Calculation of New Zealand’s Position under the Kyoto Protocol

Page updated 6 May 2009

New Zealand’s Position under the Kyoto Protocol is calculated using three variables:

• The quantum (size) of New Zealand’s projected emission units position;
• A price for Kyoto-compliant emission units (a “carbon price”); and
• The exchange rate between the New Zealand and European currencies.

Quantum

The quantum of the emission units position represents New Zealand’s projected net balance of greenhouse gas emission units over the First Commitment Period of the Kyoto Protocol (2008-12) relative to 1990 baselines (the “net position”). An emission unit is equivalent to one tonne of carbon dioxide equivalent (CO2-e). A projected deficit of emission units represents a net financial liability to the Government. A projected surplus of emission units represents a net financial asset to the Government.

The quantum has been compiled from agricultural, forest sink and deforestation projections provided by the Ministry of Agriculture and Forestry, energy (including transport) and industrial processes projections from the Ministry of Economic Development and waste projections from the Ministry for the Environment.

The quantum is updated annually through a process co-ordinated by the Ministry for the Environment. Each year’s revised quantum is incorporated into the Financial Statements of the Government of New Zealand as soon as the information is finalised. In the event that material changes are made to sectoral forecasts, these are also incorporated as they arise and disclosed in the Financial Statements at the first monthly reporting opportunity.

For more information regarding the compilation of the quantum see the Questions and answers on New Zealand’s net position page on the Ministry for the Environment’s climate change web site.

Changes in the Quantum

New Zealand’s position under the Kyoto Protocol was recognised for the first time in the Financial Statements of the Government of New Zealand for the Eleven Months Ended 31 May 2005 (published in June 2005). At that time the quantum was estimated at a deficit of 36.2 million tonnes (Mt) of CO2-e.

In December 2005, following a review of climate change policies, the quantum was revised to a deficit of 64 Mt. This reflected the Government’s decision not to proceed with the planned carbon tax, as well as a revision to deforestation estimates.

The climate change policy review and the associated Cabinet paper and Minute are available on the Review of Climate Change Policies page on the Ministry for the Environment’s climate change web site.

In May 2006 the annual revision to the quantum produced an estimate of a deficit of 41.2 Mt. The report documenting the latest revision of the quantum is available on the Ministry for the Environment’s climate change web site. Projected balance of emissions units during the first commitment period of the Kyoto Protocol (June 2006).

In June 2007 the annual revision the annual revision to the quantum produced an estimate of a deficit of 45.5 Mt. The report documenting the latest revision of the quantum is available on the Ministry for the Environment’s web site: Projected balance of emissions units during the first commitment period of the Kyoto Protocol (September 2007).

In May 2008 the annual revision to the quantum produced an estimate of a deficit of 21.7 Mt. The report documenting the latest revision of the quantum is available on the Ministry for the Environment’s web site: see Net Position Report 2008: Projected balance of emissions units during the first commitment period of the Kyoto Protocol (May 2008).

The Ministry for the Environment released the 2009 Net Position report on Wednesday 15 April 2009. It produced an estimate of a surplus of 9.6Mt.

Carbon Price

In order to calculate a financial value for the projected deficit of emission units, a price for Kyoto-compliant units (a “carbon price”) is applied to the quantum.

Changes to the Price

At present Treasury revises the underlying carbon price twice a year (typically for the year ended 30 June and six months ended 31 December Financial Statements of the Government of New Zealand). The current price is EUR 10.00. See New Zealand’s Position under the Kyoto Protocol Carbon Price Information Release for more information on the changes in the carbon price and how this price is derived.

Exchange Rate

The carbon price used is currently estimated in euros (previously it has been estimated in US dollars), so this needs to be converted into New Zealand currency using the exchange rate between the two currencies. The liability or asset is updated monthly by the Ministry for the Environment to reflect movements in the exchange rate.

The exchange rate used is that at 3pm on the last day of the month, sourced by the New Zealand Debt Management Office from a subscription-only Reuters web site. It is the mid-rate (i.e. the average of the Bid Rate and the Offer Rate). If the month end falls on a weekend the previous Friday’s rate is used.

Value of the Position

The value of the position is therefore calculated as follows:

Quantum * (carbon price/exchange rate) = Kyoto position

For example, the unaudited liability at 30 June 2007 is calculated as:

45.5 Mt * ($US11.90/0.7689) = $NZ704 million