Creative Accounting and the Climate Negotiations:

Transcription

1 Creative Accounting and the Climate Negotiations: New Zealand s Approach to Quantified Emissions Limitation/Reduction Obligations (QELROs) February 2012 WWF-New Zealand

2 Summary New Zealand has yet to commit to a second period of emissions reductions under the Kyoto Protocol and has said it will only take a decision on whether to commit and how much to commit (i.e. its emissions reduction target) once certain details have been ironed-out. One such area of detail is how to calculate a country s Quantified Emissions Limitation/Reduction Obligation (QELRO); in other words, how to calculate the amount of pollution credits each country will be freely allocated over the whole commitment period. If a country exceeds this allocation, it will have to buy-in credits to offset the excess pollution. Unlike the first Commitment Period (CP1) of the Kyoto Protocol, where an average emissions level over the whole 5 years was agreed for each country making a commitment, only a 2020 emissions target (an end point) has to date been set for the second Commitment Period (CP2). The starting point has yet to be negotiated and it is the combination of this starting point, and the target, that will determine each country s allocation of Assigned Amount Units (AAUs), or pollution credits, over the commitment period. The New Zealand Government has proposed a starting point for its QELRO in CP2 of actual gross emissions at the time. Other governments are arguing for a starting point in CP2 of where countries committed to be at the end of CP1; in other words a continuation of the emissions reduction trajectory countries were supposed to begin in the first phase of the Kyoto Protocol. This briefing is split into two parts. Part one deals with the issues of principle arising from the New Zealand Government s position. It shows how New Zealand s proposal rewards countries like New Zealand where gross emissions have been increasing rather than decreasing. If New Zealand s starting point for emissions reductions in CP2 is its actual level of gross emissions at the end of CP1 rather than where New Zealand committed to be at the end of CP1, the resulting reward for New Zealand would be in the region of an additional 49 million tonnes of free credits in CP2 worth over NZ$2.4 billion (at a NZ$50 per tonne carbon price). Just as if not more important for New Zealand, and certainly more important for the rest of the world, is the potential precedent that this sets for the allocation of pollution credits in any post 2020 agreement. If New Zealand s creative accounting approach is carried over to a new global agreement, and starting points are once again recalibrated in 2020, it might even provide a perverse incentive for some countries to take no action to reduce emissions below business as usual over the next 8 years rather than pursue the non-binding reductions promised in the Copenhagen Accord. Based on current business as usual emissions projections and current policy directions, it is reasonable to assume that the current New Zealand Government has no intention of setting gross emissions on a downward path. 1 WWF-New Zealand believes the inclusion of New Zealand in CP2 will only be accepted by the New Zealand Government if the accounting rules provide New Zealand with sufficient flexibility to continue business as usual. It will therefore amount to little more than a public relations exercise. No doubt the European Union is keen for countries like New Zealand to be part of CP2. The EU may even calculate that the public relations value of having New Zealand on board is worth the compromise of allowing New Zealand to essentially get away with not having to set gross emissions on a downward path during CP2. However, this would be a dangerous road to take due 1 Chapter 5 of New Zealand s Fifth National Communication to the UNFCCC projects that with measures, New Zealand s gross emissions will slightly increase by 2020: 1

