6 Design Features for Individual Sectors continued

6.4 Industrial process (non-energy) emissions

6.4.1 Context

The emissions included in the industrial processes sector are from the chemical transformation of materials from one substance to another. Although fuel is also often combusted in the manufacturing process, emissions arising from combustion are included in the energy sector. CO2 emissions relating to energy production (eg, refining crude oil and the production of synthetic petrol from natural gas) are also considered within the energy sector.

New Zealand has a relatively small number of plants emitting non-energy related greenhouse gases from industrial processes. However, there are six industrial processes in New Zealand that emit significant quantities of CO2:

  • reduction of ironsand or recycled steel in steel production

  • oxidation of anodes in aluminium production

  • calcination of limestone for use in cement production

  • melting of soda ash in glass production

  • calcination of limestone for lime.

Non-CO2 emissions from the industrial processes sector include perfluorocarbons (PFCs) from aluminium smelting, hydrofluorocarbons (HFCs) used as substitutes for ozone-depleting substances, PFCs from refrigerants, and sulphur hexafluoride (SF6) from electrical switchgear.

Emissions from New Zealand’s industrial processes sector represented 5.6 per cent of total greenhouse gas emissions in 2005. Those emissions increased 31.8 per cent from 1990 to 2005.

6.4.2 Sectoral design features

Table 6.4: Summary of design features for the industrial processes (non-energy) sector

Design feature

In-principle decision

Source of emissions

Industrial processes, including:

  • material transformation for production of steel, aluminium, cement, burnt lime, glass, gold and paper (note that production of urea, hydrogen, ammonia and methanol is covered in the stationary energy sector)

  • lime fertiliser production

  • loss of inert synthetic gases.

Greenhouse gas

Material transformation: CO2, PFCs (aluminium only)

Lime fertiliser: CO2

Loss of inert synthetic gases: HFCs, PFCs, SF6

Scope of activities

Material transformation: use of emission source for material transformation in an industrial process, net of carbon embedded in final products. Exemption: all carbon embedded in final products.

Lime fertiliser: sale of limestone products sold as fertiliser.

Loss of inert synthetic gases: importation of SF6 and synthetic fluorocarbons (when liable for excise duty).

Exemption: importation of HFCs and PFCs in manufactured equipment.

Commencement of unit obligation, monitoring and reporting

1 January 2010 (with deferral of SF6 until 1 January 2013)

End of initial compliance period

31 December 2010 (with deferral of SF6 until 31 December 2013)

Participants with unit obligations

Material transformation: producers of steel, aluminium, cement, burnt lime, glass, gold and paper.

Lime fertiliser: producer.

Loss of inert synthetic gases: electricity and refrigeration industry entities that import relevant synthetic gases.

Free allocation

Some free allocation to eligible participants after entry of the sector into the ETS and declining to zero in 2025; addressed separately under section 6.5 (‘Industrial production’).

Progressive obligation

Option to consider the use of progressive obligations.

6.4.2.1 Scope of activities

Material transformation

Emissions from industrial processes primarily include CO2 from metal production (such as steel aluminium and gold), mineral products (such as cement and burnt lime), chemical production (ammonia and urea), wood processing (such as for pulp, paper and wood product manufacture) and PFCs from aluminium production. There are relatively few sites with these emissions. Emissions from the production of hydrogen, ammonia, methanol and urea are included in the stationary energy sector.

Lime fertiliser

This category includes the sale of lime fertilisers65 that are used on grasslands.

Loss of inert synthetic gases

Synthetic gases are used in electrical switchgear (SF6), metered dose inhalers (HFCs) and refrigeration (HFCs and PFCs). Emissions trading could be used to manage the emissions of synthetic gases, particularly of fluorocarbons used as refrigerants (ie, in refrigerators and cars) and the use of SF6 in electrical switchgear.

6.4.2.2 Date of entry into the NZ ETS

The government has decided in principle on a 1 January 2010 date of entry for industrial process emissions into the NZ ETS, with the exception of emissions of SF6. These will not enter the NZ ETS until 1 January 2013, because they are covered in a memorandum of understanding between the Crown and major users through 2012.66

6.4.2.3 Participants with unit obligations

Material transformation

Points of obligation are best placed on emitters themselves: producers of steel, aluminium, cement, burnt lime, glass, gold and paper. Depending on what is agreed for the points of obligation in the stationary energy sector, it is possible that many of these emitters, being major users of coal and gas, may also have obligations for the fuels they use for stationary energy.

