Global responses to climate change and the ETS

Sixty leading Kiwi CEOs linked arms last week in a pledge to combat climate change. The group, containing the likes of Air New Zealand, Fonterra, and Z Energy, have committed to measuring and reporting their greenhouse gas emissions, part of a long-term aim to help keep future global warming within 2C – the key goal of the Paris Agreement. 

This initiative reflects a growing trend of New Zealand businesses and organisations seeking to reduce their emissions and contribute to the success of the government's carbon-neutral by 2050 aim.

One of the most important and hotly debated aspects of this goal is the emissions trading scheme. 

Let's take a look at the NZ ETS, how it fits into place with historical responses to climate change, and how it sits in the current social and political climate. 

A BRIEF HISTORY OF GLOBAL RESPONSES TO CLIMATE CHANGE

In 1994, the United Nations Framework Convention on Climate Change (UNFCCC) was established, with the aim of stabilizing greenhouse gas levels in the atmosphere at a level that would prevent dangerous human-induced interference with the earth’s climate system. The UNFCCC was ratified by all 197 member states of the United Nations, as well as the State of Palestine, Niue, the Cook Islands and the European Union.

Up until this point, global concern around climate change had been relatively limited. The term ‘global warming’ only entered the public domain in 1975, and no international response to climate change had been made outside of the 1987 Montreal Protocol, which committed to phasing out the production and consumption of ozone-depleting substances worldwide.

It was only in 1990, when a report from the Intergovernmental Panel on Climate Change (formed two years earlier) showed that global temperatures had risen by 0.6 degrees Celsius in the past century, that international recognition of the need to address climate change was properly established.

So, the UNFCCC was born, and immediately set to work in determining the best method for combating rising global temperatures, eventually settling on the ‘Kyoto Protocol’.

Initialised in Kyoto, Japan, in 1997, and officially entered into force in February of 2005, the Kyoto Protocol is based on the principle of common but differentiated responsibilities, putting the obligation to reduce current emissions on developed countries on the basis that they are historically responsible for the current levels of greenhouse gases in the atmosphere. The initial aim of the protocol was for each developed nation (37 industrialised countries, plus the European Community) to reduce yearly emissions of carbon, as measured in six greenhouse gases, to 1990 levels by 2012.

However, in the eight years between its origin and actualisation (1997-2005), global emissions rose substantially, making the likelihood of achieving this reduction practically non-existent for a number of countries. Additionally, China, who wasn’t mandated to reduce emissions given its developing status, and the US, who refused to ratify the protocol, “churned out more than enough extra greenhouse gas to erase all the reductions made by other countries during the 2005-2012 period” (Robert Henson, The Guardian). It was this that caused Canada to officially renounce the Kyoto Protocol in 2011.

In 2015, the beginning of the end of the Kyoto Protocol was signaled by the signing of the Paris Agreement. The Paris Agreement commits to holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C above pre-industrial levels. 195 UNFCCC members have signed the agreement, which will officially come into effect in 2020, at which time the Kyoto Protocol will dissolve.

Under the Paris Agreement, each country shall determine, plan, and regularly report on the contribution that it undertakes to make in order to mitigate global warming. There is no mechanism to force a country to set a specific target by a specific date, but each target should go beyond previously set targets.

THE NZ EMISSIONS TRADING SCHEME

New Zealand's Emissions trading scheme (ETS) is the government's policy response to climate change. It puts a price on greenhouse gas emissions, with the intention of creating a financial incentive for businesses to invest in technologies and practices that reduce emissions. Part of the ETS initiative is a requirement for all sectors of the economy to report on their emissions and purchase and surrender emissions units to the Government. An emissions unit represents one metric tonne of CO2 or the same equivalent of any other greenhouse gas. In New Zealand, emissions units (also known as carbon credits) are represented as NZU.  

