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6 Reconciliation with the 2005 projection

Table 9 compares the net position from May 2005, the interim update to the net position reported in the Crown Financial Statements since December 2005, and the current May 2006 net position.

Table 9: Reconciliation of previous projections of the most likely balance of emissions units (Million tonnes carbon dioxide equivalent)

  May   December   May
2006 Change 2005 Change 2005
Projected Emissions          
a. Projected aggregate emissions 398.5 -16.3 414.8 13.1 401.7
Energy (excluding transport) 91.3        
Transport 78.8        
Industrial processes 22.9        
Energy (including transport) and industrial processes 193.0 -14.5 207.5 13.1 194.4
Solvent and other product use 0.3 0.3 0.0   0.0
Agriculture 198.8 -3.2 202.0   202.0
Waste 6.5 1.2 5.3   5.3
b. Assigned Amount Units AAUs 307.6 0.0 307.6   307.6
c. Emissions to be covered (b-a) -90.9 16.3 -107.2 -13.1 -94.1
Projection of Removal Units          
d. Removals via forests 78.2 1.0 77.2   77.2
e. Deforestation emissions 21.0 0.0 21.0 14.7 6.3
f. Net Removals via forests (d-e) RMUs 57.2 1.0 56.2 -14.7 70.9
g. Balance (f-c) -33.7 17.3 -51.0   -23.2
h. AAUs allocated to Projects to Reduce Emissions 7.5   7.5   7.5
Statistical discrepancy 0.0 5.5 -5.5   -5.5
Balance of units (g-h) -41.2 22.8 -64.0 27.8 -36.2

Note: One emissions unit is equivalent to one tonne of greenhouse gas emissions converted to carbon dioxide equivalents by the global warming potential.

Note: Net removals via forests offset emissions and reduce the deficit on the net position.

Emissions projections in some sectors are higher while other sectors are lower; however the net effect is that emissions are projected to be lower during the first commitment period than reported in the Crown Financial Statements since December 2005. Chart 10 tracks the changes to the net position by component and shows how changes in each component have impacted on the final net position value since the May 2005 net position report. Chart 10 also shows the change to the net position made in the December 2005 interim update in the Crown Financial Statements, and shows how the net position has changed through to the May 2006 net position report.

Chart 10: Changes to the net position by sector (Million tonnes carbon dioxide equivalent)

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6.1 December 2005 net position

Deforestation emissions

For the May 2005 net position report the historic rate of deforestation of 6.3 Mt CO2-e was used for the most likely scenario. A structured survey of forestry companies' deforestation intentions was completed in late 2005 which projected emissions during the first commitment period could be as high as 38.5 Mt CO2-e. In December 2005, the Crown Financial Statements were updated to reflect the capped value of the Crown's liability of 21 Mt CO2-e. This increased emissions relative to the May 2005 net position report by 14.7 Mt CO2-e. For the 2006 projection of the net position the deforestation cap value of 21.0 Mt CO2-e is retained.

Carbon tax

The decision not to proceed with the proposed carbon tax added approximately 13.1 million units to the net position and was based on SADEM model results from the Ministry for Economic Development. The Crown Financial Statements were updated in December 2005 when the Government announced it would no longer proceed with implementing a carbon tax.

6.2 May 2006 net position

Energy and industrial processes

As discussed in section 4.2, emissions projections for energy, transport and industrial processes were only provided as an aggregate result for these emissions projections in May 2005. The 2006 net position report provides separate projections for energy (excluding transport), transport and industrial processes for the first time. This will enable future net position reports to provide more disaggregated explanations of year-on-year changes in emissions projections.

Emissions from energy (including transport) plus industrial processes are projected to be lower than reported in December 2005 by 14.5 million tonnes carbon dioxide equivalent during the first commitment period. The reduction in emissions from the energy and industrial processes sectors is largely attributable to:

  • higher energy prices, even without the carbon tax
  • refined energy modelling with SADEM.

For the May 2005 net position report a $15 per tonne carbon tax was assumed to apply to carbon dioxide emissions from fossil fuel combustion from 2007. Coal and oil price assumptions were significantly lower in the May 2005 net position report compared with this report. Oil prices were assumed to be around $US35.00 per barrel and coal prices were assumed to be around $NZ3.75 per gigajoule over the projection period. Expectations of higher energy prices have been assumed for the May 2006 net position report. Oil prices are now assumed to be $US60.00 per barrel and coal prices $NZ4.20 per gigajoule during the first commitment period. This is equivalent to a price increase for carbon dioxide emissions due to higher oil and coal prices of roughly $NZ150.00 and $NZ7.00 per tonne of carbon dioxide, respectively, compared to the price assumptions in the May 2005 net position report. Overall energy prices to end users are assumed to be significantly higher in 2006, compared to 2005 even without the carbon tax being applied.