Lime fertiliser

Points of obligation are best placed on limestone fertiliser companies.

Loss of inert synthetic gases

For inert synthetic gases, points of obligation are best placed on the importers of relevant inert synthetic gases (at the time a liability for excise duty arises). Importation would be the recommended point of obligation rather than end users, because end users are relatively numerous, whereas the importation points are few and companies already collect the relevant information due to the existence of the excise duty regime.

Emission units could be rebated if gases are re-exported in finished projects (eg, refrigerators). Obligations would provide appropriate abatement incentives and the transaction costs would be reasonable. A de minimus threshold will be considered (especially in the case of importers of metered dose inhalers and of refrigerants) if it would improve transaction costs without compromising coverage. This will be addressed during engagement with the sector.

6.4.2.4 Allocation

The government proposes offering some free allocation of emission units to participants that are sources of industrial process emissions when they meet eligibility requirements. This is addressed in section 6.5 below on ‘Industrial production’.

6.4.3 Complementary measures

The No Loss Synthetic Greenhouse Gas Initiative (“No Loss”) is a scheme that requires companies that handle synthetic greenhouse gases (greenhouse gas emissions that are, on average, several thousand times more powerful than CO2) to have formal accreditation to minimise the risk of synthetic greenhouse gases leaking into the atmosphere.

As noted above, the SF6 memorandum of understanding between the Crown and users promotes industry to adopt best practice in relation to the management of emissions of SF6.

The Ministry for the Environment is in the process of developing resources to assist firms that want to monitor and report their emissions on a voluntary basis. This guidance will be targeted at businesses that wish to track the greenhouse gas emissions they are responsible for (eg, from electricity and transport use). Initially, this guidance will focus on a limited set of common emission sources. The guidance will not specifically cover the details of industrial process emissions (the ETS and international guidance will do this). However, alongside the requirements of the ETS, the guidance would be relevant to firms that have industrial process emissions and would like to do comprehensive reporting voluntarily on the emissions sources they use (eg, for corporate sustainability or triple bottom line reporting purposes).

6.5 Industrial production: direct/indirect emissions from stationary energy and industrial process emissions

6.5.1 Context

This section addresses industrial producers, excluding electricity generators. Such producers will be affected by the NZ ETS both directly and indirectly. Some will be direct points of obligation for industrial process emissions. The government is considering an option for some industrial producers to opt into the NZ ETS as points of obligation for emissions associated with fuels used for stationary energy (ie, coal, natural gas and geothermal). Otherwise, such producers will be indirectly affected by the pass-through of emission costs in fuels consumed on-site for stationary energy. Finally, industrial producers are often large consumers of electricity, and will be indirectly affected by the pass-through of emissions-related increases in the price of electricity.

When industrial producers cannot pass on emission costs because they are trade exposed, they may bear a disproportionate impact relative to other sectors of the economy. Ideally, assistance should be targeted at producers that have high emission levels, are emissions intensive and are unable to pass costs on. When designing transitional assistance measures it is useful to give joint consideration to the treatment of direct emissions from stationary energy, direct emissions from industrial processes, and indirect emissions associated with the consumption of electricity.

A further issue is whether to extend support to industry for increases in the price of land transport fuels. This may be important in certain industries such as fishing, forestry, cement and some parts of the mining industries. However, to do so would add considerable complications to the scheme, and it is not clear how significant the cost increases would be in the context of fuel price movements generally.

6.5.2 Sectoral design features

As noted previously in this framework document, the government is considering two forms of assistance to industrial producers: free allocation of emission units or the use of a progressive obligation for emissions from fuels that are primarily used for stationary energy as well as from non-energy industrial processes. The government favours providing assistance via free allocation, but has left open the possibility of using a progressive obligation in sectors such as the industrial sector.

The comments below assume that a free allocation model is used; if a progressive obligation model is decided upon then it will operate within the same total level of assistance to industry.

6.5.2.1 Free allocation

Level of total assistance to industry

The government proposes that a free allocation of NZUs be provided to industrial producers for direct stationary energy emissions (such as gas and coal), for increases in electricity costs, and for industrial process emissions. This would operate within a total envelope of assistance to industry defined as 90 per cent of 2005 emission levels (for firms within the scope of activities).

