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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 the worst impacts of climate change, we need to stop emitting greenhouse gases and transition from our carbon-based economy—from burning fossil fuels and from agriculture—to a zero-carbon economy.
  • The biggest single driver of climate change is carbon dioxide (CO2), so 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 amounts and 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 have gotten used to using the term ‘carbon credits’).
  • The units, or ‘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.
  • One option to offset emissions is to plant trees, which absorb carbon dioxide. Those growing trees can sell their carbon credits to the Government, or to those wishing to buy them. Some companies can offset their credit buy buying entire forests. As not all trees absorb carbon at the same rate (this will depend on the species and where it is planted), the Government has specified the carbon value of each forest type.
  • Even through the agricultural sector is responsible for around 50% of New Zealand’s emissions, they are exempt from the scheme until 2025. Even then, they will get a 95% discount, just a fraction of what everyone else has to pay.
  • Example calculations below are for dairy cows and forestry.
  • Anyone can voluntarily pay to offset their emissions. For example, when you book a flight, you may have the option of paying to offset your emissions for that flight. But beware. Not all carbon credits really offset your 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.
  • Speculators are also buying carbon units, driving the value up beyond what the Government set as a maximum guaranteed price. This means the Government is unable to meet its obligations under the Paris Agreement to reduce emission under the Paris Agreement. See for example this Newsroom article March 2022: ‘Growing emissions stockpile threatens climate targets‘ and the October 2022 report from the Parliamentary Commissioner for the Environment which the government ignored in December 2022.
  • 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 New Zealand.

  Response

Other sections

Home > Climate wiki > Response > Emissions Trading Scheme

Summary

  • To mitigate the worst impacts of climate change, we need to stop emitting greenhouse gases and transition from our carbon-based economy—from burning fossil fuels and from agriculture—to a zero-carbon economy.
  • The biggest single driver of climate change is carbon dioxide (CO2), so 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 amounts and 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 have gotten used to using the term ‘carbon credits).
  • The units, or ‘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.
  • One option to offset emissions is to plant trees, which absorb carbon dioxide. Those growing trees can sell their carbon credits to the Government, or to those wishing to buy them. Some companies can offsert their credit buy buying entire forests. As not all trees absorb carbon at the same rate (this will depend on the species and where it is planted), the Government has specified the carbon value of each forest type.
  • Even through the agricultural sector is responsible for around 50% of New Zealand’s emissions, they are exempt from the scheme until 2025. Even then, they will get a 95% discount, just a fraction of what everyone else has to pay.
  • Example calculations below are for dairy cows and forestry.
  • Anyone can voluntarily pay to offset their emissions. For example, when you book a flight, you may have the option of paying to offset your emissions for that flight. But beware. Not all carbon credits really offset your emissions. Some money might go towards planting native forests, which permanently store carbon. But the bulk of offsetting is currently  also pay for 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.
  • Speculators are also buying carbon units, driving the value up beyond what the Government set as a maximum guaranteed price. This means the Government is unable to meet its obligations under the Paris Agreement to reduce emission under the Paris Agreement. See for example this Newsroom article March 2022: ‘Growing emissions stockpile threatens climate targets‘ and the October 2022 report from the Parliamentary Commissioner for the Environment which the government ignored in December 2022.
  • 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 New Zealand.

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 the largest. For this reason, CO2 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 than others, 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 or from every person all 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.
Fig.1: New Zealand's gas inventory 2018.
Fig.1: New Zealand’s gas inventory 2018.

In 2018, when all of New Zealand’s greenhouse gas emissions were added up, the total was 78.9 million tonnes of CO2-e; a 24% increase on 1990 emissions. Between 2017 and 2018, gross emissions decreased by 1%. Knowing what these emissions are each year is crucial to understanding how much they increase or decrease (see NZ Statistics for annual emissions 1990-2016).

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 in itself reduce greenhouse gases. It does, however act as incentive for businesses of all types to reduce emissions:

  1. They will need to pay for NZUs if they emit more than what’s allowed under their ‘cap’. This ‘cap’ will be reduced each year in order to make sure we meet 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 (‘trade’) 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 currently not covered by the NZ ETS. The Government has proposed introducing a price on agricultural emissions from 2025.
  • However, even from 2025 the agriculture sector will be given a 95% discount.

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

If the Government were to allow 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
  • 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 will enter the ETS in 2025 with a 95% discount. That is, instead of paying for 2098.1 NZU, they need only pay for 104.9NZUs. Taxpayers will need to cover rest somehow, if we are to meet NZ’s goals under the Paris Agreement.

    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 forestrycan fund native forestry that gradually replaces the exotics.

More information