Reporting and analysis by Mathew Carr
Feb. 6, 2024 — Christina Hood, one of the few people who understands well how global carbon markets can work if politicians lift their game, published a chart that shows naysayers how the Paris climate deal might slow global heating, after all.
While this focuses on New Zealand, a relatively small country, it demonstrates how the Paris accounting and incentives work over time to reduce heat-trapping gas. New Zealand’s economy isn’t easy to decarbonize because it’s got a big dairy-export industry — which produces a lot of greenhouse gas.
Read Chistina’s post then I’ll take you through some commentary, which is informative and offers some hope to those concerned the climate is doomed. [I’m not saying the climate as we know it isn’t doomed. It still might be.]
New Zealand progress toward its Paris climate limit*
–*it’s not really a hard limit because Paris is essentially voluntary. The soft limit is known as a Nationally Determined Contribution under the Paris deal made under the UNFCCC; the post is from LinkedIn
Here is the post:
“Three years into our Paris Agreement NDC.
The mildly good news is that lower-than-projected domestic emissions over the last couple of years mean New Zealand is “only” around 15.3Mt above levels consistent with our NDC so far (yellow area).
This gap that has already occurred will need to be compensated with offshore mitigation*. That purchase can happen between now and 2030, but the need to do so is already locked in.
At ~US$25/t (ballpark price being reported for ITMOs [internationally transferred mitigation outcomes]) that would be around NZ$600M [$383 million] liability accrued so far to the end of 2023.
[CarrZee: So this means NZ will need to buy /is buying about $383 million of ITMOs to cover this shortfall at $25 each per ton.]
Or if you want to talk financial years (which would be the basis for financial accounting for a liability), the gap up to 30 June 2024 is projected to be around 20.1Mt, or around NZ$800M to that point in time.
How much more we [NZ, to be clear or a country may place the obligation to buy onto its companies] will need to purchase offshore to cover future years’ emissions gaps depends on how much action is taken to reduce domestic emissions. The future is still able to be changed, the past unfortunately is not.
(Graph based on govt’s Dec 23 emissions projections to 2050)
* this by the way, is not a surprise it was always part of the plan. New Zealand’s domestic emissions budgets under the Climate Change Response Act were set leaving a gap to the NDC that would require offshore mitigation. The cost of meeting the NDC 100% domestically was seen as far too high.”
26 comments are worth reading – let me know if any are astray
Andrew E.View Andrew E.’s profile (He/Him) • 2ndStrategy l Leadership | Governance I Collaboration | Health | Climate Solutions | A Brighter Aotearoa NZ
6d(edited)
Morena Christina, thank you. Useful
Treasury used a range for possible offsets of between $40 / tonne and far higher +$200 / tonne
Is there a chance the price per tonne rises above the US $25 tonne quoted above?
One of the conundrums of course is low offset costs, driven by low costs per tonne, incentivise offsetting instead of domestic action
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4 Replies4 Replies on Andrew E.’s comment
Christina HoodView Christina Hood’s profile (She/Her)AuthorClimate change & energy policy, carbon markets at Compass Climate, Aotearoa New Zealand. Former head of International Energy Agency Climate Change Unit, Paris #Article6 alumni.
6d(edited)
Treasury had 3 scenarios: $41 for cooperation with developing countries (as above), $95 for linking ETS schemes, $227 for a hypothetical world where we’re all acting in line with 1.5C. Only the first two are realistic as actual market prices. The third is more relevant as a shadow price to guide domestic ambition. I agree there’s a risk that these get naively (or deliberately) confused by those wanting to slow down domestic action.
And yes, those are current prices & they may well rise. But my comment was more about costing the current liability, which you’d do based on a current market price.
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Buddhika Rajapakse
Consultant | Energy, e-transport, aviation, strategy and analytics
6d
Christina Hood If I remember rightly from discussions several years back, Paris doesn’t actually have solid frameworks like Kyoto did for cooperation with developing countries and/or linking ETS to source carbon credits. It leaves it up to countries to form “climate clubs” and sort out all the details amongst themselves, which is a non-trivial task. Furthermore, my understanding was that a country couldn’t export units to another country unless it had already met its own NDC – another non-trivial task. Is any of this still true? Or have I merely misremembered!