3 to the potential precedent that this accounting approach sets for a future agreement negotiated through the Durban Platform for Enhanced Action. The key question is whether accepting New Zealand s proposals will result in a fair, transparent and robust system that will help to drive down domestic emissions in all countries with commitments, or whether it is an attempt by one country to doctor the rules in order to get away with doing the minimum. If creative accounting was an effective way to address climate change, the problem would have been solved long ago. The second part of this briefing looks at four what if scenarios that make use of New Zealand Ministry for the Environment (MfE) modelling of future net emissions 2 to illustrate with numbers how this approach could play out in practice. The scenarios suggest that New Zealand s preferred gross emissions at the time starting point, combined with a 2020 net emissions reduction target, could enable New Zealand to avoid having to take any further action to reduce emissions beyond current projected business as usual, 3 yet still benefit financially. It is important to note that the net emissions projections used in this briefing are now out of date due to the fact that, since the modelling was conducted, new rules have been negotiated for Land Use, Land Use Change and Forestry (LULUCF) regarding, amongst other things, harvested wood products and afforestation/deforestation debit-credits. The Government has yet to update its modelling in light of these new rules which is why WWF New Zealand has used the previous modelling as a way to illustrate the effects of New Zealand s QELROs position. The new harvested wood products accounting method will likely have a dampening effect on New Zealand s forestry emissions (on paper) during CP2, lowering net emissions and thus increasing the amount of surplus AAUs from that shown in the four scenarios in this paper. The new afforestation/deforestation debit-credit rule will likely increase net emissions (on paper) in CP2 from those shown in the model thus reducing the amount of surplus AAUs from that shown in the four scenarios in this paper. WWF New Zealand is not in a position to estimate what the net result of these two rules will be on New Zealand s projected emissions during CP2. Bearing in mind therefore that the following figures can only be taken as illustrative, the scenarios show that if New Zealand is allowed to choose a gross emissions at the time starting point for its second Commitment Period QELRO, it could enable New Zealand to either: 1) Increase its net emissions by almost 20% and still not exceed its AAU allocation for CP2. 4 2) Continue on its current trajectory, taking no further action to reduce emissions, and still end up with an AAU surplus of up to 34.2 million tonnes (worth up to NZ$1.7 billion at a NZ$50 carbon price). 5 3) Reduce emissions and end up with an even larger AAU surplus that, depending on the rules relating to 'carry-over', could help offset the projected spike in New Zealand s net emissions that will occur during the 2020s when forests planted in the 1990s are harvested. 2 In terms of forest management, this modelling includes only sinks and sources from Kyoto forests (i.e. those planted after 1989). 3 In this briefing, 'business as usual' for New Zealand describes the emissions trajectory the country is on with existing policies, which includes the current weak Emissions Trading Scheme (ETS). The Ministry for the Environment s modelling projects that the ETS, will slow the growth in gross emissions but not set them on a downward path. According to New Zealand s Fifth National Communication to the UNFCCC, there are no other policies in place that will make a significant difference to New Zealand s emissions. 4 This figure is from a scenario based on a 5 year commitment period and following a trajectory towards a 2020 target of a 10% reduction in net emissions below a 1990 gross emissions baseline. 5 This figure is from a scenario based on a 5 year commitment period and following a trajectory towards a 2020 target of a 10% reduction in net emissions below a 1990 gross emissions baseline. 2

