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6 Design Features for Individual Sectors

This chapter focuses on the more detailed design features for each major sector to enter the NZ ETS, covering:

  • forestry
  • liquid fossil fuels (primarily transport)
  • stationary energy (direct emissions from coal, natural gas and geothermal energy)
  • industrial process (non-energy) emissions
  • industrial production (including both direct/indirect emissions from stationary energy and industrial process emissions)
  • agriculture
  • waste.

As noted in the previous chapter, the government has taken some in-principle decisions on sectoral design issues, particularly for those sectors that will be earlier entrants into the NZ ETS, and has identified one or more preferred options as a starting point for discussion with stakeholders and Māori.

6.1 Forestry

6.1.1 Context

The forestry sector makes a major contribution to New Zealand’s economy and environment. It is also critical to New Zealand’s response to the challenge of climate change. New Zealand exports wood products to more than 30 countries. Total export earnings for the year to June 2006 were $3.2 billion, or 10.4 per cent of New Zealand’s merchandise exports. The industry contributes about 3 per cent of New Zealand’s GDP and directly employs around 22,500 people. It also has substantial potential for export growth: up to a third more wood than is available now will be ready for harvest over the next few years.

Forestry delivers many environmental benefits, and these can help us both build a more sustainable economy and adapt to climate change. Forests can reduce flood peaks during major storms, and can reduce rates of erosion by up to 90 per cent on hill country land under pasture. In terms of water quality, forests can reduce harmful micro-organisms, sediment, nutrient run-off and high temperatures. Basically, forests can be used to help land managers adapt to climate change.

Forests and forestry also have a major role to play in reducing greenhouse gas emissions. As trees grow, they absorb carbon dioxide (CO2) from the atmosphere and store it as wood. This process is recognised under the Kyoto Protocol, which allows new forests planted in or after 1990 (called “post-1989” forests in this document) to earn forest sink credits. Over the first commitment period of the Protocol, New Zealand is projected to generate around 79 million tonnes of forest sink credits54 from these post-1989 forests. These credits can be used to offset greenhouse gas emissions.

In turn, when trees are removed from a forest through events such as harvesting or fire, the carbon they once stored is released back into the atmosphere.55 Due to an uneven age-class distribution, these post-1989 forests are forecast to become net emitters of carbon from around 202056 to 2033, as growing numbers are harvested and then replanted or deforested.

Globally, about 20 per cent of CO2 equivalent emissions into the atmosphere come from deforestation – the removal of trees from an area of land – and the introduction of a new land use, such as agriculture. In New Zealand, deforestation of exotic forests has increased rapidly in recent years, and this is expected to continue unless measures are introduced to actively manage the process. A deforestation intentions survey undertaken in 2006 indicated that New Zealand exotic forest owners currently intend to deforest about 50,000 hectares from 2008 to 2012. If this area is deforested, it is estimated that the deforestation emissions could total 41 million tonnes57 of CO2 over this time, contributing significantly to New Zealand’s projected net position deficit during the first Kyoto commitment period. Over the longer term, the Ministry of Agriculture and Forestry estimates that up to 280,000 hectares of pre-1990 exotic forest is at risk of deforestation58 if effective controls are not put in place. These estimates are subject to considerable uncertainty.

Deforestation of New Zealand’s pre-1990 indigenous forest has been more limited in recent years. Over the past five years, it is estimated that around 1,100 hectares of this land, on average, has been deforested each year. However, over the longer term, much higher deforestation rates are possible if the economic drivers for clearance of indigenous forest change.

The concern over deforestation emissions should not obscure the importance of the forestry sector. Not only is it an important export industry for New Zealand, it also produces renewable “climate change-friendly” wood products that can displace more greenhouse gas and energy-intensive alternatives such as concrete, steel and aluminium, particularly in countries that use fossil fuels to generate electricity.

6.1.2 Treatment of indigenous forests

New Zealand has large areas of pre-1990 indigenous forest – over 7.5 million hectares. The bulk of that land – well in excess 5 million hectares – is owned by the Crown, and mostly held in the conservation estate. However, officials’ best estimate is that a further 2.4 million hectares are held in private hands – twice as much forest land as the 1.2 million hectare exotic forest estate.

Deforestation of these areas has been limited over the past five years – estimated to be 1,100 hectares, or 0.04 per cent of the overall estate, in total each year. These relatively low levels of deforestation are expected to continue in the near term; however, if it were to be excluded from the ETS, and no other additional controls were put in place that rate of deforestation may increase. Officials estimate that around 3.1 Mt CO2 emissions from deforestation of indigenous forest might occur over the period 2008–2012. At an emissions price of $15 per tonne of CO2, this would lead to a cost on the Crown of $46.5 million.

Over the longer term, much higher deforestation rates are possible if the economic drivers for clearance of indigenous forest change. For that reason, the government has expressed an interest in engaging with stakeholders and Māori on whether to include indigenous forest, both Crown-owned and privately-owned, in the ETS.