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Christina HoodView Christina Hood’s profile (She/Her)AuthorClimate change & energy policy, carbon markets at Compass Climate, Aotearoa New Zealand. Former head of International Energy Agency Climate Change Unit, Paris #Article6 alumni.
5d
Buddhika Rajapakse
1) is true for now, the game is bilateral cooperation. There’s a new UN governed market under construction but unclear when that’ll be up.
On 2), no you don’t need to meet your NDC first. The rules are basically designed to make sure both Parties fairly count the trade in their respective NDCs, but don’t enforce achievement of the NDC. There’s definitely reputational risk though if a buyer were to trade with a seller that didn’t meet its NDC, so that’s a due diligence issue for any bilateral cooperation.
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Mathew CarrView Mathew Carr’s profile (He/Him) • YouPublishing at Carrzee.org
15h
Buddhika Rajapakse if a country sells itmo credits it is meant to lower its own co2 budget / limit by the same amount
…known as a corresponding adjustment….
in theory under Paris countries can have emission-reduction projects that are outside their ndcs
… dealing in these projects will bring reputational risk in my opinion (because it indicates the ndc is not ambitious )
… I’m happy for Christina Hood to correct me
This comment from a trader seems key
This comment from
Paul Burgin Trader at CarbonHq
seems key:
My experience with all the financial markets I have ever seen is that they go where the most pain would be caused. That, to me, would be a rush for ‘coverage’ of NDC and could see a total squeeze on acceptable supply.
The price(s) could collapse but, as with fixing ones mortgage , a semi expensive known is better than sleeping in ones car if the worst happens.
You come across as a wonderfully optimistic person but I feel we need more doomsayers to put the fear of God into policy makers.
Hoping to be wrong!
Other comments (see on LinkedIn if you prefer – rough cut and paste below)
- Marcel PodstolskiView Marcel Podstolski’s profile • 2ndEnergy Modelling Analyst1wThese are the MfE projections that assume the effectiveness of since-cancelled policies and high ETS price? And there are just 4(?!) financial years remaining in which to buy offshore credits?
Alarming stuff.
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Christina HoodView Christina Hood’s profile (She/Her)AuthorClimate change & energy policy, carbon markets at Compass Climate, Aotearoa New Zealand. Former head of International Energy Agency Climate Change Unit, Paris #Article6 alumni.1w(edited)Yes the dotted lines (future projections) assume now-cancelled policies, and assume high ETS prices. The future can be changed but that can go in either direction!
& yes time to pull finger on the purchase programme. As 2030 final emissions aren’t reported until 2032 there’s potentially some wiggle-room for purchase extending slightly at the end (though I’d need to check the exact wording of the Article 6 guidance on that).Like - Paul BurginView Paul Burgin’s profile • 2ndTrader at CarbonHq6d
- [KEY COMMENT]
Christina Hood My experience with all the financial markets I have ever seen is that they go where the most pain would be caused. That, to me, would be a rush for ‘coverage’ of NDC and could see a total squeeze on acceptable supply.
The price(s) could collapse but, as with fixing ones mortgage , a semi expensive known is better than sleeping in ones car if the worst happens.
You come across as a wonderfully optimistic person but I feel we need more doomsayers to put the fear of God into policy makers.
Hoping to be wrong! - Like
- Robert McLachlanView Robert McLachlan’s profile • 2ndDistinguished Professor in Applied Mathematics at Massey University6d”The cost of meeting the NDC 100% domestically was seen as far too high.” – but was it too high in reality? There are many ways to increase domestic ambition.Like
4Reply2 Replies2 Replies on Robert McLachlan’s comment
Christina HoodView Christina Hood’s profile (She/Her)AuthorClimate change & energy policy, carbon markets at Compass Climate, Aotearoa New Zealand. Former head of International Energy Agency Climate Change Unit, Paris #Article6 alumni.6d(edited) I agree that we can and should increase domestic action, but meeting the NDC 100% domestically is something else entirely. It’s an easy thing to suggest in abstract, much much harder when you look at the actual numbers. e.g. the Commission’s Tailwinds vs Demonstration path only saves 25Mt – great if we can get that but it’s only a fraction of the full gap. - Philip YoungView Philip Young’s profile (He/Him) • 2ndSenior Associate Engineer at Beca6d
- Great to see acknowledgement that the cost of meeting NDC 100% domestically is seen as far too high. Considering the marginal abatement cost is important as is considering the international validity of credits.
