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Response: Emissions Trading Scheme

Emissions Trading Scheme (ETS)

Emissions Trading Scheme (ETS) and the Carbon Economy

Summary

Emissions Trading Scheme (ETS) and the Carbon Economy

Summary

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 gasses 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 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 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

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 gasses, ie, a price on CO2-e.

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 gasses. 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 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 COi.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.
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.

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