6.1.3 Sectoral design features

This paper summarises the key ETS design features for the forestry sector. Further detail is provided in the companion document Forestry in a New Zealand Emissions Trading Scheme.59

Table 6.1: Summary of design features for the forestry sector

Design feature

In-principle decision

Source of emissions/ removals

Pre-1990 forest (land that was forested on 31 December 1989 and remains forested on 1 January 2008).

Post-1989 forest that has voluntarily been entered into the ETS.

Greenhouse gas

CO2

Scope of activities

Deforestation: emissions from the conversion of pre-1990 forest land to a non-forestry use (this does not include forest harvesting, provided the harvested land is replanted or allowed to regenerate).

Net carbon stock changes: emissions or removals arising from net changes in the carbon stocks of in-scheme post-1989 forest land.

Exemptions: those with total holdings of less than 50 hectares of pre-1990 forest land. Provisions around the deforestation of less than 2 hectares in a commitment period and deforestation for weed control purposes will also be included.

Commencement of unit obligation, monitoring and reporting

1 January 2008

End of initial compliance period

31 December 2009

Participants with unit obligations

Landowner in most instances

Free allocation

Free allocation to landowners of pre-1990 forest

Level of free allocation

From 2008 to 2012 free allocation such that the Crown assumes a total liability (taking the cost of the provision of the de minimus threshold into account) for deforestation emissions as follows:

  • 21 Mt CO2 from exotic forest

  • 0.8 Mt CO2 from weed control.

From 2013, additional free allocation of 34 Mt CO2 for exotic forest.

6.1.3.1 Scope of activities

Under the Kyoto Protocol, parties’ obligations are specified with reference to 1990 emission levels. For example, New Zealand’s obligation is to reduce its overall emissions to 1990 levels or meet the cost of any excess. For forestry, this reference to 1990 emission levels leads to differences in the treatment of forests established before and after 1 January 1990. The government has chosen to reflect these international rules in its design of the NZ ETS.

Pre-1990 forests: deforestation

The government has decided in principle that owners of pre-1990 forest land will only face obligations under the ETS if they “deforest” – remove the trees and introduce a new land use. Those owners will not face any emission obligations if they temporarily remove the tree cover, such as when the trees are harvested and then replanted, so long as the forest is ultimately re-established.

All deforestation of pre-1990 exotic forest will be covered by the ETS unless exempted under the scheme rules. An in-principle decision has been taken to provide a de minimus threshold for owners with total pre-1990 forest holdings of less than 50 hectares. All owners will also be granted a 2-hectare deforestation allowance in the first commitment period and each subsequent phase of the ETS.

Provision will be made for deforestation entailed in forest weed (eg, wilding pines) control programmes (over and above the 21 Mt CO2), and consideration will be given to whether further provision is necessary to allow for papakainga (housing) on Māori forest land subject to the Te Ture Whenua Act 1993. Further to this, consideration will be given to whether to include indigenous forests in the ETS or not.

The detail of the approach that the government has decided in principle to take on key operational issues - such as determining when deforestation has occurred, how emissions will be calculated, and scheme exemptions - is covered in the companion document Forestry in a New Zealand Emissions Trading Scheme.

Post-1989 forests: net carbon stock changes

The government has decided in principle to give owners of all post-1989 forest land the choice to enter the ETS and receive all of the sink credits and future liabilities associated with this land. Owners who enter the scheme will be obliged to take responsibility for the ongoing net changes in the carbon stocks of their forests. They will receive NZUs if those stocks increase as a result of tree growth, and will be required to surrender NZUs if those stocks decrease as a result of activities or events such as harvesting or fire. The government will retain responsibility for changes in the carbon stocks of post-1989 forests that have not entered the ETS, keeping any credits earned and remaining responsible for any future liabilities.

The government’s in-principle decision to allow forests planted between 1990 and 2006 to enter the ETS represents a change from previous announcements that the government was likely to retain all relevant forest sink credits and future liabilities. The government’s previous position was developed in the context of it retaining responsibility for a significant level of emissions elsewhere in the economy. There is a stronger rationale for devolving credits and liabilities to the forestry sector in the context of the government devolving liabilities more widely through an ETS. Allowing these forests to enter the ETS will also provide better incentives for their owners to maximise carbon sequestration, such as by extending rotation lengths.

6.1.3.2 Date of entry into the NZ ETS

There will be significant benefits to both the Crown and the New Zealand economy if effective deforestation controls are in place from early 2008. Given this, and the level of consultation that has already occurred with the forestry sector, the government has decided in principle to introduce forestry into the ETS from 1 January 2008 (both pre-1990 and post-1989 forests).

