Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Full credit for turning off the gas

COMMENT

Grants worth tens of millions of dollars are on offer for climate-friendly projects.

And they should be easier to come by in the second tender round of the Government's Projects to Reduce Emissions programme, which opens next week.

The Government will peel six million units off the wad of tradeable carbon credits it gets under the Kyoto Protocol and hand them out as grants to projects which will reduce the amount of greenhouse gas New Zealand will be accountable for under the climate change treaty.

Strictly speaking, what successful tenderers get is tradeable rights to some of the assigned amount units which will be allotted to New Zealand under the protocol to cover the level of emissions it is permitted in the first commitment period, 2008 to 2012.

Countries which expect to exceed their allotment will have to get credits from other sources to cover the difference.

New Zealand is unusual among Kyoto countries as the credits allowed for its expanding commercial forest estate mean it expects to have a surplus to sell.

That reduces the fiscal risk in doling some of them out now.

Theoretically, there should be no risk to the taxpayer.

To be eligible for these subsidies (sorry, incentives), a project must reduce national emissions by at least as many tonnes of carbon dioxide equivalent as the units it gets represent.

And the Government must be convinced that the project would not have occurred without the subsidy.


In the first round, started last year, most of the four million units on offer went to projects involving renewable energy.

Four wind farms and four small hydro-electric projects were awarded units.

So were a scheme to generate electricity from landfill gas, a plan to use bio-fuel to heat glasshouses, the production of combustible pellets from wood waste and a co-generation plant at the Marsden Pt oil refinery.

The round was four times over-subscribed, receiving applications from 46 projects covering 16 million tonnes of carbon dioxide avoided.

"Some were too early in the project cycle, so that there was not enough information or too many risks," Martin Harvey of the Climate Change Office said.

"For example, a scheme might involve the use of a waste stream it hadn't yet secured the rights to."

Unsuccessful bidders are free to reapply.

The second round has dropped the first round's apparent emphasis on electricity-related schemes.

"There was a perception last time that if it was not electricity it was not in the running," Harvey said.

"So we are sending an explicit signal that we will not be prioritising electricity this time."

Nor does the greenhouse gas involved have to be carbon dioxide.

"If someone in agriculture has found a measurable way to reduce nitrous oxide emissions, there's nothing to preclude that."

The second round also drops the first round's preference for schemes which will start before the Kyoto Protocol's first commitment period starts in 2008.

Harvey said that turned out to be a key factor in ranking applications. "It meant smaller, early-implemented projects had an advantage."

Last year, about 70 million tonnes of carbon credits traded on the international market.

One of the more active buyers is the Dutch Government, which plans to buy 100 million tonnes from other countries towards meeting the Netherlands' Kyoto obligations (a 6 per cent reduction from 1990 levels, or about 200 million tonnes overall).

In the most recent tender round, it paid an average €5.25 a tonne, or $9.60 at yesterday's exchange rate.

Some forward trading on the incipient and so far less liquid European emissions trading system market has been in the €8.50 to €9 range.

Dutch representatives have been in New Zealand for the past week talking to companies and municipalities which might have credits to sell.

The Dutch are interested only in parcels of 250,000 tonnes or more. The minimum reduction required to be eligible under the New Zealand projects scheme is 10,000.

But the project officer for the Dutch buying programme, Gerhard Mulder, said it was possible for several owners of credits to bundle them together. Projects could be submitted in parallel with local tender.

The credits are creatures of the Kyoto Protocol and there is a risk that it will not come into force. That depends on whether Russia ratifies it.

The Dutch Government is carrying the risk that Kyoto will not come into force and the credits will be worthless.

It is also prepared to pay up to half the value of the total contract before 2008, tied to milestones of the project.

Climate change consultant Stuart Frazer sees a second possible market for carbon credits.

Large emitters can conclude "negotiated greenhouse agreements" with the Government - essentially partial or total exemption from the planned carbon tax in exchange for committing to a programme to reduce emissions to world's best practice within an agreed time.

"Even in the absence of a national trading system [such] firms may create a market to purchase carbon credits, to offset under-performance against their contracted emissions pathway," Frazer said.

"The alternative option available for them is to pay the carbon tax for the amount of emissions that needs to be offset.

"Although the carbon tax is not due to be introduced until 2007, it is possible some firms may seek to build up a pool of credits early."

Frazer negotiated New Zealand Refining's greenhouse agreement, the only one concluded.

He warns that whenever credits are sold forward, their value will be discounted to reflect the risk that the project does not proceed as expected and the underlying units are not delivered.

Last year, Meridian Energy sold the Dutch 530,000 tonnes worth of credits the Government issued it as a subsidy towards its 90MW Te Apiti wind farm. The price is understood to be around $10.40 a tonne.

Trustpower also received credits for the 36MW second stage of its Tararua wind farm.

Those were before the first tender round, in which 888,000 tonnes-worth of credits for another 104MW of wind power were spread between Genesis Energy, New Zealand Wind Farms and Wainui Hills wind farm.

In short, every significant wind farm development announced has received or will receive a carbon credits subsidy.

But Frazer sees a downside to that. To qualify for the subsidy, projects have to persuade the authorities that they meet the "additionality " test - that they would not have been viable and would not have occurred anyway.

"The wind power industry is trying to shift from being a marginal to a mainstream industry. It will only do this if it is perceived to be economically viable," Frazer told a Wind Energy Association conference last month.

The Government plans to introduce a tax on the carbon content of fossil fuels from 2007.

A tax of $15 a tonne of carbon dioxide would add 0.8c a kilowatt hour to the cost of gas-fired electricity generation, and 1.5c/kWh to coal-fired generation.

"This alone should have a positive effect on the viability of wind power," Frazer said.

* The Climate Change Office is holding a briefing for businesses interested in the projects tender round at 11am tomorrow at the Totum on the Viaduct in Auckland.


HOW IT WORKS

Carbon credits are the currency of the Kyoto Protocol, the international treaty to limit global warming.

The Government is offering six million credits as subsidies to projects will reduce New Zealand's emissions of greenhouse gases.

Projects are eligible only if they would not be commercially viable without the subsidy.

The Dutch Government has been paying around $10 a tonne for credits and is looking for more.

Herald Feature: Climate change

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Brian Fallow

The Economics Editor of the NZ Herald

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