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Response: Emissions Trading Scheme & the Carbon Economy


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Emissions Trading Scheme (ETS) and the Carbon Economy

Summary

  • To mitigate climate change, we need to stop emitting greenhouse gases and transition from our carbon-based economy—from burning fossil fuels and agriculture—to a zero-carbon economy.
  • As the biggest driver of climate change is carbon dioxide (CO2), CO2 is used as a benchmark to work out what other greenhouse gases contribute. This is called their carbon dioxide equivalent or CO2–e.
  • Different industries emit different types of greenhouse gases, so each has been allocated carbon credits or ‘units’ up to a maximum or ‘cap’ they are allowed to emit. Each unit is the equivalent of one tonne of CO2–e, called ‘One NZU’ or ‘one unit’. Most people use to the term ‘carbon credits’.
  • The carbon credits they are allowed to emit is gradually being reduced, so that by 2050, they won’t be allowed to emit any at all. If they emit more than they are allowed, they must buy carbon credits from others within the ETS scheme or directly from the Government, specifically, the Environmental Protection Agency.
  • This financial incentive is the ‘cap and trade’ cornerstone of the ETS. However, some large New Zealand companies are exempt, which means the taxpayer will need to pay offsets to meet our obligations under the Paris Accord.
  • One option to offset emissions is to plant trees, which absorb CO2. Those growing trees can sell their carbon credits to the Government, or to those wishing to buy them. Some companies buy entire forests. As not all trees absorb carbon at the same rate (depends on the species and where it’s planted), the Government has specified the carbon value of each forest type.
  • The agricultural sector is responsible for 50% of New Zealand’s emissions, but under the current National-led coalition government, they will remain exempt, leaving taxpayers to pick up the costs under international trade obligations and the Paris Accord.
  • Example calculations below are for dairy cows and forestry.
  • Anyone can voluntarily offset their emissions. For example, when booking flights, you may have the option of paying to offset your emissions for that flight. But most carbon credits are ‘junk’, that is, they don’t offset emissions. Some money might go towards planting native forests, which permanently store carbon. But the bulk of offsetting is currently in plantation forests in New Zealand, which ignore environmental damage and risks (see the Billion Trees Project). Worse, some companies selling carbon credits are buying cheap credits in other countries to remove rainforests to plant palm-oil plantations.
  • If you are buying carbon credits, always check to see where your money is going. Tanes Tree Trust and Trees That Count, for example, invest in native forestry in Aotearoa.
  • See the Climate Change Commission: NZ ETS unit limits and price control settings for 2025–2029

  Response

Other sections

Home > Climate wiki > Response > Emissions Trading Scheme

Summary

  • To mitigate climate change, we need to stop emitting greenhouse gases and transition from our carbon-based economy—from burning fossil fuels and agriculture—to a zero-carbon economy.
  • As the biggest driver of climate change is carbon dioxide (CO2), CO2 is used as a benchmark to work out what other greenhouse gases contribute. This is called their carbon dioxide equivalent or CO2–e.
  • Different industries emit different types of greenhouse gases, so each has been allocated carbon credits or ‘units’ up to a maximum or ‘cap’ they are allowed to emit. Each unit is the equivalent of one tonne of CO2–e, called ‘One NZU’ or ‘one unit’. Most people use to the term ‘carbon credits’.
  • The carbon credits they are allowed to emit is gradually being reduced, so that by 2050, they won’t be allowed to emit any at all. If they emit more than they are allowed, they must buy carbon credits from others within the ETS scheme or directly from the Government, specifically, the Environmental Protection Agency.
  • This financial incentive is the ‘cap and trade’ cornerstone of the ETS. However, some large New Zealand companies are exempt, which means the taxpayer will need to pay offsets to meet our obligations under the Paris Accord.
  • One option to offset emissions is to plant trees, which absorb CO2. Those growing trees can sell their carbon credits to the Government, or to those wishing to buy them. Some companies buy entire forests. As not all trees absorb carbon at the same rate (depends on the species and where it’s planted), the Government has specified the carbon value of each forest type.
  • The agricultural sector is responsible for 50% of New Zealand’s emissions, but were exempt until 2025. Under the current National-led coalition government, they will remain exempt, leaving taxpayers to pick up the costs under international trade obligations and the Paris Accord.
  • Example calculations below are for dairy cows and forestry.
  • Anyone can voluntarily offset their emissions. For example, when booking flights, you may have the option of paying to offset your emissions for that flight. But most carbon credits are ‘junk’, that is, they don’t offset emissions. Some money might go towards planting native forests, which permanently store carbon. But the bulk of offsetting is currently in plantation forests in New Zealand, which ignore environmental damage and risks (see the Billion Trees Project). Worse, some companies selling carbon credits are buying cheap credits in other countries to remove rainforests to plant palm-oil plantations.
  • If you are buying carbon credits, always check to see where your money is going. Tanes Tree Trust and Trees That Count, for example, invest in native forestry in Aotearoa.
  • See the Climate Change Commission: NZ ETS unit limits and price control settings for 2025–2029

Creating a common ‘carbon currency‘ for all greenhouse gases

Some greenhouse gases are many times more powerful than others when it comes to warming the atmosphere. This is called their global warming potential (GWP). Three of these gases, carbon dioxide (CO2), nitrous oxide (N2O), and methane (CH4) are the main concern. Of these, CO2 from burning fossil fuels (coal, oil etc) is used as a benchmark against which the GWP of all other gases are measured.
 
