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Climate change Net Position Report 2008: Projected balance of Kyoto Protocol units during the first commitment period Online version
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Appendix B: Energy (Including Transport) and Industrial Processes Sectors Emissions Projections
Ministry of Economic Development, April 2008
1 Introduction
1.1 Scope coverage of emissions
This report covers emissions from energy and industrial processes. Energy emissions covered are those associated with electricity generation, transport and direct use in the residential, commercial and industrial sectors.
Industrial process emissions are the non-energy emissions ie, those that occur during:
- reduction of ironsand in steel production
- oxidisation of anodes in aluminium production
- hydrogen production
- calcination of limestone of use in cement production
- calcination of limestone for lime.
1.2 Recent trends
The energy sector contributes around 40 per cent of New Zealand’s total greenhouse gas emissions.
On average, around two-thirds of New Zealand’s annual electricity needs are met by hydro-electric generation. The balance is provided by fossil-fuelled thermal generation using natural gas and coal, and other renewable sources such as geothermal and wind.
Around 40 per cent of energy emissions are from the transport sector. Emissions for this sector have grown significantly since 1990, averaging over three per cent growth per annum. The growth in transport emissions is largely due to the increased use of petrol and diesel as well as increased use of aviation fuels.[New Zealand's Greenhouse Gas Inventory 1990-2006, Ministry for the Environment, April 2008, http://www.mfe.govt.nz/publications/climate/greenhouse-gas-inventory-overview-apr08/index.html] Recent increases in the price of liquid transport fuels appear to have resulted in a reduction in the growth rate of demand for liquid transport fuels.
Industrial processes contribute around six per cent of New Zealand’s total greenhouse gas emissions, with most emissions coming from the metal industry.
1.3 Key drivers of emissions
In general, changes in energy emissions in New Zealand are linked to the overall rate of consumption within the economy. Emissions therefore tend to increase steadily over time, driven by economic growth.
There can be significant year-to-year fluctuation in emissions from electricity generation, with increased thermal generation in a ‘dry’ hydro year.
Historically, fluctuations in the price of liquid transport fuels have had a limited impact on consumption and emissions. However, the very large recent increases in the price of liquid transport fuels appear to have resulted in a reduction in the growth rate of demand, and therefore emissions from the transport sector.
2 Modelling
2.1 Description of method
Projections of emissions from energy (including transport) and industrial processes are largely derived from the Ministry of Economic Development’s Supply and Demand Equilibrium Model. SADEM is a collection of models, each representing the supply of a form of energy, or the demand from a sector of the economy. The sub-models buy and sell from each other just like in a real market. The Ministry has used SADEM since the early 1990s for internal policy analysis and to make projections of New Zealand’s energy supply, demand, prices and emissions.
Modelling CO2 emissions from combustion is fairly straightforward, since the output of CO2 depends on the amount of each type of fuel being burned. Emissions of other greenhouse gases and of CO2 from non-combustion activities, eg, industrial processes, are more complicated to estimate and depend both on the amount of fuel and on the way the fuel is used.
2.2 Improvements to modelling since Net Position 2007
Since the Net Position 2007 report, a number of enhancements have been made:
- Actual data for 2006 and, where possible, 2007 has been incorporated.
- Enhancements have been made to modelling of emissions from the electricity sector, based on the Electricity Commission’s Generation Expansion Model (GEM).
- Enhancements have been made to modelling on-road transport, utilising the Ministry of Transport’s Vehicle Fleet Emissions Model (VFEM).
- Energy emissions from the dairy sector are now based on projected milk solids production provided by the Ministry of Agriculture and Forestry (MAF).