A simple example explaining how the ETS works is provided by the Ministry for Primary Industries:

  • Firm A is an oil company. It needs to buy emission units to cover the greenhouse gas emissions it is responsible for.
  • Firm B is a large forestry company that receives emission units for land it is planting in forests. It is also undertaking some deforestation, leading to emissions for which it has to surrender emission units. Initially, Firm B has a shortfall of units but, as the new forest matures over time, it will have an overall surplus of units.
  • Firm C is a major industrial user of electricity. Its costs increase with the introduction of the emissions trading scheme. To help Firm C adapt to these higher costs, the government gives Firm C an allocation of emission units, which Firm C can sell to offset its increased electricity costs.

Under the emissions trading scheme, Firm A and Firm B both buy Firm C’s units in the short term to cover their emissions. Because it now has to pay higher energy prices, Firm C finds it is cheaper to invest in energy efficiency. Alternatively, any firm can import or export eligible units from other countries. Over time, as its forest matures, Firm B has spare units available and sells them to Firm A.

Households are not required to surrender emissions units under the ETS, however, they do still feel some of the effects of the legislation, as businesses that are involved pass the ETS costs on to consumers.

However, only a small percentage of businesses are involved in the scheme, as the point of obligation is placed as far up the supply chain as possible. For example, for transport fuels, the obligation falls on the companies importing the fuels, not those who simply sell it on to the consumer.

THE HISTORY OF THE ETS IN NEW ZEALAND

Put into effect in September of 2008, the NZ ETS was initially linked to the Kyoto Market. In their 2017 paper “Evolution of the New Zealand Emissions Trading Scheme: Linking”, Catherine Leining, Judd Ormsby, and Suzi Kerr explain how this model functioned:

“Uniquely among ETSs developed globally to date, the NZ ETS was designed to operate without a limit on domestic emissions. From 2008 to mid-2015, the NZ ETS essentially was nested within the Kyoto cap through buy-and-sell linkages and had no quantitative limits. This enabled the global Kyoto market to serve as the dominant source of unit supply in the NZ ETS and set the domestic emission price based on global supply and demand.”

The first commitment period (CP1) of the Kyoto Protocol ran from 2008 to 2012. The CP1 was governed as such:

“Parties to the Kyoto Protocol use Kyoto emission units to track their progress against emissions reduction commitments. Each Kyoto unit represents one tonne of carbon dioxide equivalent (CO2-e). At the start of a commitment period, a party issues Kyoto units equal to its target (Assigned Amount Units or AAUs). After the end of the commitment period, the party must retire Kyoto units equal to its gross emissions. If it does not have enough Kyoto units domestically it has to purchase eligible units internationally to make up the shortfall.” – www.mfe.govt.nz

New Zealand’s target was to reduce emissions to 61.9 million tonnes CO2-e (New Zealand’s annual emissions for 1990) over CP1.

Their total emissions for the five-year (2008-2012) period came to 372.8 Million tonnes. At the end of the period, the government held a total of 496.7 million Kyoto units (302.1 initially assigned, 122.9 obtained internationally through the NZETS, 71.6 through forestry). So their target for CP1 was achieved with a surplus of 123.7 million surplus units.

After achieving its target for CP1 under the Kyoto Protocol, the New Zealand Government announced future delinking of the NZ ETS from the Kyoto market in 2013. This came into effect in June of 2015.

In December of the same year, New Zealand accepted the Doha Amendment to the Kyoto Protocol. This amendment established a second commitment period under the Kyoto Protocol, running from 2013 until 2020. By accepting the Doha Amendment, New Zealand signaled its support for the second commitment period and for the ongoing climate change negotiations. However, New Zealand undertook this emissions reduction target under the UNFCCC (the Kyoto Protocol parent body) rather than under the Kyoto Protocol itself, sticking with its decision to delink from the Kyoto Market.

On the fourth of October, 2016, New Zealand ratified the Paris Agreement. Coming into effect in 2020, the Paris agreement delivers nationally determined contributions (NDCs) to the countries involved. In New Zealand’s case, this contribution is to reduce greenhouse gas emissions by 30 percent below 2005 levels by 2030.