How to allocate between industrial firms

Once the overall level of assistance to industry is agreed, decisions are then needed on how to determine the level of allocation that particular firms should receive. This requires a decision on whether to calculate each firm’s allocation on the basis of historical emission levels or benchmarking. The government’s initial preference is to use a firm’s recent historical emissions, rather than using the more complex benchmark approach, unless there is clear agreement within an industry sub-sector and a benchmark can be developed rapidly. The use of historical emissions has clear administrative benefits, and to the extent that New Zealand firms are near to “world’s best practice”, a historical emission level will approximate a benchmark approach anyway.67

Which industrial firms should receive emission units

Ideally, assistance should be targeted at firms that are likely to face high costs as a result of the ETS and are unable to pass costs on to consumers. There are, however, practical limits on the extent to which it is possible to identify and target firms in this way. Also, highly targeted assistance will lead to inequities between firms that gain assistance and those that do not. At the other end of the spectrum, an untargeted approach (ie, providing broad, generalised support) would not provide the right economic signals and is not preferred.

There is a range of options for determining how (and to whom) assistance for industry should be organised. The government has an initial preference for either:

  • a moderately targeted approach, where support would be provided to eligible firms through the use of free allocation for any emissions above a predefined threshold

  • a limited targeting approach, where broad support would be provided through a progressive obligation approach for stationary energy emissions, together with free allocation specifically for industrial process emissions.

How many units should be allocated to industrial firms

Both of these approaches would operate within an overall level of allocation to the industrial sector. There are no hard-and-fast rules for assessing the appropriate level of assistance to provide, but within a context of a relatively generous initial allocation, the following has been developed for consideration:

  • providing free allocation as a percentage of total emissions in a base year (including emissions implicit in electricity price rises) above a set threshold

  • allowing firms the choice of determining a base year between 2003 and 2005.68

Using this approach, the level of free allocation to provide to individual firms in the industrial sector would be determined on the following basis:

  • the eligibility of individual firms to receive an allocation would be limited to those that pass a simple trade exposure test, and have total emissions (from industrial processes, direct stationary energy use and consumption of electricity) above 50,000 tonnes

  • each eligible firm’s share of the total allocation to industry would be calculated by taking its emissions from one of the years from 2003 to 2005, subtracting the 50,000 tonne threshold,69 and then calculating the firm’s proportion of emissions relative to other eligible firms’ emissions using the same formula.

The government is by no means fixed on this particular approach for determining the level of assistance to provide to individual firms (within the overall assistance package to the industrial sector). Some specific issues that have been identified for consideration are:

  • whether it is desirable to include an emissions-based size threshold at all, and, if so, at what level the threshold should be set

  • whether it is worthwhile considering an allocation to all firms within a sector once some firms from those sectors have been identified as eligible to receive assistance

  • whether there are more effective ways of providing recognition for early entry.

Box 7: The government’s rationale for the proposed approach to allocation to industry

The government recognises that elements of this proposed approach can be seen as somewhat arbitrary. No method for determining levels of allocation for individual firms is perfect. While the government considers that this proposed approach supports its objectives, it wants to engage with stakeholders and Māori on the workability and effectiveness of the proposed approach.

The government is willing to adjust the specific parameters that are proposed where good reasons exist. Further, the government has not ruled out adopting the progressive obligation approach for providing assistance to industrial producers if compelling arguments against its current allocation plans, such as its administrative workability, are raised.

There are two elements to the proposed approach for allocating to industry. These are the:

  1. assessment of the total allocation to industry
  2. division of that total level of assistance to individual firms.

In terms of the former, the government’s view is to base the total level of assistance to industry at 90 per cent of its 2005 emissions. This reflects a desire for industry to take responsibility for at least some of its emissions from the outset, and reflects the importance of inter-sector equity as previously discussed.

There is no simple answer to the question of how much assistance to provide, and international practice varies considerably. The international evidence suggests that considerably smaller levels of assistance than 90 per cent are often needed to maintain firm profits, although the actual level required depends on whether firms can pass on costs to consumers.

