 |
 |
Petroleum oil and oil products
Gas and gas products
Coal and coal products
Geothermal energy
Industrial process emissions
Burning of embedded carbon from fossil sources
Products from biological sources
5.1 Points of obligation to pay the carbon tax, as well as some of the rules relating to emission factors will vary from industry to industry.
Petroleum oil and oil products
5.2 The tax will apply to imported oil products other than those delivered directly to a New Zealand refinery, and to most emitting products of New Zealand oil refineries. It will be collected at these points by the Customs Service, as part of the existing excise system. Process emissions from a refinery will also be subject to the tax, which will be payable to Inland Revenue.[20]
5.3 This approach is intended to minimise the compliance and administration costs of the tax, using relatively few points of obligation and relatively few emission factors for the bulk of the oil product sold.
5.4 Emission factors for crude oil vary with each shipment, and even within the hold of an oil tanker. Determining emission factors for crude oil could therefore be imprecise, costly or a poor compromise, so the focus is on the refined products produced from it.
5.5 It is possible to burn unrefined crude oil to produce useful energy, although this does not appear to be occurring in New Zealand at present. In such cases the carbon tax would be applied, so appropriate emission factors would be needed.
Fossil-derived lubricating oils
5.6 In contrast to oil used as fuel, there are many varieties of lubricating oil, some of which are imported in small quantities. It is unlikely to be cost-effective to calculate emission factors for all of these products. However, lubricating oils contribute to greenhouse gas emissions and should, in principle, be subject to the tax.
5.7 Emissions from lubricating oil arise in a number of different situations, such as when oil used to lubricate an engine is burned, or when used oil is collected and burned as a fuel. This happens on a reasonably large scale, notably in greenhouses and in cement plants. Most lubricating oils that are not burned for fuel break down within a relatively short period of time, ultimately increasing greenhouse gasses in the atmosphere.
5.8 Applying the tax to lubricating oils when they are burned would risk creating an incentive for illegal disposal. Such disposal would create additional environmental problems. Furthermore, there are a large number of locations where burning might occur. Therefore, to ensure full coverage, minimise administrative and compliance costs and avoid unwanted environmental effects, the carbon tax should apply to lubricating oils when they are removed from a refinery or imported.
5.9 Because there are many lubricating oils[21] with many emission factors, new products are introduced frequently, and lubricating oils make a relatively small contribution to New Zealand's greenhouse gas emissions, it would not be cost-effective to apply a different emission factor to every product. Therefore the government intends to establish default emission factors for, say, three broad categories of lubricating oil, such as "heavy engine oil", "light engine oil" and "other lubricating oils".
5.10 Specific emission factors will not be permitted for lubricating oils, as this would add significantly to the costs of administering and complying with the tax. Competing firms would face pressures to identify specific emission factors for each of their products adding costs to the industry as a whole.
5.11 As discussed later with respect to jet and marine fuels, special constraints affect the application of the tax to the use of lubricating oils in these industries. The government is considering how to deal with these applications of lubricating fuels, and whether an exemption or rebate approach would be appropriate for lubricating oils used on international journeys.
Aviation fuel sold for domestic use
5.12 Individual nations are not responsible, under the Kyoto Protocol, for emissions from international transport. Therefore jet fuel used on international flights is outside the scope of the tax. About 90 percent of jet fuel sold in New Zealand is used on international flights.
5.13 A potential constraint on applying the tax to fuel used on domestic flights is that New Zealand is bound by international air services agreements that do not allow taxation of consumables used on domestic legs of international flights by airlines claiming "cabotage"[22] rights. However, the government understands that no airline is currently exercising such rights.
5.14 Because of the small proportion of the jet fuel sold in New Zealand that will be covered by the tax, it will apply to jet fuel further down the supply chain than it will for most other fossil fuel products. Jet fuel will therefore not be taxed when removed from New Zealand oil refineries or imported.