The Ministry of Economic Development has also undertaken significant refinement of its SADEM model for the 2006 Energy Outlook due in mid-2006, such as refining the estimated demand for energy by heavy industry. This will impact on the projections of emissions from energy, transport and industrial processes during the first commitment period, however the effects of all these refinements cannot be quantified.

Agriculture

Emissions from agriculture are projected to be lower in 2006 compared to 2005 projections by 3.2 million tonnes carbon dioxide equivalent. In line with IPCC good practice and new research the emissions factor for nitrous oxide from agricultural soil was revised from 1.25 percent to 1.00 percent. Previous projections of nitrogen fertiliser application were based on a simple average of industry expectations and a linear extrapolation. The projection methodology for nitrogen fertiliser has been refined and nitrogen application projections are now linked to Ministry of Agriculture and Forestry's livestock projections. This change in methodology resulted in projected nitrogen application decreasing from 421,000 tonnes nitrogen to 403,709 tonnes. As a result the combined effect of these changes was that emissions of nitrous oxide from soils are lower compared to projections included in the May 2005 net position report.

There have been small changes in the projected numbers of livestock and the emissions methodology has been improved for livestock excreta, however, the impact on the net position has been small.

Solvents and other products use

For this year a projection for this sector was included for completeness. This sector contributes less than 0.1 percent of total emissions; however, a simple projection for this sector was included and contributed an additional 0.3 million tonnes carbon dioxide equivalent to New Zealand's projected emissions during the first commitment period.

Waste

Waste emissions are projected to be higher than previously projected by 1.2 Mt CO2-e due to a number of model refinements, revisions to assumptions and recalculations. Some of the improvements this year include:

  • revisions to projections of municipal solid waste per person per day and this increased emissions marginally because more solid waste is going to landfill
  • population projections were revised to be consistent with projections used in other sectors as recommended by the AEA Technology review of the 2005 net position report
  • the methodology for projecting methane recovery was recalculated
  • the forecast impact of the waste strategy was recalculated.

Removals by sinks

Removals of carbon dioxide by forest sinks are approximately 1.0 million tonnes higher this year compared with the 2005 net position report because of changes to assumptions and the use of the latest information from the National Exotic Forest Description.

Statistical discrepancy

For the 2005 net position report, the mean of the distribution of results was used as the final estimate of the net position. The mean of the results from the repeated sampling was higher than the simple summation of the most likely estimate of emissions and removals. The use of the repeated sampling and the reporting of the mean has caused some confusion among readers. The 2006 net position report now calculates the most likely estimate as the simple summation of each most likely projection by sector. The repeated sampling was still used, however, to provide the 95 percent confidence interval for the upper and lower scenario. The use of the mean of the repeated sampling as opposed to the simple summation of most likely projection in each sector decreases the deficit by 5.5 million units relative to the 2005 net position. The repeated sampling in 2005 increased the net position by 5.5 million units relative to a simple summation of all the most likely estimates because there was more uncertainty in the upper range than lower range. If this method were applied for the 2006 report to obtain the most likely estimate of the net position it would likely reduce the deficit on the net position because there is more uncertainty in the lower range.

6.3 Accounting for uncertainty

Chart 11 shows the relative contribution of each component of the net position makes to the total level of uncertainty in the net position. The contribution to total uncertainty by each component is related to the overall magnitude of the component in the calculation of the net position as well as the level of variability considered in the projection. Small sources of emissions such as industrial processes do not make a significant impact on overall uncertainty around the net position. The negative range of values indicate more downside uncertainty (optimism) on the deficit of the net position than upside uncertainty (pessimism).

If all upper and lower scenarios were combined without the repeated sampling technique the absolute uncertainty range would be 160.3 million tonnes carbon dioxide equivalent compared to the current range from the repeated sampling technique of 77.5 million tonnes. Uncertainty due to net removals of greenhouse gas emissions by sinks is the greatest, with a range between the upper and lower scenarios of 54.1 million tonnes carbon dioxide.

If all the upper and lower results were simply summed the range of uncertainty would be implausibly high. The method of simulating the range of uncertainty by the repeated sampling technique provides a more plausible confidence interval around the most likely value of the net position.

Chart 11: Uncertainty ranges for impact on net position by component (Million tonnes carbon dioxide equivalent relative to the most likely scenarios)

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Explanation of the repeated sampling technique

Figure 1 has been provided to help explain how the repeated sampling technique works. A triangular distribution is used to approximate the distribution of possible results for emissions by each sector and removals of emissions via forest sinks. The base of the triangular distribution is set at the lower and upper results and the mode of the triangular distribution (the peak of the triangle) is set at the most likely value of the projection result. Repeated samples (50,000) are drawn from each distribution and the net position is calculated each time. With so many samples drawn and the net position calculated so many times an approximate normal distribution curve (bell shaped curve such as Chart 1) is obtained. From this distribution the 95 percent confidence interval for the upper and lower range is obtained.

Figure 1: Representative fitting of triangular distributions

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