Drawing direct comparison with international practice is difficult. The proposed total allocation to industry (once industry enters the ETS) can be argued to be broadly comparable with the proposed allocation in Phase 2 of the EU ETS (in this regard, it is important to note that the treatment in different member states varies considerably, and also that the EU ETS does not compensate firms for the impact of increased electricity prices under the scheme). It is significantly more generous than the Norwegian approach.

A further issue relates to whether to extend support to industry for increases in price for land transport fuels. This may be important in certain industries such as fishing, forestry, cement and some parts of the mining industries. From a theoretical viewpoint, assistance to industry would also be provided to cover increases in liquid fossil fuels. However, to do so would add complications to the scheme and it is not clear how significant the cost increases would be in the context of fuel price movements generally.

The second feature of the proposal for assistance to industry is the approach for determining the level of assistance at an individual firm level. This has a number of features (again, it is worth stating that the government is not tied to this particular model for allocating between firms).

The proposed trade exposure rule is designed to avoid giving NZUs to firms that will not face any competitive disadvantage under the ETS, and will be able to pass much of their costs on to consumers. Its proposed approach is to exclude firms selling goods or services into the New Zealand market that are clearly not internationally tradable, such as domestic building or aviation services. While this may be desirable in principle, it may well prove difficult to assess in practice.

The government’s consideration of an eligibility threshold of 50,000 tonnes of CO2 equivalent emissions per year is designed to target free allocation towards larger, more emissions-intensive firms. The government expects this threshold to lead to allocation being limited to a relatively small number of firms. A separate test of emissions intensity is not proposed, as anecdotal evidence suggests that the clear majority of these large emitters are relatively emissions intensive. In turn, the proposed approach of providing assistance to cover emissions over and above the 50,000-tonne threshold is designed to minimise distorting the behaviour of firms with emissions just above or below the threshold. (A threshold of this nature reduces administration difficulties, but inevitably the use of any threshold results in some inequities at the margin.)

Furthermore, the government is considering giving each eligible firm the right to choose which of the years between 2003 and 2005 to use to determine its share of the overall allocation. This is aimed at avoiding unfairly disadvantaging firms which have had a significant drop in output in one particular year, or which have taken early action to reduce emissions. However, the government is conscious that this proposed approach could have the effect of unfairly advantaging firms that enjoyed a single year of unusually high levels of output or emissions. Ideally, it would seek evidence from firms to demonstrate that their selected year was ‘representative’ of their historical levels of output and emissions. However, this may not prove administratively practical.

Another possible approach is to attempt to directly determine the level of assistance given to each firm on the basis of maintaining its individual levels of profit. However, the government considers that this approach is likely to prove very complex and time consuming. Further, it is arguable whether an objective of maintaining firm profits is consistent with an equitable sharing of the costs of the ETS across all parties.

6.6 Agriculture

6.6.1 Context

The agricultural sector70 currently contributes 52 per cent of the value of our exports and 10 per cent of our GDP. Its GDP contribution is expected to rise from $7.6 billion in March 2006 to $8.7 billion by March 2008. The dairy sector, in particular, has been a major driver in agricultural sector output and productivity growth, and its production is forecast to continue growing at 3 per cent per year.71 Hence, the continued health and vitality of this sector is vital to the continued growth of the New Zealand economy.

The agricultural sector has become more diverse and intensified over the past few decades. Productivity gains have been driven by increases in the use of nitrogen fertiliser, improved animal genetics and various on-farm technologies. However, the environmental effects of decades of fertiliser use and animal-intensive farm production are becoming increasingly apparent in our waterways, ground water and lakes.

The agricultural sector has strategies to improve the long-term sustainability of farming, including making more effective use of technologies and management practices, and seeking the continual improvement of these. This approach allows the sector to achieve higher levels of production while addressing negative environmental effects.

Globally, only 12 per cent of greenhouse gas emissions come from agriculture. However, New Zealand has an unusual greenhouse gas emissions profile, with 49 per cent of emissions coming from the agricultural sector (excluding the agricultural sector’s use of energy).72 The emissions consist of methane (CH4) from livestock, and nitrous oxide (N2O) from animal waste and nitrogen fertiliser use. New Zealand’s agricultural emissions have grown by 1 per cent per year since 1990, and are predicted to continue to grow at this rate over the medium term. However, productivity gains through farming animals more efficiently have led to a reduction in the level of emissions per unit. For example, CH4 emissions per unit of milk solids (MS) have been decreasing by 1.2 per cent per year. In 1990, 8.4 kg CO2-e/kg MS of CH4 was released, whereas in 2005, 6.85 kg CO2-e/kg MS of CH4 was released. Agricultural emissions are projected to be 40.6 million tonnes above 1990 levels for the first commitment period of the Kyoto Protocol from 2008 to 2012.