By 2020, the New Zealand government aims to reduce yearly emissions to five percent below 1990 levels. Although it chose to take its 2020 target under the UNFCCC rather than the Kyoto Protocol, it is still applying the Kyoto Protocol rules in its emissions accounting to ensure transparency. According to information provided by the Ministry for the Environment, New Zealand is on track to achieve this 2020 aim.

THE NZ ETS AND AGRICULTURE

One of the most controversial aspects of New Zealand’s emissions trading scheme is that it doesn’t include agriculture.

Agriculture makes up around half of New Zealand’s annual emissions, however, prior to last year, the government has continually reiterated that it will only bring biological emissions from agriculture fully into the ETS if there are economically viable and practical technologies available to reduce these emissions.

This has been a heavy point of contention for greens and conservationists, many of whom feel excluding agriculture greatly hampers New Zealand’s ability to achieve its emission reduction goals.

However, in 2017, the new Labour Government revealed plans to gradually move agriculture into the ETS by 2020, alongside a long-term goal of reducing national carbon emissions to net zero by 2050.

The big question is: what effect will this have on the economy?

According to Federated Farmers, the move could cost New Zealand’s farmers up to $83 million in its first year alone, and the agriculture sector around $800 million all up.

Climate change spokesman Andrew Hoggard has said the decision would be an illogical step, putting the sector at a competitive disadvantage against export competitors and shifting production to less efficient producers overseas, a change that he feels would add to overall greenhouse gasses, rather than reduce them.

WHY IS AGRICULTURE NOT INCLUDED IN THE ETS IN THE FIRST PLACE?

Outside of the economic factors, the key issues with adding agriculture to the ETS fall under the banners of carbon sequestration and the effects of methane.

In an excellent article for the Herald, Doug Edmeades explains, in as simple terms as possible, the complex science behind the issue, showing how pastoral animals effectively operate as carbon sinks:

“Methane is short-lived in the atmosphere. It hangs around for about 10 years before it is converted to CO2. For every unit of carbon the animal emits as CH4, it must ingest the same amount of carbon from its plant-based feed source, which, remember, comes initially from the CO2 in the atmosphere.

“From the animal's perspective every bit of carbon it emits as methane it mopped up as carbon in its feed. The animal is both the source of the carbon in methane and it is also the sink for the equivalent amount of carbon in CO2. In this sense, the carbon-methane cycle: methane-to-CO2-to-forage-plants-to-animals-to-methane, is a closed cycle.

“This is analogous to planting trees to mop up CO2. If we plant enough trees we can offset the CO2 from fossil fuels and if we plant the right amount we can become carbon neutral. But in this case, the decision to plant trees to offset fossil fuel CO2 is voluntary.

“This is not the case with methane. The methane-carbon mop is built in. The animal is both the source and the sink - you cannot have one without the other. The animal is CH4-carbon neutral.”

This, according to the science, is why methane, and therefore biological emissions from agriculture, are not included in the ETS.

Putting the science aside, the reality is, it is difficult to put a tax on something that is essentially outside of human control, an argument that has long kept agriculture free of the worries of ETS inclusion.

However, that is set to change in the near future, and so the question now becomes, how can the agriculture sector cut down on its emissions?

CUTTING DOWN ON EMISSIONS FROM THE AGRICULTURE SECTOR

The ministry for primary industries identifies four key areas where agriculture can make changes to improve the emission efficiency of their activities. These are:

  • feed and nutrition
  • animal genetics
  • pasture management
  • animal health.

As technology and science continue to develop and stimulate improvements in these areas, the issue of how agriculture addresses its emissions issue will become easier to address.

What can be said with certainty is that practices are currently underway (and have been for some time) in each of these areas, with the result of greatly reduced emissions levels. In fact, according to the Ministry for Primary Industries, although total agricultural emissions have grown by 15% since 1990, they would have increased by more than 40% if it wasn’t for the efforts of our farmers.

 

 

Information sourced from:

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