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Review of New Zealand's Net Position

Executive summary

1 Introduction

2 Sector reviews

3 Impacts of New Zealand's Climate Change Policies

4 Compilation and processes used for the Net Position report 2005

5 Conclusions and recommendations

6 References

Appendix A: Additional analysis of the New Zealand SADEM Energy Model

Appendix B: Priority ranking of SADEM Energy Model improvements

3 Impacts of New Zealand's Climate Change Policies

New Zealand has developed a range of policies aimed at limiting and reducing greenhouse gas emissions across a wide range of sectors and has plans for future action. This section examines the reasonableness of the greenhouse gas emissions savings attributed to the policies and how these savings have been incorporated into projections for the net position over CP1. We note also that New Zealand Government has initiated a review of the wider climate change policy programme.

Key elements of New Zealand's climate change policy include:

• 'Projects to reduce emissions' programme
• Carbon tax
• Negotiated greenhouse agreements
• National Energy Efficiency and Conservation Strategy
• Additional measures focused at energy intensive businesses (EIB) and small and medium-sized enterprises (SMEs)
• Communities for Climate Protection programme
• New Zealand Waste strategy

The impacts of some of these policies are modelled directly by SADEM and so are included in the energy sector CO₂ projections published in May 2005, while the effects of others are calculated separately and then subtracted from the projections to get the net position over CP1. The reason for this split is that, due to its top-down approach, SADEM is unable to model many non-price based policies (see Section 2.1.1). While this is not necessarily a great problem (the UK energy model used by the DTI has similar drawbacks in certain sectors), it does mean that extra care has to be taken to ensure consistency and avoid double counting when evaluating policy impacts separately and indeed we have identified two cases where such double counting appears to be a problem.

Potentially a greater problem will occur as we approach CP1 and the impacts of these non-modelled policies start to become part of the SADEM projections. This arises as the policies start to change the historical relationship between energy demand, GDP and prices that are used by SADEM to project future emissions in a given sector. The longer the policies have been running (and the more years of historical data are affected) the greater the impact on projections. Once even some of the policy impact is included within the SADEM projection, it will no longer be appropriate to simply subtract the full saving attributable to the policy from the CO₂ projections, as this again will result in double counting. We note that NZ officials are very aware of this issue; the common challenges surrounding incorporation of policy effects into projection baselines were discussed with various NZ officials by the review team.

3.1 Policies modelled directly in energy projections

3.1.1 'Projects to reduce emissions' programme

Projects that reduce greenhouse gas emissions during 2008-2012 and are above 'business-as-usual' can apply for Kyoto emission units (carbon credits) to the PRE programme. Projects are selected through a competitive tender and successful projects are entitled to emission units on condition that the projects are completed and deliver their expected reductions in greenhouse gases. So far two tender rounds have been held (plus two projects that were used as models for the programme) and 41 projects are currently going forward with a total emissions saving of 13.2 Mt CO₂ eq (calculated as the sum of the savings from individual projects and excluding the third tender round).

Within SADEM the effect of PREs are modelled based on the assumed economics of different types of generation, with the carbon credits (valued at NZ$15/tCO₂) issued to the project acting as an effective discount on capital costs within the model (the cost of entry is lowered by up to 0.6c/kWh). The projects modelled exclude those from the third tender round and result in emissions reductions of 2.4 Mt CO₂ eq. This saving is substantially lower than the bottom-up calculation of 13.2 Mt CO₂ eq and largely can be explained by three factors:

• Many of the projects are not 'additional' according to the plant economics included in SADEM (i.e. the projects would have gone ahead even without the help of carbon credits).
• Even with the value of carbon credits, not all projects are economic and so are not built within the model (the 'success rate' is about 57 %).
• The average emissions saved per kWh from the projects as calculated by SADEM may be different from those assumed in the PRE evaluation.

Thus there is a relatively small tranche of PRE projects that the model identifies as being both economic and additional and it is only the savings from these, as calculated by SADEM, which have been attributed to PREs and included in the CO₂ projections over CP1.

