusted monthly for transfers of emission units.

Note: that all numbers have been rounded to one decimal place so some values may not add due to rounding.

## How are future emissions projected?

The net position includes data from the New Zealand Greenhouse Gas Inventory up to the latest inventory year, and includes projections of emissions for the remaining years to 2012. Each year, an additional year of projected data is replaced with inventory data.

The net position is compiled using projections of emissions produced by different agencies:

• Agricultural emissions are projected by the Ministry of Primary Industries.
• Projections of energy emissions (including transport) and industrial process CO2 emissions are provided by the Ministry of Business, Innovation and Employment.
• Emissions of synthetic gases (hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride) from industrial processes are projected by the Ministry for the Environment.
• Removals from eligible forests are estimated by the Ministry for the Environment using the Land Use and Carbon Analysis System (LUCAS).
• Emissions from the waste sector are projected by the Ministry for the Environment.

The Ministry for the Environment leads the net position update across government to ensure internal consistency of projections, to project manage the update and to report the Kyoto Financial Position.

The models and methodologies used to project emissions are set out or referenced in the emissions reports for each sector. Links to these reports are at the right-hand side of this page.

## What is the Kyoto Financial Position? How is it different to the net position?

The Kyoto Financial Position is the asset or liability that sits on the Government’s financial accounts as a result of the Kyoto Protocol. It is calculated by taking the net position (measured in Kyoto Units), and converting it into dollars using the current trading price for emissions units and the current exchange rate. This asset or liability must be reported in the Government’s financial accounts. It also takes account of Kyoto Units that have been received by the Government under the NZ ETS or transferred out of the Government account.

## What is the level of uncertainty in total emissions?

Total emissions are projected to be 363.5 million tonnes over 2008–2012. The models used to project emissions indicate that total emissions (excluding Land Use, Land-use Change and Forestry) could be as low as 332.9 million tonnes (–8.4 per cent), or as high as 408.6 million tonnes (+12.4 per cent).

The uncertainty does not include possible changes in emissions due to new scientific developments or revised methodologies for measuring emissions. Research is ongoing to improve these methodologies. Methodological improvements are used to recalculate emissions from all years since 1990 and can therefore bring about a step change in our estimate of total emissions.

## What is the level of uncertainty in forestry removals?

Removals from forestry are projected to be 77.2 million tonnes over 2008–2012. Removals could be as high as 90.8 million tonnes (+17.6 per cent) or as low as 63.3 million tonnes (–18.0 per cent). The three main sources of uncertainty in net removals are:

• refinements to the removals rate for forests
• refinements to the mapped forest area
• changes in total deforestation.

Changes to the rate of afforestation have a very small effect on removals from forestry, as trees planted today will absorb a very small amount of carbon dioxide before the end of the commitment period in 2012. Refinements to the mapped area and sequestration rates have historically changed the best estimate of removals by under 10 per cent.

The largest source of uncertainty is in the amount of deforestation that will occur over 2008–2012. One of the reasons deforestation is so uncertain is that landowners who clear forest on their land have four years to replant it before the land is deemed to be deforested (unless decided earlier by the landowner).
If land is replanted, it is deemed to have been harvested and does not need to be accounted for as deforestation under the Kyoto Protocol. If land is not replanted it is deemed to be deforested and this incurs a liability for the Government under the Kyoto Protocol.

The latest survey of deforestation intentions can be found on the Ministry of Primary Industries’ website.

## What is the difference between the deforestation estimates in the inventory, the Deforestation Intentions Survey and the net position?

The national inventory report (1990–2011). The deforestation estimates included in the inventory are based on historical deforestation. This meets international reporting guidelines for Kyoto accounting under the first commitment period. The deforestation estimates do not necessarily account for those areas harvested but awaiting a decision by the landowner to replant or convert to another land use. As such the estimates included in the inventory are likely to increase once the final mapping is completed in 2013.

The 2012 Deforestation Intentions Survey report. The Ministry for Primary Industries has commissioned annual Deforestation Intentions Surveys since 2005. The 2012 Deforestation Intentions Survey is based on current intentions to deforest. These reflect forest owners’ perceptions about land-use economics, land prices, government policy, emission unit prices and other factors as they exist today. As such there is considerable uncertainty about the levels of future deforestation. The survey report is the only information source used to estimate future deforestation in New Zealand and is used to assist with projecting New Zealand’s likely balance of emission units over CP1 (the net position).
The 2013 net position report (2008–2012). The net position projection is intended to reflect the emissions and removals that New Zealand will account for under the Kyoto Protocol in the 2014 inventory. The latest greenhouse gas inventory includes only confirmed deforestation. Land that has been cleared of forest but is awaiting a decision from the land-owner to replant or convert to another land use is not included. Therefore the amount of deforestation New Zealand will account for under the Kyoto Protocol is likely to be higher than the amount currently confirmed in the latest inventory.

The 2012 Deforestation Intentions Survey reflects landowners’ intentions to deforest. However, not all the land that foresters intend to deforest is always deforested. The deforestation survey represents a likely upper bound on the final amount of deforestation in New Zealand. To reflect this, the low range in the 2013 net position report is sourced from the inventory, the high range from the deforestation intention survey and the mid range (the ‘most likely’ scenario) is the average of the two.

## Why do the net position numbers change over time?

The projection of the net position changes for several reasons. It will change as:

• economic or climatic conditions change significantly (eg, a recession or a drought)
• actual inventory data replaces projections of emissions
• new scientific data improves our ability to estimate emissions
• models are refined to be more accurate
• new policies are enacted or technologies developed that affect emissions.

The balance of units may also change over time as Kyoto Units enter or leave the government account, for example, when international Kyoto Units are surrendered by participants in the NZ ETS, these units are added to the net position.

## How is the Crown’s position under the NZ ETS different from the net position?

The net position is a forecast of how far New Zealand will be over or under its Kyoto target. The Crown’s position under the NZ ETS will be different depending on how many units the Government will receive, and allocate, under the NZ ETS. This will depend on the dates sectors enter the scheme, and the timing for allocation of emission units.

The NZ ETS changes the Government’s expected flows of emission units. The net position might be in surplus, but the Government’s position could be in deficit if it allocates more units to NZ ETS participants than it receives.

## What is the carbon price?

The estimate of the carbon price is €0.61 per tonne CO2-e. The Ministry of the Environment has been responsible for estimating the carbon price since June 2010. Previously, the Treasury was responsible for estimating the trading price of carbon. Earlier updates of the carbon price may be found at 'Historic updates of the Kyoto protocol financial information'.

## How is the price of carbon estimated?

The Ministry for the Environment is responsible for ensuring that the methodology used to value the Kyoto asset or liability is appropriate given current trading conditions and rules.

The current trading price of carbon is estimated from trades in registered secondary Certified Emissions Reduction units (CERs) as reported by Point Carbon. This valuation approach is based on a methodology provided by Point Carbon that indicates that it is unlikely NZ AAUs can be priced higher than CERs.

Between October 2011 and August 2012, the price of AAUs was estimated for the Ministry by PointCarbon twice a year. The full time-series of updates to the carbon price may be found at 'Historic updates of the Kyoto protocol financial information'.

Prior to  June 2010, the Treasury was responsible for estimating the trading price of carbon. Earlier updates of the carbon price may be found at 'Historic updates of the Kyoto protocol financial information'.