Seems we are going down a path which acknowledges high quality carbon credits at least cost may be available offshore?
Also seems we are going down a path of increased adaptation and declining mitigation. Tragedy of the commons coming home to roost.
Perhaps most of want to live ‘indoors’ & don’t see the value of the ‘outdoors’?LikeReply1 Reply1 Comment on Philip Young’s comment
Christina HoodView Christina Hood’s profile (She/Her)AuthorClimate change & energy policy, carbon markets at Compass Climate, Aotearoa New Zealand. Former head of International Energy Agency Climate Change Unit, Paris #Article6 alumni.6d(edited) - Not new – it’s always been the plan (since 2015) to have an international component. Basically our legislated domestic emissions budgets set the domestic part, the rest is internatonal. Need to be careful though about comparing prices – a lot of the ‘cost’ of domestic action is actually investment that saves $ over the long term. Modeling tends to show that delaying domestic investment leads to higher long-term costs. What might seem like a cheap international offset price can be a false economy.Like
Michel van den BergView Michel van den Berg’s profile (He/Him) • 2ndSupporting companies to navigate climate change, Sustainability and ESG Integration | Strategy & Implementation | Net Zero and target setting | Sustainable Finance and Investing | Climate Risk | Disclosure and Reporting2d
I like the transparency with which New Zealand discloses progress against the NDC. Many countries can take that as an example. What appeals less is the acknowledgment that the cost of reducing in line with the NDC was deemed too expensive and that offshore mitigation was deemed a suitable alternative. Replace New Zealand with company X and the general opinion would be that we can’t offset ourselves to net zero so they could not use it to close the gap. Governments are role models and the signal it gives is that offsets are okay. With carbon markets suffering from a massive credibility problem, we are still socializing the cost of emissions by relying on low quality offsets. The argument that it is too expensive to reduce in line with the NDC is another way of saying that the political resolve isn’t sufficient to take full responsibility for domestic emissions. Sadly New Zealand is far from the only country suffering from an abundance of political pragmatism. - Like
- LikeReplySimon OrmeView Simon Orme’s profile (He/Him) • 2ndAssociate Director, Marsden Jacob Associates9h
Thanks for the update Christina. Reading the MBIE briefing to the incoming Energy Minister is frustrating for its retro steam punk. It presses the false assertion that more RE would raise costs and prices, when the exact opposite is true. The ~10% renewable energy required in a dry year could be supplied by low cost rooftop solar avoiding the need to run thermals and purchase offsets. Grid and CER batteries charged by RE are now economic and can manage winter morning and evening peaks which aren’t very long – see latest OZ Gencost. The briefing makes clear there is no framework for shared connection transmission necessary for rapid deployment of grid scale renewable energy zones (REZ), similar to the NSW electricity infrastructure roadmap I worked on. There is instead an ongoing reliance on gas, with no acknowledgement that, in the timelines that matter (20-30 years), gas is worse than coal emissions-wise. Rooftop solar in the NEM has a larger installed capacity than the entire NZEM and is growing faster than grid solar, but doesn’t even get a mention as an economic dry year supply option by MBIE. Finally, NZ is the only Australasian jurisdiction that still has energy and climate portfolios separated. LikeReply
Dr Ann Smith CEnv FIEMA EHFView Dr Ann Smith CEnv FIEMA EHF’s profile (She/Her) • 2ndDirector at Ann Smith Limited (aka Professor Zero) – born at 312 ppm CO21w
Excellent summary and explanation – thank you.LikeReply
Tony SailView Tony Sail’s profile • 3rd+Director of Cricket and Teacher1w
Saw today that global use of Coal is at its highest EVER level.
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Christina’s next post (backwards chronologically) was also extremely important — and shows the right attitude that politicians should be adopting to prevent backsliding in my opinion … (Note Rishi Sunak UK PM):- https://www.linkedin.com/posts/christina-hood-71a1b024_how-much-forestry-would-be-needed-to-offset-activity-7157912648863424512-9G55?utm_source=share&utm_medium=member_desktop
Key highlight:
