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Development of Industrial Allocation Regulations

• Foreword
• Executive Summary
• Introduction
• The overall approach to industrial allocation
• Who will receive an allocation?
• How much will be allocated: determining allocative baselines
• Proposed requirements for data submitted under Gazette notices
• Confidentiality of data
• Penalties and verification
• How to make a submission
• Annex 1: Activity descriptions, inclusions, exclusions, products and specified years
• Annex 2: Meaning of saleable
• Annex 3: Eligibility rules under the proposed CPRS EITE Assistance Scheme
• Annex 4: Trade-exposure and emissions-intensity tests

5 Proposed requirements for data submitted under Gazette notices

Gazette notices

The Act establishes a Gazette notice process for collecting data on an activity in order to make decisions about its eligibility, level of assistance, and allocative baselines on the New Zealand track. A Gazette notice will request that firms supply financial and emissions data to determine the eligibility of an activity and allocative baselines.In doing so, Gazette notices will provide:

• a description of the activity, including input(s), output(s) and the transformation that takes place
• the product(s) that may be used as the basis for allocation (ie, the metric of production used to calculate entitlements)
• the emissions that must be included in any information provided
• the emissions that must be excluded in any information provided (emission sources that would typically be excluded are discussed below)
• the financial years for which information must be provided (discussed below)
• the date by which information must be provided
• methodologies for calculating emissions and revenue (ie, data collection rules, discussed below).

Emissions to be excluded

As discussed in section 3, the Gazette notices used to call for data on an activity will clarify which emissions are to be excluded or included in calculating emissions for each activity. The Act clarifies that emissions sources typically excluded will be:

• the use of machinery and equipment, and other processes, that are not integral to, nor essential to, transformation taking place when the activity is carried out
• any extraction or production of raw materials that are subsequently used when the activity is carried out
• the transportation of inputs used in the activity to storage at the location where the activity is carried out
• the transportation of outputs of the activity from storage at the location where the activity is carried out to another location
• the transportation of intermediate products between different locations where the activity is carried out
• operations that are complementary to the activity, including (but not limited to) packaging, head office operations, and administration and marketing (whether carried out at the same location where the activity is carried out or at another location)
• the generation of electricity at the location where the activity is carried out.

Financial years for information

Gazette notices will specify the financial years for which information must be provided. If an activity was carried out by any person in each of the financial years 2006/07, 2007/08 and 2008/09, the Act requires that those financial years be specified. However, if the activity was not carried out in each of those years, other years may be specified.

A financial year is defined in the Act as a period of 12 months commencing on the first day of July and ending with the 30th day of June. Therefore, regardless of the financial year a firm normally uses for financial reporting, information must be provided for July to June financial years.

Data collection rules

Data called for must be submitted in accordance with the requirements (rules) specified in the Gazette notice. This subsection sets out the proposed requirements that will govern the preparation of data for submission under Gazette notices for the New Zealand track.

Proposed rules for calculating revenue

Revenue data is required for calculating the emissions intensity of an activity. It is important for considering whether an activity meets thresholds that will define it as moderately or highly emissions intensive. Emissions intensity is calculated by the quantity of emissions per million dollars of revenue:

emissions intensity = total emissions ÷ total revenue (NZ$ million)

The revenue portion of this equation can be estimated on the basis of actual sales revenues, although there is a need for clarity about how to treat the costs of sales, including transport to market (especially if to an export market). The Government will estimate emissions intensity using the total sum of emissions and the total revenue over the selected years. The overall requirement is defined by the following rule:

Revenue Rule 1: Revenue should be calculated as the output of a process multiplied by its market price, exclusive of GST, at the time(s) of sale, for each of the historical financial years listed in the Gazette notice.¹

Table 3 illustrates the likely data required in order to generate revenue and is used to provide context to the rules that follow. Total revenue is the value in the ‘Total’ column of line I in the table; it is the sum of revenues in each historical year, where revenue in each year is calculated from the production quantity (row A) multiplied by the market price (row H).

The ways in which the data collected using this table are used in estimating revenue is explained further below.

Table 3: Revenue data requirements (using sales revenue)

Revenue Rule 2: Quantity of output is either defined as the direct measure of output of the defined product for the defined activity, excluding product that is not of saleable quality, or is calculated from units sold and changes in inventory.

This rule builds on the proposed Australian scheme, under which quantity of output can be calculated using one of the following two methods:

1. quantity of output = direct measurement of output for the defined activity (eg, operational data)
2. quantity of output = units sold (externally or internally) + closing inventory – opening inventory.²

The preference and under the NZ ETS (and under the proposed CPRS) – is to use the first method. Under the second approach the number of units sold internally is used to define outputs that are further processed before sale, just as clinker is ‘sold’ for use in manufacturing cement.

Revenue Rule 3: The market price is the fair value of the product, as defined under NZ Accounting Standard NZ IAS 18, received at the ‘plant gate’ for the output produced. It should be calculated from the revenue from external output sales divided by the number of unit sales; or, if sales data is not available, by using an observable market price.

The market price is the price received for the output at the plant gate. (This is the same as the approach used in Australia, where the price used should “exclude recovery of transport costs”.)³ Estimating revenues at the plant gate eliminates differences between plants on the basis of location. In many cases this means that a market price will need to be calculated net of transport costs. Firms may choose to use a gross market price that does not take account of transport costs if they wish. This would increase estimated revenues and decrease the measured intensity, so it could be disadvantageous to firms seeking to establish eligibility. However, it might be simpler to collect, so if eligibility can be demonstrated using this higher estimate of revenue, it might be chosen for reasons of simplicity.

Table 3 is based on the assumption that price is calculated from sales revenue at the gate (row G) divided by external sales (row B). The sales revenue at the gate will often need to be calculated from the revenue received for products delivered to market (row C), adjusted for the exchange rate (row D) to produce a delivered price in NZ dollars (row E); this then needs to be adjusted to a gate price by subtracting the costs of transport to market (row F). The market price calculated this way is a weighted average price for each year.

Table 3 recognises that the quantity of units sold externally may be different from total production, because total production may include outputs that are processed further. The external sales numbers are used to represent the sales of output, defined as the output of the activity.

If there are no external sales of that output, an alternative market price should be used rather than an estimate from sales revenue. An example would be clinker used in cement production: there is a market price for clinker, but in New Zealand it is produced in an integrated process that produces cement as a final output.

The data required for this approach are summarised in table 4. Output is recorded in the same way (row A) and is multiplied by the observed market price (row B) to estimate sales revenue (row C), converted to NZ$ using the relevant exchange rate (row D) to produce a NZ$ estimate of sales revenue. As for the sales revenue methodology in table 3, the gate revenue is estimated by subtracting the transport costs (row F) to produce a gate revenue and an implied gate price (row H).

Table 4: Revenue data requirements (using market price)

Revenue Rule 4: Market prices should be converted from foreign currencies to New Zealand dollars at the historical rate relevant to the period of output consistent with NZ Accounting Standard NZIAS 21.

Where sales are in a foreign currency, an appropriate exchange rate should be used. This should be either the actual rate achieved for sales, or based on the standard practice used in converting overseas income to New Zealand income for tax purposes.⁴ Monthly and 12-month average rates are available from the Inland Revenue Department. The appropriate exchange rate will depend on the data. If data is gathered on an annual basis, then the 12-monthly average rate should be used for the ending month of the financial year. If data is gathered on a monthly basis, then New Zealand prices can be estimated for each month using the monthly exchange rates.

Rules for calculating emissions

Emissions and other data required to demonstrate eligibility include direct emissions (from oxidation, use of fossil fuels as a feedstock, and industrial processes) and the direct consumption of electricity.

Emissions Rule 1: Data should be supplied for each of the historical financial years specified in the Gazette notice from only the emissions sources specified in the Act, expressed in tonnes of CO₂ equivalent.