2.3 Specific assumptions
This section provides an overview of the key assumptions used. An effort has been made to align modelling assumptions across government, and with the assumptions underpinning the New Zealand Energy Strategy. Macroeconomic assumptions are in line with Treasury projections, milk solids projections are supplied by the Ministry of Agriculture and Forestry (MAF) and fuel price assumptions are consistent with those recommended by the Energy Data and Analysis Coordination Group (EDAC).[Recommended Input Assumptions, MED, 7 January 2008, http://www.med.govt.nz/templates/MultipageDocumentPage____33244.aspx. (The horizontal rule in each MED web address represent four underscore characters)]
2.3.1 Key macro-economic assumptions: most likely scenario
Table B1: Most likely scenario for key macro-economic assumptions for CP1
| Year | Economic growth |
Exchange rate |
Oil prices |
|---|---|---|---|
2007 (actual) |
3.00 |
0.736 |
100 |
2008 |
2.09 |
0.738 |
100 |
2009 |
2.73 |
0.697 |
100 |
2010 |
2.67 |
0.652 |
100 |
2011 |
2.87 |
0.622 |
100 |
2012 |
2.87 |
0.607 |
100 |
2.3.2 Emissions price
The government has decided in principle that New Zealand will use an emissions trading scheme (ETS) as its core price-based measure for reducing greenhouse gas emissions and enhancing forest carbon sinks. The government has also proposed a staged entry of different sectors into the ETS:
- liquid fossil fuels from 1 January 2009[On 6 May 2008, the Prime Minister announced deferral to 1 January 2011.]
- stationary energy from 1 January 2010
- industrial process emissions from 1 January 2010
- for the most likely case, an assumption of $NZ25 per tonne of carbon dioxide equivalent has been adopted in the forecast. $NZ50 and $NZ15 per tonne of carbon dioxide equivalent have been adopted for the low and high emission scenarios.
2.3.3 Coal
Coal prices are based on import parity prices around $4.00 per GJ.
2.3.4 Gas
The rate of new gas discoveries is assumed to average 60 PJ/year with production from new discoveries starting in 2012.[http://www.med.govt.nz/templates/MultipageDocumentPage____33244.aspx]
2.3.5 Methanex
Methanex is the gas-to-methanol operation in Taranaki. Based on recent announcements by Methanex, it is assumed that it will increase production at Motonui from 2008 and that the smaller Waitara Valley plant will continue operating until mid 2008.
2.3.6 Energy efficiency and conservation measures
Energy efficiency measures included in Net Position 2008 are those evaluated as part of the Benefit Cost Analysis of the New Zealand Energy Strategy. These are assumed to be 100 per cent implemented in the most likely case, and 120 and 80 per cent in the low and high emissions scenarios. An “upside” factor has been incorporated to account for increased energy use resulting from the greater uptake of electrical appliances, eg, heat pumps, and take-back effects not included in the models, eg, purchase of larger plasma televisions.
An approximate saving of 2,100 kWh per unit per year from the solar water heating programme is assumed. The programme is funded for three-and-a-half years, therefore we assume no additional solar water heating units installed as a result of the programme beyond 2010.
2.3.7 Projects to reduce emissions
The Projects to Reduce Emissions (PRE) programme allows firms to receive tradable emissions credits for each tonne of carbon emissions saved. Credits have been awarded for a number of projects, with the majority of eligible projects in the electricity generation sector.
2.3.8 Heavy industries
The heavy industries section is under continuing review and sector-specific discussions take place at various times. Key assumptions are:
- Steel – assume constant production over the First Commitment Period (CP1).
- Aluminium – assume constant production over CP1.
- Petrochemical – additional methanol production will continue into CP1.
- Ammonia and urea production forecasts have not changed since Net Position 2006.
- Forestry – the energy demand projections for pulp and paper, sawmill, and panel products are based on estimates from the Heavy Industry report.[Heavy Industry Energy Demand, Ministry of Economic Development, June 2006]
- Dairy – the dairy model uses milk solids production projections (provided by the Ministry of Agriculture and Forestry) and calculates the energy required to process these. This is discussed further below.
2.3.9 Other transformation
It is assumed that energy use and emissions from the New Zealand Refinery Company will be steady over time, with a step change occurring following the expected 20 per cent capacity expansion in 2009. This is consistent with Net Position 2007.
2.3.10 Biofuels sales obligation
In projecting transport emissions it is assumed that the proposed Biofuel Sales Obligation levels are met, which will require biofuels sales of at least 3.4 per cent of total diesel and petrol sales by 2012.[Cabinet Decision, http://www.mot.govt.nz/biofuels-440-index/] It is assumed that this fuel will be used by the transport sector; tail-pipe CO2 emissions produced from this fuel are not included in the Net Position. CH4, and N2O emissions produced from this fuel are included.
Bio-diesel is assumed to supply 30 per cent of the sales obligation and from bio-ethanol 70 per cent.