4 Part 1. Targets, QELROs and New Zealand s Position In Durban, countries agreed that there will be a second Commitment Period (CP2) of the Kyoto Protocol. It remains to be determined whether it will last 5 years (from 1 st Jan st Dec 2017) or 8 years (from 1 st Jan st Dec 2020). Also still to be determined is how to calculate each country's Quantified Emissions Limitation/Reduction Obligation (QELRO). Up to now, countries have set targets, or target ranges, for where annual emissions should end up by New Zealand is one of the countries that have set a conditional target range; in other words, the actual emissions reduction target New Zealand chooses will depend on the rules that have been agreed. If New Zealand's conditions are met, and carbon accounting rules that are more favourable for New Zealand are agreed, then New Zealand has said it will set a target of reducing net emissions 20% below 1990 levels. If New Zealand's conditions are not met, and the accounting rules are less favourable, New Zealand has said it will set a lower target of 10% below 1990 levels. If New Zealand's conditions are partially met, the target could be somewhere in between. Ultimately, this will make little difference to the environment; the Government seems to be planning that New Zealand's actual emissions will be similar under any of these targets. The difference will be how they are accounted for on paper. One such accounting issue still to be clarified is the starting point for the emissions reduction. In contrast to the first Commitment Period (CP1) of the Kyoto Protocol, where an average over the whole 5 years was agreed for each country making a commitment, only a 2020 target (an end point) has to date been set for CP2. In order to work out how many Assigned Amount Units (AAUs) to allocate each country for CP2, the relevant Kyoto Protocol members not only have to set out their targets but they also have to agree the starting point from which they will reduce emissions. The trajectory between this starting point and the emissions reduction target results in a QELRO. This can be expressed either as an imaginary linear trajectory from starting point to target, or as a flat average over the (5 or 8 year) commitment period. Either way, it results in a total of AAUs for the period. The total number of AAUs allocated to a country over the commitment period can be thought of as pollution permits or pollution credits. If a country pollutes more than its allocated amount over the 5 or 8 year commitment period, it will need to buy extra credits to offset that pollution, incurring a cost to the taxpayer. If the country pollutes less than its allocated amount, it can sell AAUs to other countries, or possibly bank the AAUs for future commitment periods, incurring a benefit to taxpayers. The decision on how to calculate the allocation of AAUs therefore has significant financial implications. New Zealand has been advocating that countries adopt a starting point that is the gross emissions level (for each country) at the time the commitment period begins (or the most up to date verified inventory figures at that time 6 ). However, few countries want to adopt such a system because it unfairly benefits countries where gross emissions have increased since 1990 (i.e. they get more free pollution permits) and penalises those countries where emissions have decreased. A contrasting and more robust approach is to start CP2 QELROs from where countries promised to be at the end of CP1. This would continue the emissions reduction trajectory that was supposed to begin in the first phase of Kyoto, benefit countries where emissions have actually gone down and provide an ongoing incentive for emissions reduction. These different accounting methods are represented graphically in Figure 1. The solid grey flat line shows the average reduction commitment over the 5 years of CP1. The box underneath the line represents the total allocation of AAUs (pollution credits) the country would have received during 6 So if the commitment period starts in January 2013 and the most recent peer reviewed inventory is for 2011, the 2011 figures will be used as the starting point. 3

5 CP1. If the country emitted more during CP1 than its total allocation it would need to buy credits to 'offset' this excess pollution and if it emitted less it could sell its surplus credits or possibly bank some for the next commitment period. The solid line then follows a downward trajectory to the country's CP2 target. The box underneath the solid grey line represents the total allocation of AAUs (pollution credits) the country would receive during CP2. Figure 1: Graphical Illustration of Different QELROs Accounting Methods Average reduction commitment over 5 years Recalibrating start point to increased level of actual gross emissions Extra pollution credits gained from recalibration Reduction commitment for the end of CP2 GHG Emissions Total allocation of pollution credits in CP1 Total allocation of pollution credits in CP2 Start of CP1 End of 5 year CP1 & start of 8 year CP2 End of CP2 New Zealand's proposal is that countries should 'recalibrate' their starting points to where actual gross emissions are at the beginning of CP2 (or the nearest peer reviewed inventory). The graph shows that, in the case of a country like New Zealand where gross emissions have increased rather than reduced, this 'recalibration' (shown by the dashed grey line) raises the bar for the allocation of AAUs, giving the country a higher total of pollution credits. The amount of additional credits is represented by the triangular area between the dashed and solid lines. These extra credits would make it easier to achieve the target and reduce the incentive to cut pollution. For clarity's sake, the graph does not show what would happen to a country where actual gross emissions are lower than its CP1 average (i.e. a country that has reduced emissions). In such a case, a 'recalibration' would lower the bar for the allocation of AAUs, giving the country a lower total of pollution credits for CP2, making it harder to achieve the target. Not surprisingly, the proposal that all countries adopt such an approach has met stiff opposition. This has led New Zealand to also suggest that, instead of a one size fits all approach, countries could each choose their own starting points (with New Zealand choosing its gross emissions at the time starting point) and then compare what each other have committed to do. New Zealand has argued that its preferred starting point is fairer because, it is claimed, New Zealand faces more significant challenges (and costs) in reducing emissions than other countries. Applying numbers to New Zealand's proposal, the size of the gain from the 'recalibration' can be estimated. Figure 2 shows the linear emissions reduction trajectories that would result from a 10% 4