Given the apparent uncertainty both in relation to the additionality of some PRE projects and the extent to which selected projects will actually go ahead, it seems reasonable that this lower savings figure from SADEM should be used in estimates for the net position. However, in future work it may be worth considering high and low savings figures about any central estimate, as has been calculated for other policies.

Finally, in our view, this is clearly an area that warrants further work and we would suggest the following areas:

• A comparison of the project economics provided to government under the PRE tender round with those currently assumed for each plant type in SADEM to help improve the realism of the data in the model;
• A comparison of the modelled savings per kWh with those assumed in the PRE evaluation to ensure these are broadly consistent;
• A consistency check between the results of SADEM in relation to the success rate for projects and the assumptions used to calculate the liabilities from PREs in the compilation of the overall net position, as currently there appears to be a discrepancy (see Section 4).

3.1.2 Carbon tax

From April 2007, a tax will be introduced on carbon dioxide emissions from fossil fuels (coal, gas, diesel, petrol, heavy fuel oil) and from industrial processes, such as cement manufacture. The carbon tax will initially be set at NZ$15 per tonne of CO₂ and will be capped at a maximum of NZ$25 per tonne of CO₂ for the period 2008 - 2012. Overall the tax will be revenue neutral, with money returned to the economy through other tax changes.

The impact of the carbon tax is modelled in SADEM by applying an appropriate uplift to the price of fuels from 2007 in all sectors except heavy industry, which are assumed to be covered by NGAs. Given the assumed price elasticities in the model for the different sectors, this results in an emissions reduction over CP1 of 10 Mt CO₂ eq (also includes the impact of NGAs). However, we note that in some sectors, such as Other Industry and Commercial the possible fuel-switching element of the tax is not modelled and so the effect may be slightly underestimated for this sector. Nevertheless, we were told that this was a similar reduction to that obtained using a different model by ABARE, and without our own detailed analysis it would be difficult to say more about the reasonableness of the result.

3.1.3 Negotiated greenhouse agreements

Firms that are greenhouse gas emissions intensive and compete internationally may be eligible for exemption (full or partial depending on the stringency of the agreement) from the carbon tax in return for making a commitment to move to "worlds best practice" in the management of greenhouse gas emissions. These contracts between the government and eligible firms are known as Negotiated Greenhouse Agreements. So far, two NGAs have been concluded and a further eight firms are currently eligible to negotiate. Applications or expressions of interest have also been received from a further 28 firms or industry groups.

Within SADEM it is assumed that for the heavy industry sector (where the carbon tax is not applied) that the effect of NGAs is incorporated in the forecasts received from these sectors. The effect of NGAs is not explicitly modelled in any other sector, but rather the simplifying assumption is made that if NGAs are concluded then their effect will be broadly similar to that of the carbon tax (which is modelled). No details were available on the size of the emissions savings from just the NGAs and so it is not possible to comment on their reasonableness. However, we are aware that work is ongoing by MED to look at energy demand within heavy industry and we would recommend that understanding the impacts of NGA's should form an important element of this work.

3.2 Policies modelled outside the energy projections

3.2.1 National Energy Efficiency and Conservation Strategy

The National Energy Efficiency and Conservation Strategy (NEECS) is targeting a 20% improvement in New Zealand's energy efficiency by 2012 and an increase of 30 PJ in renewable energy. These targets were intended to be incentivised through a broad range of policies, including NGAs and PREs. NEECS activities that deliver significant emissions reductions beyond those included in the SADEM projections are:

• Changes to the building code and new minimum energy performance standards (MEPS).
• Industrial/commercial energy audits and incentives
• Loans and grants e.g. for solar water heaters

The savings calculated from each of these policies is shown in Table 4 below. These savings were then subtracted from the energy emission projection over CP1.

