The COP26 summit brought governments together in Sept 2021 to discuss accelerated actions towards the goals of the Paris Agreement (2015), which is an international treaty signed by 196 participating member states at COP21 in Paris, 2015. It aims to keep the global average temperature at ‘well below’ 2 degrees above pre-industrial levels, ideally 1.5 degrees, to strengthen the ability to adapt to climate change, and build resilience; align all finance flows with, ‘a pathway towards low greenhouse gas emissions, and climate-resilient development’.
New Zealand has signed up to United Nations Framework Convention on Climate Change (UNFCCC) and as a signatory to the agreement we have to commit Nationally Determined Contributions (NDC) to climate action. Our first NDC saw us committed to reducing greenhouse gas emissions to 30% below 2005 levels by 2030. However this was refreshed at the summit to increase our commitment to reduce emissions by 50% at 2030, compared to 2005 levels.
One of COP26 objectives is to phase out coal. The current Government has already committed to removing coal as a fuel source from our economy. A ban on new coal boilers used in manufacturing and production will come into effect by 31st December 2021 and phasing out existing coal boilers by 2027.
A further option proposed is to prohibit other new fossil fuel boilers (gas, LPG) where suitable alternative technology exists and is economically viable.
The key instrument that will be used to foster a move to a low carbon economy will be the emissions trading scheme (ETS), and a series of changing emissions budgets. An emissions budget seeks to limit greenhouse gases that can be emitted over a period of time.These changing budgets are spread over three key periods: 2022-2025, 2026-2030 and 2031-2035. This will reduce the quantity of Government-issued New Zealand Carbon Units. As these quantities reduce, the cost of carbon will be increased.
When the emissions trading scheme (ETS) was first introduced, the price of carbon was fixed at $25 per tonne; however, there was a 2 for one surrender ratio meaning that for every tonne emitted, only half a tonne was surrendered, making the effective price $12.50/tonne.
Over time the market caps have been lifted, and emitters have moved to a one for one surrender ratio. In the last two years, the Government introduced a floor and ceiling in the market: $20 floor and $50 ceiling. This year, prices were raised to make the minimum price $30/tonne and ceiling price $70/tonne. The ceiling will be increased by 10% per year plus inflation.
The below table covers current carbon spot pricing and New Zealand Unit (NZU) future pricing with a view on where carbon prices could go out to in 2030. This is the cost that relates to the gas field producing natural gas or the electricity generator producing electricity. For gas customers who are Time of Use (TOU) metered, this cost is passed through as a line item on each invoice. For small commercial gas consumers and all electricity customers, the cost of the ETS is built into the energy tariff. You can see the change from 12 months ago where the carbon price has nearly doubled. In November 2018, it was priced at around $25/tonne.
Energy companies within NZ will have to look at their generational assets and search for alternative solutions in a fast and least disruptive way to avoid shortages and payment of increased ETS costs.
Transitioning the economy’s energy needs to electricity requires much more than just new generation, the national grid operator and local electricity network distributors will need to invest billions to get things moving.
Whatever is done, NZ needs to sort out its energy policy and fast to ensure the security of supply, the ability for manufacturing to thrive in NZ (by avoiding having to outsource our emissions), and keep prices as low as possible.