6 target 7 (solid lines) and a 20% target 8 (dashed lines) over an 8 year commitment period. The two different trajectories for each target represent the different potential starting points for the QELRO. The lower starting point is the average level of net emissions New Zealand committed to achieve during CP1 (it is worth noting that New Zealand will likely surpass this target because actual net emissions will be slightly lower than this level). The higher starting point is where New Zealand is proposing to commence CP2 - the likely actual level of gross emissions at the end of CP1. 9 Figure 2: How Different Starting Points Affect New Zealand's QELRO 80 Emissions (millions tonnes CO2e) 'New Gross' starting point, 10% reduction 'New Gross' starting point, 20% reduction CP1 starting point, 10% reduction CP1 starting point, 20% reduction The area of the triangles between the two solid lines and between the two dashed lines represents the additional AAUs, or pollution credits, that New Zealand will gain from setting an actual gross emissions starting point for CP2 rather than continuing from where New Zealand committed to be at the end of CP1. If New Zealand commits to CP2, whichever target is adopted the total amount of extra pollution credits gained from the proposed 'recalibration' is the same; 49 million tonnes. 10 At a NZ$50 carbon price, this would be worth NZ$2.45 billion to the New Zealand Treasury. In terms of what, if any, incentive there would be to reduce gross emissions in New Zealand during CP2, this is a more complex issue explored in more detail in Part 2 of this briefing. In simple terms, based on current business as usual emissions projections, current policy directions and the conditions New Zealand has placed on adopting a reduction target, it is reasonable to assume that the current New Zealand Government has no intention of setting gross emissions on a downward 7 A 10% reduction in net emissions below 1990 gross emissions levels. 8 A 20% reduction in net emissions below 1990 gross emissions levels. 9 Previous Government models have projected emissions to be in the region of 78 million tonnes in 2012 but, due to the recession, this now seems unlikely so a lower estimate of 74 million tonnes has been used for this briefing. 10 This gain in AAUs will vary slightly if New Zealand's actual level of verified gross emissions is different from the estimate used in this paper. 5