5.15 Instead, the tax will be payable by a firm, generally an oil company, when it supplies jet fuel to "domestic airlines", including foreign-owned domestic airlines, for domestic flights. International airlines and international flights by domestic airlines will not be taxed.
5.16 Domestic and international flights can be distinguished by their flight numbers. Moreover, it is rare for an aircraft to carry more fuel than is required to reach its next destination safely, owing to the cost of carrying excess fuel. Therefore the proposed treatment of jet fuel will be unlikely to result in charging fuel used outside New Zealand airspace.
5.17 The government is considering what unintended risks the proposed approach might pose and how such risks might be mitigated.
5.18 The government understands that most "avgas" sold in New Zealand is used domestically. Therefore avgas will be subject to the tax when imported or removed from a refinery, and a rebate will be available if it is used on an international flight.
Transport by sea
5.19 New Zealand is not treated under the Kyoto Protocol as being responsible for emissions from international transport, although these emissions are noted as a memorandum item in the national inventory.
5.20 New Zealand's national inventory includes emissions from fuel supplied to ships in New Zealand, except when supplied for international transport.
5.21 Most fuel purchased in New Zealand is used in New Zealand. Therefore the tax will apply to fuel used in shipping when it is imported or removed from a refinery. A rebate will be available to a ship purchasing fuel for international transport.
5.22 Where fuel is sold to a ship carrying coastal cargo while transiting between New Zealand ports as part of an international journey, the domestic leg uses a small proportion of the total fuel used on the journey. It is proposed that the whole trip be considered international. This would slightly increase the cost margin between domestic operators of coastal shipping services and international operators carrying coastal cargo while in transit. There would, however, be similar treatment of domestic shipping operators and other domestic transport modes.
Fishing
5.23 Under the Kyoto Protocol, New Zealand is responsible for emissions from fishing operations when vessels refuel in New Zealand, regardless of where the fishing occurs. The tax will be applied to all fuel used in fishing when it is imported or removed from a refinery, with no rebate available to fishing vessels except if available under a Negotiated Greenhouse Agreement.
Gas and gas products
5.24 The carbon tax will be applied to gas when first sold or used by the holder of the petroleum permit under which the gas was produced. Flaring or venting by the permit holder will be treated as "own-use". Oil products removed from the gas stream before the first point of sale (the point at which the product is first supplied by a producer to another person) will be taxed under the rules for oil products (for example, taxed when refined, if sent to a refinery).
5.25 At the first point of sale, a standard emission factor based on energy content (but assuming a standard carbon dioxide content) will apply to each standard gas product, such as "spec gas", LPG and LNG. If such products were burned rather than sold, the same emission factors will apply.
5.26 If the gas sold or burned is not a standard product and does not meet specification, a specific emission factor, verified by an approved laboratory, will be required. Specific emission factors could also be calculated by the firm for gas streams that are blended in fixed proportions from other gases with approved emission factors.
5.27 If a petroleum permit holder sells or vents carbon dioxide in a gas stream containing too little hydrocarbon content to be burned, the tax will apply to the tonnage of carbon dioxide. This will avoid applying an energy-based emission factor to a gas stream with only a trace amount of combustible gas.
5.28 Except in the case of venting by the petroleum permit holder, emission factors will be based on the assumption that the hydrocarbons in the gas, when used, will be burned and thereby converted into carbon dioxide.
5.29 Natural gas leaking from transmission and distribution pipelines is primarily in the form of methane (CH4). The 2004 national inventory[23] estimated that less than two percent of the gas entering the distribution system is leaked in this way. This estimate is based on assumptions about the metering error component of distribution companies' unaccounted-for gas.
5.30 Given the technical difficulty of measuring these emissions and the existing incentives to minimise leakage, no adjustment will be made with respect to the methane that is leaked from gas lines rather than burned after being supplied, despite methane having a higher emission factor than carbon dioxide.
