Technical Advisory Group Stationary Energy and Industrial Process Component of the New Zealand Emissions Trading Scheme

Annex III: Summary Report from the Methodologies (Regulations) sub-group

Members: Carmen Blackler (Chair), Craig Palmer, John Carnegie, James Flexman, Ewan Gebbie, Sara Arhaim (MED, Robin Brasell (MFE)

Contributors: Kennie Tsui, Jim Miller, Ray Deacon, Hans Buwalda, Michael Rynne, David Fletcher

Objectives

The TAG SEIP Regulations sub-group was tasked with developing measurement methodologies for the activities related to the Stationary Energy Industrial Process sector set out in Schedule 3, Part 3 and 4 and Schedule 4, Part 4, and the other removal activities set out in Schedule 4 Part 2, Sub-part 1.

The Approach

In terms of delivering on this objective, the sub-group sought to map the relevant process, and develop formulae that appropriately reflected the point of measurement that would deliver on the goals of the emissions trading scheme. However, it was important to first determine the criteria that would be used in order to ensure that the point of measurement for which formulae were to be developed was appropriate. The sub-group discussed criteria such as:

  • Least cost
  • Coverage
  • Administrative simplicity
  • Verifiability
  • Transparency
  • Consistency
  • Non-distortionary
  • Fairness

Ultimately, these criteria boiled down to seeking to ensure that the methodologies were efficient – both in a productive and dynamic sense – and that this needed to be balanced against the goal of accuracy of measurement. This balance, or trade-off, was considered to be a pragmatic response to an otherwise potentially enormously complex area.

It is acknowledged that as a result, the proposed methodologies may not be 100% perfect. This is considered appropriate as a starting point and furthermore, until any methodology is implemented, it is difficult to determine in advance whether it is the most appropriate for the situation.

However, in light of this acknowledgement, the sub-group agreed that any regulations developed needed to incorporate some checks and balances to ensure that they continued to evolve over time in a manner that ensured that the trade-off between least cost/simplicity and accuracy remained appropriate. The nature of the checks and balances is set out below.

The Output

The industry representatives, alongside officials have developed the attached documents:-

  • Diagrams (hand drawn) to demonstrate the relevant process and the appropriate point of measurement along the supply chain; and
  • A table of methodologies by activity including point of measurement

The sub-group has developed the methodologies with the information that has been made available to it. The sub-group acknowledges that its membership did not encompass sufficient understanding to complete some of the methodologies (e.g. Refining Petroleum). In addition, with changes to the Climate Change (Emissions Trading and Renewable Preference) Bill, there are some methodologies which were not previously required which will now have to be developed (e.g., Coal Seam Methane). These methodologies will be considered and consulted on by officials and others as per normal process.

While the specifics of the methodologies as attached are reasonably self-explanatory, there are five aspects associated with their development that warrant particular mention.

Emission Factors

At this point it is worthwhile making the observation that in developing these documents, the sub-group has not focused on the specifics of the emission factors and what they should be. Instead, the sub-group determined that the development of the methodologies should – in the pursuit of the balance between least cost/simplicity and accuracy - be generic to the activity and only broken into a further level of specificity where perceived additional value or clarity in doing so.

To this end, the sub‑group’s preference – initially at least, was to have generic emission factors rather than ones specific to mines or gas fields unless there is clear evidence of differences in emission factors. The Kapuni and Kaimiro gas fields and potentially imported coal are cases in point.

The group discussed whether the emission factors used for each activity should be determined by volume (tonnage) or by energy content of the fuel. The group was comfortable with utilising either emission factor. It was agreed, however, that utilisation of energy based emission factors was more accurate, and therefore the methodologies have been developed on this basis. For example, in determining the emissions of coal, which is measured in tonnes, it was agreed that the formula should use the energy based emission factor for the type of coal multiplied by the actual calorific value of the coal. This produced a more accurate emission calculation, and decreases the variance within classes of products, e.g. variances within sub bituminous coal.

In respect of activities relating to gas, the initial preference of a generic “spec” gas emission factor was considered appropriate for all gas fields within a defined tolerance level (say 5%). However, when considering the impact under the “opt in” provision, two views emerged:-

  • The first, interprets the opt in provision as the obligation for emissions of only gas purchased which is by nature “spec gas” delivered through the gas transmission network
  • The second interprets the opt in provision as being the carve out of the “total” obligation relating to the gas field, from the mining participant (including any obligation relating to sourcing the gas from a high CO2 field)

This difference of view was not resolved by the group. Despite this, it was agreed that the formulas were unaffected by the choice of the emission factor, and that when emission factors were derived and consulted on, this issue would be further debated.

The above issues also included discussion around the Part 4 Schedule 4 not enabling large gas purchasers to opt in where they had purchased from a gas aggregator/wholesaler. The group acknowledged that this was an issue related to the drafting of the Act, and did not impact on the development of the methodologies, but was worth noting.

Stockpiling and Storage

The group acknowledged that for a number of the activities it was likely that some sort of stockpiling or storage of fuel was likely, and that emissions would not result as a function of the stockpiling or storage activity in itself. The group considered how best to incorporate this into the formulas, and agreed that some stockpile/storage adjustment was required.

Initial thoughts suggest that the methodologies should utilise “opening stockpile” and “closing stockpile” figures. However, there is still some work to be carried out on how best to achieve the desired outcome. Additionally, the group notes that in year 1 (year ending 31 December 2010), any opening stockpile calculation should be set to zero. This recognises that the stockpile at this point in time represents coal or gas mined &/or imported in a prior period (where no obligation was applicable).

