The Current Kyoto Provision
The current official Kyoto Provision,
as at 28 February 2006, is $582 million. This
is based on a New Zealand/US dollar exchange rate
of NZ 0.6598 cents, an estimated deficit of emission
units of 64 Mt (million tonnes) and a price per
tonne of carbon of $US6.00 (or $NZ 9.09) per emissions
unit. The price of Kyoto-compliant emission units
is updated annually by Treasury and will be next
updated in the June 2006 'actuals' reported to
Treasury.
Calculating the Kyoto Provision
When New Zealand's Provision was entered into
the Crown accounts for the first time in May 2005,
it was calculated using three variables, as follows:-
The balance of our projected
greenhouse gas emission units;
The price for Kyoto-compliant emission units (in
$US per tonne of carbon dioxide equivalent); and
The $US/$NZ exchange rate. All of these variables
can be expected to fluctuate.
Updating the Provision
The balance of our projected greenhouse gas emission
units is reported to the Minister Responsible
for Climate Change Issues on May 15th each year.
The balance may also be adjusted through the year
when significant new information is available.
A report is compiled by the Ministry for the Environment,
based on projections from the Ministry of Agriculture
and Forestry, the Ministry for Economic Development
and Ministry for the Environment. The price of
Kyoto-compliant emission units is updated annually
by Treasury and will be next updated in the June
2006 'actuals' reported to Treasury. The Provision
is also valued monthly based on the current $US/$NZ
exchange rate.
Recent changes in the Kyoto
Provision
In January 2006 the Kyoto Provision changed from
$307 million to $563 million. This increase was
partly due to the re-forecast of the deforestation
numbers which the Ministry of Agriculture and
Fisheries (MAF) recently completed. MAF’s historical
figures indicated deforestation was at 6.3 million
tonnes. This has now been revised to 21 million
tonnes which is the figure at which the Government
liability for deforestation has been capped. There
was also an adjustment of $13 million tonnes as
a result of the decision not to proceed with the
Carbon Tax. This has resulted in an increase from
$307 million to $563 million.
New Zealand and the Kyoto Protocol
New Zealand is a signatory to the Kyoto Protocol
which imposes binding emission reduction targets
on New Zealand over the First Commitment Period
(CP1: 2008 - 2012). The Kyoto Protocol entered
into force on 16 February 2005 as a result of
Russia's decision to ratify.
The position of each country
for CP1 is calculated using an internationally
agreed method. Countries may sell any surplus
emission units they earn through the Kyoto Protocol
to countries that need to purchase emission units
to make up for any deficits they may have in meeting
their Kyoto obligations. Alternatively, countries
can choose to hold on to any surplus emission
units to count against emission obligations in
future commitment periods.
About the Kyoto Liability/Provision
When New Zealand ratified the Kyoto Protocol we
agreed to work towards reducing our greenhouse
gas emissions back to the levels they were in
11000. We agreed to try and achieve this in the
period 2008 – 2012. Although we haven’t reached
that time period yet, we have done some preliminary
estimates of how we are tracking towards achieving
that goal. These preliminary estimates show New
Zealand is behind its desired target.
Because New Zealand operates
on an accrual accounting system any potential
or recognised provision has to be recorded in
the books. Most other countries that ratified
the Kyoto Protocol work on a different accounting
system and don’t have to do this. However many
countries are now working towards trying to calculate
the Provision in advance. Treasury felt that the
first official Provision was sufficiently robust
enough to book an actual value, enter it into
the books and publicly announce it. This happened
in May 2005 when the Provision was estimated to
be $307 million.
We calculate a Provision in
order to work out how much the cost will be to
the Crown to meet our Kyoto commitments. When
we do this Provision it goes through a robust
review process involving Audit New Zealand and
other external reviewers.
When New Zealand's Provision
was entered into the Crown accounts for the first
time in May 2005, it was calculated using three
variables, as follows:
The total sum of our projected
greenhouse gas emission units deficit;
The price for Kyoto-compliant emission units (in
$US per tonne of carbon dioxide equivalent); and
The $US/$NZ exchange rate.
All of these variables can be expected to fluctuate
over time.
Why does the Kyoto Provision
keep increasing?
In January 2006 the Kyoto Provision changed from
$307 million to $563 million. This increase was
partly due to the re-forecast of the deforestation
numbers which the Ministry of Agriculture and
Fisheries (MAF) recently completed. In the past
MAF’s historical figures indicated deforestation
was at 6.3 million tonnes. They have now completed
further research into this and now estimate it
to be between 21 and 38 million tonnes. The Government
has capped this figure at 21 million tonnes. The
increase from $307 million to $563 million was
also due to the removal of the Carbon Tax. Even
if the Carbon Tonne level doesn’t change – the
dollar value will as exchange rates, the price
of Carbon and the dollar value changes. The Kyoto
Provision is updated each month.
What are the costs of climate
change to New Zealand?