Changing land management practices will have an important role in helping New Zealand to adapt to climate change, reduce emissions and, potentially, increase carbon storage. These goals can be achieved through better integration of trees on farms, the more efficient use of fertilisers, the development of crops for biofuels, increasing the amount of soil carbon, and reducing methane emissions.

6.6.2 Sectoral design features

Table 6.5: Summary of design features for the agricultural sector

Design feature

In-principle decision

Source of emissions

Synthetic fertiliser use.

Enteric fermentation and manure management.

Greenhouse gas

Synthetic fertiliser use: N2O.

Enteric fermentation and manure management: CH4 and N2O.

Scope of activities

Synthetic fertiliser use: sale of nitrogenous fertilisers.

Enteric fermentation and manure management:

(a) probable: processing of meat and dairy products

(b) possible: farming activity.

Commencement of unit obligation, monitoring and reporting

1 January 201373

End of initial compliance period

31 December 2013

Participants with unit obligations

Synthetic nitrogenous fertiliser use:

(a) preferred: importers and producers of nitrogenous fertiliser

(b) alternative: farmers

(c) alternative: sector bodies.

Enteric fermentation and manure management:

(a) preferred: processor/company

(b) alternative: farmers

(c) alternative: sector bodies.

Free allocation

90 per cent of 2005 levels at the time of entry into the ETS; declining to zero at a linear rate from 2013 to 2025.

Three possible options as the point of receipt of free allocation are:

(a) farmers

(b) processors

(c) sector bodies.

Progressive obligation

Option to consider the use of progressive obligations.

6.6.2.1 Scope of activities

The government proposes that coverage for sources of agricultural gases be limited to those that are currently accounted for under New Zealand’s nominated activities for the Kyoto Protocol. This is to ensure that the scheme coverage reflects New Zealand’s current obligations under Kyoto, and is because of the limited technical feasibility of including additional sources.

Broadly speaking, the ETS has been developed to cover the bulk of emissions from pastoral agriculture (sheep, beef, deer and related production such as wool and velvet), horticulture and arable production. This means that other minor sources may be included in the scheme where it is practical to do so, but a pragmatic approach will be taken and there is likely to be a range of minor emission sources to which the de minimus principle will apply.

6.6.2.2 Date of entry into the NZ ETS

The government has decided in principle to formally bring all agricultural emissions into the ETS on 1 January 2013, and not to introduce any other price-based measures in the interim. However, the government may require participants to monitor their emissions prior to 2013 to ensure the relevant monitoring and reporting systems are functioning properly.

This in-principle decision reflects the operational challenges faced in bringing the agricultural sector into the ETS and previous undertakings by the government. However, an earlier introduction is considered to be technically feasible, and the government is open to discussing this option with the sector.

6.6.2.3 Participants with unit obligations

To capture the major sources of agricultural greenhouse gas emissions in an ETS, the government has identified a range of options for the point of obligation to surrender units, including the farm level, processor/company level and sector body level. In terms of providing incentives for behaviour change, the farm-level obligation represents the best option. However, a farm-level obligation is not likely to be feasible in the short term due to a range of issues, including administrative complexity and the difficulty of measuring and verifying emissions.

The government’s initial preference is to bring the agricultural sector into the ETS with a company/processor level point of obligation. This would include emissions from:

  • nitrogen fertilisers at the fertiliser company level

  • the dairy sector at the dairy processor level

  • other animal agriculture at the primary (meat) processor level.

However, the government is open to considering the options identified above for emissions from both nitrogen fertiliser and livestock. This will be a subject for further engagement with the sector.

6.6.2.4 Allocation

The total level of free allocation when the agricultural sector enters the ETS in 2013 is defined as 90 per cent of 2005 levels of emissions. This is the same approach as that used to define the total allocation to industry and is relatively close to the target that was outlined in the Memorandum of Understanding signed between the Crown and the agricultural sector in 2002.74 As in the industrial production sector, the level of free allocation will decline to zero at a linear rate from 2013 to 2025.

