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Climate Change Leadership Forum reports

• February 2008

Mitigation Potential and the Cost of Mitigating Greenhouse Gas Emissions in New Zealand 2013 – 20

Briefing for the Climate Change Leadership Forum
Prepared by the Ministry for the Environment
February 2008

CCLF Feb 21- Paper 2

Overview

1. Mitigation of greenhouse gas emissions includes activities that reduce emissions of greenhouse gases into the atmosphere (abatement) and activities that remove carbon dioxide from the atmosphere (sequestration).
2. Knowing what it is likely to cost to mitigate greenhouse gas emissions in New Zealand by any given amount is important information for the development of domestic climate change mitigation policy. It is also important information for New Zealand to have for participating in the international negotiations over the regimes and commitments to follow the First Commitment Period of the Kyoto Protocol, 2008 - 2012. 
3. A whole-of-government project is developing estimates of the cost of planned and possible actions to mitigate emissions of greenhouse gases in New Zealand over the period 2013 - 20. Marginal mitigation cost curves are being estimated for four sources of emissions - agriculture, energy (excluding transport), transport, deforestation - and two sinks – afforestation (ie. forests established post-1989) and management of pre-1990 forests.¹
4. Each marginal mitigation cost curve² will show, for 2013 - 20, the average annual emission reduction (or sequestration) relative to "business as usual" expected from particular programmes, policies, measures or technologies and the cost of those reductions (or sequestrations). 
5. This work will be carried out iteratively over at least the next 12 months, building initial sectoral cost curves with the information that is most readily available, seeking comment from stakeholders on how best to improve the quality and scope of those estimates, obtaining further information on mitigation costs, developing refined cost curves, and so on.
6. Where practicable more than one approach may be used to estimate mitigation potential and costs in each of the six areas. There will be greater confidence in the estimates if the results from different approaches are consistent or any differences in results can be satisfactorily explained.
7. The information available, the gaps, the work in progress and the work planned in each of the six source/sink areas is addressed below.

Analytical framework

8. The focus of the project is on:
   • the period 2013 – 20
   • specific measures/policies/programmes/technologies that could significantly mitigate New Zealand’s net emissions over that period (say, > 0.8 Mt CO₂e cumulative over the 8 years)
   and for each of these producing:
   • an estimate of average annual mitigation for the period 2013 – 20 relative to a ‘business as usual’ baseline, and
   • an estimate of the cost ($/t CO₂e) of that mitigation.

9. In this project:
   • the cost of mitigation ($/t CO₂e) is the cost to New Zealand Inc.³
   • quantified co-benefits and co-costs of mitigation are included in the analysis in the few cases where this information is available (e.g. health benefits of insulating low income housing); where particular co-benefits or co-costs are known to exist but have not been quantified, this will be noted when the results of the analysis are presented.
   • the default discount rate being used is 5 percent, with sensitivity analysis using 10 percent.
10. It can be particularly difficult to accurately estimate the impact of market-based measures such as a price on greenhouse gas emissions⁴ because the impact is the result of a very large number of decentralised individual decisions. There is some evidence that in the analysis of economic incentive policies, often the cost is over-estimated or the mitigation is under-estimated.
11. From a global perspective, if domestic mitigation results in increased emissions elsewhere in the world, its value in terms of climate change mitigation is reduced or even cancelled out. Quantitative estimates of ‘carbon leakage’ are not being attempted as part of the current work on mitigation costs but where significant carbon leakage is considered possible, this will be noted when the results of the analysis are presented.
12. There is likely to be an economic upside to domestic mitigation actions, for example the development and export of goods with a low carbon footprint and new, low-carbon technologies, practices or expertise. This benefit is not addressed in this project.
13. A final point on the analytical framework concerns structural change in the economy. Over time there may be changes in the fundamental relationships within the NZ economy or the nature of the NZ economy. Such changes (referred to as ‘structural changes’) are distinct from micro-scale or short-term changes in output and employment and, should they occur, could have a significant effect on the cost to NZ Inc. of particular mitigation actions. In general the analysis in this project does not take structural change into account – in effect it assumes that past relationships within the economy will continue for the 8 year period under consideration. The exception is the modelling of the effect of a price on emissions – the models used for this analysis indicate to different degrees, some of the long term changes in the allocation of resources, output and employment within the economy that are expected to result from a price on emissions.
14. Officials are checking the consistency of this analytical framework with the methodologies used in the studies referenced by the IPCC and those being used by other countries. The greater the consistency, the more valid will be comparisons between the results of this project and the mitigation potential and costs estimated for other countries.

