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# 4 How much will be allocated: determining allocative baselines

## Doing the calculations

We have already looked at the two tracks for determining eligibility – the Australian and New Zealand tracks. When it comes to determining an allocation amount for an eligible activity conducted by an individual firm there are again two proposed tracks – the Australian and New Zealand tracks.

Under both tracks the quantity of emission units allocated will be calculated using an ‘allocative baseline’, which is multiplied by activity data in the form of product from that activity. The allocation each eligible person receives for a given year will thus be calculated as follows:

FA = LA × PDCT × AB

where:

• FA = the person’s final allocation for the year (a number of New Zealand units)
• LA = the level of assistance (initially 60 per cent and 90 per cent for moderately and highly emission-intensive activities, respectively, and declining at the rate of 1.3 per cent per year after 2012)
• PDCT = the amount of product from conducting the eligible activity for the year
• AB = the allocative baseline for the activity (tonnes of emissions per unit of product).

The Act also provides for eligible persons to apply for a provisional allocation for a given year based on the previous year’s production, with a true-up payment (‘allocation adjustment’) paid once actual production for the year is known. Box 2 contains a hypothetical example of how an allocation would be calculated.

The allocative baseline is a historical measure of emissions intensity, but it is measured differently from the intensity measure used to define eligibility. When determining baselines, intensity is measured in physical terms (eg, in emissions per tonnes of product from an activity), as follows.

• The New Zealand track will estimate a New Zealand-specific baseline using an average emissions intensity for the activity, based on recent historical data.
• The Australian track would use the allocative baseline developed in Australia, adapted to take account of New Zealand-specific emissions intensities for electricity generation and natural gas production.

As discussed above, the Australian track is not currently being pursued as a means for making regulations. Should the Carbon Pollution Reduction Scheme pass into law, this will be reconsidered.

### Is there a pool of emission units to be allocated?

There is no cap on the total quantity of emission units that will be allocated. This means that if a firm increases output from an eligible activity, it will be given more emission units.

### Proposed electricity allocation factor

A common issue for both tracks is how many emission units to allocate for the use of electricity.

The NZ ETS will increase the costs of generating electricity from fossil fuels and geothermal sources. Although fossil fuels make up a relatively small proportion of total electricity generation (34 per cent of the total in 2008),1 they have a larger impact on the average wholesale price under New Zealand’s competitive electricity market.

A number of energy-intensive firms will face significantly higher costs of production because of the electricity intensity of their production. Work was undertaken in 2008 by the Stationary Energy and Industrial Process Technical Advisory Group (SEIP TAG) on the expected increase in electricity price as a result of the introduction of the NZ ETS. This was used to derive an emission factor that would take account of this price increase. The factor is 0.52 tonnes of CO2 per megawatt hour of electricity. This consultation document proposes that this factor be used for determining allocative baselines for industrial allocation under the NZ ETS.

The estimate was based on analysis using the GEM (Generation Expansion Model) to determine plant mix and the SDDP (Stochastic Dual Dynamic Programme) to estimate the price impact of a range of plausible emissions prices. The proposed factor is the median of the range of outcomes. A summary of this work is available on the www.climatechange.govt.nz website.2

The same approach will be used regardless of whether the electricity is generated on site, via distributed generation or purchased from the grid. The only exception will be for very large users (greater than 2000 gigawatt hours per annum at a single facility) with contracts for electricity. These contracts will be examined to establish an appropriate emission factor.

## Determining allocative baselines

### New Zealand track

Under the New Zealand track, allocative baselines will be calculated using New Zealand data. They will be calculated as an average emissions intensity of the activity in New Zealand in a given historical period. The default years for data collection will be the three financial years3 2006/07, 2007/08 and 2008/09. For these periods, data will be collected on emissions and product from the process. Two allocative baselines are defined:

1. direct emissions intensity, based on measured emissions (in other words, the same emissions that count towards eligibility will count towards allocative baselines)

2. electricity use, for which an electricity allocation factor of 0.52 tonnes of CO2 per megawatt hour is proposed.4

The data required to define the allocative baselines is data on production in these historical years, direct emissions, and electricity use.

The same Gazette notice that requests data for eligibility purposes will be requesting data for the purposes of determining allocative baselines.

Box 2: Example of the use of an allocative baseline

## Acme Inc

This example shows how the allocative baseline for the production of bulk flat glass would be used, assuming regulations were made containing an allocative baseline of 0.985 tonnes of CO2-e per tonne of bulk flat glass.

Acme Inc is a producer of bulk flat glass. In 2014 they produce 48,000 tonnes of saleable bulk flat glass. In 2015 they produce 50,000 tonnes of saleable bulk flat glass. Under the Act, Acme Inc would calculate their allocation for 2015 as follows:

Calculation of provisional allocation (PA)
PA       =   2015 level of assistance (LA) × amount of product in the preceding year (PDCT) × allocative baseline (AB)
LA        =   0.9 × 0.987× 0.987× 0.987 = 0.87
PDCT   =   48,000 tonnes
AB       =   0.985 tonnes CO2-e /tonne bulk flat glass
PA       =   0.87 × 48,000 × .985 = 41,134 NZU
Acme Inc is able to apply for a provisional allocation of this number of NZU (New Zealand units).

Calculation of final allocation (FA)
(FA)      =   level of assistance (LA) × amount of product in 2015 (PDCT) × allocative baseline (AB)
LA        =   0.9 × 0.987× 0.987× 0.987 = 0.87
PDCT   =   50,000 tonnes
AB       =   0.985 CO2-e /tonne bulk flat glass
FA        =   0.87 × 50,000 × .985 = 42,848 NZU

AA       =   PA – FA
AA       =   41,134 NZU – 42,848 NZU = –1,714 NZU

AA is a negative amount, which means Acme Inc is entitled to be allocated this number of units in addition to their provisional allocation for 2015. If AA were a positive amount, Acme Inc would be liable to repay this number of NZU.

(Note that modifications will apply to the allocation formulas during the transition phase to account for the 1 July 2010 start of the stationary energy and industrial process sectors and the 2:1 progressive obligation.)

##### Question 3
1. Do you have any comments on the proposed use of an electricity allocation factor of 0.52 tonnes of CO2 per megawatt hour when adjusting allocative baselines from Australia and creating baselines from New Zealand data?
2. Do you have any comment on the proposed use of an electricity factor of 1 tonne of CO2-e per megawatt hour when testing activities against the emissions intensity thresholds in the Act?

Question 4

1. If you are conducting an activity or activities listed in Annex 1, or an activity that you believe would be eligible, do you consume more than 2000 gigawatt hours of electricity at a single facility in a typical year?

1 Ministry of Economic Development. 2009. New ZealandEnergy Data File: 2008 Calendar Year Edition.

3 The Act defines the financial year as July to June.

4 The only exception will be for very large users (greater than 2000 gigawatt hours per annum at a single facility) with contracts for electricity. These contracts will be examined to establish an appropriate emission factor.