Forest owners have a degree of flexibility over when they cut down their trees so can bring forward deforestation if there are incentives to do so. Officials estimate that for every 12 months that deforestation remains outside the ETS after 1 January 2008, increased emissions of 12 to 24 Mt CO2-e are possible, resulting in increased costs to the Crown of $180 to $360 million, assuming an emissions price of $15/t CO2-e.60 At the same time, the reduction of deforestation is likely to be one of the lower-cost abatement options in the domestic economy in the first commitment period. Analysis suggests that deforestation levels would reduce substantially if the sector were to face the full cost of the emissions involved. Strong economic signals from the start of 2008 are important to ensure that these costs do not materialise - for either the New Zealand economy or the Crown.

An intention to introduce deforestation controls has been clearly signalled to the forestry industry since October 2002, and was spelled out specifically in the consultation document Sustainable Land Management and Climate Change (MAF), which was released in December 2006. Further, a subsequent and detailed discussion document on specific design options for an emissions trading regime for deforestation was released in February 2007 as part of a comprehensive consultation process. Finally, the forestry sector has clearly expected such measures to take effect from 1 January 2008, as evidenced by many stakeholders having moved to bring forward their deforestation activities in advance of this date.

Although it is intended to bring the forestry sector into the ETS from 1 January 2008, certain provisions of the legislation covering forestry will not be passed by that date. Participants in the forestry sector will be required to monitor their activities and report their emissions from 1 January 2008, although they would not have to surrender emission units until the end of 2009.

The government will develop and publish practical guidelines on what constitutes a forest, and deforestation, so that the forestry sector is aware of its obligations from 1 January 2008. It will also publish guidelines on appropriate accounting and tax treatment for firms that have balance dates in 2008 prior to finalisation of the legislation.

6.1.3.3 Participants with unit obligations

In most instances, the unit obligations will be placed on the owners of the land under forest. However, where the landowner does not own the forest, due to the existence of some form of agreement such as a forestry right or lease, the legislation will allow for the unit obligation to be transferred to the forest owner in some instances. Details on when and how the unit obligation can be transferred in this way are discussed in the companion document Forestry in a New Zealand Emissions Trading Scheme.

6.1.3.4 Allocation

A one-off allocation of NZUs will be provided to the owners of pre-1990 exotic forest land to offset some of the economic impact of deforestation liabilities they will face under the ETS. As emphasised by the forestry sector during recent consultation, requiring owners to take account of the climate change effects of deforestation will reduce their opportunities to profitably introduce new land uses. Even where forestry is currently the most profitable land use, the scheme is likely to have some impact on land value. For some - particularly larger - landowners, deforestation liabilities will be balanced by the opportunity to gain credits from post-1989 forest. Most, however, will face some economic loss, particularly those who lose the ability to profitably convert from forestry to another land use.

Pre-1990 exotic forests

The government has decided in principle to meet the cost of 21 million tonnes of deforestation emissions from exotic forest from 2008 to 2012, consistent with previous commitments. It will provide this assistance through the free allocation of units to the owners of pre-1990 exotic forest land, and through the introduction of a de minimus threshold (as discussed above).

With regard to subsequent commitment periods, the government has decided in principle to limit the total future level of free allocation to a pre-agreed level. This reflects the fact that there is a finite number of hectares of land under exotic pre-1990 forest (approximately 1.2 million hectares). The government’s in-principle decision is to provide an overall level of free allocation after 2012 of an additional 34 million tonnes. This would take the total level of assistance for the sector to the equivalent of 55 million tonnes of emissions, equivalent to slightly over 5 per cent of the total pre-1990 forest estate. This is higher than the historical average deforestation rate.

Pre-1990 indigenous forests

The government wishes to explore the possibility of including deforestation emissions from indigenous forest in the ETS. Although this topic was included as a possibility in the discussion document Sustainable Land Management and Climate Change (2006), there was very little feedback on this point.

It is likely that, if indigenous forests were to be included in the ETS, there would be provision of a free allocation of units and the introduction of the relevant exemptions, including the de minimus threshold. Further information on this possibility is included in the companion document Forestry in a New Zealand Emissions Trading Scheme. The issues covered in that paper include how the government could allocate NZUs between owners of forest land and when it intends to allocate units.

6.1.4 Complementary measures

Two existing initiatives already create financial incentives to increase afforestation and avoid deforestation:

  • the Permanent Forest Sink Initiative
  • the East Coast Forestry Project.

As part of its plan of action on sustainable land management and climate change, the government is also considering introducing an Afforestation Grant Scheme to provide an alternative financial afforestation incentive for parties that choose not to join the ETS.

6.1.4.1 Permanent Forest Sink Initiative (PFSI)

The government has agreed in principle to operate the PFSI alongside the ETS as a complementary measure. The PFSI scheme targets owners of land that will be kept under forest cover indefinitely, rather than clear felled at the end of each rotation. It also devolves Kyoto units (assigned amount units) as opposed to NZUs. As such, the PFSI acts as a useful complement to the ETS. Any owners who have entered the PFSI will be able to move to the ETS, if they choose, within 18 months of the ETS legislation being passed. Further discussion of possible refinements to the PFSI is provided in the companion document Forestry in a New Zealand Emissions Trading Scheme.