This benchmark is called the carbon dioxide equivalent or CDE.
 
Some greenhouse gases stay in the atmosphere longer, so time is also included in the equation. Over 100 years, the GWP of methane (CH4) is 25 times that of CO2, so it’s written as 25CO2-e. The GWP of nitrous oxide (N2O) over the same time period is 298 so it’s written as 298CO2-e in New Zealand. Terms such as CO2eq, CO2e, or eCO2 are also used.
 
Globally, a huge variety of business, industries and people produce CO2, CH4,  N2O, and other greenhouse gases. It’s not feasible to use instruments to measure the exact amounts of these gases emitted in every situation around the world, so internationally agree upon standards are used to make estimates. These standards were developed using actual measurements taken in similar circumstances. They’re set out in the IPCC Fourth Assessment Report (AR4), the release date of which was 2007, and this is what New Zealand uses in this guide. Table 1 below is a working page for the Agricultural and Forestry sector.
 
Each country works out the types and amounts of greenhouse gases it emits; this is their greenhouse gas inventory (Fig. 1). Knowing this enables them to identify where these gases are coming from and therefore what sectors need to reduce their emissions. Unfortunately, this is based on the notion that every molecule of CO2 in the atmosphere has a simple linear effect. However, this is not the case:

The effect of increasing the concentration of atmospheric carbon dioxide on global average surface air temperature might be expected to be constant. However, doubling the atmospheric CO2 concentration increases the impact of any given increase in CO2 by about 25%, owing to changes induced in the climatological base state. The more anthropogenic CO2 emissions raise the atmospheric CO2 concentration, the more serious the consequences will be. — Science, 30 Nov. 2023

Fig.1: New Zealand's gas inventory 2018.
Fig.1: New Zealand’s gas inventory 2018.

Emissions Trading Scheme (ETS): ‘cap’ & ‘trade’

In 2016, New Zealand pledged to reduce greenhouse gases to 30% below 2005 emissions by 2030 (Fig. 2). One way to do this was to put a price on carbon and other greenhouse gases, ie, a price on CO2-e.

Fig.2: Page 2 of the 2016 Paris Agreement
Fig.2: Page 2 of the 2016 Paris Agreement
  • The primary unit of trade in the ETS is one carbon credit, which is one metric tonne (1,000 kg) of CO2-e.
  • This is written as tCO2-e, where ‘t’ = 1 tonne
  • In New Zealand this is commonly referred to as ‘One NZU’ or simply ‘one unit’.

Putting a price on carbon does not reduce greenhouse gases. It acts as incentive for businesses to reduce emissions:

  1. They should pay for NZUs if they emit more than what’s allowed under their ‘cap’. This ‘cap’ was to be reduced each year in order to make sure Aotearoa meets our commitments by 2030.
  2. The faster businesses reduce their emissions (e.g. converting to renewable energy, becoming more efficient, etc) and/or offsetting their emissions (e.g., by planting trees), the faster they can make money by selling (‘trading’) their NZUs to other business that are exceeding their cap.
  • Emitting 1 tonne of methane (CH4) is like emitting 25 tonnes of CO2 i.e. 25 NZU
  • Emitting 1 tonne of nitrous oxide (N2O) is like emitting 298 tonnes of CO2 i.e. 298 NZU
  • The largest emitter of these two extremely powerful greenhouse gases in New Zealand is agriculture (Fig. 2)
  • Agricultural emissions are not covered by the NZ ETS as the National-led Government scrapped them in 2024, ignoring advice from the Climate Commission, so that taxpayers will now be left to pay for the consequences of extreme weather events.

The Climate Change Commission 2024 emissions reduction monitoring report

This webinar shares information about the Climate Change Commission’s first annual emissions reduction monitoring report, released in July 2024.

This report provides an evidence-based, impartial view of whether the country is on course to reach its goals of reducing and removing greenhouse gas emissions (spoiler alert: it’s not). It provides insight into the progress made, challenges experienced, and opportunities and risks that need to be considered.

5 August 2024:  See the Climate Commission website

Agriculture: the offsetting problem with cows, sheep and deer—not enough land in New Zealand…or anywhere else.

If the Government allows livestock farmers to offset emissions from methane and nitrous oxide by planting trees, the numbers simply don’t stack up. In New Zealand to offset just the biogenic methane emissions from existing agricultural animals, an additional 7.7 million hectares of very risky monoculture pine plantations need to be planted. No point looking offshore. At the rate that high emitting global corporations including oil producers and large airlines are buying up land to plant trees to offset their emissions, there simply isn’t enough land anywhere on Earth.