Afforestation

15. New forests can be established by planting exotic or indigenous tree species or by natural regeneration.
16. The Ministry of Agriculture and Forestry (MAF) has information on the historical relationship between the rate of return on exotic forestry and national planting rates. MAF also has estimates of the level of grant under the proposed Afforestation Grant Scheme (AGS) that would approximate the present value of carbon sequestered. Tender prices from the East Coast Forestry Project are one source of information on how land owners have responded to competitive tender grant schemes aimed at increasing afforestation.
17. Officials are clarifying how marginal mitigation costs should be estimated for afforestation under the AGS, under the emissions trading scheme (ETS) and under the Permanent Forest Sinks Initiative (PFSI). Initial estimates of mitigation costs for exotic afforestation under the ETS, the PFSI and the AGS should be completed by April 2008.
18. The Department of Conservation (DoC) has contracted Landcare Research to estimate current carbon stocks on public conservation land and the potential to increase those carbon stocks, including by establishing new (post-1989) indigenous forest. This work will be completed by the end of March 2008.
19. Officials are in the early stages of planning further work to estimate the mitigation potential and the costs of different scenarios for establishing new (post-1989) indigenous forest on a range of sites (eg. fertile, high-growth rate, lowland sites with high biodiversity co-benefits).

Management of pre-1990 forests

20. MAF has information that enables estimates to be made of the effect on carbon sequestration of different management options for pre-1990 exotic forest (e.g. moving to a longer rotation) and of the cost ($/t) of such mitigation activities.
21. Through the Wild Animal Control for Emissions Management Programme DoC has contracted Landcare Research to provide information on the potential effects of wild animal control (eg. control of goats and deer) on carbon sequestration in, and greenhouse gas emissions from, indigenous forests, shrublands and grasslands. The results, scheduled for the end of April 2008, are expected to provide estimates of the cost ($/t) of wild animal control as a mitigation activity in different locations.

Avoided deforestation

22. MAF has information on the financial gains to landowners from converting different classes of land to dairying and how that would be affected by the proposed ETS. The latest survey of the deforestation intentions of forest owners has recently been carried out and results will be available by April 2008. This information will enable officials to estimate the extent to which the proposed ETS will reduce planned deforestation.
23. Officials are clarifying how marginal mitigation costs should be estimated for any such avoided deforestation. Initial estimates of mitigation costs for avoided deforestation under the ETS should be completed by April 2008.

Agriculture

24. MAF has commissioned international consultancy ICF to estimate a marginal mitigation cost curve for agriculture. ICF’s final report is expected by the end of February 2008 and initial estimates of mitigation costs should be completed by April 2008.

Land use

25. Officials are looking into the use of Motu’s Land Use in Rural New Zealand (LURNZ) model as a second approach to investigate the mitigation potential in forestry and agriculture associated with a range of emission prices across the economy and the cost of that mitigation.

Energy

26. An initial marginal mitigation cost curve has been estimated for the energy sector based on the benefit-cost analysis done for the New Zealand Energy Strategy (NZES). It covers five broad sets of energy efficiency measures that are contained in the New Zealand Energy Efficiency and Conservation Strategy (NZEECS) and the introduction of a carbon price (at four different levels) into the energy sector. The emissions reductions estimated for each of the four carbon prices are reductions for the whole energy sector (stationary energy and transport). Whilst this analysis picks up the impact of the key interventions contained in the NZES and NZEECS it is not comprehensive - other policies and measures will be added to it over time. It is a work-in-progress. 

Energy sector abatement curve

Text description of figure

Four of the five sets of energy efficiency measures - home retrofits, industrial energy efficiency, energy efficiency in commercial buildings, energy efficient products - are estimated to have negative cost to New Zealand Inc. It is estimated that, together, these four measures will give average annual emission reductions of a little over 2Mt CO₂ equivalent for the period 2013 - 2020. An emissions price of $25/t is estimated to give further average annual emission reductions for that period of a little more than 2Mt CO₂ equivalent at an average cost to New Zealand Inc. of about $0/t. An emissions price of $100/t is estimated to give average annual emission reductions of over 5Mt CO₂ equivalent over and above those from the four energy efficiency measures, at an average cost to New Zealand Inc. of about $20/t.