Table 4. NEECS programmes included in the "most likely" scenario for the net position

We were not able to obtain the detailed calculations that were used to derive the savings from each programme and so cannot comment on their reasonableness. However, we understand from the NEECs team that the revisions to the building code have yet to be agreed and so are unlikely to be implemented in the very near future and savings from this policy will not be included in the next projection for the Fourth National Communication. Fortunately, the larger saving from this policy package comes from new MEPS and labelling and we were told that this programme is on track. Indeed, more recent estimates of the savings from these policies put the savings at 2.7 Mt CO₂ eq, more than compensating for any reduced savings from delays to the building code.

Savings from the other parts of NEECS (energy audits and loans and grants) total 0.54 Mt CO₂ eq over CP1 and we understand that these programmes are being implemented as planned. However, we are still not absolutely convinced that there is no double counting between savings attributable to the audits and those arising from the SME/EIB policy. We understand that this issue will be looked at in more detail.

In addition to the most-likely savings estimate of 3.2 Mt CO₂ eq for the overall NEECS programme, optimistic and pessimistic savings were assumed of 5.7 Mt CO₂ eq and 1 Mt CO₂ eq respectively. The pessimistic value appears to be somewhat arbitrary.

3.2.2 Additional measures focused at energy intensive businesses (EIB) and small and medium-sized enterprises (SMEs)

A package of assistance is available to encourage small and medium sized businesses and larger energy intensive businesses that are not covered by other policies to reduce greenhouse gas emissions and to mitigate the possible adverse effects on them of the carbon tax. This includes grant schemes, demonstration projects, training and education initiatives.

Savings of 1.5 Mt CO₂ eq over CP1 (300,000 t CO₂ per year) from this policy have been included as mostly likely within the net position calculation. The underlying reasoning behind this estimate is documented in a paper to the Cabinet Policy Committee [Climate change policy for small and medium size enterprises, Office of the Convenor, Ministerial Group on Climate Change.]. This paper suggests to us that the figure of 1.5 Mt CO₂ eq relates to the combined impact both of the carbon tax and the SME/EIB policy assistance package. Since the impact of the carbon tax is calculated in SADEM, there may be some double counting since the full savings of 1.5 Mt CO₂ eq are subsequently subtracted from the energy sector CO₂ projections. Officials from MfE confirmed that some double counting may have occurred, although we have no information on which to judge its extent. We would therefore recommend that this issue is looked into as part of the climate change policy review.

Once again optimistic/pessimistic savings are reported around the most likely estimate of 1.5 Mt CO₂ eq, but their basis is unclear.

3.2.3 Communities for Climate Protection programme

Communities for Climate Protection New Zealand (CCP-NZ) is a strategic framework through which councils and their communities take action to reduce greenhouse gas emissions. It is based on a model that has proved successful in other countries and helps councils to develop inventories of greenhouse gas emissions, set targets for reducing them, devise action plans and monitors progress.

The impact of CCP-NZ in CP1 of 0.3 Mt CO₂ eq was calculated based on the Australian experience of CCP assuming that the New Zealand scheme would be only 50% as effective. However, this estimate was based on the expectation that additional government money would be available to fund the programme, which to date has not been the case. We anticipate that this lack of funding may reduce the savings delivered by the programme and this is clearly an issue that should be looked at in more detail.

In addition to the best estimate of savings from CCP, optimistic and pessimistic values of 0.6 Mt CO₂ eq and 0.1 Mt CO₂ eq were also assumed. We were told that the higher savings had been a previous estimate of the savings from the programme, although no formal justification was provided of why this should be retained as an optimistic value. The pessimistic value appears even more arbitrary and in our view as lower estimate of savings could even be zero.

3.2.4 Waste policies

As described earlier in Section 2.4, significant reductions in the future emissions from the waste sector are projected to occur as a result of implementation of both the New Zealand Waste Strategy (MfE 2002) and the National Environmental Standard for Landfill Gas collection.

