22 December 2011

Climate Change Minister Nick Smith has announced that Certified Emission Reduction units (CERs) from HFC-23 and N2O industrial gas destruction projects are now banned from New Zealand’s Emissions Trading Scheme (effective 23 December 2011).

This means participants in New Zealand’s ETS will be unable to surrender these units to meet their obligations under the scheme, unless they bought them or have a forward contract entered into before 23 December 2011.  This exemption ends in June 2013.

"We are banning international units generated from industrial gas destruction projects involving HFC-23 and N2O because we are concerned that they create perverse incentives that may not benefit the environment. This change is about ensuring the environmental integrity of the New Zealand Emissions Trading Scheme," said Dr Smith.

This decision arises from the 2011 Review of the ETS that recommends that urgent consideration be given to banning the units and a subsequent discussion paper on the issue released in October.

“Australia and the European Union have already announced their intention to ban these industrial gas CERs from their emission trading schemes. It's important that New Zealand does the same or we risk becoming a dumping ground for units of questionable environmental benefits," said Dr Smith.

"The Government is also cognisant of the importance of market certainty. Units already in the New Zealand ETS register will be able to be used for meeting surrender obligations. Emitters who have already committed to purchase these types of units in forward contracts will be able to use them for surrender obligations until June 2013, providing contracts were entered into prior to today.

“The ETS is the most important tool New Zealand has to reduce emissions and meet our international obligations on climate change but it is complex and will require ongoing refinement.

“We will be monitoring future developments in the Clean Development Mechanism certification process to ensure any units entering the New Zealand scheme are consistent with its purpose.

"These changes have been made by regulation on Monday and take effect today. We are also planning an ETS Amendment Bill in 2012 in response to the Review Panel's report to ensure the scheme meets the Government's overall goal of New Zealand doing its fair share internationally on climate change while minimising costs on households and businesses," said Dr Smith.

The regulations will be available on the New Zealand Legislation website from Friday 23 December.

This decision follows consultation undertaken in October 2011 by the Ministry for the Environment.  The consultation document is available here.                   

What are Certified Emission Reduction units (CERs)?

Certified Emission Reduction units (CERs) are carbon credits that are issued in relation to Clean Development Mechanism (CDM) projects. The CDM is one of the flexibility mechanisms defined in the Kyoto Protocol.  It allows emissions reduction projects in developing countries to be used to assist developed countries (Annex 1 countries) in achieving their commitments under the Kyoto Protocol.

Currently, the most common types of CERs in the global market are those generated from industrial gas destruction projects, in particular those which destroy HFC-23 and N2O gasses. It has been estimated that such projects account for around 67 percent of all CERs issued to date.

Other examples of CDM projects for which CERs are generated include (but are not limited to):

• renewable energy: wind farms, hydroelectric power and landfill gas
• electricity and fuel efficiency for households and industries
• reducing emissions in industrial and manufacturing processes e.g. cement production
• reducing fugitive emissions from production and consumption of fossil fuels, halocarbons and sulphur hexafluoride.

Which units are being banned?

CERs generated from the following project methodologies are banned from being used to meet NZ ETS obligations from 23 December 2011:

• The destruction of HFC-23 (under approved methodology AM0001); and
• The destruction of N2O resulting from the production of adipic acid (under approved methodology AM0021).

Why are these units being banned?

Concern has been raised about the environmental integrity of CERs from HFC-23 and N2O industrial gas destruction projects.  Some sources have suggested the economics of these projects may create perverse incentives to increase production of these gases in non-Annex I Countries.

There is a further concern that profitability from HFC-23 destruction projects creates a perverse incentive to increase production of HCFC-22, a precursor of HFC-23. HCFC-22 is an ozone depleting gas which also has a high Global Warming Potential, and is being phased out under the Montreal Protocol.

These concerns have led the European Union to ban the surrender of CERs generated from these projects in Phase 3 (2013-2020) of the European Union Emissions Trading Scheme (EU ETS). The recently announced Australian Carbon Pricing Mechanism will also prohibit the surrender of these units for domestic compliance when the scheme enters its flexible price period in 2015.

Approval of CDM projects is governed by the CDM Executive Board. In November 2011 the CDM Executive Board approved a revised methodology that cuts the number of credits new industrial gas destruction projects can earn by a third. However this new methodology does not apply to existing projects.
The Government considers that there is enough concern about the environmental integrity of these units to warrant banning them from being used to meet obligations under the NZ ETS.

What about participants who have already purchased these units?

Any units held in the New Zealand Emission Unit Register at the time the regulations came into force (23 December 2011) may be used to meet NZ ETS obligations. In addition, an exemption is provided until 1 June 2013 for units purchased under forward contracts that were in place before 23 December 2011.

What do I have to do to get an exemption?

To be eligible for an exemption, an account holder must provide to the Registrar by 10 February 2012:

(a) a copy of the forward contract; and
(b) a statutory declaration by the account holder that the forward contract was entered into before 23 December 2011.

How do I identify banned CERs? It is the participants responsibility to identify units which are banned.  The Ministry for the Environment will provide guidance material in January 2012.

Source:  NZ Government media release