There are issues that are specific to the agricultural sector. In particular, the agricultural sector is characterised by a large number of sellers producing relatively homogeneous and perishable product. For the most part, downstream processors are price takers on international markets and cannot influence the price of goods sold. Likewise, farmers are price takers and cannot influence the price obtained from downstream processors. As a result, all costs introduced into the agriculture value chain are generally absorbed at the farm level.

The government has identified three key options for allocating free NZUs in the agricultural sector.

  • The government could allocate directly to farmers on the basis of historical emission levels or some other proxy for emissions. The key advantage of this option is that farmers would capture the benefits of the free allocation, offsetting lost profits and impacts on land prices. Allocating to farmers would be challenging, however, because there is a range of ownership structures to consider and agricultural land use frequently changes over time, meaning that static allocations based on a single year or reference period will fall out of alignment with land use over time. There would also be issues to address relating to new entrants and competition.

  • The second option is to allocate to processors, based on their historical levels of throughput. This allocation would be based on the fact that some major agricultural processors are co-operatives and/or operate in a highly competitive market, and therefore the effects of a free allocation to processors could be incorporated into their supply pricing to the benefit of farmers. One advantage of this is that the net effect would be to shield farmers from exposure to the full price of emissions. In reality, however, there is currently a range of ownership structures, particularly in the meat sector, and it is uncertain whether a free allocation to processors would benefit farmers through supply prices.

  • A third option would be to allocate to sector bodies, which would take responsibility for managing the units on behalf of farmers. The allocation could be based on historical production throughput, as above.

The government does not have a clear preference for any one of these options. However, it will want to ensure that the approach ultimately chosen directs the benefits of free allocation to farmers as far as possible.

6.6.3 Complementary measures

6.6.3.1 Plan of action on sustainable land management and climate change

It is important that the agricultural sector makes use of the period up until its entry into the ETS (2013) to take steps towards mitigating the sector’s emissions levels. The government is working in partnership with the agriculture and forestry sectors, Māori and local government to develop a plan of action on sustainable land management and climate change. This is critical to secure the changes to land-use practices needed for New Zealand to successfully adapt to changes in climate, reduce agricultural greenhouse gas emissions and secure new forest planting. This plan of action will include three “pillars”:

  • adapting to a changing climate

  • reducing emissions and enhancing sinks

  • capitalising on business opportunities.

These three pillars will be supported by research and innovation, technology transfer and communication, as detailed below.

Adaptation

The government proposes to work with the primary sector, local government and Māori to develop a five-year work programme focused on building adaptive capacity in the sector in relation to climate change. In the meantime, work will commence on developing detailed regional information on climate impacts on agriculture and forestry, identifying the areas most vulnerable to gradual and extreme climate impacts, and implementing a rural water enhancement fund.

Reducing emissions and enhancing sinks

The sector will be encouraged to adopt practices that reduce emissions, to monitor and report emissions and practices at a farm level, and to increase contributions to technology transfer. This includes commitments to roll out mitigation technology and energy efficiency on farms. The government will work with the sectors to assist with farm-scale greenhouse gas information and reporting that support emission reduction activities. The government is also considering introducing an Afforestation Grant Scheme to provide an alternative financial afforestation incentive for parties that choose not to join the ETS (for further information refer to section 6.1.4 and the companion document Forestry in a New Zealand Emissions Trading Scheme).

Capitalising on business opportunities

The government will work with the land management sector to develop a five-year work programme aimed at addressing barriers that hinder the private sector from capitalising on climate change opportunities. This will include developing an extensive greenhouse gas footprint response for the primary sectors, as well as reviewing market opportunities such as non-Kyoto trading markets and the creation of markets for emission-reducing technologies.

Research and innovation
Strategic framework

Research is needed to inform decision-making, develop cost-effective means for mitigation and adaptation, and reduce uncertainty around climate change impacts. A strategic framework will be developed to provide a comprehensive research and technology platform to underpin the plan of action. This will provide consistency and avoid duplication, and direct new funding to priority areas. The focus will be on:

  • the impacts of climate change and adaptation

  • mitigation of agricultural and forestry greenhouse gas emissions (eg, animal genetics and feed types)

  • greenhouse gas measurement

  • cross-cutting issues, including economic analysis, life-cycle analysis, farm catchment systems analysis, and the social dimensions of climate change.