From an economic perspective the most significant
costs of climate change will be an increase of
up to fourfold in flood risk in most regions;
a twofold to fourfold increase in drought risk,
especially in eastern regions; eroding and retreating
coastlines; and changing biosecurity risks. The
costs of these impacts are likely to be highly
significant for New Zealand. The February 2004
flood cost was about $0.3 billion. The late 11000s
droughts cost well over $1 billion.
Is estimating our Kyoto Protocol
provision complex?
Yes it is complex because the Kyoto Protocol is
a new initiative and the forecasting methods are
still evolving. New Zealand is one of the first
countries in the world to put the Kyoto Provision
on the country’s official accounts. We are doing
a good job in this area and have received praise
internationally for the methodologies we have
adopted to undertake this task.
Imagine trying to do a prediction
of the future value of the NZ dollar, GDP, oil
prices, energy use, the climate, car numbers,
tree planting, tree cutting and industry devices
for a period of 10 years ahead of time. The Kyoto
Provision combines all these factors. It’s very
complex and there are a lot of variables that
change all the time.
Who provides the numbers for
the Kyoto Provision?
Estimating the Kyoto Provision is a Whole-of-Government
initiative involving the Ministry of Agriculture
and Fisheries (MAF), the Ministry of Economic
Development (MED), the Ministry for the Environment
(MfE) and Treasury. In terms of time spent working
on the Kyoto Provision, each Government department
spends a different amount of time calculating
their components of the Provision, as follows:
MAF: 40%
MED: 30%
MfE: 20%
Treasury: 10%
What influences the level of the Kyoto Provision?
The numbers represent our greenhouse gas emissions
minus our ability to remove Carbon via forest
sinks. If our greenhouse gas emissions are estimated
to be high, then the level of the Kyoto Provision
will be high. The reality is we have cut down
more forests than we have planted – that is going
to have a direct impact on our greenhouse gas
emissions.
Is the Kyoto Provision likely
to increase again?
The number is always going to change. However
as we get closer to the end of the first commitment
period (2008 - 2012) the forecasts will be more
robust.
Does anyone review these numbers
before they are entered in the books?
Yes. Audit New Zealand always reviews and approves
the numbers before they are entered in the books
and publicly declared.
How come the Government can’t
confirm our exact Kyoto Provision right now?
It is the nature of forecasting and the nature
of provisions that they change all the time. However
over time we will have more certainty in the numbers.
These are all just forecasts at the moment – they
are not set in concrete. If our actions change,
then our numbers may change.
History of New Zealand's Kyoto
Provision
May 2005
In May 2005 the projected Kyoto
Provision was updated and for the first time projected
a deficit of 36.2 million units (million tonnes
of Carbon Dioxide equivalent).
Treasury estimated the price of emissions units
using World Bank Data on early trades and the
end of month exchange rate.
The liability associated with
the 2005 Kyoto Provision ‘net position’ report
used a price of $NZ8.48 ($US6.00) per emissions
unit. The estimate of the price of emissions units
used by Treasury was reviewed by the Allen Consulting
Group.
The Kyoto Provision in May 2005 was estimated
at $307 million ($NZ8.48 X 36.2 Mt CO2-e).
December 2005
In December 2005 the projected
deficit of emissions units was increased from
36.2 million units to 50.9 million units (increase
of 14.7 million units) reflecting the latest information
from the Ministry of Agriculture and Forestry
(MAF) for deforestation intentions 2008-2012.
Projected deforestation increased from 6.3 Mt
CO2-e to 21 Mt CO2-e for the first commitment
period.
The change from deforestation is a forecasting
change and was noted in the Ministry for the Environment’s
December Cabinet paper.
The decision not to proceed
with the proposed Carbon Tax added approximately
13.1 million units to the Kyoto Provision. This
was based on SADEM model results from the Ministry
for Economic Development.
The cancellation of the proposed Carbon Tax constituted
a policy change and the resulting increase in
liability was appropriated in December 2005, at
the same time the policy decision was taken to
not proceed with the proposed tax.
The Kyoto Provision, based on latest information
regarding expected deforestation and the decision
to withdraw the Carbon Tax, will probably increase
the deficit of emissions units to 64.0 million
units (36.2+14.7+13.1).
January 2006
The valuation of the Kyoto Provision
is adjusted monthly for the average exchange rate.
On 31 January the exchange rate was 0.68245 implying
a local price for emissions units of $NZ8.79.
These values were reported in the Crown Financial
Statements on 10 March 2006. Based on these numbers,
the Kyoto Provision was then adjusted to $NZ563
million ($NZ8.79 X 64.0 Mt CO2-e).
April 2006
The Kyoto Provision is updated
each month in the Crown financial statements to
reflect the changes in the Provision such as the
exchange rate. • As the US/NZ Exchange Rate has
changed to 0.65980 the Kyoto Provision for April
2006 is estimated at $582,000 (64,000,00 Carbon
Units at $6 USA/ 0.65980 US/NZ Exchange Rate).