The Act specifies emissions sources as:

• those resulting from the direct use of any coal, natural gas, geothermal fluid, used oil, or waste oil as part of the activity
• those resulting from the direct use of any coal, natural gas, geothermal fluid, used oil, or waste oil to generate steam that is used as part of the activity
• those resulting from any of the activities listed in Part 4 of Schedule 35 carried out as part of the activity
• electricity used when the activity is carried out.

Emissions Rule 2: Emissions should be calculated using the applicable formulas and emission factors.

Table 5 provides an indication of the type of data likely to be requested.

Table 5: Emissions data requirements

Direct emissions

The Act allows for the inclusion of emissions from the “direct use of any coal, natural gas, geothermal fluid, used oil or waste oil”.

Emissions Rule 3: Emissions from the direct use of gas/coal should include the use of gas/coal as a feedstock. Emissions from the use of gas/coal as a feedstock should be calculated as zero when either (1) the output of the activity is an obligation fuel⁷ under the NZ ETS, or (2) the production of the output is eligible to earn emission units under the Climate Change (Other Removal Activities) Regulations 2009.⁷

Emissions Rule 4: Emissions from coal, natural gas, used oil or waste oil should include emissions from the oxidation of these fuels.

The situations where emissions from feedstock are to be counted as zero take account of instances where:

• the production of obligation fuels for which competing imports will also be subject to obligations under the NZ ETS such that there is no competitiveness disadvantage from the NZ ETS
• the firm conducting the activity will be earning emission units for their removal activity and therefore do not face NZ ETS costs for gas/coal used as a feedstock.

Emissions Rule 5: Total emissions from a heat plant should be allocated to an activity in proportion to its use of the output of the plant. Total emissions from a co‑generation plant should be split between heat and electricity emissions on the basis of relative efficiencies of production, then the heat emissions should be allocated to the activity in proportion to its use of the output of heat from the plant.

In some cases, some emissions on an industrial site may need to be allocated only partly to an activity. For example, where a heat or co-generation plant provides output to more than one activity at a site, the emissions from the heat plant should be assigned to the activity in proportion to its use of the output from the plant. For co-generation plants this needs to be adjusted for the relative efficiency of production of each output (electricity and steam).

The proposed approach is based on the efficiency method as set out in guidance issued under the GHG Protocol⁸ and has the following components.

• Step 1: Determine the total direct emissions and the total steam and electricity outputs for the combined heat and power (CHP) co-generation system.
• Step 2: Assign efficiencies to steam and electricity production. Values of 80 per cent efficiency for steam and 35 per cent efficiency for electricity are to be used.
• Step 3: Determine the fractions of total emissions to allocate to steam and electricity production using the following formulas:
  
  E_H = ((H/e_H) ÷ (H/e_H + P/e_P)) * E_T      and      E_P = E_T - E_H
  
  where:
  E_H = emissions allocated to steam production
  H = steam output (energy)
  e_H = assumed efficency of steam production
  P = delivered electricity generation (energy)
  e_P = assumed efficiency of electricity generation
  E_T = total direct emissions of the CHP system
  E_P = emissions allocated to electricity production
  
• Step 4: Calculate emission rates for steam production. Divide the total emissions from steam production (step 3) by the total amount of steam produced.
• Step 5: Estimate emissions from steam used in the activity.

The same approach is used for a heat plant, but there will be only one type of output from the plant. The total emissions from the plant are divided by the total steam output from the plant to produce an emissions factor, which is then multiplied by the steam used by the activity.

Electricity emissions should use the same emission rate regardless of whether the electricity is generated on site or purchased from outside the site. The emission factor to use is discussed below.

Formulas

Emissions Rule 6: Specific formulas should be used in estimating direct emissions.

The formulas to use are set out below.