7 path. 11 WWF-New Zealand believes the inclusion of New Zealand in CP2 will only be accepted by the New Zealand Government if the accounting rules provide New Zealand with sufficient flexibility to continue on its current course - business as usual 12 - without having to take further action to reduce emissions. It will therefore amount to little more than a public relations exercise. It is possible that other Kyoto members will either accept New Zealand s claim that 'it's harder for us than for you', or will default to an everyone can choose approach if a single system cannot be agreed. No doubt the European Union (EU) is keen for countries like New Zealand to be part of CP2. The EU may even calculate that the public relations value of having New Zealand on board is worth the compromise of allowing New Zealand to essentially get away with not having to set gross emissions on a downward path during CP2. However, this would be a dangerous road to take due to the potential precedent that this accounting approach sets for a future agreement negotiated through the Durban Platform for Enhanced Action. It is possible that setting this precedent is the critical issue for New Zealand so that the starting point for any emissions reduction in a post 2020 deal can again be 'recalibrated' in order to help mitigate (in accounting terms) the projected spike in New Zealand s forest harvesting related emissions during the 2020s. Setting a bad precedent is certainly the most important issue for the rest of the world, and certainly the most important issue for the climate because if New Zealand s creative accounting approach is carried over to a new global agreement, and starting points are once again recalibrated in 2020, it might even provide a perverse incentive for some countries 13 to ignore their non-binding Copenhagen Accord promises, take no emissions mitigation action and let gross emissions continue increasing on a business as usual trajectory over the next 8 years. The key question is whether accepting New Zealand s proposals will result in a fair, transparent and robust system that will help to drive down domestic emissions in all countries with commitments, or whether it is an attempt by one country to doctor the rules in order to get away with doing the minimum. Neither the EU, nor any other Kyoto Protocol member, should accept an approach that at best enables New Zealand to avoid taking further action and avoid setting gross emissions on a downward path, and at worst could create a perverse incentive for some other countries to take no emissions mitigation action before It would of course be best if New Zealand signed up to CP2 using a target and accounting methodology that require gross emissions to be reduced. However, if this cannot be achieved it is important to stress that the public relations benefit of having New Zealand on board with Kyoto CP2 is significantly outweighed by the potential damage New Zealand's QELROs methodology does to the international climate regime and to actual, sincere, emissions reduction efforts. To put it bluntly, if creative accounting was an effective way to address climate change, the problem would have been solved long ago. 11 Chapter 5 of New Zealand s Fifth National Communication to the UNFCCC projects that with measures, New Zealand s gross emissions will slightly increase by 2020: 12 In this briefing, 'business as usual' for New Zealand describes the emissions trajectory the country is on with existing policies, which includes the current weak Emissions Trading Scheme (ETS). The Ministry for the Environment s modelling projects that the ETS, will slow the growth in gross emissions but not set them on a downward path. According to New Zealand s Fifth National Communication to the UNFCCC, there are no other policies in place that will make a significant difference to New Zealand s emissions. 13 Particularly, those non-cp2 countries with significant forest sinks that would be advantaged by the difference between a higher gross starting point, and a net emissions target, at the start of a post 2020 deal. 6

8 Part 2. What If : Possible Scenarios for New Zealand s QELRO and Their Implications What follows are four scenarios for New Zealand s QELRO (and resulting AAU allocation), looking at what could happen with different commitment period lengths (5 and 8 years) and different targets. Scenarios 1 and 2 are based on New Zealand s low-end target of a 10% reduction in net emissions below 1990 gross emissions. Scenarios 3 and 4 are based on New Zealand s high-end target of a 20% reduction in net emissions below 1990 gross emissions. All scenarios make use of New Zealand Ministry for the Environment (MfE) modelled projections of future net emissions, 14 obtained under the Official Information Act. MfE projects, under current policies, net emissions will be 59.5 million tonnes CO2e in 2017 and 61.4 million tonnes in All scenarios are based on the following rounded numbers (in order to make the example clearer and easier to understand): NZ 1990 gross emissions 60 million tonnes NZ likely 2012 gross emissions 74 million tonnes 15 NZ projected 2012 net emissions 60 million tonnes NZ 2020 target net emissions 10-20% below 1990 gross emissions NZ 10% below 1990 target 54 million tonnes by 2020 NZ 20% below 1990 target 48 million tonnes by 2020 Carbon price in 2017 and 2020 NZ$50 (currently equivalent to 29 or US$38) It is important to note that the net emissions projections used in this briefing are now out of date due to the fact that, since the modelling was conducted, new rules have been negotiated for Land Use, Land Use Change and Forestry (LULUCF) regarding, amongst other things, harvested wood products and afforestation/deforestation debit-credits. The Government has yet to update its modelling in light of these new rules which is why WWF New Zealand has used the previous modelling to illustrate the effects of New Zealand s QELROs position. Regarding harvested wood products, in all likelihood, the new rules will create a more realistic picture of actual emissions, with the same amount of CO 2 ultimately being released but in a more gradual way over a longer time period. This new accounting method will likely have a dampening effect on New Zealand s forestry emissions (on paper) during CP2, lowering net emissions and thus increasing the amount of surplus Assigned Amount Units (AAUs) from that shown in the four scenarios in this paper. Regarding the afforestation/deforestation debit-credit rule, WWF New Zealand was advised that the model assumed an ongoing commitment period using the CP1 method of accounting (i.e. debiting the release of only carbon stored during a commitment period and crediting only carbon stored during a commitment period). The new accounting method for CP2 (i.e. debiting the release of all the carbon stored in a harvested tree but crediting only carbon stored during a commitment period) will increase net emissions (on paper) in CP2 from those shown in the model thus reducing the amount of surplus Assigned Amount Units (AAUs) from that shown in the four scenarios in this paper. WWF New Zealand is not in a position to estimate whether this increase (on paper) outweighs the reduction (on paper) caused by the harvested wood products rule. 14 In terms of forest management, this modelling includes only sinks and sources from Kyoto forests (i.e. those planted after 1989). 15 Previous Government models have projected emissions to be in the region of 78 million tonnes in 2012 but, due to the recession, this now seems unlikely so a lower estimate of 74 million tonnes has been used for this briefing. 7

