The draft removal regulations have been developed to provide for activities covered by Schedule 4, Part 2, Subpart 1 of the Climate Change Response Act 2002 (the Act). This part of the Act relates to producing a product that embeds a substance which would otherwise result in emissions.
The purpose of providing for removals embedded in a product is to compensate a person for a pass-through cost imposed by the NZ ETS, to the extent that their activity does not result in emissions for which New Zealand pays a cost. Upstream points of obligation in the NZ ETS increase the price of fossil fuels in the stationary energy and liquid fossil fuels sectors. This is because fuel is assumed to be combusted, resulting in emissions. However, emissions do not result from fossil fuel carbon which is instead embedded in a product.
The criteria for eligibility to register as a participant for removal activities are set out in Schedule 4, Part 2, Subpart 1 of the Act. Significantly, removals embedded in a product must be recognised in New Zealand’s Greenhouse Gas Inventory. Currently only two activities satisfy these criteria – methanol production and steel production. Other activities which embed emissions, such as urea production and CO2 used in glasshouses, are not eligible activities because these activities are not recognised in the 1996 IPCC Guidelines for National Greenhouse Gas Inventories with which New Zealand’s Greenhouse Gas Inventory must comply.5
The draft removal regulations prescribe a threshold of 5000 tCO2-e for eligibility to register as a participant. This threshold reflects the costs associated with providing for a removal activity. These include costs from determining sufficient data collection requirements and calculation methods, promulgating regulations, data collection, filing emissions returns for removals, risk management and compliance, and transferring emission units for removals. Removal activities falling below this threshold would result in only a minor economic benefit from transferring a small number of emission units from the Crown to a person. Additionally, the proposed threshold is consistent with the threshold set in the Act for mandatory registration as a participant for mining coal.
Currently, the quantity of removals from steel production is significantly less than the proposed threshold. Therefore, the draft regulations do not prescribe data collection requirements and calculation methods for removals from steel production, and the SEIP regulations do not allow for the deduction of carbon embedded in steel.
The quantity of removals from methanol production does cross this threshold and a process for data collection and removals calculation for this activity is outlined in the draft removals regulations. It is possible that further activities will satisfy the eligibility criteria, including the threshold. If this occurs, the regulations will be amended to provide data collection requirements and calculation methods as appropriate.