The group discussed the issues raised when dealing with mixed stockpiles, e.g. bituminous and sub bituminous coal. It was agreed that a proportioning methodology would be used to determine the grades of coal coming off the stockpile.

Checks and Balances

This lead to the sub-group consideration of the need for a process by which the methodologies could continue to evolve in a manner that ensured emissions were being appropriately measured and reported. To this end, the sub-group proposes a “tolerance level” of 5% whereby any participant whose actual emissions fall outside the tolerance level can apply for a unique emission factor (UEF).8

This is considered by the sub-group to be an appropriate balance to the Crown’s right to audit and review participants’ emissions and change the emission factors to ensure that all emissions are being reported. The industrial representatives within the group agreed that the commercial drivers (specifically the penalty regime) more than adequately incentivised the participants to measure and report emissions accurately.

It should be noted that the process for applying for the UEF has not been developed by the group at this point. Officials have indicated that they are considering how this would work from a governance and administration perspective. In particular, officials will need to be cognisant of the adoption of UEFs and what that means for those who continue to use generic emission factors.

Unaccounted-for-Gas

One issue which was debated at some length was the treatment of emissions for “unaccounted for gas” (UFG) in both the gas transmission pipeline and the gas distribution networks. The sub-group initially determined that UFG should be assigned a unique emission factor to account for the higher methane component related to gas losses. However, while this was theoretically possible for purchasers of natural gas (opt‑in participants), it became practically difficult for these participants, and is complex for the mandatory participants. Furthermore to include it in the opt-in provision but not the mandatory obligation was inconsistent and inequitable both across the supply chain and across the sector.

Discussion with officials’ highlighted that the issue of UFG is related to the transmission of gas, and the associated “losses” which escape directly into the atmosphere (as these have higher methane content). It was agreed, however, that these direct losses into the atmosphere were negligible on the “transmission pipeline” and therefore the increased cost in administrative complexity of separating out direct losses (from UFG) for the small increase in accuracy was unwarranted.

The sub-group agreed that while theoretically imperfect, it was pragmatic to account for UFG using the same emission factor as the “purchased spec gas” when applying the methodological (volume * emission factor) principle. Furthermore it is envisaged that UFG emissions would be allocated using the same process as that used to allocate payment for UFG within the gas market. That is, participants will receive invoices detailing their purchased gas and their proportion of UFG. Participants would then be required to “pay for” emissions for all the purchased gas (including UFG) in accordance with the invoice. This is likely to be an area of some focus during the eventual consultation round on the methodologies.

The group acknowledges that this is an area for improvement; however, the group considered that to introduce the associated level of complexity for this activity would be detrimental to the implementation process and therefore recommends that a specific emission factor for UFG be considered in the first review period of the ETS.

Removal Activities

Due to the large differences between entities carrying out removal activities, the sub group favoured a process approach over detailed methodologies.

Officials will develop a process which entities can follow to establish they are carrying out a removal activity and to establish the amount of emissions embedded. This process will involve using a lab or a verifier to establish the relevant emission factor for each activity. There will be no default emission factors provided in the regulations.

Contrasting Views

Finally, there was the matter for the sub-group of how to accommodate different views in the development of the methodologies. While the sub-group sought unanimity, this was not possible in all instances. Differing commercial interests (as opposed to differing operational circumstances which have led to more than one formula in certain circumstances) between sub-group members have, in some instances, lead to contrasting views as to how the methodologies should be set.

By way of example, as mentioned previously, some members had a differing view to the balance of the sub-group with regard to the methodologies developed for mining gas and the “opt in” provision.

Similarly, the officials’ within the group had a differing view to the preference to use a standard “spec gas” emission factor for opt in and mandatory participants with a 5% tolerance level. The concern was whether this approach would provide enough accuracy to align with the New Zealand’s obligations as reported in its inventory. The sub-group recognises that officials may choose to use field specific emission factors, in preference to generic ones.

Noting this difference in view, the sub-group is comfortable that the methodologies are developed in such a way that they are still valid whether the emission factor is generic or by field.

Where sub-group members have differing views, and unanimity was unable to be achieved, these have not been included in the attached documentation. In preference to having multiple formulas in the tables, the sub-group essentially sought to develop a ‘base-line’ formula. This approach is largely in recognition that there is a substantial amount of water yet to go under the bridge before these methodologies are finalised – both by officials before being consulted on and as a result of the consultation process itself. It is also likely officials will consult on the differences in approaches in order to be assured an appropriately informed final view is reached.

Next Steps (for officials)

Officials anticipate releasing an exposure draft of the SEIP Regulations by the end of July.

Recommendations

It is recommended that the SEIP TAG:

  1. Agree, subject to any amendments discussed at the SEIP TAG meeting, that this report and the attached tables be provided to the ETG as the SEIP TAG’s views on the methodologies for the measurement of emissions from activities related to the stationary energy industrial process sector set out in Schedule 3, Part 3 and 4 and Schedule 4, Part 4, and the other removal activities set out in Schedule 4 Part 2, Sub-part 1.
  2. Agree, that exposure draft Regulations be reviewed by the SEIP TAG when released.

8  It should be noted, that this does not prevent a participant “within the 5% tolerance level” applying for a unique emission factor should they deem it worthwhile. The tolerance level proposed is to discourage people from applying where the difference is minuscule and the benefit is outweighed by the administrative cost.

 

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Last updated: 15 September 2008