9 Scenario 1: 10% Target, 5 year Commitment Period If New Zealand is permitted to choose a current gross emissions starting point (74 million tonnes) for its QELRO and a 10% reduction target (54 million tonnes by 2020), the trajectory in a 5 year commitment period, compared to Ministry for the Environment projections of New Zealand s net emissions, can be seen in the table and graph below (all figures are millions of tonnes CO2e). WWF New Zealand has been told that, if a 5 year CP is adopted, New Zealand will follow the same trajectory as if it were in an 8 year CP heading towards a 10% target by 2020, but cutting off three years earlier. Year Total Surplus Projection QELRO New Zealand QELRO Scenario 1: 10% Trajectory and 5 Year CP Emissions (millions tonnes CO2e) Year MfE net emissions projection QELRO (linear reduction trajectory) As the graph shows, for the whole 5 years of CP2, New Zealand would be earning surplus AAUs (i.e. actual net emissions would be less than New Zealand s emissions reduction obligation). By the end of the commitment period, New Zealand would have gained a substantial surplus. Based on currently projected net emissions, in this scenario New Zealand would end CP2 with a surplus of 34.2 million AAUs without having to take any further action to reduce emissions. At a NZ$50 carbon price, this would be worth NZ$1.71 billion to the New Zealand Government. 8

10 Scenario 2: 10% Target, 8 year Commitment Period If New Zealand is permitted to choose a current gross emissions starting point (74 million tonnes) for its QELRO and a 10% reduction target (54 million tonnes), the trajectory in an 8 year commitment period, compared to Ministry for the Environment projections of New Zealand s net emissions, can be seen in the table and graph below (all figures are millions of tonnes CO2e). Year Total Surplus Projection QELRO New Zealand QELRO Scenario 2: 10% Target and 8 Year CP Emissions (milions tonnes CO2e) Year MfE net emissions projection QELRO (linear reduction trajectory) As the graph shows, for the first 5 years of an 8 year CP2, New Zealand would be earning surplus AAUs (i.e. actual net emissions would be less than New Zealand s emissions reduction obligation). It is only in the last three years of the Commitment Period that net emissions exceed the obligation. By that time New Zealand would have gained a significant surplus. Based on currently projected net emissions, in this scenario New Zealand would end CP2 with a surplus of 24 million AAUs without having to take any further action to reduce emissions. At a NZ$50 carbon price, this would be worth NZ$1.2 billion to the New Zealand Government. 9

