Global emissions still rising
Global climate change caused by very large emissions of heat-trapping greenhouse gases (carbon) continues to accelerate as fossil-fuel use rises world-wide. For the first time, year-on-year temperature rises exceeded 1.5°C in 2023 (RNZ February 2024).
This latest NASA report on the Global Carbon Budget shows that fossil fuel use - the main driver of dangerous climate change - continues to rise despite negative impacts world-wide. Fossil fuels and land use change are "sources" of carbon emissions. The atmosphere, oceans and land (mainly forests) are "sinks" for carbon emissions.
New Zealand's emission profile is very different from the global profile
Source: Climate Watch 2024
The number one source of emissions in New Zealand is Agriculture 51% (mainly livestock emissions of methane). Second is Energy 39% (with just under half of that from cars), third Industry at 6%, and fourth Waste at 4%. Sinks are almost entirely forest land at 97% (existing forest and land converted to forest) MfE 2021. Mt means million tonnes.
New Zealand is in an unusual position with its emissions profile. Most developed countries have a profile dominated by energy emissions. See Australia's profile below, where energy emissions are about 75% of its total.
Source: Climate Watch 2024
Because New Zealand is a slightly industrialised nation, with a relatively low population drawing most of its power supply from renewable energy sources, agricultural emissions occupy first place in its emissions profile.
This is ironic, because methane from livestock is not the number one source of climate change. Carbon dioxide from human fossil-fuel use is.
Source: USEPA 2024
Livestock-sourced methane is 25% of total global methane emissions, or about 4% of all global emissions (IEA 2024).
Carbon dioxide emissions are the real villain
Carbon dioxide is the real villain because of the sheer volume of emissions from fossil fuel use, and because it circulates in the atmosphere for hundreds of years. The other gases are sidekicks compared to carbon dioxide, even accounting for methane's higher global warming potential (GWP 28) compared with carbon dioxide (GWP 1), the baseline GWP unit. Also, methane has a short life in the atmosphere of only 7-12 years (NASA 2024).
New Zealand's unique emissions profile creates problems
The prevalence of livestock-sourced methane in New Zealand's emissions profile creates a major problem for the agricultural industry and the New Zealand Government. Similarly 17% of emissions from light vehicles is problematic, because the technology involved is dependent on overseas manufacturers and most Kiwis cannot afford the current offerings of non-fossil fuel vehicles. Most electric, hybrid or hydrogen-powered vehicles are priced over $50,000, when the median wage is around $65,000 per year.
The NZETS includes all industries except Agriculture, so ETS covers only 49% of emissions The New Zealand Emissions Trading Scheme (NZETS) is a major policy tool that the Government uses to encourage reduction in carbon emissions. One carbon credit represents one tonne of a greenhouse gas equivalent (CO2e - carbon) removed from the atmosphere (carbon sequestration). There is a "cap" on the total number of emissions that are permitted in accordance with the national emissions budget set by Government, but this is only for 49% of emissions.
A price is charged for carbon emissions using domestically tradable New Zealand Units (NZU). NZU can be bought in quarterly in Government auctions, or on the secondary public market.
Carbon credits are purchased by emitters that have emission liabilities. Some "emission-intensive trade-exposed industries" (EITE) are given free allocations of NZU on the basis that their activities (eg. manufacture of aluminium, steel, cement, paper, whey), might migrate off-shore to countries that do not have equivalent emission pricing. Lately it has been determined that there has been an overallocation of credits to EITE industries, and a review is underway.
As of Tuesday 19 March 2024 the Government auction floor price was $64, and the NZU price on the secondary (publicly-traded) market was $65.40. At present the vast majority of emission removals (NZU supply) in New Zealand is achieved by forestry participants with registered Post-1989 forests. Forest owners receive an allocation of NZU as the trees grow. No type of international carbon credit is permitted on the New Zealand market.
Source: GreenXperts Limited 2022
Credit auction volumes set to reduce
The Climate Change Commission (CCC) advises the Government on the number of NZU to be auctioned, and on the price to be set for those credits. These are set to reduce over the next five years, but critically Agriculture is not included, and so these reductions will affect only 49% of emissions. The CCC's 2024 recommendations are shown below.
Source: NZCCC 2024
The CCC has advised that it considers that the market is over-supplied by 68 million credits.
Secondary market carbon price drop following March 2024 auction
On Wednesday 20 March 2024, the new National-Coalition Government hosted its first carbon auction of the year against the background of the CCC advising that it considered the market oversupplied with credits. Unsurprisingly, only 84% of the first tranche of credits sold at the reserve (and floor price) of $64, and Tier 1 and Tier 2 prices were not reached.
Secondary public market prices on the Jarden Securities Exchange dropped to $51 by close of business on Wednesday 20 March 2024. It is useful to remember that the secondary market has no statutory floor price, nor does it have a ceiling price. The 16 participants are unlikely to be back into the secondary market very soon. This result is very different from the March 2021 auction where there were 40 participants, 30 successful bidders, and a clearing price of $36. It will be fascinating to see how the secondary market adjusts itself to this price dive, as the secondary market now appears more attractive to buyers than Government auctions. On the other hand, credit sellers generally may be unwilling to let their credits go below the Government price floor of $64, unless they need to sell. The next few weeks will be very interesting.
Emissions sneaking up again
In the meantime, New Zealand's 2023 emissions have started to sneak up again after trending downward in 2022.
Source: Stats NZ 2024
This was mostly from electricity generation. Emissions are closely related to economic activity, which is why they are indexed to gross domestic product. In the September 2023 quarter, the largest increase in emissions came from electricity, gas, water, and waste services, up 39.9%, transport, postal, and warehousing up 3.7 percent, and other services' emissions increased 2.2 percent.
So to get absolute emissions down (that is those counted by Mother Nature according to the laws of physics - the only reductions that actually make a real difference), New Zealand must focus on reducing agriculture, energy, and transport emissions.
Carbon credits too cheap
Clearly carbon credits are still too cheap since there is, as yet, no firm downward emissions trend. Sustaining a downward trend is very difficult when:
51% of emissions (agriculture) are excluded from the NZETS - even though animal methane is not the primary source of dangerous climate change. Farmers will need to use strategies that comply with IPCC international carbon accounting criteria to reduce emissions, otherwise they won't count;
Renewable energy projects take 5-10 years to deploy - even though we are doing really well at 80-90% of power generation compared to other nations; and,
We rely totally on overseas technology to provide us with vehicles. The complete replacement of New Zealand's fossil-fuelled vehicle fleet with electric, hybrid or hydrogen-powered vehicles will take at least the rest of the century to achieve, or even longer if cheap fossil-fuel powered car imports continue.
Source: Imported Cars at Port of Auckland - Wikipedia 2024 CC License
The CCC's advice on credit surpluses is strictly correct given current NZETS policy settings. These policies make carbon credits artificially too cheap when the purpose of an ETS is to provide economic incentives for New Zealanders to move away from fossil-fuelled energy and transport.
Absolute carbon accounting provides a completely different picture - not enough credits
Using Mother Earth's absolute carbon counting methodology, if free industrial allocations are cancelled and agricultural emissions fully included in the NZETS, the market is actually only "over-supplied" for about 1.5 years. After that about a 40 million unit deficit occurs per year, largely because of agricultural and transport emissions.
This is New Zealand's challenge heading towards the 22nd Century.
How will we make real and lasting reductions to our emissions in the international communities' eyes, so we are seen to be pulling our weight and don't get hit with carbon tariffs (but that's another story); and more importantly how do we look in Mother Nature's eyes - we must be able to point out to others with integrity that She is the one we really need to cool down.