6.1.4.2 East Coast Forestry Project

Under the existing East Coast Forestry Project, landholders in the region are provided with a cash grant for soil conservation. Participants in the scheme are also eligible to participate in the PFSI. Discussion of the relationship between the East Coast Forestry Project and the ETS is provided in the companion document Forestry in a New Zealand Emissions Trading Scheme. That discussion addresses the question of whether an East Coast Forestry Project grantee should also be allowed to participate in the less restrictive ETS, and, if so, whether the East Coast Forestry Project grant should be reduced to recognise the financial value of the ETS.

6.1.4.3 Plan of action on sustainable land management and climate change

The government is working in partnership with the agriculture and forestry sectors, Māori and local government to develop a plan of action on sustainable land management and climate change. This is critical to secure the changes to land-use practices needed for New Zealand to successfully adapt to changes in climate, reduce agricultural greenhouse gas emissions and secure new forest planting. This plan of action will include three “pillars”:

  • adapting to a changing climate
  • reducing emissions and enhancing sinks
  • capitalising on business opportunities.

These three pillars will be supported by research and innovation, technology transfer and communication. Further information on the plan of action is provided in section 6.6.3.

As part of the plan of action, the government is considering introducing a new Afforestation Grant Scheme (AGS) to provide an alternative financial afforestation incentive for parties that choose not to join the ETS. AGS grants would only be available for new forests planted from 2008 that were not included in the ETS. Discussion of the objectives and design of the possible AGS is provided in the companion document Forestry in the New Zealand Emissions Trading Scheme.

6.2 Liquid fossil fuels (primarily transport)

6.2.1 Context

New Zealanders have a strong culture of mobility. We travel frequently, have a high level of vehicle ownership by comparison with other countries, and our fuel costs have historically been relatively low. Our geographic isolation has made us reliant on ships and planes to connect us to the rest of the world, and our use of energy for freight transport has increased as the economy has grown.

Emissions from transport increased 61.9 per cent from 1990 to 2005. If we make no changes to the way we travel and transport freight, transport energy use is expected to grow by about 35 per cent by 2030, with three-quarters of that growth coming from road transport. Greenhouse gas emissions from transport would increase at a similar rate. The risks of climate change make it unacceptable for us to continue on this path. Likewise, change is desirable to reduce the vulnerability of our transport system to disruptions in oil supply and price uncertainty, as well as addressing the local environmental impacts currently associated with fossil-fuel-based transport.

Our key challenge is to reduce the greenhouse gas emissions from transport fuels while continuing to improve our quality of life and to benefit from a strong, competitive economy. A focus on reducing greenhouse gas emissions from the transport sector will also help to reduce New Zealand’s dependence on oil.

6.2.2 Sectoral design features

Table 6.2: Summary of design features for the liquid fossil fuels sector

Design feature

In-principle decision

Source of emissions

Liquid fossil fuels (primarily used for transport).

Greenhouse gas

CO2

Scope of activities

Removal from a refinery or importation of refined oil products. This is typically the point where liability to pay excise or excise equivalent duty arises.

Exemption: any fuel exported or intended for use on international trips.

Commencement of unit obligation, monitoring and reporting

1 January 2009

End of initial compliance period

31 December 2009

Participants with unit obligations

Preferred: oil companies that import liquid fossil fuels or remove them from a refinery.

Alternative: as above, with an option for large consumers of jet fuel to be a point of obligation on a voluntary or mandatory basis.

Free allocation

Zero free allocation to participants with unit obligations.

6.2.2.1 Scope of activities

Liquid fuels used in New Zealand include petrol (regular and premium), diesel, aviation gasoline (“avgas”), jet kerosene (“jet fuel”), light fuel oil, heavy fuel oil and lubricating oils. Only domestic fuel use would be covered. Emissions from fuel used for international aviation and marine transport will be exempted from the scheme, consistent with the Kyoto Protocol. The mechanism that will be used by participants in the scheme to recognise fuel that is exempt will be fuel that has a zero rate for goods and services tax (GST). Goods can be zero rated for GST purposes if they are “exported”. Fuel sold for use on an international trip is considered to be exported for GST purposes.

Lubricating oils will be excluded from the scheme because of the administrative complexity associated with their inclusion and the small amount of emissions concerned. The burning of used oil on a large scale is covered by the scheme under stationary energy. Liquified petroleum gas (LPG), including that used for transport, is covered under the stationary energy sector (because the majority of natural gas is used for stationary energy).

6.2.2.2 Date of entry into the NZ ETS

The government’s strong preference is to introduce liquid fossil fuels into a NZ ETS on 1 January 2009. This reflects the fact that it is relatively easy to introduce liquid fossil fuels into an ETS (there are five firms concerned, and they track the volume of fuel they purchase for, among other reasons, the purposes of the excise duty regime).

6.2.2.3 Participants with unit obligations

The most suitable point of obligation for emissions from the use of liquid fossil fuels (primarily used for transport)61 is upstream on fuel suppliers when they purchase fuel rather than on emitters (ie, vehicle users). An upstream point of obligation would allow for greater coverage of oil sector emissions, would require reporting by a small number of points of obligation (minimising administration and compliance costs), and would provide similar end-user price incentives.