11 Scenario 3: 20% target, 5 year Commitment Period If New Zealand is permitted to choose a current gross emissions starting point (74 million tonnes) for its QELRO and a 20% reduction target (48 million tonnes by 2020), the trajectory in a 5 year commitment period, compared to Ministry for the Environment projections of New Zealand s net emissions, can be seen in the table and graph below (all figures are millions of tonnes CO2e). WWF New Zealand has been told that, if a 5 year CP is adopted, New Zealand will follow the same trajectory as if it were in an 8 year CP heading towards a 20% target by 2020, but cutting off three years earlier. Year Total Deficit Projection QELRO New Zealand QELRO Scenario 3: 20% Trajectory and 5 Year CP Emissions (millions tonnes CO2e) MfE net emissions projection Year QELRO (linear reduction trajectory) As the graph shows, for the first 4 years of a 5 year CP2, New Zealand would be earning surplus AAUs (i.e. actual net emissions would be less than New Zealand s emissions reduction obligation). It is only in the last year of the CP that net emissions exceed the obligation. The end result is a significant surplus of AAUs. Based on currently projected net emissions, in this scenario New Zealand would end CP2 with a surplus of million AAUs assuming no further action to reduce emissions. At a NZ$50 carbon price, this would be worth NZ$1.147 billion. 10

12 Scenario 4: 20% Target, 8 year Commitment Period If New Zealand is permitted to choose a current gross emissions starting point (74 million tonnes) for its QELRO and a 20% reduction target (48 million tonnes), the trajectory in an 8 year commitment period, compared to Ministry for the Environment projections of New Zealand s net emissions, can be seen in the table and graph below (all figures are millions of tonnes CO2e). Year Total Deficit Projection QELRO New Zealand QELRO Scenario 4: 20% Target and 8 Year CP Emissions (millions tonnes CO2e) Year MfE net emissions projection QELRO (linear reduction trajectory) As the graph shows, for the first 4 years of an 8 year CP2, New Zealand would be earning surplus AAUs (i.e. actual net emissions would be less than New Zealand s emissions reduction obligation). In the second half of the Commitment Period, net emissions exceed the obligation by a little more than the AAU s gained in the first four years, meaning that overall New Zealand would have incurred a small deficit at the end of CP2. Based on currently projected net emissions, in this scenario New Zealand would end CP2 with a deficit of 3 million AAUs without having to take any further action to reduce emissions. At a NZ$50 carbon price, this would cost the New Zealand Government NZ$150 million. This small deficit could be turned into a surplus by reducing New Zealand's target to 18%. Anything lower would increase the size of the surplus. 11

13 Part 2 Conclusions Whatever the length of the Commitment Period, and whatever the target, the critical point for the New Zealand Government is that an actual gross emission starting point combined with a net emissions target presents New Zealand with a number of options. 1) New Zealand could increase emissions by almost 20% and still meet the target. The following tables and graphs present a linear emissions increase scenario showing how, with a 5 year commitment period, and a 10% emissions reduction target, New Zealand s net emissions could gradually increase and end CP2 19.8% higher yet still not exceed New Zealand s overall QELRO of million tonnes and with an 8 year commitment period and 10% emissions reduction target, New Zealand s net emissions could gradually increase and end CP2 7.4% higher yet still not exceed New Zealand s overall QELRO of 502 million tonnes. Year Total 10% target QELRO Linear increase New Zealand QELRO Scenario 5: 10% Target, 5 Year CP and Linear Emissions Increase Emissions (millions tonnes CO2e) Linear increase projection Year QELRO (linear reduction trajectory) 12

14 Year Total 10% target QELRO Linear increase New Zealand QELRO Scenario 6: 10% Target, 8 Year CP and Linear Emissions Increase Emissions (millions tonnes CO2e) Year Linear increase projection QELRO (linear reduction trajectory) 2) New Zealand could continue on its current trajectory, taking no further action to reduce emissions, and still end up with an AAU surplus of up to 34.2 million tonnes (worth up to NZ$1.71 billion at a NZ$50 carbon price). Only in one of the scenarios presented above (20% target, 8 year CP) would New Zealand end up with an AAU deficit (3 million tonnes) although this provides little incentive to reduce emissions much below business as usual. In the other three scenarios, New Zealand ends CP2 with a significant surplus without having to take further action to reduce emissions. 3) New Zealand could reduce emissions and end up with an even larger AAU surplus that, depending on the 'carry-over' rules, could help offset the spike in New Zealand s net emissions that will occur during the 2020s when forests planted in the 1990s are harvested. Achieving such a surplus (to be carried over to a post 2020 deal) with minimum effort may well be the ultimate objective for the New Zealand Government. A critical period for New Zealand comes between 2020 and 2030, when emissions from forestry will spike (as trees planted in the 1990s are harvested). Ministry for the Environment projections for net emissions during the 2020s (assuming the Emissions Trading Scheme remains) are in the following table and graph. 13