Pastoral Greenhouse Gas Research Consortium (PGGRC)

Much of the research effort to mitigate agricultural greenhouse gas emissions has been co-ordinated through the PGGRC, a joint government- and industry-funded research consortium that implemented a five-year research strategy in 2003. A new round of funding has recently been agreed, and the PGGRC will continue to be a critical vehicle for undertaking research into reducing greenhouse gas emissions in the sector.

Technology transfer

The process from initial research through to the adoption of new technologies by the agricultural sector can take up to 20 years. However, well-targeted programmes delivered by industry with funding support can speed up the technology transfer and implementation process. A Technology Transfer Work Programme is proposed to develop the capacity of the sector to roll out and adopt new technology in order to:

  • reduce total greenhouse gas emissions and related environmental effects, and improve the efficiency of resource use

  • adapt to a changing climate

  • take advantage of new business opportunities relating to climate change.

Communication

A key component of the plan of action is the development of a modest communication programme in partnership with the sector. Communication of factual information and key messages will be critical in order to achieve sustained action over the medium to long term.

6.7 Waste

6.7.1 Context

The waste sector has reduced its greenhouse gas emissions by 26 per cent from 1990 levels. It was responsible for 2.4 per cent of national CO2-e emissions in 2005, and is the only sector to have reduced its emissions below 1990 levels. This result has been achieved through improved landfill management, increased recycling and composting, and the rapid uptake of landfill gas-recovery technologies.

6.7.2 Sectoral design features

Table 6.6: Summary of design features for the waste sector

Design feature

In-principle decision

Source of emissions

Solid waste

Greenhouse gas

CH4

Scope of activities

Disposal of solid waste likely to contain an organic component at a landfill

Commencement of unit obligation, monitoring and reporting

1 January 2013

End of initial compliance period

31 December 2013

Participants with unit obligations

Landfill operators

Free allocation

Zero free allocation

6.7.2.1 Scope of activities

It is proposed to include methane (CH4) emissions from solid waste disposal in the ETS. At this stage, it is proposed that emissions of CH4 and nitrous oxide (N2O) from wastewater treatment, and emissions of CO2 from the fossil fuel component of solid waste incineration, are to be excluded.

Emissions from wastewater handling and treatment plants accounted for 20 per cent of emissions from the waste sector in 2005; this represents 0.5 per cent of New Zealand’s greenhouse gas emissions. The emissions of these gases are difficult to measure precisely at an individual site. There are hundreds of wastewater treatment facilities (which include septic tanks) in New Zealand. There are no solid waste incinerators currently operating in New Zealand that emit significant volumes of greenhouse gases.

The administration and compliance costs associated with the inclusion of wastewater treatment facilities and solid waste incinerators in an emissions trading scheme are likely to outweigh the benefits. Therefore, it is proposed to exclude greenhouse gas emissions from wastewater facilities and solid waste incineration from the ETS.

Emissions of CH4 from solid waste disposal are created by bacterial action on organic waste. Consequently, only landfills that dispose of waste with some organic component will be included within the scope of the ETS. The amount of CH4 produced depends on a number of factors, including waste disposal practices, moisture content, temperature, and waste composition. A proportion of the emissions are often flared off. Any CO2 emissions from flaring will be outside the ETS. Emissions of CO2 from aerobic decomposition are not included in the national inventory and will not be included in the ETS.

At the time of printing, the Local Government and Environment Select Committee was considering the Waste Minimisation (Solids) Bill. The bill sets up a funding system to support future solid waste minimisation and management activities at local and national levels. One possible funding mechanism is a national levy on waste volumes disposed of at landfills. Although this levy does not directly address greenhouse gas emissions, the government considers that it would be inappropriate to apply two price measures on the sector that both seek improved environmental outcomes. For this reason, it is proposed that CH4 emissions from solid waste disposal not be included in the ETS until 1 January 2013. Note that this position could be revisited should the Waste Minimisation (Solids) Bill not be enacted, if the resultant Act does not apply a financial cost to solid waste disposal, or if the levy is found to be sufficient to address emissions.

