Emissions Trading Scheme (ETS)
Emissions Trading Scheme (ETS) and the Carbon Economy
- To mitigate the worst impacts of climate change, we need to stop emitting greenhouse gasses and transition from our carbon or fossil fuel economy to a zero carbon economy.
- Different industries emit different amounts and types greenhouse gasses, so each is allocated carbon credits or ‘units’ up to a maximum amount or ‘cap’ they can emit. This allowed ‘cap’ will gradually be reduced to zero by 2050.
- If businesses reduce emissions quickly, they can sell their unused units allowed up to their cap, and make money. If they go over their ‘cap’, they need to buy units to offset their emissions.
- Businesses can either buy credits from others within the ETS scheme or directly from the Government
- This financial incentive to become ‘carbon neutral’ quickly is the ‘cap and trade’ cornerstone of the ETS…Except that some large NZ emitters are exempt including the agricultural sector, which will be given a 95% discount when enter the market in 2025.
- The biggest single driver of climate change is carbon dioxide (CO2), so CO2 is used as a benchmark to work out how much other greenhouse gasses contribute. This is called their carbon dioxide equivalent or CO2–e . Scroll down to see how CO2-e is calculated.
- Example calculations below are for dairy cows and forestry.
- Anyone can voluntarily buy credits to offset emissions, e.g., to offset driving or flying, or by supporting businesses that are working to make this transition.
- Credits are not all the same. Some pay for planting native forests, which permanently store carbon. But some go to plantation forests, which ignore environmental damage, increasing risks to those plantations, and the amount of carbon returned into the atmosphere when trees are harvested. See the Billion Trees Project for the flaws in this scheme.
- Speculators are also buying carbon units, driving the price up beyond what the Government set as a maximum guaranteed price.
- Emissions and concentrations are not the same:
- Emissions are the amount of CO2-e being released to the atmosphere by human activity.
- Concentrations are the amount actually in the atmosphere.
Creating a common ‘carbon currency‘ for all greenhouse gasses
Some greenhouse gasses 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 gasses, 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 gasses are measured. This benchmark is called the carbon dioxide equivalent or CDE.
Some greenhouse gasses 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 gasses. It’s not feasible to use instruments to measure the exact amounts of these gasses 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 gasses it emits; this is their greenhouse gas inventory (Fig. 1). Knowing this enables them to identify where these gasses are coming from and therefore what sectors need to reduce their emissions.
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 gasses to 30% below 2005 emissions by 2030 (Fig. 2). One way to do this was to put a price on carbon and other greenhouse gasses, ie, a price on CO2-e.
- 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 gasses. It does, however act as incentive for businesses of all types to reduce emissions:
- 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.
- The faster businesses reduce their emissions (e.g. converting to renewable energy, becoming more efficient, etc) and/or by off-setting their emissions (e.g., planting enough trees), the faster they can make money by selling (‘trade’) their NZUs to other business that need to buy some because they’re 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 gasses 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 substantial discount.
Dairy cows: example calculation for biogenic methane + nitrous oxide
These calculations are taken from MfE’s 2019 guidance and also their summary tables and workbook (Table 1 below). These links are to documents on this website as any updates may change the example calculations on this page.
- Methane from enteric fermentation (Fig. 3) dairy cow: 2,060kg CO2-e
- Methane manure management 1 dairy cow: 141kg CO2-e
- Nitrous oxide manure management 1 dairy cow: 9.91kg CO2-e
- Nitrous oxide from dairy herd soils 1 dairy cow: 514kg CO2-e
- Total emissions: enteric fermentation + manure management + soil/dairy cow = 2724.91 kg
- The average North Canterbury dairy herd is 770 cows
- Total: 2,724.91kg x 770 cows = 2,098,180.7kg or 2,098.1 tonnes = 2098.1 NZU…
…except these emissions are currently EXEMPT from the NZTS
If the agricultural sector is brought into the ETS by 2025 as currently proposed, these 2098.10 NZUs will not need to be offset in full. Instead they will be calculated with a 95% discount. Taxpayers will have to pay the rest if we are to meet NZ’s goals under the Paris Agreement.
