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Emissions Trading Scheme Transport Fuels Technical Advisory Group Expert Advisory

1.0 Introduction

2.0 Issues to Resolve

3.0 Update of emissions factors

4.0 Calculation Changes

Appendix 1: New Zealand’s Fuel Supply

Appendix 2: Updated Emissions Factors

Appendix 3: NIWA Climate Data

Appendix 4: Request for Recommendations

2.0 Issues to Resolve

2.1 Definition of Obligation Fuels

2.1.1 Customs and Excise Tax Definitions

Fuels have been defined in the draft regulations by reference to the Customs and Excise Act or the Tariff. Another option is to define fuels by way of technical description (e.g. Petroleum Product Specifications Regulations - PPSR). A preference during the first meeting of the TF TAG was expressed to use the Customs and Excise Act or Tariff definitions. However this does raise some issues as some of the definitions in these Acts are not well defined.

Some feedback has suggested that there should be a single set of definitions for petroleum fuels in one Act that all other legislation/regulation borrows. However this may require significant change to existing legislation which may be too difficult to consider at this stage.

Comment was also made that the regulations should state the intent - that all liquid domestic fuels typically directly combusted when used are included in the ETS. It should also state a process of how new fuels should be included (it was seen as impossible to try and predict future fuels and define them now).

Given the feedback and the intention to use the customs definitions the following is a summary of the issues:

• The regulations should state the intent of what should be included as obligations fuels

• The regulations should include a process on how to include a new fuel as an obligation fuel

• The excise definition for premium and regular motor spirit should be adjusted so the break point is 95 octane (note - Customs would not want to use the PPSR definition for regular as it would want to capture regular gasoline of under 91 octane that might then be blended with ethanol to make it on specification for the PPSR)

• It may be worth listing fuels specifically excluded for clarity (e.g. LPG, lighting kerosene, solvents, chemicals, lubricants)

• Fuel oil definitions need to be changed as covered in Section 2.1.2

On the excise definition for motor spirit, one company has suggested that there should only be one factor for motor spirit rather than two as is done in most other countries. This is a possibility although to remain consistent with the calculation of New Zealand’s greenhouse gas inventory that would need to be changed as well as currently different factors are used. However it would avoid any need to change the excise definitions if only one factor was used.

Recommendations:

• State the intent of what fuels are to be included as obligation fuels in the Regulations – e.g. all liquid fuels used in New Zealand that are typically directly combusted when consumed (note based on the Biofuel Bill, biofuels will be included as obligation fuels so the definition doesn’t need to exclude them)
• The regulations to include a process on how a new fuel is included as an obligation fuel
• Adjust the octane break point in the excise definition for premium and regular motor spirit to 95 octane (unless decision is made to change to a single motor spirit emissions factor)
• List fuels specifically excluded in the regulations for clarity (e.g. LPG, lighting kerosene, solvents, chemicals, lubricants)

2.1.2 Fuel Oil Definitions

The Regulations currently lists five type of fuel oil as obligation fuels (6 (g) through 6 (k)). Light fuel oil, medium fuel oil, heavy fuel oil and bunker fuel oil are all grades regularly sold in New Zealand to defined specifications while power station fuel oil can vary depending on the requirements of the customer (and is generally infrequently produced).

The regulations also refer to 2710.19.93 which may not be correct. These are referred to as hydraulic oils which are different than the residual fuel oils being covered here. Residual fuel oils would be covered either by 2710.19.71/2710.19.73 (residual fuel oils) or other 2710.10.95/2710.19.99 (other). The residual fuel oil category does not split fuel oils at all where as “other” splits it into light, medium and heavy.

NZRC provides historic data on light, heavy and bunker fuel oil (medium fuel oil is a recent grade) but as sales data is only split between light fuel oil and heavy fuel oil, emissions factors are only produced for these grades for use in calculating New Zealand’s greenhouse gas inventory. Power station fuel oil and bunker fuel oil are included as heavy fuel oil sales.

There is only a 0.3% difference in the energy content (MJ/l) between heavy and bunker fuel oil which results in a very similar emissions factor. It is reasonable to group heavy fuel oil, bunker fuel oil and power station fuel oil as a single group of heavy fuel oils with a single emissions factor (the factor derived for heavy fuel oil as these are the bulk of the sales) for the group. A definition for heavy residual fuel oil would cover bunker fuel oil and power station fuel oil without any adjustment.