2.3.11 Energy use in dairy
In Net Position 2007, the Ministry of Agriculture and Forestry’s dairy herd projections were used to project the dairy sector’s energy demand. Enhancements had been made to SADEM for Net Position 2008 whereby MAF’s milk solids production projections are used to project energy demand.
MAF’s projections take account of the recent drought conditions which have significantly reduced projected milk solids production, resulting in a decrease in the dairy sector’s energy demand over CP1.
2.3.12 Transport
The Vehicle Fleet Emissions Model (VFEM) has been used for the transport projections. The VFEM models changes to New Zealand’s on-road vehicle fleet, including the number of vehicles, kilometres travelled per vehicle and average fuel economy and adds a level of refinement to estimates of on-road transport energy demand. It also allows an improved estimate to be made of the off-road and non-motor vehicle uses of petrol and diesel. This time series is itself projected forward to give a total projection of future land transport energy demand.
Text description of the figure
The schematic illustrates an overview of the transport emissions modelling. All of the details in the figure are contained within the paragraph above.
2.3.13 Industrial processes
The Ministry of Economic Development models carbon dioxide emissions from industrial processes, which is then adjusted to account for non-carbon dioxide greenhouse gases. A multiplier of 17.6 per cent is used.
2.3.14 Energy demand sectors and modelling techniques
Table B2: Energy demand sectors and modelling techniques used
| Major demand sector | Sub-sector |
Model |
|---|---|---|
Residential demand |
Residential |
Multivariate, GDP, price, heating and cooling degree days, lagged demand |
Industrial and commercial demand
|
Forestry |
Industry-specific forecasts |
Petrochemicals and refining |
Company forecasts |
|
Metals |
Industry-specific forecasts |
|
Dairy |
MAF forecasts (as input) |
|
Other industrial |
Multivariate, GDP, lagged demand |
|
Commercial |
Multivariate, GDP, lagged demand |
|
Transport demand
|
Land |
On road: Vehicle Fleet Emissions Model MoT/MED forecast |
Off road: Multivariate |
||
Sea |
Ordinary least squares |
|
Aviation |
Ordinary least squares |
3 New policies
The impact of two new policy measures have been incorporated into the modelling for Net Position 2008.
3.1 Emissions trading scheme
In September 2007, the government announced its in-principle decision that New Zealand will use an emissions trading scheme (ETS) as its core price-based measure for reducing greenhouse gas emissions and enhancing forest carbon sinks.
The impact of introducing an emissions price on energy and industrial process activities has been incorporated into the projected emissions over CP1.
3.2 Renewables preference
The government is considering regulatory options to limit investment in baseload fossil-fuelled thermal electricity generation. The projections generated for Net Position 2008 do not include the commissioning of any new baseload thermal electricity generation capacity over CP1.
3.3 New Zealand Energy Efficiency and Conservation Strategy
The New Zealand Energy Efficiency and Conservation Strategy (NZEECS) was released in October 2007. It contains a range of measures to improve energy efficiency throughout the economy, and the impact on emissions of these measures has been incorporated into Net Position 2008.
4 Emissions projection
4.1 Total emissions by sector
Total emissions from energy and industrial processes are projected to be 163.7 Mt of carbon dioxide equivalent for the first Kyoto Commitment Period.
Table B3: Emissions by sector during the First Commitment Period (kt CO2-e)
| Year | Energy |
Transport |
Industrial Processes |
Total |
|---|---|---|---|---|
2008 |
18,759 |
14,346 |
4,330 |
37,434 |
2009 |
18,632 |
14,287 |
4,361 |
37,280 |
2010 |
18,483 |
14,170 |
4,393 |
37,046 |
2011 |
18,128 |
14,147 |
4,427 |
36,702 |
2012 |
18,374 |
14,326 |
4,461 |
37,161 |
Total CP1 |
92,377 |
71,274 |
21,972 |
185,623 |
4.2 Emissions from energy
See figure at its full size (including text description). Projected emissions from electricity generation are around 5 per cent lower than for the 2007 Net Position.
This is primarily due to:
- inclusion of an emissions price, which reduces fossil-fuelled electricity generation
- inclusion of a wider range of energy efficiency measures based on modelling completed for the “Benefit Cost Analysis of the New Zealand Energy Strategy”, October 2007
- increased emissions from methanol production as a result of Methanex announcing that it will increase production at Motonui from 2008
- increased fugitive emissions from commissioning new geothermal plants and additional flaring from oil and gas fields.
