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Projects to Reduce Emissions - Q&A

Projects to Reduce Emissions

Questions And Answers On First Tender Round

Q What are greenhouse gas emissions?

A Greenhouse gases trap some of the heat the earth radiates back into space. This is referred to as "global warming' or the "greenhouse effect', hence the term, "greenhouse gas'. The greater the concentration of greenhouse gases in the atmosphere, the greater the projected temperature rise and associated climate change. The greenhouse gases included in the Kyoto Protocol are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and a group of synthetic gases - hydrofluorocarbons (HFCs), sulphur hexafluoride (SF6) and perfluorocarbons (PFCs).

Q What is a project?

A A project is a specific activity that reduces greenhouse gas emissions in the Kyoto Protocol's first commitment period (2008 - 2012) in return for an incentive. It may involve new technologies and practices that would not be currently economic, or where market barriers exist to prevent them being taken up. An activity cannot be a project unless it would be uneconomic without payment of the incentive.

Q What is the incentive provided by the Government for a successful bid in the Projects tender?

A Projects that provide additional emission reductions will be rewarded with emission units. These units, which are often referred to as "carbon credits', are expected to be internationally tradeable when the Kyoto Protocol comes into force. A pool of four million units is being made available for the first tender round.

Q What do successful tenderers get from the Government?

A If a project passes the various eligibility tests and is selected, then the Government will enter into a contract with the project owner to deliver future emission units to them.

Q How much is an emission unit worth?

A The international market will set the price for future emission units. Any tenderer will have to make their own assessment of the value of emission units. Greenhouse gas emissions trading is already underway through emerging national-level emissions trading schemes and on a voluntary level. One brokerage firm estimates that over 60 million tonnes of CO2-equivalent have been traded since 1996.

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Q How will projects be selected?

A Projects that have met the eligibility criteria will be selected based on the following:

- A core criterion ratio: the ratio of the number of units requested by the tenderer divided by the total CO2 (equivalent) reductions from the start of the project to the end of the Kyoto Protocol first commitment period (2008 - 2012).

- Risk assessment of the project.

Projects offering the most reductions in exchange for the least number of units will be ranked highest. The ranking system will only ration projects that have met the eligibility criteria if the total number of emission units requested by all successful projects exceeds the four million emission units available in the first tender round. If rationing is required, then larger projects that contribute to near-term electricity security will be given priority over other projects.

Q Who is responsible for the Projects tender?

A The New Zealand Climate Change Office is responsible for the tender. The Office has established the Projects to Reduce Emissions team to oversee the tender process.

Q When will the Projects tender commence?

A The first tender round is planned to take place in September and October 2003. Pre-tender briefings will be held in Auckland, Wellington and Christchurch to brief potential tenderers.

Q How frequently will the Projects tender take place?

A It is expected that Projects rounds will be held annually.

Q What process will the Projects tender follow?

A The tender will follow a three-part process:

- Call for proposals

- Assessment of proposals and decisions on successful projects

- Finalisation of project agreements with successful tenderers

There are several key elements involved:

- The Projects team will issue the tender, receive tenders, evaluate them and make recommendations to an independent Assessment Panel.

- The Assessment Panel will assess tender proposals, with administrative support from the Projects team. The Panel will produce a list of recommended projects for the Chief Executive of the Ministry for the Environment to make a final decision.

- Finalisation of a project agreement, incorporating the commitments of both parties.

Q What is additionality?

A The additionality tests for projects are investment and environmental additionality:

- Investment additionality - the project is carried out only because it receives a contract for future emission units. It would not be carried out in business-as-usual conditions.

- Environmental additionality - the project results in quantifiable emission abatement beyond what would have occurred in the absence of the project.

Q If a project is unsuccessful in this tender round, can it be considered in subsequent tender rounds?

A Yes. However it would still need to pass the eligibility tests in future rounds.

Q What part do Projects play in the Government's climate change policy package?

A Projects are a key component of the Government's confirmed policy package on climate change, announced in October 2002, to enable New Zealand to meet its targets under the Kyoto Protocol to the United Nations Framework Convention on Climate Change. The Projects policy, together with the emissions charge planned from 2007, and Negotiated Greenhouse Agreements (NGAs for firms whose competitiveness will be at risk from the charge) are expected to play key roles in reducing emissions.

Q What is the status of the Kyoto Protocol?

A More than 100 countries have ratified the Kyoto Protocol including the 15 member states of the European Union, as well as Japan, Norway, Iceland and a number of Eastern European countries. The Kyoto Protocol has not yet entered into force, but it is expected to do so following ratification by the Russian Federation.

Q Can emission units awarded to projects be used to offset the Government's proposed carbon charge or agricultural research levy?

A No, they cannot be used to offset any other domestic policy measures such as the carbon charge or the agricultural research levy.

Q Are firms with a Negotiated Greenhouse Agreement in place also eligible for Projects?

A Firms in the process of negotiating a Negotiated Greenhouse Agreement (NGA) with the Government are not eligible to participate in the Projects tender until their negotiations have been concluded. Firms with an NGA in place can submit a project proposal but a "no double dipping' principle will apply under which the Projects incentive cannot be used to help meet an agreed NGA target.

Q How does the "no double dipping' principle work in respect of Negotiated Greenhouse Agreements?

A Under the "no double dipping' principle:

- Firms in the process of negotiating a Negotiated Greenhouse Agreement (NGA) with the Government are not eligible to participate in the Projects tender until their negotiations have been concluded.

- Firms with an NGA in place can submit a project proposal but the Projects incentive cannot be used to help meet an agreed NGA target. Similarly, a firm with a successful project could apply for NGA status, but the project would be excluded from the scope of the NGA.

Q The Government has said that priority in negotiation and assessment will be afforded to larger proposals that contribute to electricity security. What does this mean in practice? How does this relate to the ranking criterion?

A As part of the assessment process, each project will be ranked in priority order according to its core criterion ratio - the number of units requested by the applicant divided by the total CO2-equivalent reductions from the start of the project to the end of the Kyoto Protocol first commitment period. Projects offering the most reductions in exchange for the least number of units would be ranked highest. The ranking system will only ration projects that have met the eligibility criteria if the total number of emission units requested by all successful projects exceeds the four million emission units available in the first tender round. If rationing is required, then larger projects that contribute to near-term electricity security will be given priority over other projects.

Q How, and to whom, do project owners sell any emission units received from the Government? Will the Government facilitate trading with other governments or overseas entities?

A Project owners can sell or assign emission units to whomever wishes to buy or receive them.

At present there is no organised or formal market for the sale of emission units, however there are a number of brokers willing to act in this area. The Dutch government has been the principal purchaser to date, and other European governments have been expressing some interest in buying emission units. The Government will maintain a register of emission units but it will not directly facilitate trading with other governments or overseas entities.

Q Why is there no reward for abatement before or after the first commitment period of the Kyoto Protocol (2008-2012)?

A Binding commitments under the Kyoto Protocol only come into effect from 2008. Rewarding abatement prior to the first commitment period could result in a net decline in New Zealand's Kyoto "account'. It is not clear what the rules and targets will be for the second commitment period so at this stage it is not appropriate to allocate units associated with this period.

Q How are the proposals for the two windfarms, which the Government agreed to support, related to the Projects mechanism?

A The Government is currently finalising two windfarm proposals from Meridian Energy and Trustpower. It has agreed that these offer benefits to electricity security and the development of the Projects first tender round. The one million emission units potentially available to these two proposals will not affect the number of units available for the Projects first tender round.

Further information: www.climatechange.govt.nz


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