27. Each ‘emissions price’ block on the curve shows the additional abatement over and above what is achieved in the ‘emissions price’ block immediately to its left on the curve. The cost to New Zealand Inc. ($/t) of any particular emissions price is significantly less than the emissions price itself since most of the additional cost faced by firms and households is paid to other firms and households in New Zealand. These payments result in a re-allocation of resources within New Zealand but are not an economic loss to New Zealand Inc.
28. The marginal mitigation cost curve shown above suggests that with an emissions price of $50/t CO₂e and the homes retrofit, industrial energy efficiency, energy efficiency in commercial buildings and energy efficient products programmes as set out in the NZEECS:
    • on average, annual energy sector emissions in the period 2013 - 20 would be reduced by about 5.4 Mt below business-as-usual emissions for the sector of around 23 Mt;
    • the first 2 Mt of this would have a substantial net economic benefit for New Zealand, the next 2.5 Mt would have approximately zero cost to New Zealand and the last tranche, a bit less than 1 Mt, would have an economic cost to New Zealand Inc. of about $20/t.

29. Important assumptions underlying this first estimate of an energy sector marginal mitigation cost curve include:

    • no new technologies are considered (this includes carbon capture and storage and electric vehicles both of which are expected to have an increasingly significant impact on reducing emissions from 2020);
    • there are no changes over the period 2013 – 20 from the current composition of industry or from the current emission characteristics of industrial processes⁵ and as a result there are very limited measures available to reduce emissions from industry relative to the base case over the period 2013 -20;
    • the five energy efficiency programmes are designed to address market barriers that are not addressed through emissions pricing and so, at a first order of approximation, their mitigation can be added to the mitigation from an emissions price without significant double counting.
30. Assumptions about how people will respond to particular measures and about response rates are important. If these are too optimistic the potential abatement can be difficult to achieve in practice.
31. Officials are considering whether the above estimate of a marginal mitigation cost curve can be improved by information from the recent work on energy efficiency that has been undertaken for the Electricity Commission and the Energy Efficiency and Conservation Authority.
32. Officials have begun looking at:
    • mitigation potential and marginal mitigation costs of direct use of renewables (ranging from small scale, distributed use of renewables to larger scale energy supply/generation project

and are identifying:

• transport measures/policies/programmes/technologies to be analysed
• additional feasible stationary energy measures/ policies/ programmes/ technologies (including hypothetical acceleration/expansion of existing measures/policies/programmes) to be analysed.

33. Late last year officials (the Emission Trading Group) commissioned Infometrics to use their general equilibrium model to investigate aspects of the economic impacts of the ETS. This work, which has now been publically released, included analysis based on several different emission prices. As a check on the other estimates of mitigation potential and cost associated with different emission prices, officials will look at the levels and costs of mitigation contained in this modelling work. This should be completed by April 2008.

Gaps

34. The major current gaps in mitigation potential and costs are in relation to:

    • afforestation
    • management of pre-1990 indigenous forests
    • management of pre-1990 exotic forests
    • avoided deforestation
    • agriculture
    • the Biofuels Sales Obligation
    • a hypothetical extended Biofuels Sales Obligation
    • other transport measures/policies/programmes/technologies that could give a significant reduction in emissions over the period 2013 - 20
    • direct use of renewables
    • additional feasible stationary energy measures/policies/programmes
    • heavy industry – the impact of strategic investment or dis-investment decisions
    • new technologies in the energy sector (necessary to achieve substantial emission reductions from this sector in the longer term; probably relatively little impact in the period 2013 – 20 although biofuels and electric vehicles may be becoming significant by the end of the period)
    • changes in transport infrastructure and urban form (probably necessary to achieve substantial reductions in transport emissions in the longer term but probably relatively little impact on emissions in the period 2013 – 20 because of the long time required for small incremental changes to build to a significant effect)
    • changes in social attitudes, norms and behaviour (could potentially be a very important driver of mitigation but it would be unwise to count on a significant impact on domestic emissions from this in the period 2013 - 20).

35. Assessing the mitigation potential and mitigation costs for 2013 – 20 for all the above except:

    • management of pre-1990 exotic forests
    • heavy industry
    • new technologies in the energy sector
    • changes in transport infrastructure and urban form, and
    • changes in social attitudes, norms and behaviour

is currently included in work underway or proposed for the next 12 months.

36. A consortium involving Ministry for the Environment, Victoria University, the Life Education Trust and Colmar Brunton is keen to establish a regular survey to track changes in New Zealanders' attitudes and behaviour regarding climate change. The consortium is currently seeking the additional funding needed to enable the survey to proceed.

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