5.31 The tax will also apply to imported gas products and be collected by the Customs Service. Emissions from imported gas will be calculated on the same basis as emissions from gas produced by petroleum permit holders.
Coal and coal products
5.32 Coal will be subject to the tax when first imported, or sold or used by the coal miner, including in the manufacture of briquettes or other energy products.
5.33 Processed coal products such as briquettes will be subject to the tax when imported, but the tax will already have applied to the coal used in making coal products in New Zealand.
5.34 A default emission factor will be provided for each coal rank. It will be a rounded average of the range within that coal rank. Emission factors are likely to be close to those indicated in the table of products in Appendix 1, but require some further research.
5.35 Using an "energy-based" emission factor eliminates much of the natural variation that is found in emission factors based on product weight. However, coal from some mines may have unusually high or low emissions relative to energy — for example, owing to differences in hydrogen content. The government is likely to accept the risk that some coal will have above average emissions, but allow coal miners and importers to obtain and use a specific emission factor. This would need to be verified by a laboratory approved by the New Zealand Climate Change Office and, to avoid adding to administrative and compliance costs in relation to very small differences, to be at least two percent less than the relevant default emission factor.
5.36 Coal miners and importers will also be permitted to calculate specific emission factors from the default or specific emission factors of coal blended in fixed proportions, or when proportions of particular consignments are adequately recorded.
Coal-seam gas emissions
5.37 Coal-seam gas can either be vented or burned. It must be reduced to a safe level in the course of underground coal mining, but it quickly escapes to the open air from open-cast mines. Although some emissions of coal-seam gas occur naturally, the emissions increase as a result of human activity (mining or extraction). The increase in emissions should, in principle, be subject to the tax.
5.38 The National Inventory records coal-seam gas (CH4) emissions as 315 kt CO2-e for 2003, or 0.86% of New Zealand's total emissions from energy. This is less than 0.5% of New Zealand's total greenhouse gas emissions. These estimates are based on measurements of coal production and assumed emission factors; the emissions are not measured directly.
5.39 If coal-seam gas is extracted for use as a source of energy (generally before the coal is mined), the carbon tax will apply to the petroleum permit holder,[24] using the same rules as for petroleum permit holders generally. (See paragraph 5.24 on gas and gas products.) This is intended to ensure that the tax applies equitably to all fossil sources of gas used for energy.
5.40 The impact of coal mining on coal-seam gas emissions varies significantly between coal fields, locations within coalfields, and over time. For the purpose of reporting emissions in the National Inventory, the Ministry of Economic Development has chosen two "release factors" for all underground mines, one for bituminous coal and one for sub-bituminous coal. These indicate an average level of coal-seam gas emissions for a given quantity of coal removed from these mines, and are useful for the purpose of calculating New Zealand's overall greenhouse gas emissions. However, these average release factors would not be sufficiently accurate for the carbon tax: they would result in over-taxing some mines and under-taxing others relative to the true level of coal-seam gas emissions. On the other hand, attempting to accurately measure the increased emissions associated with the mining of coal from each location within each mine would be costly.
5.41 The quantity of coal-seam gas that is vented during the course of coal mining is a very small proportion of New Zealand's total emissions from energy. There is no straightforward way of applying the tax accurately to coal-seam gas, and some of the gas must be vented for health and safety reasons. For these reasons it is proposed that coal-seam gas that is vented during the course of coal mining not be included within the scope of the tax. If it is collected and burned for energy, sold, or converted to another energy product, the tax will be applied.
Geothermal energy
5.42 Geothermal resources are used for electricity generation, industrial process heat and various other commercial and domestic applications. CO2 and CH4 are released from developed geothermal fields into the atmosphere at a much faster rate than would occur naturally. The National Inventory records emissions from this source as 367 kt CO2-e for 2002, or about one percent of New Zealand's total emissions from energy.
5.43 This percentage is expected to increase in the medium term as more geothermal development takes place. To ensure that the incentives are correct, the sector should be subject to the carbon tax, even though the current take from geothermal resources is not large.
