19 April 2015

Is it ‘doing our fair share’ to use creative accounting to meet New Zealand’s 2020 climate change target?

I look at how the National Government intends to use creative carbon accounting to ensure that New Zealand meets it’s 2020 climate change target (a five percent reduction) in spite of a projected trend of increasing emissions of greenhouse gases (GHG) to 2020.

On 10 April 2015, when he was releasing the latest inventory of greenhouse gases, the Minister for Climate Change Issues Tim Groser made this very confident statement; “We’re well on track to meet our 2020 target"

That target is to reduce greenhouse gas emissions to five per cent below 1990 levels by 2020.

When this was announced in 2013 the ambition (-5%) of the target was criticised as useless, pathetic and inadequate.

The five percent reduction stands in stark contrast to the Ministry for the Environments projections of increasing emissions out to 2020. The Ministry estimates that the increase in gross (total) emissions in 2020 will be 29% above the 1990 baseline (from 60 to 77 million tonnes) and the increase in net emissions (gross less any increase in the stock of carbon stored in forests) to 2020 will be 130% (from 33 to 75 million tonnes). So why is Tim Groser so confident that the target will be achieved?

Simon Terry of the Sustainability Council has commented on the ‘kicking the can down the road’ features of the Government’s climate change policies: the mismatch between the emissions target and the predicted emissions, the absence of a credible plan or carbon budget approach and the deferring of liabilities into the future.

Taking Simon Terry’s work as a starting point, I am going to look at how the Government intends to apply the accounting rules for carbon credits to achieve the 2020 target in spite of the likely predicted increase in gross and net greenhouse gas emissions.

So how is NZ going to reduce emissions by five percent by 2020?

In December 2014, at the Lima, Peru, climate change conference, NZ climate ambassador Jo Tyndall was asked that specific question. Her answer was that NZ had four ways of achieving the 2020 target;

  1. through a combination of domestic emissions reductions,
  2. removal of carbon dioxide by forests,
  3. participation in international carbon markets and,
  4. recognising surplus achieved during the first commitment period of the Kyoto Protocol.

Domestic emissions reductions are unlikely. In 2013, Tim Groser told the Herald that his "strong advice" from officials was that the 2020 target could be met without any changes to settings of the NZ emissions trading scheme (ETS). The relevant Cabinet Paper for the 2020 target also states that the 2020 target can be met without changing policies or ETS costs. In other words, the NZ ETS will remain in its current induced coma, and stay ineffective in reducing domestic emissions.

NZ can’t meet the target by buying carbon credits from international carbon markets as access was blocked at the Doha meeting because we didn’t sign up to a formal Kyoto Protocol second commitment period target.

That leaves two ways of meeting the 2020 target; removal of carbon dioxide by forests, and recognising surplus units from the first commitment period of the Kyoto Protocol. I will look at the removal of carbon dioxide by forests next.

Forest carbon and Kyoto gross-net carbon accounting

By saying “removal of carbon dioxide by forests”, politicians and officials actually mean that carbon credits will be accounted for using the Kyoto Protocol’s gross-net forest carbon accounting rule. This sounds innocuous, if a bit sleep-inducing. It is in fact a method of creative accounting that NZ has already relied on to meet the 2008-2012 Kyoto first commitment period target.

The 'baseline’, 1990 emissions, is “gross” - the sum of all emissions without subtracting any “credit” for carbon absorbed into sinks such as growing forests and land use changes. The target (2008 to 2012) emissions are “net", as credits for carbon absorbed in growing forests are recognised and are subtracted from the gross emissions. This is called gross-net accounting. This makes the comparison between baseline and target inconsistent - it is not an “apples with apples” comparison.

I have blogged on this before but Professor Martin Manning, an IPCC author and formerly of the Climate Change Research Institute at Victoria University of Wellington, explained it better in 2012.

..achieving the Kyoto Protocol target can be quite misleading because it compares net emissions over the first commitment period, 2008 – 2012, with the gross emissions in 1990. If one compares the net emissions in 2012 with those for 1990, then the increase in NZ has actually been more than 100%.