Since the initial assessment of the emission impacts arising from these policies, the projected emissions from solid waste disposal sites have decreased. For the 2005 Net Position report (MfE 2005), the amount of projected reduction has been reduced proportionally for both policies. Implementation of the Waste Strategy is now forecast to deliver 2.8 Mt CO₂ eq over the first commitment period (from an original estimated delivery of 5 Mt CO₂ eq), whereas the reduction forecast to be delivered as a result of the National Environmental Standard for Landfill Gas collection is now 0.9 Mt CO₂ eq for the same period (compared with an initial reduction estimate of 1.2 Mt CO₂ eq).

Scaling back the expected emission reductions to reflect the decreased waste emissions in the national inventory is reasonable. However, we note that according to the analysis presented for this sector in the Net Position report, average annual emissions over the first commitment period have a most likely value of 1.1 Mt CO₂ eq, which equates to a further reduction of almost 40% from the 2003 emission level.

We have concerns over whether such a large reduction is feasible in the time remaining until the middle of the first commitment period. Reasons for this concern are two-fold: there have already been significant reductions made in the sector since 1990 as a result of improved waste management practices and the scope for the future reductions anticipated does not appear to be documented or quantified, and secondly, inspection of the trend in emissions from the waste sector over recent years (especially over the last four years) shows a flat level of emissions with no downward trend apparent (although admittedly there is only a single years inventory data available (2003) since the Waste Strategy was introduced and so impacts arising from this policy may not yet be apparent).

The magnitude of this projected decrease arises directly from the initial assumptions made concerning the likely impact of both policies i.e. for the Waste Strategy the original assessment was that this policy would deliver savings of 5 Mt CO₂ eq based on projected emissions of 12.5 Mt CO₂ eq. We have been unable to verify the basis on which this initial assessment was made i.e. there appears to be no documentation that describes how the 5 Mt CO₂ eq saving was derived. The value is quoted, but not referenced, in the Waste Strategy (MfE 2002). In this instance, we have therefore been unable to verify the reasonableness of the savings quoted.

Combined, the Waste Strategy and the National Environmental Standard for Landfill Gas collection are projected to deliver 3.5 Mt CO₂ eq in the Net Position Report. After PREs, these policies contribute the largest emission savings of all the quoted climate change policies. Given the significance of the reduction presently ascribed to these policies, we recommend that the basis of the savings forecast from both policies are revisited, and that (as for any climate change policy) the savings ascribed to policy impacts be clearly and transparently documented.

The 'most likely' scenario associated with the forecast emission reduction occurring from the Waste Strategy was that 90% of the scaled emission saving occurs; the optimistic scenario is that 100% of the scaled emission saving occurs, with the pessimistic value assuming 75% of the reduction. The percentage reduction values selected for the most-likely and pessimistic scenarios are also arbitrary, with no justification available as to why these values were selected. Given the concerns raised above concerning the validity of the original forecast reduction, we would consider that the pessimistic value (and without knowing the basis of the forecast saving, probably also the 'most-likely' value) to be most likely on the high side i.e. a more reasonable assumption may be that the savings arising from implementation of the Waste Strategy will be lower than those quoted.

We note that with respect to the National Environmental Standard for Landfill Gas collection, the presence of a national standard has been taken to mean that no scenario analysis is required.

3.3 Treatment of uncertainty

For those policies modelled directly within SADEM (PREs, carbon tax and NGAs) no indication of uncertainty is given, although three different scenarios have been modelled that result in different levels of overall CO₂ emissions from the energy sector in CP1 (see section 2.1.8). In future work we would recommend explicitly considering and presenting the likely uncertainty surrounding the savings from these policies.

For other policies, in which savings have been calculated offline, an optimistic and pessimistic value has often been presented along with the central estimate. However, it is frequently not clear how this range has been calculated and what elements of uncertainty have been considered. It is likely that much it is related to unpredictability (i.e. an inherent uncertainty about people's response to policy such as a grant or a loan), but there may be cases where structural and value uncertainty (Section 2.1.8) could also contribute (and which further analysis of the problem could reduce).