A one-off upfront planting of 0.6 hectares per animal for dairy cattle, 0.4 hectares per animal for beef cattle, 0.2 hectares per animal for deer, and 0.08 hectares per animal for sheep would be needed. These numbers are for pine plantation forest with a 30-year rotation.

At the national level, planting around 770,000 hectares of pine plantation forest between now and 2050 achieves a similar change in temperature as reducing methane emissions from the national dairy, sheep, beef and deer herds by 10% over the same time period.

To put this area into perspective, there is currently around 9 million hectares of land being used for pastoral farming in New Zealand and around 1.7 million hectares of production forest.

This means that very large areas of forest would need to be planted to make any significant dent in the warming effect of New Zealand’s agricultural methane emissions. – Parliamentary Commissioner for the Environment, October 2022

Agriculture: claims around the ‘CO2 fertilisation effect’

For practical reasons, however, many greenhouse gas accounting systems allow some “passive” CO2 uptake, such as enhanced vegetation growth due to CO2 fertilisation, to be included as removals in the definition of net anthropogenic emissions. By including passive CO2 uptake, nominal net zero emissions would not halt global warming, undermining the Paris Agreement. Here we discuss measures addressing this problem, to ensure residual fossil fuel use does not cause further global warming: land management categories should be disaggregated in emissions reporting and targets to better separate the role of passive CO2 uptake; where possible, claimed removals should be additional to passive uptake; and targets should acknowledge the need for Geological Net Zero, meaning one tonne of CO2 permanently restored to the solid Earth for every tonne still generated from fossil sources.  – Allen et al, 2024
  • Dairy cows: example calculation for biogenic methane + nitrous oxide
     
     The calculations below are from MfE’s 2019 guidance and their summary tables and workbook (Table 1 below). Updates will change these calculations, so this an illustration of how it could work if dairy farmers were allowed to offset their emissions by planting forests.
     
    Note, these calculations DO NOT included carbon dioxide, not do they include methane emissions from other sources such as settlement /wastewater ponds.
     
    1. Methane from enteric fermentation (Fig. 3) dairy cow: 2,060kg CO2-e
    2. Methane manure management 1 dairy cow: 141kg CO2-e
    3. Nitrous oxide manure management 1 dairy cow: 9.91kg CO2-e
    4. Nitrous oxide from dairy herd soils 1 dairy cow: 514kg CO2-e
    5. Total emissions from enteric fermentation + manure management + soil = 2724.91 kg/cow
    6. The average North Canterbury dairy herd is 770 cows
    7. Total: 2,724.91kg x 770 cows = 2,098,180.7kg or 2,098.1 tonnes = 2098.1 NZUs. These emissions are currently exempt from the NZTS

    Fig. 3: Methane from enteric fermentation, also called biogenic methane. (This is conservative. The 2022 Parliamentary Commissioner for the Environment report (p10) uses 94.7.) But, for the sake of this exercise, let’s stick with the conservative 82.4kg/year, this equates to 2,060 CO2-e/cow/year.

    The agricultural sector was going to enter the ETS in 2025 with a 95% discount. That is, instead of paying for 2098.1 NZU, they would have only had to pay for 104.9NZUs. Taxpayers wpuld need to cover rest somehow, if we are to meet NZ’s goals under the Paris Agreement.  Under the current National-led coalition government, they will remain exempt.

    If the agricultural sector was required to pay 100%, the following options would apply:

    Option 1: Purchase 2098.1 NZUs (from the government or the open market). As this is constantly increasing, for this example, we’re using a maximum Government cap of $50/NZU, the calculation would be 2098.10 x $50 = NZ$104,905/year.

    However, in October 2022 it was around $80/NZU so the calculation would be 2098.10 x $80 = NZ$167,848/year.

    Option 2: Plant sufficient trees to offset these cost (calculations below)

    Option 3: Reduce the number of dairy cows + a combination of Option 1 and/or Option 2

    Option 4: Innovate; collaborate with researchers working to reduce methane emissions in cows and effluent ponds (including using methane to power dairy sheds)

    Option 5: Invest in milk products grown without cows, return dairy farms to their original native ecosystems for carbon farming (Note: Fonterra is already investing in milk products grown without cows)

    Option 6: A combination of some or all of the above

     

    For more information see:

Table 1: From the MfE Emissions Factors Workbook 2019 xls file
Table 1: From the MfE Emissions Factors Workbook 2019 xls file
Video 1: Turning degraded agricultural land into native forests using gorse as a nursery crop. This area on the Banks Pensinsula is earning around $100,000 annually from carbon credits.
Video 2: Dr Sean Weaver, CEO of EKOS explains the complex carbon economics of conservation forestry and how a return on investment using a proportion of exotic forestry can fund native forestry that gradually replaces the exotics.

More information