NZ Govt policy

Straterra’s position on climate change and coal

The burning of fossil fuels is driving human-caused climate change. All of us – collectively, globally, including the coal industry – face the challenge of reducing COemissions to stabilise average surface temperatures, as agreed by 195 countries (including New Zealand) in Paris in late 2015.

That’s the problem definition. How to do this is the hard part.

Fossil fuels currently provide 81% of global primary energy. Fossil fuels, including coal, remain the fuel of choice for many developed countries, and for developing countries where priorities are clearly aimed at raising standards of living rather than environmental cost. The data produced every year by the International Energy Agency, and published in BP Energy Outlook and elsewhere confirm the reality that, globally, the world as a whole is not moving away from using fossil fuels nearly quickly enough to meet the Paris Agreement climate stabilisation targets of +1.5 to +2degC of global warming by 2050. 

Straterra supports the Government’s legislated commitment to a net zero carbon economy by 2050, provided this takes account of New Zealand’s international competitiveness during the transition, to ensure we avoid economic contraction and avoid exporting jobs and emissions. For example, if the Methanex methanol plant were to close in New Zealand, most likely, the methanol will be produced overseas with coal, delivering an overall increase in global emissions.

New Zealand needs to do its fair share in upholding the Paris Agreement, and in seeking to stabilise global climate. But it must not implement policies that undermine New Zealand, in the face of the overall sluggish response, internationally, to the climate change issue. This is not a cop out: New Zealand’s international leadership on climate change must continue to articulate New Zealand’s aspirations, and that to meet them, we need the rest of the world to also act, as they have undertaken to do.

The Covid-19 pandemic has seen a decrease in global demand for coal, the International Energy Agency reported for the first quarter of 2020 compared with Q1 of 2019. But a November 2020 study by Urgewald reveals that 440 companies of 1000 identified in the global thermal coal value chain are deepening their interests in coal. This illustrates the global challenge to reducing coal consumption.    

Some progress is being made in technologies such as solar, battery, nuclear, carbon capture and storage to achieve the emissions reductions required under the Paris Agreement. This will take many decades, given current trends, investment, the rate of innovation, and the life cycles of power plants and industrial facilities.

For the coal sector, the imperative is for new coal infrastructure for electricity generation and steel manufacture to use the best available technology. The continued development and implementation of CCS technologies are a vital contribution to global efforts to reduce emissions. The world and New Zealand must not lose sight of this.

For New Zealand, we need to understand accurately the costs and trade-offs of what we do, and benchmark global progress, so we make well-informed decisions – decisions that ensure we do our share, but don’t cost investment and jobs for no climate benefit.

The Government’s proposed non-market interventions (endorsed in the Climate Change Commission’s draft advice to the government) are opposed because they will undermine the efficiency of the New Zealand Emissions Trading Scheme (ETS). Specifically, a ban on coal in low and medium-temperature industrial process heat from 2030 risks contraction in dairy and other food processing, and hothouse horticulture, among industries, because there is currently no cost-effective alternative to coal as a source of process heat.

New Zealand’s low electricity generation carbon footprint gives us a real advantage over almost every other country – hydro, geothermal and wind.

Options open to New Zealand for achieving a lower-emissions economy include, and they all come with challenges:

  • Encouraging hybrid and electric vehicles
  • Improving energy efficiency generally
  • Increasing renewable electricity generation, noting significant economic and time constraints on achieving 100% renewable (and considering that geothermal produces some CO2 emissions)
  • Planting more trees, noting a physical limitation on new land available for tree planting
  • Producing mined and quarried materials locally, where economic, to reduce carbon miles from transport
  • Offsetting our emissions in international carbon markets (which will first need to be created, noting major obstacles currently to their creation)

A well-considered hybrid vehicle and EV strategy can play an important role in our climate change response; the Energy Effciency and Conservation Authority is driving progress in fuel efficiency; and we already have more renewable electricity generation consented for development than we need in the short term. The Government’s proposed pumped hydro scheme, as part of delivering New Zealand 100% renewable electricity by 2030, has promise, provided the economics work in favour. At the time of writing, the business case is far from proven. 

