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Projected Balance of Emissions Units During the First Commitment Period of the Kyoto Protocol

1 Executive Summary

2 Introduction

3 Net Position Compliance Equation

4 Projected Emissions over the First Commitment Period of the Kyoto Protocol

5 Sectoral Emissions

6 References

Annex A: Agriculture Emissions Projections provided by Ministry of Agriculture and Forestry

Annex B: Energy and Industrial Processes Emissions Projections provided by Ministry of Economic Development

Annex C: Land Use, Land-use Change and Forestry Sector provided by the Ministry of Agriculture and Forestry

Annex D: Waste Emissions Projections provided by Ministry for the Environment

Annex B: Energy and Industrial Processes Emissions Projections provided by Ministry of Economic Development

1 Introduction

1.1 Scope coverage of emissions

This report covers emissions from energy (including transport) and industrial processes. Total greenhouse gas emissions from the energy sector are calculated by the Ministry of Economic Development. For industrial processes carbon dioxide estimates by the Ministry of Economic Development are supplemented by Ministry for the Environment estimates of other associated greenhouse gas emissions.

1.2 Recent trends

The energy sector (including transport) contributes around 40 per cent of New Zealand’s total greenhouse gas emissions.

On average, around two-thirds of annual electricity needs are met by hydro-electric generation. The balance is provided by geothermal generation, thermal generation using natural gas and coal, and other renewable sources such as wind and co-generation using wood.

The transport sector contributes a large portion of all emissions from the energy 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 the two major liquid fuels of petrol and diesel as well as increased use of aviation fuels.⁶

Industrial processes contribute around six per cent of New Zealand’s total greenhouse gas emissions. There are six major industrial processes that are represented in this sector:

• the reduction of ironsand in steel production

• the oxidisation of anodes in aluminium production

• the production of hydrogen

• the calcination of limestone of use in cement production

• the calcination of limestone for lime

• the production of ammonia and urea.

The industrial processes sector is dominated by emissions from the metal industry.

1.3 Key drivers of emissions

In general, changes in energy emissions in New Zealand tend to be closely 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 from both coal and gas in a ‘dry’ hydro year. The reverse occurs in a ‘wet’ hydro year. This is a different trend to the steady increase in emissions from coal and gas fuelled electricity generation found in many other countries.

Fluctuations in the price of oil products have only a limited impact on changes in the level of greenhouse gas emissions in New Zealand. While there is a historic relationship between transport fuel prices and fuel consumption in New Zealand, consumption volumes change relatively little as a result of a change in fuel price. For example, recent government energy forecasts in New Zealand have used long run price elasticities of demand of 0.19 for petrol and 0.13 for diesel.⁷

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). 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.

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.

Modelling carbon dioxide (CO₂) emissions from combustion is fairly straightforward, since the output of CO₂ depends only on the amount of each type of fuel being burned. Emissions of other greenhouse gases and of CO₂ from non-combustion activities are more complicated to estimate. They depend both on the amount of fuel and on the way the fuel is used.⁸

2.2 Improvements to modelling since net position 2006

Since the net position 2006 report, a number of enhancements have been made:

• actual data for 2005 and where possible actual data for 2006 has been incorporated

• the ‘Other Industrial and Commercial’ model has been disaggregated into two separate sectoral models for ‘Commercial’ and ‘Other Industrial’

• demand elasticities have been incorporated into the new ‘Commercial’ and ‘Other Industrial’ models

• enhancements have been made to modelling on-road transport, utilising the Ministry of Transport’s Vehicle Fleet Emissions Model⁹

• enhancements have been made to the fugitive emissions model.

2.3 Specific assumptions

This section provides a brief overview of the key assumptions used. Where possible, an effort has been made to align modelling assumptions across government, and with the assumptions underpinning the New Zealand Energy Strategy (NZES). Macroeconomic inputs are in line with Treasury projections, dairy herd projections are supplied by Ministry of Agriculture and Forestry and price assumptions for fuel commodities are consistent with those used in NZES.