In practice, the obligation would be placed on refined oil products at the time of removal from a refinery or importation, when a liability to pay excise or excise-equivalent duty arises if applicable. If this is not applicable, then the obligation would be placed at the same point in the supply chain as where a liability to pay excise duty would arise. This regime would currently involve five oil companies in New Zealand: BP, Caltex, Gull, Mobil and Shell.

However, the government is interested in engaging with the sector regarding an option to allow large consumers of jet fuel to serve as the direct point of obligation for emissions from liquid fossil fuels, either on a voluntary or mandatory basis. In order to avoid double-counting of emissions obligations, this would require a carve-out mechanism to apply at the level of the obligation placed on fuel suppliers.

6.2.2.4 Allocation

The costs associated with the purchase of emission units are likely to be passed through the supply chain to consumers of liquid fossil fuels, regardless of any free allocation of emission units. Thus, a free allocation would only amount to a windfall gain to the fuel companies and would not change behaviour. The government has therefore decided not to allocate any units to fuel companies for free.

6.2.3 Complementary measures

6.2.3.1 Biofuels sales obligation

The government has developed a Biofuel Bill to introduce the biofuels sales obligation, which was announced by the government in February 2007. The obligation will require oil companies to sell an amount of biofuel (measured in terms of energy) representing a proportion of their sales of petrol and diesel from 1 April 2008. The level of the obligation begins at 0.53 per cent in 2008, increasing to 3.4 per cent by 2012. The obligation will be administered by the Ministry of Economic Development.

6.2.3.2 Govt3 – vehicle procurement

The government has reviewed the vehicle fleets of 21 government organisations and will be encouraging changes to more efficient and low-carbon vehicles through procurement policies.

6.2.3.3 Fleet operator commitment and driver training programmes

The government is developing a fleet operator commitment and driver training programme (heavy and light commercial fleets) that will include providing information and training to drivers of heavy vehicles. Driver behaviour can help improve the fuel economy of the existing vehicle fleet. Differences in driver behaviour alone can vary fuel use by up to 35 per cent, and it has been estimated that a targeted driver training programme for heavy vehicle drivers could give energy savings of at least 10 per cent, or 6.1 petajoules per annum.

6.2.3.4 Fuel economy information label

This programme will introduce a regulation requiring a fuel economy information label to be displayed on new and used cars at the point of sale from a registered motor trader by 1 December 2007. Consumers will benefit from the programme because it enables them to compare the fuel consumption of cars, which affects both running costs and greenhouse gas emissions. More information is delivered via a website, the labelling scheme and a promotional campaign. This programme will help consumers to make better choices about the cars they drive. There are also substantial future benefits of labelling. For example, the programme allows comparisons within and between different vehicle classes, which means the government could develop future policies using this information (eg, rewarding the best performers in the fleet).

6.2.3.5 Sales-weighted standard for fuel economy

The government has noted that establishing a vehicle fleet sales-weighted standard for fuel economy would spread the incentive to improve fuel consumption across all vehicles entering the fleet, as well as providing flexibility to the industry and choices to consumers. The Ministry of Transport is working with industry on options for such a standard, and will report back to the government later this year.

6.2.3.6 Public transport

In the 2007 Budget the government committed $900 million of additional government investment in public transport in the period 2006 to 2010, in particular on rail infrastructure improvements in Auckland and Wellington, as well as national rail improvements.

6.2.3.7 Urban rail development

In the 2007 Budget the government committed $600 million over six years to contribute to urban rail development projects in Auckland and Wellington.

6.2.3.8 Public education

In May 2006 the Ministry of Transport launched the Fuel$aver website (http://www.fuelsaver.govt.nz/), which provides consumers with information to compare the fuel consumption of new or used Japanese vehicle models, and to calculate vehicle fuel costs.

In March 2007 the Ministry of Transport launched the second phase of the Choke the Smoke campaign. This campaign encourages people to go on the “low carbon diet”; for example, by using public transport, carpooling, walking or cycling, tuning their cars, keeping tyres inflated correctly, and using their accelerator more sparingly.

6.2.3.9 Travel planning

The Ministry of Transport is also working with a number of non-transport government agencies to reduce transport emissions. Initiatives such as the walking school buses and the Auckland school travel plan programme (managed by the Auckland Regional Transport Authority) have been successful in getting cost-effective changes in behaviour, with safety, health and climate change benefits.

6.3 Stationary energy (coal, natural gas and geothermal energy)

6.3.1 Context

Stationary energy includes all fuels used for electricity generation and in the direct production of power and heat in the industrial, commercial and residential sectors. It does not include emissions from the liquid fossil fuels that are primarily used for transport, or industrial process emissions, which are covered in separate sections.