There are some methodological issues that will hopefully be resolved in partnership with the sector.

6.7.2.2 Date of entry into the NZ ETS

It is proposed to include net CH4 emissions from solid waste disposal in the ETS from 1 January 2013. As noted above, this entry date could be bought forward if the Waste Minimisation (Solids) Bill fails to become legislation, or if the bill does not apply a direct price instrument on solid waste disposal. There are no plans to include greenhouse gas emissions from solid waste incineration or wastewater treatment in the ETS, although this position might be revisited if a municipal solid waste incinerator comes into operation.

6.7.2.3 Participants with unit obligations

It is proposed that landfill operators be required to surrender emission units based on a calculation of emissions associated with the volume of waste received at a landfill. We anticipate that the methodology to calculate emissions will be resolved in partnership with the sector before the start date for the waste sector. Definitions of “waste disposal” for the purposes of ETS legislation will need to be aligned with the definitions contained in the Waste Minimisation (Solids) Bill.

6.7.2.4 Allocation

It is anticipated, based on the allocation principles set out in this document, that there will be no free allocation to landfill operators for emissions from solid waste disposal.

6.7.3 Complementary measures

The National Environmental Standard on Landfill Gas Emissions directly addresses CH4 emissions from solid waste disposal. This environmental standard requires landfills over a certain capacity to install and operate landfill gas collection systems.

As noted above, a national waste levy or other financial charge on the disposal of waste under the Waste Minimisation (Solids) Bill, if enacted, would likely influence greenhouse gas emissions from landfills. It is likely that the levy would encourage the additional diversion of waste from landfills and would provide funds for organic waste management initiatives, which in turn would result in further emission reductions. Also, the New Zealand Waste Strategy contains a range of targets, some of which relate specifically to organic waste and waste disposal. Initiatives introduced in response to these targets are likely to influence greenhouse gas emissions from the waste sector.

It is possible that emissions from wastewater treatment and waste incineration could be the subject of offset projects due to the current intention to exclude them from the scope of the ETS.


65 The use of lime on grassland is included in the land-use, land-use change and forestry section of the national inventory. However, for the purposes of the ETS, these emissions are included along with other limestone products under industrial processes. This is a non-calcined limestone product.

66 In 2004, a non-binding memorandum of understanding (MOU) was signed between the Crown and major and minor users of imported SF6 in the electricity sector. Major users were to be exempt from any climate change policy costs in return for meeting a specified target. All users agreed to adopt best practice in SF6 management. This MOU is intended to end on 31 December 2012 (with the exception of ongoing reporting), and had provisions for a review in 2005, 2007 and 2010.

67 In the context of an ETS that will operate on an absolute basis as opposed to an intensity basis, using a benchmark approach to determining allocation has attraction where there is evidence to suggest that significant numbers of firms are operating in a particularly inefficient manner in relation to emissions. It is not clear in New Zealand that this is the case.

68 A historical period is chosen to remove incentives to grow in order to gain additional units. Allowing firms to choose the most advantageous base year between 2003 and 2005 provides some opportunity to reward early action to reduce emissions. Emissions would be calculated based on corresponding data used to prepare audited financial statements. (If such data is not available this approach may well need some adjustment.)

69 Subtracting the 50,000 tonne threshold from firms’ emissions is important in such a calculation as it reduces incentives for firms to raise reported emissions to a level above the threshold in order to gain free allocation.

70 In the context of this document, the agriculture sector includes pastoral and arable farming and horticulture.

71 Dairy and Environment Review Group 2006, Dairy Industry Strategy for Sustainable Environmental Management 2006. http://www.dexcel.co.nz/main.cfm?id=335.

72 Ministry for the Environment 2007, New Zealand’s Greenhouse Gas Inventory 1990–2005, Ministry for the Environment: Wellington.

73 Due to the nature of agri-business cycles, later dates of introduction within 2013 may be considered for the dairy industry and meat processors.

74 The wording of the MoU is that the “target of the Research Strategy is to ... lower New Zealand’s total ruminant methane and nitrous oxide emissions by at least 20% compared with the ‘business as usual’ emissions level, by the end of the Kyoto Protocol’s first commitment period (2012)”. Eighty per cent of projected 2012 levels of emissions from agriculture would result in a marginally less generous free allocation than 90 per cent of 2005 emissions.