Without this discount, this is the real calculation (not including the other eCO2 costs of running a dairy farm):
- Purchase 2098.10 NZUs (from the government or the open market). As this fluctuates hourly, using a maximum Government cap of $50/NZU by 2025 (it’s already exceeded that), the calculation would be 2098.10 x $50.00 = NZ$1049.05
- Plant sufficient trees to offset the cost (calculations below)
- Reduce the number of dairy cows + reduced Option 1 and/or Option 2
- Innovate: collaborate with researchers working to reduce methane emissions in cows and from effluent ponds (including using methane to power dairy sheds)
- A combination of some or all of the above
Forestry: example calculation
Negative values (-) = negative emissions, i.e., how much CO2-e is taken out of the atmosphere and sequestered into trees.
- Planting a new forest per hectare: -33,807kg CO2-e
- Regenerating a natural forest per hectare: -5,097kg CO2-e
For example, planting 63 ha of new forest: 63 x -33,807kg = -2,129,841kg (-2,130 tonnes CO2-e) or –2130 NZUs
If this was used to offset some of the farm emissions in the example above, the calculation would be (2098.1) – (-2130) = -31.9NZUs. This would mean the farm would be 31.9NZUs in credit. The farm could use these to help offset its other emissions, such as using diesel to power vehicles and milking sheds, and methane and nitrous oxide emissions from effluent ponds and soils.
However, by taking the plantation forestry option instead of regenerating a natural forest, they would be contributing to biodiversity problems and opening themselves to increasing financial risks of planting exotic forestry.
The above calculations are for simple illustrative purposes only; they do not take into account different types of trees, where they’re planted, management plans for the forest etc. Please see this document (pages 98-102) for the full explanation.
The biggest single driver
CO2 is not the only greenhouse gas, however emitting CO2 by burning fossil fuels (coal, oil, gas) has had the biggest impact. See the Carbon Cycle.
Creating a ‘carbon currency’
The carbon dioxide equivalency for a gas is worked out by multiplying the mass and the global warming potential (GWP) of that gas. Different organisations use the same values to calculate this, however they express it in quite different ways. For example:
- IPCC (Intergovernmental Panel on Climate Change) use very large numbers because they are referring to total amounts or changes to the atmosphere of the entire planet: n×109 tonnes of CO2 equivalent: GtCO2eq, where Gt means ‘gigatonne’ or ‘billion tonnes‘ which can be written as the numerals: 109
- Industry: million metric tonnes (1,000,000kg) of carbon dioxide equivalents: MMTCDE
- Vehicles: grams of carbon dioxide equivalents per kilometre driven: gCDE/km or gCO2e/km
The release date of 2007
The next report on the Physical Science was released August 2021. This includes more complex modelling and scenarios. For example, the effect that higher temperatures have on methane production in cows and the uptake of carbon dioxide by trees. Please be aware that the examples above are only to illustrate the concept. Anyone looking to offset emissions through any mechanism should seek advice based on real-time carbon prices.
References and further reading
- Canterbury’s councils: It’s time, Canterbury – our climate change conversation
- 2021: Woodford; On Wednesday, The Government lost control of the ETS to speculators. This has big implications and challenges for the path ahead, Interest.co.nz.
- 2021: IPCC 6th Assessment Report
- 2020: Climate Change Response (Emissions Trading Reform) Amendment Act 2020
- Ministry for the Environment: New Zealand Emissions Trading Scheme
- Ministry for the Environment: Climate Change Response (Zero Carbon) Amendment Act
- Ministry for the Environment: 2019 Measuring Emissions: A Guide for Organisations
- Ministry for the Environment: 2019 Measuring Emissions: A Guide for Organisations. 2019 Summary of Emission Factors
- Ministry for Primary Industries: Agricultural Inventory Advisory Panel
- New Zealand Government Submission under the Paris Agreement: New Zealand’s Nationally Determined Contribution
- Maanaki Whenua Landcare Research: Agricultural greenhouse gasses
- Maanaki Whenua Landcare Research: Methane emissions
- Kyoto Protocol: Reference Manual on Accounting of Emissions and Assigned Amount
- Carbon Trading News New Zealand
- South Island Dairying
- 2019: IPCC: Refinement to the 2006 IPCC Guidelines for National Greenhouse Gas Inventories
- 2018: Ministry for Primary Industries: Report of the Biological Emissions Reference Group (BERG)
- 2017 Ministry for Primary Industries: A guide to Carbon Look-up Tables for Forestry in the Emissions Trading Scheme
- 2007: IPCC Annual Report 4 Climate Change 2007: The physical science basis
- 2007: IPCC 4th Assessment Report