2.3.1 Key assumptions for the net position 2007 most-likely scenario

Table B1: Key assumptions for the net position 2007 most-likely scenario

2.3.2 Coal

Coal prices are based on import parity prices around $4.00 per GJ.

2.3.3 Gas

Gas is assumed to be readily available in the CP1 period.

Gas prices are determined within SADEM, and increase in response to depleting domestic reserves.

2.3.4 Methanex

Methanex is the gas-to-methanol operation in Taranaki. Based on recent experience Methanex’s smaller Waitara Valley plant is assumed to continue operating until 2009.

The continuing operation of the Methanex plant is a specific change from net position 2006 assumptions.

2.3.5 Energy efficiency measures

Energy efficiency policies that have been fully implemented include energy efficiency improvements driven by the existing National Energy Efficiency and Conservation Strategy (NEECS), local government initiatives, and the energy-intensive business programme. As in the net position 2006 report, and based on the AEA Technology 2005 review, energy efficiency gains are explicitly represented within the SADEM energy projection.

Residential energy efficiency improvements were estimated to provide 1.70 PJ of energy savings per year and other industrial and commercial sectors were estimated to achieve 2.34 PJ of energy savings per year during the first commitment period.

2.3.6 Fossil fuels levy

A fossil fuels levy is not modelled. This is consistent with net position 2006 reporting.

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. The majority of the eligible projects are in the electricity generation sector.

In consultation with the Electricity Commission, only plants which are sufficiently advanced¹⁰ are included – in that they are likely to be installed and in operation over the commitment period – regardless of whether they qualify for PREs or not.

2.3.8 Heavy industries

The heavy industries section is under continuing review¹¹ and sector specific discussions take place at various times. Assumptions of specific relevance are:

• steel – assume constant production

• aluminium – assume constant production

• petrochemical – limited methanol production will continue into the First Commitment Period (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 have been incorporated from the heavy industry report¹²

• Dairy – the dairy model takes in livestock projections (provided by the Ministry of Agriculture and Forestry) and projects the energy required to process the resulting milk solids from the number of given livestock. This is discussed further in section 2.3.12.

2.3.9 Other transformation

Refinery expansion from 2009 is included. This is consistent with net position 2006.

2.3.10 Solar water heating

An approximate saving of 2,100 kWh¹³ per unit per year is assumed for net position 2007. The number of installations per year over the first commitment period as a result of the government’s programme is estimated as follows.¹⁴

Table B2: Number of installations per year over first commitment period

As discussed in section 3.1.2, the government’s programme is currently 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.

2.3.11 Biofuels sales obligation

In deriving the emissions expected from land transport we assume that the government’s proposed biofuel sales obligation levels are met.¹⁵ This obligation will require that biofuel sales achieve yearly mandatory levels from 2008, reaching at least 3.4 per cent of total diesel and petrol sales by 2012. For modelling purposes it is assumed that this fuel will be used by the transport sector and that the tail-pipe CO₂ emissions produced from this fuel will not be counted for the net position. However, CH4, and N2O emissions produced from this fuel will be counted for the net position.

Further assumptions include:

• bio-diesel is assumed to supply 70 per cent of the sales obligation as it is expected that this fuel will be the most economic over this timeframe¹⁶

• all biofuel will be produced domestically

• domestic biofuel production will produce additional energy demand and emissions which are accounted for in the net position. These emissions are modelled as being equivalent (on a fossil fuel basis) to 54 per cent additional for bio-diesel and 11 per cent additional for bio-ethanol.¹⁷

2.3.12 Dairy herd numbers

Dairy herd numbers are based on the Ministry of Agriculture and Forestry’s medium growth scenario projections.¹⁸ SADEM uses the Ministry of Agriculture and Forestry’s dairy projections as an input into calculating the growth of the productive dairy herd. the Ministry of Agriculture and Forestry’s dairy projections have been revised since 2006, increasing energy demand for the dairy sector during CP1. Overall, the increase in projected figures has resulted in a 19.35 per cent increase in energy demand for the dairy sector during CP1, from 153 PJ to 183 PJ.

