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Appendix 4: Request for Recommendations

TF TAG Memo

25 March 2008

Request for recommendations by external expert

Background

The Transport Fuels Technical Advisory Group would like to receive advice in the form of recommendations from Hale and Twomey regarding a series of issues that relate to the Climate Change (Liquid Fossil Fuels) Regulations 2008 and the related commentary (contained in Emissions Trading Bulletin No. 2).

The source of the issues in this list is:

  • Emissions Trading Bulletin No.2

  • Further Items noted for discussion at the first meeting of the TF TAG

  • New items noted in the minutes of the first meeting of the TF TAG.

The minutes of the first meeting of the TF TAG are attached for your reference.

Issues to resolve

1. Definition of obligation fuels

a. Obligation fuels have been defined in the draft of the regulations by reference to the Customs and Excise Act 1996 or the Tariff.

Another option would be to define the fuels by way of a technical description, as has been done in the Petroleum Products Specifications Regulations. These regulations cover only petrol and diesel. They have been defined as follows:

  • Premium grade petrol means petrol supplied as having a research octane number of 95 or higher.

  • Regular grade petrol means petrol supplied as having a research octane number of at least 91 but less than 95.

  • Diesel means a refined petroleum distillate having a viscosity and distillation range that is intermediate between those of kerosene and light lubricating oil, whether or not it contains additives, and that is intended for use as fuel in internal combustion engines ignited by compression.

During the first meeting of the TF TAG a preference was expressed by members to use the definitions as contained in the Customs and Excise Act 1996 and the Tariff.

Please provide a recommendation on how best to define obligation fuels in the regulations, taking into consideration the views of the TF TAG.

b. There are two obligation fuels that are not defined in the Bill: these are bunker fuel oil and power station oil.

During the first meeting of the TF TAG it was suggested that these fuels would be caught by the item ‘heavy hydraulic oils and other heavy oils’ that is on the obligation fuel list (reference in the draft regulations is 6(i)).

Please confirm that this definition would cover bunker fuel oil and power station oil as the draft regulations stand. Alternatively advise if further clarification would be useful such as through an explanatory note to the Regulations.

2. Complete list of obligation fuels

A complete list of obligation fuels is required to ensure the ETS captures all material sources of greenhouse gas emissions from liquid fossil fuels. The list of obligation fuels should not include those fossil fuels that do not tend to be used in such a way that results in emissions (i.e., are not combusted).

It should also not include fuels where the emissions from the fuel are negligible or the cost of collection of the necessary information about the fuel outweighs the benefit of including the fuel in the ETS. Thus, the ETS should not cover lightening kerosene, solvents (e.g., naphtha), chemicals (e.g., methanol) and lubricating oils because the emissions associated with them are negligible (about 0.0235 tCO2 per year) and further they are often not combusted and therefore may not result in emissions.

Members of the TAG indicated that they were not aware of any additional fuels, except the New Zealand Refining Company, who uses other fuels during their production process. Officials have had a follow-up discussion with NZRC who will inform officials about an appropriate name or names for the intermediate products that they use.

Please confirm that based on current and likely medium term expectations about New Zealand fuel supply industry, whether the list is complete list or not.

3. Future fuels

At present the draft liquid fossil fuel regulations include a finite list of obligation fuels. It would not therefore capture a fuel that is not on the list. If a fuel is imported or produced in New Zealand that is a fossil fuel but is not on the list, then it would not be captured by the ETS without amendment to the regulations. One possibility would be to amend the Bill to provide for such a situation and require the participant concerned to obtain a unique emission factor. Without a change to the Bill, it is effectively up to the government to keep abreast of what is happening in the market and add new fuels to the obligation fuels covered by the regulations (with default emission factor) as they come to market.

It is not clear how likely it is that a fuel that is not listed in the regulations would be supplied in New Zealand. Also, the way in which the fuels are defined will influence whether a new fuel is more likely to be captured or not.

Please provide comment and if possible a recommendation about how to capture fuels that are not currently supplied in New Zealand and that may not be caught by the current list of obligation fuels.

This issue was not discussed at the TF TAG meeting. Therefore feedback has been sought by email from members. Date of feedback was not specified – therefore officials will follow-up this week. Please take feedback received prior to Friday 28 March into consideration.

4. Fuels made from biomass

Biofuels are exempt from the ETS and are therefore not listed as an obligation fuel. Biofuel blends are managed through the use of the biofuel factor when calculating emissions from a particular fuel. However, if a fuel is made by processing crude oil and biomass together, the biofuel factor may not enable a reduction in emissions from fossil fuels to be recognised. This situation needs to be clarified in the liquid fossil fuel regulations so that emissions from fossil fuels are not overstated (i.e., so the ETS does not capture emissions from fuels made from biomass).

Please recommend how these fuels could be taken into consideration. For example, could the use of the term ‘biomass’ rather than ‘biofuels’ be sufficient?

This issue was not discussed at the TF TAG meeting. Therefore feedback has been sought by email from members. Date of feedback was not specified – therefore officials will follow-up this week. Please take feedback received prior to Friday 28 March into consideration.

5. Background policy documents

This commentary contains some substantive background information relevant to the draft of the liquid fossil fuel regulations. The content of the draft is made up of the core elements of the methodology for monitoring and calculating emissions. These are the aspects of the methodology that will have legal force.

However, in theory, the regulations could contain some or all of the ‘decisions’ contained in this commentary. For example, the regulations could set out the process for calculation of the emission factors that are reflected in Annex 1 and include the table, which provides full details of the calculation of the emission factors for all fuels.

The draft regulations reflect the view that these matters are appropriately dealt with outside the regulations and to include them would merely be confusing to those using the regulations.

Please comment on whether you think the regulations contain correct information or if some of the details contained in the commentary (the emissions trading scheme Bulletin No2, February 2008).

This issue was not discussed at the TF TAG meeting. Therefore feedback has been sought by email from members. Date of feedback was not specified – therefore officials will follow-up this week. Please take feedback received prior to Friday 28 March into consideration.

6. Method for accounting for biofuels

There is a need to ensure that the methodologies account for accurately and simply.

The way biofuels are handled in the present draft of the regulations may be difficult as biofuels could be both blended in the obligation fuel and in the calculation of 7(c) - not common but possible in sales of international bunkers. The alternative is - in calculation 8 (2) each of the factors A through E should have any biofuel component subtracted before doing that calculation (strictly speaking this should be done anyway as biofuel is not an obligation fuel so shouldn't be counted in the first place even if blended). There would then be no need to multiply by B.

Please provide some recommended amendments to the regulations to ensure that biofuels get accounted for appropriately. This may mean accounting for biofuels at each of 7 (a) to (e) rather than after summing all of the litres from 7 (a) to (e) for each obligation fuel. Noting that officials support the suggestion that under 8 (1) T would be separately identified for each product/obligation fuel.

7. Definition of a litre

During the first TF TAG meeting, the issue of how to define a litre was raised.

Please analyse the financial and emissions materiality of using a definition of 15 degrees for all transactions relating to the calculation of emissions under the regulations vs. using ambient temperature or some other measure.

8. Flow diagram

Please prepare a flow diagram of the fuel supply chain (including where biofuels may come into the picture) and the calculation of emissions for the emissions trading scheme.

9. Jet fuel left in tank at time of filling up

During a follow-up meeting with members of the airline industry, the question of how to manage any fuel left in the tank of aircraft where the use of the aircraft is switched between domestic and international flights.

Please provide brief comment on the financial and emissions materiality of attempting to account for this fuel, as well as the administrative costs.

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