New Zealand’s stationary energy emissions come mainly from the provision of energy sourced from non-renewable fuels (mainly coal and gas) and, to a lesser extent, from geothermal fields. Energy policy is the primary focus for climate change policies abroad. However, New Zealand is in an unusual situation because approximately 69 per cent of our electricity is generated from renewable sources (mainly hydro), which is the third highest level of renewable generation capacity in the developed world.

Notwithstanding our high use of renewable electricity sources, New Zealand needs to take action on emissions from electricity generation. Between 1990 and 2006, greenhouse gas emissions from electricity generation increased by approximately 138 per cent,62 while emissions from energy use by manufacturing industries increased by approximately 10 per cent. Without further action, the government projects that greenhouse gas emissions from stationary energy (including fugitive emissions)63 will increase by approximately 7 per cent between 2005 and 2015.

6.3.2 Sectoral design features

Table 6.3: Summary of design features for the stationary energy sector

Design feature

In-principle decision

Source of emissions

Coal, natural gas and geothermal energy

Greenhouse gas

CO2, CH4

Scope of activities

“Importation” of an emission source or “sale” of an emission source by specified persons.

Exemptions:

  • emission sources when exported

  • coal-seam methane vented or flared (but not sold)

  • (potential) emissions subject to carbon capture and storage

  • sales to downstream firms with obligations

  • sales for non-fuel uses where the product is exported (eg, methanol feedstock) and it is considered preferential to provide an exemption at the time of export of the final product

  • sales for non-fuel uses (eg, urea feedstock) where the emissions from the final product are not yet (or will not be) covered by the ETS (eg, emissions arising from the use of urea).

Commencement of obligation

1 January 2010

End of initial compliance period

31 December 2010

Participants

There is a range of options for discussion; for example:

Upstream points of obligation:

  • coal importer; coal miner (coal-mining licence and coal-mining permit holder)

  • gas importer; gas producer (petroleum permit or licence holder); gas processor

  • geothermal electricity generator or direct user for industrial heat

  • industrial producer that obtains used oil for the purpose of combustion.

Upstream and midstream points of obligation:

  • a combination of upstream and midstream points of obligation, such coal wholesalers and gas distributors, and/or major users of coal and gas.

Free allocation

Zero free allocation to fuel producers/importers and electricity generators.

Some assistance to eligible industrial producers (excluding electricity generators) for direct and indirect emissions from stationary energy after entry into the NZ ETS and declining to zero by 2025; addressed separately under ‘Industrial production’ (section 6.5).

Progressive obligation

Option to consider the use of progressive obligations; refer to section 6.5 on ‘Industrial production’.

6.3.2.1 Scope of activities

The government has decided in principle that the NZ ETS will apply to activities that result in emissions of CO2 and CH4 (methane) from the combustion of hydrocarbons in New Zealand, such as natural gas and coal, and the use of geothermal fluid and steam.64 There will be exemptions from the NZ ETS for activities that are too small to have a measurable effect on total emissions. The government will engage with stakeholders and Māori on what the appropriate minimum threshold for inclusion should be. In the stationary energy sector an exemption would apply to any exported emission sources such as exported coal, compressed natural gas (CNG) or liquified petroleum gas (LPG). An exemption would also apply to coal and gas sold for non-fuel uses if the resultant products are outside the scheme or are exported (eg, gas sold for methanol and urea feedstock).

The NZ ETS will apply to the venting and flaring of natural gas, and a permit is already required for these activities. Any CO2 that is “stripped” from gas streams during treatment will also be included in the NZ ETS. It is likely that this emission source will be covered through the use of an emission factor for the natural gas when it is first sold by the petroleum permit holder rather than through an obligation on the activity of stripping CO2.

The NZ ETS will also apply to used oil that is obtained for combustion for energy. The viability of any used oil recovery programme will be a matter for discussion with stakeholders, and may influence the start date for the inclusion of this activity in the scheme.

Fugitive emissions of coal-seam methane will be excluded from a NZ ETS, because coal permit and licence holders do not own coal-seam methane and fugitive emissions are difficult to measure or estimate. However, if coal-seam methane is extracted and sold for use as a source of energy, it is necessary to have a petroleum permit and the methane would be treated the same as any other natural gas activity under the NZ ETS.

An obligation would be placed on the extraction of geothermal fluid for electricity generation or industrial process heat, and not on retail operations such as motels and public baths.

In the future, it may be necessary to adapt the NZ ETS legislation to exempt any emissions that are subject to proven and effective carbon capture and storage technology.

6.3.2.2 Date of entry into the NZ ETS

Emissions from coal, natural gas and geothermal fluid will be included in the NZ ETS from 1 January 2010. This entry date reflects the fact that in the stationary energy sector, compared with liquid fossil fuels (used primarily for transport), the NZ ETS will apply to a larger number of participating firms with more varied characteristics and outputs. For example, the range of options regarding the point of obligation will need time for careful consideration.