15 Year Total Proj New Zealand's Projected Net Emissions Emissions (millions tonnes CO2e) Year As the graph shows, the harvesting of New Zealand s post 1990 plantation estate is projected to increase net emissions from just over 60 million tonnes in 2021 to a high of over 100 million tonnes in At an average of 88.4 million tonnes per year, New Zealand faces a major carbon liability during the 2020s. This is exacerbated by the fact that New Zealand is planning to cash-in about 60 million tonnes of credits, earned while these forests were growing during Commitment Period 1 (CP1), in order to pay off its gross emissions Kyoto CP1 debt, rather than holding on to them to help offset the spike in emissions when the forests are harvested. This projection of future liabilities is why New Zealand has been: trying to modify the QELRO accounting rules in ways that will reduce/eliminate the need for emissions reductions and/or earn as many credits as possible, trying to ensure the rules allow carry-over of as many credits as possible to future commitment periods. If the newly agreed LULUCF rules on harvested wood products are transposed into a new post 2020 agreement, the projected spike in emissions shown above will be reduced, although the total quantity of emissions will remain the same but be spread over a longer time period. WWF New Zealand has been advised that the projection above is based on the Kyoto CP1 method of accounting for 'afforestation/reforestation debit-credits'. If the new debit-credit accounting method is used in a post 2020 deal, the increase in emissions this would cause (on paper) could outweigh the reduction in emissions (on paper) caused by the new rule on harvested wood products, meaning that overall the spike would be higher. Two final caveats regarding the four scenarios in this paper 1) A seemingly small variation in the starting point will have a significant impact on the outcome. The following table shows that, if New Zealand s actual gross emissions starting point turns out to be consistent with previous MfE projections (78 million tonnes), rather than the estimation used in this briefing (74 million tonnes), it will either add 12.5 million or 14 million AAUs to New Zealand s 14

16 allocation (depending on the length of the commitment period). This would create even larger AAU surpluses for New Zealand from those shown in the first three scenarios above and turn the deficit into surplus in the fourth. Reduction target 10% 20% Starting point 5 yr CP 8 yr CP 5 yr CP 8 yr CP 74 million tonnes million tonnes Difference in AAUs Conversely, as the table below shows, if New Zealand s actual gross emissions starting point turns out to be 4 million tonnes lower than the estimation used in this briefing, it will reduce New Zealand s allocation by 12.5 million or 14 million AAUs (depending on the length of the commitment period). This would reduce the surpluses shown in the first three scenarios above and increase the deficit in the fourth. Reduction target 10% 20% Starting point 5 yr CP 8 yr CP 5 yr CP 8 yr CP 74 million tonnes million tonnes Difference in AAUs ) The MfE modelling used in the scenarios above was based on the Emissions Trading Scheme (ETS) as it was in During the 2011 election campaign, the Government made a manifesto commitment to further extend the loopholes (transitionary arrangements and temporary exclusions) in the ETS, 16 which means in the next year it is likely the ETS will be further weakened. Given that the ETS, as it was, would only have made a modest impact on New Zealand's emissions, the modifications to the ETS may not make much difference. However, it is likely that further weakening the scheme will result in a slight increase in emissions compared to those in the MfE model. February 2012 Peter Hardstaff Climate Change Programme Manager WWF New Zealand PO Box 6237 Marion Square Wellington 6141 New Zealand Tel: phardstaff@wwf.org.nz 16 See page 7: 15