2.3.13 Transport model

In the net position 2006 report, projections of energy use in land transport were generated by SADEM. SADEM contains separate models for energy and fuel use in land (ie, motor vehicle and rail), sea and air transport. All of these models operate in a ‘top-down’ manner, and make projections of future demand by fitting relationships between historical fuel use, GDP, and fuel price.

In net position 2007, the Vehicle Fleet Emissions Model (VFEM) has been used to enhance the SADEM projections. The VFEM is capable of modelling changes to New Zealand’s on-road vehicle fleet, including the number of vehicles, kilometres travelled per vehicle and average fuel economy. This more detailed modelling adds a level of refinement to estimates of on-road transport energy demand. It also allows an improved estimate to be made of the fuel used by 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.

2.3.14 Commercial and other industrial models

In 2007, SADEM includes separate models for the commercial and other industrial sectors.

Table B3: Energy demand sectors and modelling techniques

3 Policies

3.1 New policies in place

Since the net position 2006 report, the government has introduced two new policy measures that are likely to have an impact mainly on emissions from the transport and stationary energy sectors.

3.1.1 Biofuels sales obligations

During February 2007, Cabinet agreed that an obligation would be placed on oil companies to supply biofuels equal to a proportion of their sales of petrol and diesel. Introduced progressively from April 2008, the sales obligation will increase to 3.4 per cent of petrol and diesel sold by oil companies by 2012. The obligation is on a calendar year basis, and for the first year applies only to the nine months from 1 April to 31 December. For the first two years, companies will be allowed to carry their obliged sales forward into the following year. The carrying forward of obliged sales may incur a 5 per cent penalty at the discretion of the Minister of Energy. Companies not meeting their obligations will face financial penalties.¹⁹

The volume of biofuel sales required is dependent on a decision by the Environmental Risk Management Authority (ERMA) on the requirement for double containment storage tanks for ethanol/petrol blends.²⁰ On 16 May 2007, ERMA announced that it had relaxed the rules for storing petrol ethanol blends of up to 10 per cent ethanol by removing the requirement that the fuel must always be stored in double-skinned underground tanks.²¹

3.1.2 Solar water heating programme

In November 2006, the government agreed to a five-and-a-half-year solar water heating programme. The programme includes investment of $15.5 million for the first three and a half years in addition to existing funding already provided through the Energy Efficiency and Conservation Authority. Funding levels for the final two years will be decided after a review in 2009.

The proposed programme will increase demand through information, demonstration and promotional programmes, and direct financial incentives. This will be supported by measures to strengthen the industry’s ability to respond to increased demand by delivering quality, cost-effective installations. The programme includes:

• providing independent information to help consumers decide whether solar is suitable for them, and what kind of system they need

• motivating demand through promotion

• improving quality and cost effectiveness by working with industry including setting standards and encouraging training opportunities

• providing financial assistance to home owners

• putting more solar water heating systems into government buildings

• encouraging new ideas through an Innovation Fund.

This overview of the programme refers only to the first three and a half years, although it is likely that many of these activities would be continued into the final two years.²²

3.2 Impact of policies on net position

Only policies on which Cabinet has made a substantive decision prior to 28 February 2007 have been considered.

Table B4: Expected impact of government policies

4 Emissions projection

4.1 Total emissions by sector, net position 2007

Total emissions from the energy and transport sectors are projected to be 172.9 Mt of CO₂ equivalent for the first Kyoto Commitment Period.

Table B5: Emissions (kt CO₂ equivalent)

For the industrial processes, the Ministry of Economic Development models carbon dioxide emissions from industrial processes only. Total CO₂ emissions from industrial processes are provided to the Ministry for the Environment as an input to the modelling of overall greenhouse gas emissions from industrial processes. The Ministry for the Environment increases carbon dioxide emissions by 19 per cent to adjust for non-carbon dioxide greenhouse gases. CO₂-e emissions from the industrial processes are included in the table above.