Coal

Emissions   =   (A_L1 × CV _L1 × EF _L1) + (A _L2 × CV _L2 × EF _L2) + (A _SB × CV_SB × EF_SB) + (A_B × CV_B × EF _B)
where:
A       =   tonnes of coal consumed for different varieties, including L1 = lignite (Waimumu and Roxburgh fields), L2 = other lignite, SB = sub-bituminous, B = bituminous
CV    =   calorific value of the coal class used
EF     =   relevant emission factor for the relevant coal class.

Natural gas

Emissions   =   A × EF
where:
A       =   consumption of natural gas (in terajoules)
EF     =   emission factor for natural gas (use either one for the appropriate field, if known, or the national average if the gas field is not known).

Geothermal fluid

Emissions   =   A x EF
where:
A       =   consumption of geothermal fluid (in tonnes)
EF     =   emission factor for geothermal fluid.

Used or waste oil

Emissions   =   A × CV × EF
where:
A       =   consumption of used or waste oil (in tonnes)
CV    =   calorific value of the used or waste oil
EF     =   emission factor for the used or waste oil.

Emissions Rule 7: Emissions from industrial process emissions should be calculated using the formulas set out in Part 3 of the Climate Change (Stationary Energy and Industrial Processes) Regulations 2009.⁹

Emission factors

Emissions Rule 8: The emission factors used in calculating emissions should be those listed in Schedule 2 of the Climate Change (Stationary Energy and Industrial Processes) Regulations 2009.

The emission factors should be those listed in Schedule 2 of the Climate Change (Stationary Energy and Industrial Processes) Regulations 2009.

Electricity use

Emissions Rule 9: For eligibility purposes, electricity emissions should be estimated using an electricity allocation factor of 1 tonne of CO₂-e per megawatt hour of consumption.

Emissions are measured in order to assess eligibility for allocation of emission units, although the real concern is with costs that result from those emissions. For direct emissions, costs are directly related to emissions, so emissions are a sound proxy for costs. However, for electricity consumption the effects are more complex because the cost impact results from the way in which an emissions price affects the cost of electricity in the wholesale market.

As discussed in section 4, the relationship between emissions price and electricity price has been estimated specifically for New Zealand. This has been used to produce an electricity allocation factor proposed for use in developing allocative baselines. However, for the purpose of determining eligibility, it is proposed that the Australian electricity allocation factor be used. This is higher than the rate for New Zealand, reflecting the greater contribution of coal generation to price setting in the Australian electricity market. This will ensure some degree of comparability between eligibility on the New Zealand and Australian tracks.

Both electricity consumption and the calculated emissions using the relevant electricity allocation factor should be reported.

Emissions Rule 10: For allocative baseline purposes, electricity emissions are to be estimated using an electricity allocation factor of 0.52 tonnes of CO₂-e per megawatt hour of consumption.

As discussed in section 4 for the purpose of calculating allocative baselines, it is proposed that an electricity allocation factor of 0.52 be used.

Both electricity consumption and the calculated emissions using the relevant electricity allocation factor should be reported.

Materiality

Emissions Rule 11: Best endeavours should be used in calculating emissions from small sources that are part of an activity.

In collecting emissions data for an activity, all emissions should be calculated unless they are explicitly excluded. However, some emissions sources will be small, and the effort required to accurately calculate them may be out of proportion to their size. In all cases, best endeavours should be used to calculate the emissions, but we recognise that efforts may be less for some small sources.

Scrapped products

Emissions Rule 12: All emissions associated with the activity should be counted, regardless of whether the output is of saleable quality.

Emissions from the production of products that are scrapped or not of saleable quality can be included in the assessment.

Disclosure of methods used in preparing data

Data preparation Rule 1: The methods, assumptions and calculations used to produce the data should be disclosed along with the data.

Firms should disclose how they have calculated each part of their data. In terms of revenue data, this includes:

• whether they have used actual output or inventory data
• the source of the prices used, including the actual average price received or a market price
• how they have estimated transport costs, and the source of data used
• what exchange rates are used for converting foreign currencies to NZ$.

The basis for the emissions calculations should also be set out, including the emission factors used and the activity or fuel-use data.

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