There is also an argument that there should be no separate factor for medium fuel oil as these sales are grouped with light fuel oil in the sales data (and therefore greenhouse gas inventory). Arguably all fuel oils could be grouped as a single grouping of residual fuel oil although light fuel oil’s emissions factor is 3% lower than heavy fuel oil (tonnes CO₂/kl) so the difference is reasonably significant.

Recommendations:

• Reduce the current five categories of fuel oil to two.

• Refer to definition 2710.19.71/2710.19.73 for both light and heavy fuel oil as follows:

  • (g) Light residual fuel oil referred to in item number 2710.19.71 0C or 2710.19.73 00F in chapter 27 of the Tariff and having a kinematic viscosity at 50°C of less than 80 centistokes

  • (h) Heavy residual fuel oil referred to in item number 2710.19.71 00C or 2710.19.73 00F in chapter 27 of the Tariff and having a kinematic viscosity at 50°C of greater than 80 centistokes

2.2 Complete list of obligation fuels

The current list of obligation fuels contains all the main fuels. It has already been agreed to not include minor fuels where the emissions from the fuels are negligible or the cost of collection of the necessary information about the fuel outweighs the benefit of including the fuel in the ETS. The excluded minor fuels are fuels such as lighting kerosene, solvents, chemicals and lubricating oils.

A liquid fuel used that is not covered is reprocessed lubricant. This is turned into a fuel and used where residual fuel oil might have been used. As it doesn’t pass an excise point this would currently be missed by the system. Assuming this is not going to be picked up in the stationary fuels section of the ETS it would need to be included here (in New Zealand the reprocessed lubricant fuel is used in the cement industry).

One issue raised is what if one of the excluded minor fuels becomes more significant over time and/or it begins to be used in similar service as one of the existing obligation fuels. This is perhaps best handled by the ability to add new obligation fuels and the definition of what is being covered in obligation fuels. For instance if a vehicle type started using lighting kerosene as a fuel this would be seen as a use change and something that should be covered by the definition of obligation fuels.

The current list is complete based on current and likely medium term expectations (future fuels covered in the next section). However it should be noted that the Biofuel Bill is amending the Customs and Excise Act 1996 and the Tariff Act 1988 so that the definitions referred to in Section 6 (obligation fuels) will now include biofuels and biofuel blends.

Far more likely is changes in what constitutes a biofuel – currently only biodiesel and ethyl alcohol (ethanol) produced from biomass are defined as qualifying biofuel. The Biofuel Bill allows a new biofuel to be prescribed by an Order in Council and this will be used if there are new biofuels (this is required so companies can count biofuels towards their obligation).

Rather than duplicate the Biofuel Bill it makes sense for the Climate Change Regulations to refer to qualifying biofuels which is defined in the Biofuel Bill. Feedback on this issue is dealt with in the Section 2.3.

Recommendation:

• Decide if it is most appropriate to capture reprocess lubricant in the liquid fuels regulations and how it might be done.

• As covered in Section 2.1.1 the regulations need a process on how to handle adding new obligation fuels to cover changing use of existing fuels and/or new fuels.

2.3 Future Fuels

Questions have been raised as to how to capture future fuels that are not on the current list of obligation fuels and how the government might keep up with changes in the market place.

Future fuels may include:

• Fuel produced from gas, coal or biomass to liquids processes (e.g. Fischer-Tropsch) which may be similar to an existing product (e.g. jet fuel, diesel) or classified as new products

• A low octane blend of petrol than is used as a blendstock for ethanol blending that, when blended, will meet the regular specification

• Biofuels (or renewable fuels) that are indistinguishable from their petroleum equivalents

In some of these cases the fuels should automatically be captured in the current definitions. For instance a fischer-tropsch diesel if being sold to the current diesel specifications will be covered as would a low octane petrol blendstock by the proposed definition.

However there could well be a new fuel developed that needs a new definition. In this case (as covered in 2.1.1) a process to add new fuels is required. In terms of the Government keeping up with the market and new fuels, the government (MED) needs to do this on a monthly basis in reporting energy use (internally and to the International Energy Agency). Given the cost exposure it would seem industry and the government have a shared interest of clarity in establishing early liability or otherwise for new fuels.

