ETS And NZ's Liability: Questions And Answers

THE EMISSIONS TRADING SCHEME AND NEW ZEALAND’S KYOTO LIABILITY; QUESTIONS AND ANSWERS
SOURCE: TREASURY

By how much is the Kyoto liability expected to decrease?

The provisional net position is projected to be a deficit of 21.7 million units during the first commitment period of the Kyoto Protocol (2008-2012). This gives a Kyoto liability of $NZ481.6 million using the Treasury carbon price as at March 31 of $22.18 per tonne.

This compares with the projected deficit reported in May 2007 of 45.5 million units, that formed the basis of the Kyoto liability of $1.009 billion reported in the March 31 Crown accounts (i.e. 45.5million tonnes @ $22.18 per tonne).

Total emissions of greenhouse gases for the Kyoto Protocol commitment period are projected to be 391.5 million tonnes carbon dioxide equivalent.

What are the reasons the Kyoto liability is decreasing?

Because New Zealand’s net emissions are forecast to decrease. Details of this will be included in the Ministry for the Environment’s net emission report to be published by the end of May. However key drivers are:

 lower deforestation as a result of the ETS (4.1 million tonnes lower than last forecast, and approximately 25 million tonnes lower than without the ETS)

 lower transport emissions (8.8 million tonnes lower). Around 25% of the reduction is due to higher fuel prices, largely driven by higher crude oil prices (the use of improved data sources account for over 50% of the reduction).

 lower agriculture emissions due to effects of current drought and a continuing decline in sheep numbers (4.7 million tonnes lower);

 increased removals by forestry due to changes in the methodology to project emissions removals (5.1 million tonnes higher).

 Emissions from energy sources (excluding transport) and industrial processes are projected to be 0.7 million tonnes lower than projected in 2007 due to higher energy price expectations, emissions trading and a range of new energy policies.

What are the drivers behind the reduction in transport emissions of 8.8million tonnes?

Over 50% of the reduction is a result of the 2008 forecasts using better data then available in 2007. Around 25% of the reduction is a result of higher fuel prices.

Will the delay in bringing Transport into the ETS increase emissions and thus the Kyoto Liability?

We will have slightly lower emission reductions in the short term, but given the predominant price effect is coming from the increase in the price of crude oil, there should be little change in the level of expected emission reductions expected from the transport sector.

Is the Kyoto liability going to be subject to further revisions?

Yes, the Kyoto liability is based on a number of forecasts and assumptions all of which can, and will, change through time.

New Zealand’s net emissions position, which the Kyoto liability is largely based on, is typically updated once a year.

Why has the Kyoto liability increased in the March 31 Crown Accounts published on 5 May?

The small increase from the previous month is due solely to a decline in the value of the New Zealand dollar against the euro, the currency used for the price of Kyoto-compliant emission units.

Why is the euro used?

Most trades in Kyoto compliant emission units are stated in euros. The price is also reported in euros instead of US Dollars because this is the currency in which the latest price data is provided to the Treasury.

How often is the Kyoto liability updated?

The Kyoto liability is updated each month in the Crown accounts, usually only reflecting changes in exchange rates.

In addition, the Treasury updates the underlying price of emission units twice a year, and the Ministry for the Environment updates NZ’s projected emission units deficit annually. Both of these can change the level of the Kyoto liability.

Why are you using an out of date number in the March 2008 Crown accounts?

The Kyoto liability will decrease as a result of the new forecast level of NZ’s net emissions. The updated net emissions report, while close, is not yet finalised. As such it was not appropriate to include the results in the March 2008 Crown accounts. It is expected that this report will be finalised soon, and its results will be reflected in the Budget and Economic Fiscal Update released on Budget day.

ENDS