The reporting obligations imposed by the NZ ETS will draw on existing business functions and information collection as much as possible. Therefore, the entry date for stationary energy should not need to be extended further. It should also be possible for firms to undertake monitoring and reporting of emissions prior to facing mandatory unit obligations.

The government will engage with stakeholders and Māori on the operational detail of how the NZ ETS will apply to the stationary energy sector, such as the emissions monitoring methods employed and the determination of appropriate emissions factors.

6.3.2.3 Participants with unit obligations

The government wishes to apply the NZ ETS in a way that minimises compliance and administration costs, and captures the most emissions activities and sources. The government therefore wishes to engage with stakeholders and Māori on options for how to apply obligations to firms in the stationary energy sector.

In this sector we believe that costs are minimised and coverage is maximised through an upstream obligation at the first point in the supply chain. An upstream point of obligation for coal and natural gas would apply directly to the firms that import or extract the coal, gas or geothermal resource. In the case of domestic coal and gas producers, the point of obligation would be the permit or licence holder for Crown-owned minerals. The inclusion or exclusion of private coal miners is a matter for discussion. We anticipate that large geothermal field operators (rather than owners) would be the most suitable point of obligation for emissions from the extraction of geothermal fluid.

There is a range of other options for the point of obligation in the stationary energy sector. For example, the point of obligation could also apply to the firms that actually produce energy and emissions from thermal fuel. A midstream obligation could still capture a large proportion of domestic gas and coal consumption, reflect the composition of delivered gas or coal, require monitoring of a small number of firms, and provide consumers with an appropriate price signal.

To implement a combination of upstream and midstream obligations, it would be necessary to carve out upstream sales to downstream firms that face their own NZ ETS obligations. In either case, an upstream obligation would still be required on natural gas producers in order to capture fugitive emissions (ie, the venting and flaring of natural gas and the stripping of CO2).

Officials are actively considering the potential treatment of carbon capture and storage activities within a NZ ETS, and would welcome any suggestions relevant to this policy.

6.3.2.4 Allocation

Incorporating the costs of greenhouse gas emissions into the stationary energy sector is expected to increase the price of gas, coal and geothermal energy (see chapter 7). Fuel suppliers and electricity generators are likely to pass any increased costs on to consumers through higher prices, regardless of whether they receive a free allocation of units. As a result, the government does not propose to freely allocate any units to fuel suppliers or electricity generators. Instead, stationary energy participants with unit obligations will be expected to purchase units from the market or through any government sale of NZUs.

Electricity prices are expected to rise to reflect the increased cost of thermal generation, but a significant proportion of New Zealand’s electricity is generated from renewable resources, which will not face an emissions cost. Because of this, it is expected that generators, and in particular those with large renewable portfolios, will make a windfall gain with the introduction of emissions trading. This is because they will benefit directly from the higher expected wholesale price, but will not face an offset cost from higher fuel charges. The analysis suggests some thermal generators will also benefit, as the expected rise in wholesale price will more than compensate for the additional emissions costs that they face. The level of profit increase that the generators experience will depend on a large number of variables that are difficult to predict (eg, the weather). A significant fraction of any increased profit would be returned to government through dividends from state-owned electricity generators and increased tax revenue.

In recognition of increasing stationary energy costs, the government proposes to provide some assistance to the industrial sector, whose members are significant users of electricity, coal and gas but who are restricted in their ability to pass on any cost increases to their customers. This is addressed below under section 6.5 on ‘Industrial production’.

The government is also looking at options to assist residential consumers through the transition to a low-emissions energy system. This is discussed below.

6.3.3 Complementary measures

6.3.3.1 New Zealand Energy Strategy

The final New Zealand Energy Strategy (NZES) will set out the government’s strategic response to energy and related climate change issues. It is strongly motivated by the need to have secure and reliable energy supplies and more efficient energy use to support economic development, reduce greenhouse gas emissions, and generally transition to a low-carbon and sustainable energy system. Earlier this year the government consulted with stakeholders on the best way to achieve these objectives. The current policy direction is to:

  • introduce an economy-wide emissions trading scheme and devolve the cost of greenhouse gas emissions to those who produce them

  • maximise the efficient use and conservation of energy

  • maximise the contribution of New Zealand’s abundant and cost-effective renewable energy resources

  • promote the early uptake of sustainable energy technologies.

A price on emissions is expected to provide an incentive for energy producers and consumers to respond by reducing demand, investing in improved energy efficiency technologies, and switching to less carbon-intensive energy sources. The NZES will include additional measures to emissions pricing that may fall into two groups.

  1. Additional regulatory measures to achieve specific outcomes beyond those delivered by emissions pricing. These measures might be considered to achieve a specific objective earlier than would occur under emissions pricing (eg, a fund to assist with the deployment of marine energy and other renewable and low-carbon technologies and practices).
  2. Strategic policy mandate and support for complementary measures to accelerate the uptake of energy efficiency and conservation programmes that bring forward emission reductions. These emission reductions are unlikely to be fully realised as the result of emissions pricing alone because of market failure or barriers to investment and behaviour change, such as:
  • a lack of information about the options available and the benefits of investment

  • capital/income constraints

  • misalignment of incentives where the investor does not realise the benefits (eg, in rental properties)

  • the impact on consumer prices not being sufficient to trigger a significant change in consumer behaviour and choice.