Even if a new fuel is covered by an existing definition there is the ability in the proposed regulations to apply for a different emissions factor if significant. It has been suggested that this process should be included in the regulations not just in the supporting documentation.

Recommendation:

• Consider including process for applying for a new emissions factor in the regulations.

2.4 Fuels made from biomass

This issue has been partially covered in Section 2.2. A problem may arise if a biofuel blend has been produced by processing crude oil (or a crude oil derivative) and biomass together. In this case how is the amount of liable obligation fuel calculated?

As referred to in Section 2.2, in order for a biofuel (in addition to biodiesel and ethanol) to be accepted as a biofuel an Order in Council is required (Biofuel Bill). Companies will have an incentive to have any new biofuel accepted to count towards their biofuel obligation. For situations where biomass and crude oil are processed together there will need to be agreement as to what proportion shall be classified as biofuel from biomass.

Rather than duplicate a process that will take place under the Biofuel Bill, these Regulations should refer to qualifying biofuels under the Biofuel Bill. That will take care of new biofuels as they are accepted under the Biofuel Bill and use any proportional calculation agreed. If a biofuel is not accepted as qualifying biofuel under the Biofuel Bill then an emissions charge would apply depending on the type of product (what obligation fuel it is classified as).

Recommendation:

• No special change needs to be made to take account of possible future biofuels. This is best managed through the Biofuel Bill - references to biofuels should refer to qualifying biofuels under the Biofuel Bill.

2.5 Background policy documents

There has been discussion on whether some of the information in the background documents should be included in the regulations. The general view of officials to date (in drafting the regulations) is that to include them may be confusing to those using the regulations. However feedback from companies (as discussed in some of the previous sections) is that some of this background information should be included in the regulations.

These include (all from Emissions trading bulletin No 2: Climate Change (Liquid Fossil Fuels) Regulations 2008: draft for consultation):

• Emissions factors – the process of applying for a new emissions factor and the variation requirements should be included in the regulations.

• Stating the intent of what fuels should be (and shouldn’t be) captured in obligation fuel definitions

• Including a process covering how new fuels are added to the obligation fuel definitions

Another suggested change was that emissions factors be expressed as tonnes CO₂/ KL rather than tonnes CO₂/ litre. This point is covered in Section 3.0.

Recommendation:

• Consider including the items listed above in the regulations for additional clarity.

2.6 Method of accounting for biofuels

The current methodology for calculating emissions proposes removing the biofuel component from the calculation by multiplying by the non-biofuel percentage of the fuel (factor B in the calculation in 8).

Companies are likely to meet their biofuel obligation a number of different ways. It is unlikely that they will have a uniform percentage of biofuel across a complete grade everywhere in the country. In order to calculate a factor as proposed in the climate change regulations they would first need to calculate all the litres of biofuel they are using (which they will be doing for their calculations required for the biofuel obligation).

Given that the industry works in litres and will have the data in litres it would be more logical to subtract the litres of biofuels from the litres of obligation fuel during the calculation in 7. While at the moment biofuels aren’t obligation fuels they will be following modification of Schedule 3 of the Customs and Excise Act as proposed in the biofuel regulations. Therefore below are proposed changes to section 7.

Recommendation for Section 7 revision:

Collection of information for purposes of calculating emissions

An obligation fuel participant must collect the following information in relation to each type of obligation fuel owned by the participant at the time the fuel is removed for home consumption in accordance with the Customs and Excise Act 1996 or otherwise removed from a refinery in a year:

1. the number of litres of obligation fuel removed for home consumption not including any qualifying biofuel as defined in Biofuel Bill.

2. the number of litres of obligation fuel removed from a refinery other than for home consumption not including any qualifying biofuel as defined in Biofuel Bill:

3. the number of litres of obligation fuel sold to any person for use on an international aviation or marine trip (other than a fishing trip) where the sale is zero rated for goods and services tax purposes not including any qualifying biofuel as defined in Biofuel Bill:

4. the number of litres of obligation fuel sold to an obligation jet fuel participant:

5. the number of litres of obligation fuel exported where the related sale is zero rated for goods and services tax purposes not including any qualifying biofuel as defined in Biofuel Bill –

   1. whether or not the fuel was previously removed for home consumption; and

   2. other than the circumstances in paragraph (c).

