CLIMATE CHANGE: Emissions Trading Scheme – The Business Response

The likely postponement of the transport sector’s entry into the Government’s proposed emissions trading scheme (ETS), the intense lobbying being carried out by various interested parties from across the spectrum, and the fact that we are now just months from an election, all demonstrate that the “i’s” and “t’s” of New Zealand’s official response to climate change are still some way from being dotted and crossed.
That aside, what has been not only dotted and crossed, but also signed and sealed, is New Zealand’s ratification of the Kyoto Protocol. By signing up to Kyoto, New Zealand has effectively promised to keep the country’s total greenhouse gas emissions to 1990 levels, or to purchase sufficient “Kyoto units” to cover any increase above those levels.
The Ministry for the Environment’s latest greenhouse gas inventory shows that New Zealand’s greenhouse gas emissions are increasing – up some 25 percent between 1990 and 2005 – and the current forecast is for continuing growth in the gap between New Zealand’s actual net emissions and the amount we are entitled to generate under the Kyoto Protocol. (See table 1 opposite).
A long-term reduction in New Zealand’s greenhouse gas emissions requires significant change; the Government has decided an ETS is the most effective way to create the necessary incentive for that change. While not endorsing the Government’s overall approach, National has indicated it too favours an ETS. This is also the basis of the Australian government’s likely response to climate change, with the Rudd government last year promising to have its scheme operational by 2010.
The proposed New Zealand scheme will be based on trading government-allocated units, each backed by Kyoto unit and “worth” emissions equivalent to one tonne of carbon dioxide. Participants in the scheme will be required to surrender units to the Crown to cover their emissions.
Many will find it difficult to reduce gross emissions: much of New Zealand’s intensive industry is already at, or close to, world’s best practice; there are few easy wins on offer.
To take one example, the thermal efficiency of typical operating boiler in New Zealand is estimated to be 83 percent; the theoretical maximum thermal efficiency of an economically practical boiler is 90 percent. In other words, typically, industry is already operating at 92 percent of what is possible – not great deal of room for improvement there.
However, participants in the ETS can also create credits for themselves by investing in offshore projects that reduce carbon emissions, and then use those credits to “offset” the emissions their business generates.
To qualify as legitimate under the Kyoto Protocol, the projects that generate these credits must be over and above developments that would have been done anyway in the normal course of business. They must be response to the issue of Kyoto units, rather than simply manifestation of changing technology.
Beca, in partnership with associated companies that have expertise in guiding these projects through the certification process, is already assisting clients to identify and develop projects that meet these terms. It is also working to develop technologies that may reduce home-country emissions and thus the number of units to be surrendered by those businesses covered by the ETS.
Many New Zealand businesses will find themselves outside the ETS. As it stands, participation in the scheme is to be restricted to the following sectors: forestry, transport fuels, stationary energy, specific energy- or emissions-intensive material processing industries (such as steel, aluminium, and cement), agriculture, and waste – with the dates at which sectors will be brought into the scheme yet to be finalised.
Also still being finalised is where the obligations will fall – will it be individual farmers or processing companies, for instance, whose activities are monitored to calculate the dairy and meat industries’ obligations? However, in principle, the proposed scheme is designed so that the point of obligation is high in the supply chain – for example, in the stationary energy sector, units will generally be surrendered at the point of fuel production, import, or supply.
Structuring the scheme in this way has some advantages: notably, ease of operation. In particular, it makes it easier for the scheme’s administrators to accurately allocate units to those companies deemed to be in need of assistance (in particular those companies whose competitors around the world are not subject to similar regime).
In Europe, although the first phase of the EU ETS was successful in reducing the gross emissions of the target industries, over-allocation of carbon credits led to their price collapsing.
Minimising the number of participants in the ETS also means companies that, in practice, have little opportunity to reduce their emissions are not directly subject to the regime. Businesses and individuals purchasing electricity, for example, can’t specify the fuel used to generate it – they simply get whatever is available at the time.
However, those companies lacking an obligation (or an opportunity) to participate in the ETS will still be affected by it, and will still have an economic incentive to minimise emissions. An increase in the costs of key inputs such as petrol, diesel, aviation fuel, gas and electricity, and construction materials will influence long-term investment decisions. In the same way fluctuating world commodity markets can make long-abandoned mines economical again, the inclusion of price for carbon in various production inputs will significantly increase the return on investment for energy efficiency initiatives.
Table 2 shows indicative price increases for energy inputs. With current estimates of the price of carbon dioxide starting at about $30 per tonne, the potential impact is likely to be even more significant. Beca is currently working with companies that are assessing potential investments on the basis of carbon dioxide price as high as $50 per tonne; the flip side of this uncertainty over the actual price is delay in investment decisions.
Clearly, therefore, the energy efficiency and other initiatives which represent potential offset opportunities for ETS participants also represent economic opportunities for participants and non-participants alike.
At the other end of the supply chain, changing consumer behaviour is also motivating force for companies to reduce their carbon footprint. Demand for products and services with low greenhouse gas emissions, is growing.
Meeting this demand is driving many companies towards an involvement in the voluntary carbon market. This market has grown remarkably in the past two years, leading some financial commentators to predict it may one day become the world’s largest commodities market.
While participating in this market appeals to companies for reasons ranging from environmental altruism to brand building, it is important to note that it lacks the strict rules set out for the mandatory market represented by the ETS. An important issue for New Zealand businesses is the lack of worldwide recognition (with the Chicago Climate Exchange notable exception) for forest-sink projects, given that many of the voluntary credits purchased here are from projects of this type (ie, plantings established or deforestation avoided for the purpose of offsetting greenhouse gas emissions).
The future for New Zealand business is likely to be increasingly carbon constrained; whether directly or indirectly, the proposed ETS will introduce additional incentives for energy efficiency, and force companies to find new ways of working in order to remain economically and environmentally sustainable for the long term.

Camilla Needham is chartered chemical engineer with Beca. She has over 10 years of experience in environmental engineering, specifically in the area of air quality assessment and atmospheric pollution modelling.

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