The Marine Energy Fund has also been established under the NZES. This is a contestable $8 million fund over four years to support the early deployment of marine-based electricity generation, such as wave or tidal.

6.3.3.2 New Zealand Energy Efficiency and Conservation Strategy

The New Zealand Energy Efficiency and Conservation Strategy (NZEECS) will give effect to many of the objectives laid out in the NZES. It details programmes in five sectors – homes, business (including rural business and tourism), transport, the energy system, and government – to promote the accelerated uptake of energy efficiency, energy conservation and renewable energy measures.

Many of the NZEECS programmes are specifically designed to overcome the barriers outlined above. These programmes include:

  • homes – programmes to raise awareness of what action families can take to increase the uptake of energy efficiency and conservation measures and renewable energy, what benefits can be gained from these activities, and how to access grants and incentives to overcome financial barriers. Standards are being raised for products, to prevent inefficient appliances from entering the market, and for buildings.

  • business – programmes to help businesses reduce their exposure to rising energy and emissions costs and become more competitive. These include awareness-raising, audit, grant and technology assistance programmes. Such programmes will be further extended into the rural and tourism sectors.

  • transport – programmes to reduce demand for travel, build capacity across transport modes, and encourage increases in the efficient use of transport. Action will also be taken to accelerate improvements in vehicle fuel efficiency and the uptake of renewable fuels, including renewable electricity.

  • a renewable and efficient electricity system – action to improve the efficiency with which the electricity system is planned, built and operated. This will include work to improve the regulation of the system to encourage efficiency improvements and facilitate the accelerated uptake of renewable electricity generation, including distributed generation systems.

  • government – programmes for local government to improve urban form and manage demand for travel to reduce travel-related emissions within communities. Central government will also lead the way by improving its own uptake of energy efficiency and conservation measures, increasing renewable energy and reducing waste and travel. Many central government programmes in this area will contribute towards achieving the target for the core public service to have plans in place for carbon neutrality from 2012.

To a large extent the rate of uptake of energy efficiency, energy conservation and renewable energy measures will reflect the public’s acceptance of the need to transform society to achieve increased sustainability and address climate change. The NZ ETS will create further incentives to change behaviour and invest in energy efficiency and renewable technologies.

6.3.3.3 Measures to address electricity price increases

The government is looking at mitigation options to assist residential electricity consumers during the transition to a low-emissions energy system. Further information will be provided as policy decisions are made.


54 Note that under the Kyoto Protocol, eligible afforestation activities are awarded removal units (RMUs). RMUs are calculated as the difference between afforestation removals and deforestation emissions. Therefore, the number of RMUs actually received by New Zealand will be less than the gross amount of afforestation.

55 In the case of harvesting, much of the stemwood involved will be processed and turned into wood products. However, the remainder of the forest biomass decays relatively rapidly, releasing carbon back into the atmosphere. Further, much of the carbon stored in wood products will ultimately be released back into the atmosphere at some stage.

56 Wakelin SJ, Paul T, 2006, Carbon Inventory of New Zealand’s Planted Forests (calculations revised as at February 2006), report prepared for the Ministry of Agriculture and Forestry.

57 Deforestation emissions could be significantly greater than this amount if the forestry sector were to bring forward deforestation. This may well occur if there is no effective policy put in place immediately but there is the perception that a deforestation policy is likely to be introduced at a later date. This figure does not include deforestation of indigenous forest or shrub land that meets New Zealand’s adopted Kyoto forest definition.

58 This estimate excludes land in government ownership, subject to a Crown Forest Licence, or in the Lake Taupo catchment.

59 This is available on the website: www.climatechange.govt.nz.

60 At an emissions price of $25/t CO2-e, the increased costs to the Crown could range from $300 million to $600 million.

61 Liquid fossil fuels can also have stationary energy applications. If a midstream option is selected for other stationary energy emissions (ie, coal and gas), then we should consider any implications for the treatment of liquid fossil fuels.

62 Ministry of Economic Development 2007, New Zealand’s Energy Greenhouse Gas Emissions 1990–2006, Ministry of Economic Development: Wellington. http://www.med.govt.nz/energy/ghg/2007/. While the percentage increase in emissions from electricity generation since 1990 is large, it should be noted that our small absolute level of emissions from this sector tends to magnify percentage changes.

63 Fugitive emissions are those that do not come from the combustion of fuels to produce useful energy including heat. They arise from the production, processing, transmission, storage and use of fuels, and from non-productive combustion.

64 CO2 and CH4 are contained in geothermal fluid, which is released when the fluid is used and/or converted into steam. These emissions are covered by the scheme because they are in excess of what would occur naturally and are therefore anthropogenic. This is consistent with the Kyoto Protocol.