Regulations restricting the use of HFC-23 and N2O CERs in the NZ ETS

What’s happening?

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 cannot surrender these units to meet their obligations under the scheme.

Any units brought by New Zealand companies, on forward contracts, will be exempt from the ban until June 2013.  But the forward contracts must have been entered into before 23 December 2011.     

The Minister’s media release is available here http://www.beehive.govt.nz/portfolio/climate-change-issues.

The regulations are available on the New Zealand Legislation website.

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 gases. 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 eg, 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)
  • 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 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 participant’s responsibility to identify units which are banned.  The Ministry for the Environment has issued guidance material to help participants identify these units. See Guidance on use of CERs in the NZ ETS (PDF, 557 KB) .

 

Last updated: 22 February 2012

Guidance on the use of CERs in the NZ ETS

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February 2012
Ref. INFO 637

Regulatory Impact Statement

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February 2012