4.3 Emissions from transport
See figure at its full size (including text description). Transport sector emissions are projected to be 8.9 million tonnes CO2-e lower over CP1 than projected in 2007. The primary reasons for this are:
- Inclusion of actual fuel and emissions data for 2007 and revised data for 2006 account for more than 50 per cent of the difference between the 2007 and 2008 Net Position projections:
- The latest data on reported fuel sales (2007) shows that emissions from transport have not grown since 2004.
- The reported 2007 figure of 14.3 million tonnes CO2-e is well below the 15.1 million tonnes CO2-e projected in last year’s Net Position.
- Projecting ahead from this lower base leads to a reduction of 4.5 million tonnes CO2-e over CP1 compared with the 2007 projection.
- Higher fuel prices account for around 25 per cent of the difference:
- Our modelling now assumes that petrol prices over CP1 will be around 30 per cent higher than those assumed in 2007, resulting in about 4 per cent demand reduction in the short term and out to 8 per cent in the longer term.
- The assumed future petrol price increases are driven by the increased oil price assumption and the New Zealand exchange rate weakening as per Treasury’s assumption.
- Emissions pricing contributes a relatively small proportion of the price rises expected.[An emission price of $NZ25 per tonne of CO2-e is expected to add 5.5 c/litre (excl. GST).]
- Another 10 per cent of the difference is accounted for by:
- biofuels, where we now expect nearly all to be imported, with almost zero emissions for New Zealand – last year’s projection assumed local production
- lower GDP growth assumption.
- The remaining emissions reduction result from the model re-calibrating the long term growth trend. The flat emissions growth observed over the last three years means that the model predicts a lower future growth rate than that projected last year.
4.4 Emissions from the industrial process sector
See figure at its full size (including text description). Projected emissions from industrial processes are effectively unchanged from the 2007 projections.
4.5 Uncertainty reporting and sensitivity analysis
The following is a non-exhaustive list of conditions that could affect actual emissions over the First Commitment Period:
- New Zealand’s economic performance
- impact of government policy measures, such as the New Zealand Energy and Energy Efficiency and Conservation Strategies, Emissions Trading Scheme, Biofuels Sales Obligation
- fluctuations in international oil, coal, gas and commodity prices and the exchange rate
- negotiated outcomes between fuel suppliers and electricity generators, who may switch fuels depending upon their price and availability
- hydrological conditions, which can affect emissions from electricity generation
- rate of domestic gas discoveries and production
- degree of fuel switching in the industrial sector
- decisions by industrial consumers to locate operations overseas
- consumer response to changes of oil price (such as buying smaller size cars, diesel cars, or use of public transport)
- pandemic or natural disaster.
The ‘high’ and ‘low’ emissions scenarios provide an indication of the range of uncertainty in the projections. The table below presents the results of these two scenarios, compared to the 2008 ‘most likely’ scenario:
Table B4: High and Low emissions scenarios, and assumptions made
| Scenario | Assumptions |
Total emissions from Energy and Transport during CP1 (CO2-e) |
|---|---|---|
Low Emissions Scenario |
Low GDP growth Low population growth Carbon price $NZ50 per tones of CO2-e Low milk solids production numbers Methanex not operating after 2010 Biofuels obligation exceeded Energy efficiency gains increased Wet hydrological conditions |
152.2 Mt (–11.4 Mt compared to 2008 ‘most likely’ case) |
High Emissions Scenario |
High GDP growth High population growth Carbon price $NZ15 per tonne of CO2-e High milk solids production numbers Methanex Motonui plant running during CP1. Waitara Valley plant running between 2013 and 2020 No biofuels No energy efficiency and conservation No solar water heating programme Dry hydrological conditions |
179.2 Mt (+15.6 Mt compared to 2007 ‘most likely’ case) |
In conclusion, the projected balance of emissions from energy and transport during CP1 lies in the range between 152.2 and 179.2 with the most-likely scenario of 163.7 million tonnes of carbon dioxide equivalent. This compares with a range from 162.8 million tones to 187.7 million tones in 2007 Net Position