The National Government intends to repeat this gross net accounting for the 2013 to 2020 target. As long as forest growth exceeds deforestation, this will allow both net and gross emissions to increase up to the quantity of carbon absorbed in forests that was ignored in the 1990 baseline.

The Climate Action Tracker website thinks the credit for carbon absorbed in forests could be up to 25 million tonnes CO2e a year and the ‘recognition’ (under Kyoto rules) of all the units would allow NZ gross emissions to increase up to 35% above the 1990 baseline.

Surplus Kyoto units from first Commitment Period 2008 - 2012

Jo Tyndall’s final method of achieving the 2020 target is to recognise surplus units from the first commitment period of the Kyoto Protocol. According to the latest Ministry for the Environment’s net position statement for the Kyoto Protocol, NZ will finish the first commitment period (2008-2012) with a surplus of 90.8 million units.

Even though NZ has no formal 2013-2020 Kyoto ‘commitment’, NZ intends to ‘carry over’ millions of these surplus Kyoto units to the 2013-2020 period in accordance with the Kyoto Protocol rules.

The carry-over rules are of course complicated, but I calculate that NZ will be able to ‘carry over’ almost all of them - 86 million units of the various types of units (see final paragraph - Appendix ‘Carry-over’ of Kyoto first period units).

What’s wrong with having a surplus of units? An effective emissions trading scheme with a real cap would never have surplus units. Units would be scarce and realistically priced. A surplus of units is of itself evidence of a failed implementation of cap and trade frameworks such as Kyoto and the EU ETS.

A surplus of units is one consequence of emissions trading with no cap, unlimited access to international carbon markets and over-allocation of units to industry and a rock-bottom unit price. Which is exactly what we have had with the NZ ETS.

We need to remind ourselves why NZ has a surplus of units for the Kyoto Protocol first period. Although net and gross emissions increased, NZ gained surplus units by using the gross-net forest carbon accounting rule and allowing the nearly unlimited import of low-priced international units with dubious integrity which were surrendered by ETS participants to match their emissions.

According to Climate Analytics, internationally, the Kyoto first commitment period ended with 14 billion surplus units; enough to allow all the signatory countries to “comply” with their 2020 targets without restricting business as usual emissions growth.

And this is exactly what the Government intends to do.

Each Kyoto unit carried forward will be counted towards NZ’s 2020 target and will allow an additional tonne of domestic GHG emissions above the 1990 baseline.

Similarly, each carbon credit recognised for carbon absorbed in forests between 2013 and 20120 will be counted towards NZ’s 2020 target and will allow an additional tonne of domestic GHG emissions above the 1990 baseline.

Our politicians and bureaucrats could have focused on policies to reduce domestic emissions to meet the 2020 target. Achieving the 2020 target won’t be an outcome of policies to reduce emissions. Like fixing the emissions trading system. It will be an outcome of the accounting rules chosen for the carbon credits the Government can hold. That’s called creative accounting.

Appendix “Carry-over” of Kyoto first period units

The Kyoto Protocol has “carry-over” rules for unused units at the end of the 2008 - 2012 first commitment period. Some surplus units may be 'carried over’ to the second commitment period and then be used to comply with a country’s official commitment. Although NZ has not taken up a Kyoto second period commitment, NZ none the less intends to mimic the application of Kyoto rules designed to carry over surplus units from CP1 to CP2.

NZ will have a surplus of 91million units after transferring 378 million units to a cancellation account for the 378 million tonnes of emissions between 2008 and 2012.

There are limits on which and how many units can be “carried over”. All assigned amount units (AAUs) can be carried over; forest removal units (RMUs) cannot be carried over, carry-over of Certified Emission Reduction units(CERS) and Emission Reduction Units(ERUs) are limited to 2.5% of NZ’s initial assigned amount or 7.7 million each. See the UNFCCC Reference Manual

The Government will probably prefer to retire units that cannot be carried over in order to maximise the number it may carry forward.

On that basis, all 72 million RMUs will be cancelled, 37.3 millions CERs and 37.3 million ERUs will be cancelled, leaving 7.7 million each of CERs and ERUs carried forward. Then 231.4 AAUs need to be cancelled to make up to 378 million units.

The total carried over will be 86 million units composed of 7.7 million CERs, 7.7 million ERUs and 70.6 AAUs.