5.44 Application of the tax to geothermal emissions is complicated by variations in emissions between fields, within fields over time — particularly in the first five years of using a new well, and according to the technology used. However, large geothermal field operators do carry out routine measurements that provide a basis for calculating greenhouse gas emissions. Their estimates, based on monitored levels of geothermal fluid flows and sampled gas concentrations, are provided annually to the Ministry of Economic Development.
5.45 The government proposes to use this data as the basis for levying the tax on major geothermal energy users. Normal requirements for taxpayers to take reasonable care in calculating their tax liabilities will apply. The possibility of an Inland Revenue audit will also ensure that there are clear incentives to revise the estimated gas concentration — for example, if there is reason to believe that it is no longer accurate — say, because a new well has been introduced to the system.
5.46 Because the cost of measurement would be excessive for small users, it is proposed that the tax apply only to firms using geothermal energy for electricity generation or industrial process heat, and not to retail operations such as motels or public baths. (This could change if a company supplied such operations with energy from a geothermal source on a large scale.) Emissions from down-hole heat exchangers are minimal, so these, too, will be excluded from the tax.
5.47 Further work is needed to establish the precise point of obligation, but it is anticipated that the large geothermal field operators or users, rather than owners, will be the appropriate place.
Industrial process emissions
5.48 Emissions from limestone during calcination and gold processing are examples of "industrial process emissions".
Limestone
5.49 Limestone (calcium carbonate) differs from fossil fuels in that a significant proportion of it is used in ways that do not emit greenhouse gases. Rather than levy the tax on all limestone and provide relief for non-emitting uses,[25] the government intends to levy the tax only when the use of the limestone results in emissions.
5.50 The major industrial process that causes limestone to emit carbon dioxide is calcination. This process is a key part of manufacturing cement and burnt (quick) and hydrated (slaked) lime. Burnt lime is used in gold processing, steel manufacture, road stabilisation and paper manufacture, while hydrated lime is used primarily for water treatment, building materials, sugar refining and leather tanning.
5.51 "Clinker" is an intermediate product that is created when limestone is calcinated for the purposes of making cement. Further processing of clinker is required to make cement. The tax would be imposed on the amount of clinker made by cement manufacturers.
5.52 Lime fertiliser manufacturers will not be liable for the tax. Although application of lime fertiliser does result in emissions, applying the tax to lime might encourage farmers to increase use of nitrogenous fertilisers, emissions of which are not covered by the tax. The tax is not intended to apply to nitrous oxide emissions from agriculture, and nitrous oxide is a more potent greenhouse gas than carbon dioxide. Furthermore, nitrogenous fertilisers have other detrimental environmental effects.
5.53 As with coal and gas, the legislation will set a default emission factor, and cement manufacturers will be able to use a specific emission factor verified by an approved laboratory. Specific emission factors will need to be re-verified if the manufacturer changes its processes or input in a manner likely to increase the emissions per tonne of clinker produced.
5.54 Limestone also emits carbon dioxide when used as a catalyst in the processing of fine metal ores. These emissions will be subject to the tax according to the amount of limestone used in this way.
5.55 Emissions from limestone for purely educational or scientific purposes will not be subject to the tax, since the wide dispersion and small quantity of these emissions means that it is not cost-effective to apply the tax to them.
Soda ash
5.56 Soda ash (sodium carbonate) is used in the manufacture of glass, and carbon dioxide is emitted as part of that process. The tax will be applied to soda ash used in glass manufacture. The legislation will set a default emission factor, and manufacturers will be able to use a different emission factor if they obtain a figure verified by an approved laboratory.
Synthetic greenhouse gases
5.57 The "synthetic greenhouse gases", or SGGs, include sulphur hexafluoride (SF6) and the groups of chemicals known collectively as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs).
5.58 PFCs are emitted during the production of aluminium and are also used in the refrigeration industry as refrigerant gases, usually as part of mixtures also containing HFCs.