Many small actions are needed to achieve real change. And every organisation and industry – including the coal industry – needs to do its bit. For example, coal producers are working with their customers to supply them with coal for as long as they need coal during the transition, and this dialogue allows coal producers to manage their investments into the future. Where consumers do not want coal, the producers will not supply it.

Straterra welcomes transparent and informed debate on these issues, and trusts that this resource contributes to this outcome.

Let’s talk about coal. 

 

Page last updated April 2021

 

New Zealand Emissions Trading Scheme shift and update to new policy section

For many emitters in New Zealand, it will be challenging to move to affordable lower-carbon technologies, or use less coal in the immediate term. Regardless, every user will have to provision for the inevitable changes in government policy, while being mindful of their business, and the people they employ.

This is where the New Zealand Emissions Trading Scheme comes in, or supposed to come in. It includes a "secondary market" in which an ETS participating emitter can buy New Zealand Units or carbon credits at a cheaper price than the cost of reducing emissions directly, and in this way account for their emissions. That means someone else has to create the NZUs. In New Zealand, one creator of NZUs is the plantation forestry industry via the sequestration of atmospheric CO2 into growing trees.

The other creator of NZUs is the New Zealand Government. It receives an allocation of carbon credits every year under the Paris Agreement. This amounts to around 600 million tonnes of CO2 equivalent for the period 2021-2030, cf. forecast business-as usual gross emissions in New Zealand of 800 MtCO2e during the period. From 2021 onwards, the fixed-price option the Government previously offered ETS participants no longer exists. In March 2021 the NZU price on the secondary market was around $39, reflecting an FPO of $35 per unit for the 2020 compliance year. ETS participants have until 31 March every year to report the quantum of the previous year’s emissions, and until 31 May to account for them. After the first auction of NZUs, held in March this year, the carbon prices has since dropped to around $37.         

In March 2017 London-based Vivid Economics produced a report entitled Net Zero New Zealand, commissioned by 35 New Zealand MPs from all political parties. Its conclusions are still valid.

The report says New Zealand is unusual among Paris Agreement signatories in three key respects: a low-carbon electricity sector, a large part of the economy with high marginal costs of abatement (i.e., challenging to reduce emissions, e.g., agriculture and industrial process heat), and a large forestry sector (a source of emissions reductions, noting this constantly requires new plantings on new land to remain valid).

Vivid Economics used scenarios to suggest that “deep decarbonisation” measures include “energy efficiency, further decarbonisation of electricity generation, and the electrification of the transport fleet and of low-grade heat”.

There is also a question of fairness. If New Zealanders are paying a higher carbon price than our trading partners, that could be damaging to our export-led economy. Note that as at May 2020, the average carbon price worldwide was around USD$0.50/tCO2e (World Bank report, State and Trends in Carbon Pricing).

One way around this difficulty would be to link or expose the NZ ETS to an international carbon price or set of carbon prices, if such markets can be created. They do not exist at present, noting that this is a priority under the Paris Agreement. Exploratory work in this area has been underway, with New Zealand playing an active role, and the work was originally estimated to take 5-10 years.

At Paris a Carbon Pricing Leadership Coalition was established, which NZ later joined. This coalition argued for a price of $US100 a tonne of CO2e for the world to achieve the +2 degrees stabilisation target. This would entail a cost of 6% of global GDP – if, and only if, all countries impose this price. At issue for New Zealand is that much of the industrial process heat sector would close at such a price, as no longer competitive, as it is extremely unlikely that such a price would be global.    

In the event, however, that New Zealand can access or link with international carbon markets in the future, this would be an economically efficient avenue for New Zealand emitters to pursue. That is always provided overseas units are credible and relate to real emissions reductions elsewhere in the world, as opposed to the fraudulently-created "junk carbon credits" New Zealand purchased during the early 2010s.

The economic theory is simply that a functional market for CO2 emissions will enable those in the world who can reduce emissions at least cost per tonne of CO2 to do so in preference to higher-cost emissions. In practice, this has been challenging to implement, as the experience of the Kyoto Protocol attests. The US and Australia were not part of the Kyoto Protocol; Canada left the Kyoto Protocol; and the EU ETS covered and still covers only some sectors. The Paris Agreement is a crucial improvement (link to article on the Paris Agreement).