Table B6: Carbon dioxide emissions from industrial processes

4.2 Total emissions for energy and transport sectors (excluding industrial processes)

Projected emissions from the energy and transport sectors (excluding industrial processes) are 2.8 Mt of CO₂ equivalent (or 1.6 per cent) higher than in the net position 2006 most likely scenario.

Table B7: Emissions (kt CO₂ equivalent)

The increase in total greenhouse gas emissions from energy and transport is the result of a number of changes since net position 2006:

• in net position 2007, Methanex is assumed to operate until 2009, which has increased emissions from the petrochemicals sub-sector. In net position 2006, Methanex was assumed to cease production prior to the start of CP1

• revised Ministry of Agriculture and Forestry dairy herd projections used in modelling are higher than those used in net position 2006, resulting in higher emissions from the dairy sector

• enhancements to the ‘Other Industrial’ and ‘Commercial’ models since net position 2006 have resulted in higher emissions from these sectors in net position 2007

• the use of the Vehicle Fleet Emissions Model (VFEM) to enhance on-road transport emissions has increased emissions from the transport sector in net position 2007. VFEM was not used in modelling work for net position 2006.

A number of factors have contributed to lower emissions from some sectors in net position 2007, partially offsetting the increase:

• in the electricity sector there is increased certainty on commissioning of new renewables, increased confidence in the availability of gas through CP1, and E3P (the new gas-fuelled combined cycle plant at Huntly) is in the final stages of commissioning. These factors, combined with reducing flexibility in supply of gas result in more gas-fired generation relative to coal-fired generation

• the inclusion of recent actual data for air and sea transport has slightly decreased emissions from these sectors

• enhancements to the fugitive emissions model have led to decreased emissions from this sector.

Emissions from energy and transport (excluding industrial processes)

Net position 2006 (most-likely case) versus net position 2007 (most-likely case), 2008–12

The figure below shows the result of net position 2007 projections compared to the net position 2006 most likely scenario. The graph also includes the low and high scenarios for net position 2007 discussed in section 4.4.

Note that actual emissions in 2005 were higher than an expected average due to relatively dry hydrological conditions and consequently higher thermal electricity generation.

4.3 Uncertainty reporting and sensitivity analysis

The following is a non-exhaustive list of conditions that could affect actual outcomes for the First Commitment Period (CP1) of the Kyoto Protocol to the United Nations Framework Convention on Climate Change:

• overall New Zealand economy performance (rapid growth or recession)

• impact of government policy measures, such as the New Zealand Energy Strategy

• success of various energy efficiency programmes

• fluctuations in international oil, coal and gas prices

• fluctuations in international commodity prices

• negotiated outcomes between fuel suppliers and electricity generators, who may switch fuels depending upon their price and availability

• emissions from electricity generation may fluctuate from year to year due to changing hydrological conditions

• decisions to build additional renewable plant before 2012

• constraints on gas supplies

• fuel mix for industrial sector expansions.

• decisions by industrial consumers to locate operations overseas

• impacts on competitiveness of New Zealand industry due to exchange rate fluctuations (especially dairy and forestry)

• uncertain consumer response to changes of oil price (such as buying smaller size cars, diesel cars, or use of public transport)

• physical disasters impacting energy facilities or major energy consumers, such as:

  • major breakdown of electricity generator
  • major breakdown of HVDC link

• pandemic or natural disaster

• the continued operation of the Methanex methanol plant during CP1.

In 2007, ‘high’ and ‘low’ emissions scenarios were run to provide an indication of the range of uncertainty in the projections. The table below presents the results of these two scenarios, compared to the 2007 ‘most likely’ scenario.

Table B8: ‘High’ and ‘low’ emissions scenarios compared to 2007 ‘most likely’ scenario

These results are also shown previously in Figure B1. This compares with a range from 156.2 Mt to 187.2 Mt in net position 2006. The overall range in net position 2007 projections has diminished and the projected upper bound has remained about the same.

In conclusion, the projected balance of emissions from energy and transport during the first commitment period (2008–2012) lies in the range between 162.8 and 187.7 with the most-likely scenario of 172.9 million tonnes of carbon dioxide equivalent.

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