5.59 SF6 is used in New Zealand primarily in the electricity industry as an insulating gas in high-voltage electrical equipment. HFCs are used in a wide range of applications where the ozone-depleting CFCs were once used — mainly in the refrigeration and air-conditioning industry, although there are many other uses.
5.60 The tax will apply to the emissions of PFCs during the production of aluminium. Other policy mechanisms will apply to emissions from SGGs that are imported into New Zealand.
Carbon pitch and carbon black
5.61 Carbon pitch, carbon black and related products release CO2 when used in metal production. These products will be subject to the tax when imported or when removed from a refinery using mass-based emission factors.
Petroleum products used as feedstock
5.62 There are a number of processes in which petroleum products are used as a feedstock and CO2 is emitted — such as the manufacture of methanol, hydrogen, hydrogen peroxide and steel. Complexity could arise in charging some of these products because some of the carbon in the petroleum product may be embedded in a final product that does not emit greenhouse gases covered by the tax.
5.63 Natural gas is the feedstock for the production of ammonia-urea. Some of the carbon from the gas is embedded in ammonia-urea but is released when the ammonia-urea is applied as a fertiliser. Nitrous oxide, another and more potent greenhouse gas, is also released, but nitrous oxide from agriculture is not within the scope of the tax in the first commitment period. Nitrous oxide is also released from other fertilisers, along with other detrimental environmental effects, and applying the tax to ammonia-urea alone could increase the use of these alternatives.
5.64 In the absence of comprehensive and consistent application of the tax to fertilisers, the government proposes that it not be applied to the emissions from ammonia-urea. The natural gas used as a feedstock in the manufacture of ammonia-urea will not be subject to the tax: the manufacturer will therefore be eligible for a rebate of the tax on this gas, as if it were being embedded in a non-emitting product.
Burning of embedded carbon from fossil sources
5.65 Products such as tyres and plastics contain embedded carbon from fossil sources. Such products can be used as a source of energy, either by burning them directly or, in the case of plastics, converting them to diesel first. If they are used as a source of energy they will release CO2 to the atmosphere. Whether to apply the tax in such cases, and how to do so, will need to be considered if serious proposals of this kind emerge.
5.66 At present, there is interest in New Zealand in burning end-of-life tyres, in a suitably controlled environment, as a source of energy. This could play a role in reducing the scale of another environmental problem — that of disposing of waste tyres, and may displace other fuels with higher greenhouse gas emissions per unit of useful energy.
5.67 If there is a proposal to burn tyres on a significant scale, the government will then decide whether to apply the tax to new tyres and provide rebates for non-emitting uses of used tyres; apply the tax to used tyres burned for energy in controlled settings; or exclude tyres from the tax.
Products from biological sources
5.68 Biofuels and other products made purely from biomass will not be subject to the tax. They include wood, charcoal made from wood, ethanol made from dairy products, and diesel made from tallow or sugar. Carbon dioxide from these sources is considered carbon-neutral because it is renewable. (Carbon is re-absorbed within a relatively short period of time.)
5.69 Fossil fuels blended with bio-fuels will be subject to the tax in the usual way and at the usual point of obligation, since blending with a bio-fuel does not reduce the emissions from the fossil fuel when it is burned.
| Submission points
|
[20] As with other emission sources, this is subject to any exemption applicable as a result of an NGA or export of the product.
[21] According to an industry source, there are over 1,000 different lubricating oils on the New Zealand market.
[22] The term "cabotage" is used to refer to the carriage of cargo or passengers on a domestic leg of an international service.
[23] Page 18, New Zealand's Greenhouse Gas Inventory, Ministry for the Environment/New Zealand Climate Change Office, April 2004.
[24] Under Crown Minerals rules, only a petroleum permit holder can make full commercial use of this gas.
[25] Non-emitting uses include any use of limestone in its natural state, such as a building or roading material or when applied to the soil without undergoing calcination.