There are other recommended changes to this section which are covered in Section 4.0.

2.7 Definition of a litre

When calculating excise taxes and duties the volume is measured in litres at 15°C which is standard for calculating volume. This is possible at the excise point as product is surveyed to give all the information for the calculation (specifically temperature and density and static tanks to survey from). To do a similar calculation when selling product is impossible unless similar information is obtained (which would be so expensive it would be prohibitive).

Therefore when selling product in New Zealand all sales are at ambient temperature. This is typical practice internationally including for jet fuel. For New Zealand this has never been seen as much of an issue as ambient temperatures are close to 15°C (in the main centres they vary from 15.1°C in Auckland to 11.0°C in Dunedin¹). If the ambient temperature is higher than 15°C the volume will be overstated (you will get less than if it was measured at 15°C) and if the ambient temperature is lower than 15°C you will get more volume. While on average this would suggest the oil companies are losing out, the fact that New Zealand’s average ambient temperature is lower than 15°C is probably offset by having more sales during the day when the temperature is a bit higher (although most sales are made from underground storage where if anything temperatures would be lower than ambient temperature).

To give an idea of the order of magnitude if one litre of petrol or diesel was purchased at the following temperatures this would be the corrected volume received (corrected to volume at 15°C).²

Therefore for +/- 10°C swing in temperature petrol volume varies just over +/- 1% and diesel just under 1%. Given a debate about ambient temperatures in New Zealand is only dealing with variations of 1 or 2°C from 15°C, this variation can be regarded as insignificant.

One company proposed analysing all the companies jet sales by region and international/domestic split to see what the ambient temperature of domestic sales would be. This would take a reasonable amount of analysis and given the answer is expected to be very close to 15°C due to the weight of sales at Auckland this was not seen as adding a lot of value.

Recommendation:

• Continue to use measure litres on the basis as already done in New Zealand – all imports and refinery production measured at 15 ° C and all sales at ambient temperature.

• No further work is done on this issue.

2.8 Flow diagram

Simple flow diagrams of the fuel supply chain are shown in Appendix 1 along with the proposed calculation of volumes for the ETS. Two diagrams are shown – one with and one without biofuels. Biofuels complicates the flow diagram substantially.

2.9 Jet fuel left in tank at time of filling up

At times airlines use the same aircraft for both domestic and international flights. Domestic flights will incur an emissions charge for fuel used where as international flights won’t.³ Therefore there is an issue regarding the status of the fuel in tank when an aircraft is switched between services (either the jet fuel left in tank will have incurred an emissions charge when it is now going to be used international or it won’t have incurred a charge when it is now going to be used in domestic service).

It has been suggested that this problem could be resolved by airlines calculating their emissions on fuel burnt while aircraft are on domestic service rather than fuel purchased. This would mean:

• There is no issue with start and finish inventories when an aircraft changes service as only fuel used on domestic trips will be included.

• It prevents companies intentionally “importing” more jet fuel by aiming to have higher fuel levels when coming from an international flight than when they finish their domestic business in New Zealand (i.e. minimise jet fuel purchases for domestic use in New Zealand to avoid emissions charges).

However it does also have some downsides. These include:

• There will no longer be any definitive reconciliation between oil company sales to jet fuel participants (7(d)) and what an airline uses to calculate their emissions (10) although the numbers should be close.

• Where as jet fuel sales between an oil company and a jet fuel participant are firm numbers (invoiced amounts) fuel burnt is entered by the pilots and does not have the same rigour behind the number.

• It is likely to be more complicated to audit the airline as a lot more data will be required on consumption than with the proposed method (using domestic fuel purchased).

One airline had done some calculations on the difference between fuel purchased domestically and that from fuel burnt statistics and found a variation of 5% (fuel purchased domestically was higher). However on average one would expect the numbers to be similar especially as most of the planes used domestically (737s) do not have the capability to do a significant amount of bunkering across the Tasman. That is inventory on landing following an international trip (before switching to domestic service) should be similar to that just prior to loading fuel after domestic service before an international trip.

Recommendation

• Unless a way can be found to have an auditable system for fuel burnt (and all airlines agree to the change) it is more straight forward to use the proposed system of basing domestic fuel used on sales of domestic jet fuel.

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