Carbon Policy

Policies

1.0    Purpose

The Carbon policy outlines the management of carbon risk and management of obligations under the New Zealand Emissions Trading Scheme (NZ ETS).

2.0    Background

The purpose of this document is to establish a framework and policy guidelines within which Timaru District Council (“TDC”) will manage its obligation to report greenhouse gas emissions and surrender New Zealand Units (“NZUs”) under the NZ ETS.

  • To ensure the obligations to surrender NZUs from the Redruth Landfill are managed in line with the requirements of the NZ ETS.
  • To ensure the receipt of NZUs from the pre-1990 Forestry assets of TDC are managed in line with the requirements of the NZ ETS and for the benefit of TDC.
  • To ensure that TDC’s NZUs carbon surrender risk management process reflects the annual obligation to surrender NZUs as calculated by TDC’s Waste Minimisation Manager (“WMM”).
  • To ensure a conservative approach is adopted to fulfil TDC’s greenhouse gas obligations by a considered risk management approach that is not in any way speculative.
  • To ensure TDC adopts a risk-averse approach to greenhouse gas risk management and that all activities relate to highly probable surrender obligations as agreed by TDC’s senior management.

2.1    Legislation / Framework

Outline relevant legislation and agreements applicable to this policy document

  • New Zealand Emissions Trading Scheme (currently under review)
  • Climate Change Response Act 2002 (CCR Act) (currently under review)
  • Climate Change Response (Emissions Trading Reform) Amendment Bill
  • Climate Change Response (Zero Carbon) Amendment Bill
  • Paris Agreement
  • Kyoto Protocol (expired)

Note, several items remain outstanding on the NZ ETS agenda. This policy will need to be updated when these changes are finalised, the framework is in place and is operational.

3.0    Key Definitions

NZU – New Zealand Unit that can be traded.

ERU – Emission Reduction Unit that can be used in New Zealand until 2015.

EUR – Emission Unit Register which records all transactions of carbon credits.

4.0    Policy

4.1 Identification of Risk

Council has assessed that volatility in carbon prices present a material risk to Council, landfill users, and potentially rate payers. Significant movements in the price of carbon units that cannot be effectively met by landfill users will need to be absorbed or passed on to TDC’s rate payer base. Accordingly, TDC actively manages the carbon price risk within the following framework to provide cost certainty and reduce the risk that volatility in carbon prices is passed on to rate payers.

TDC is a registered Participant on the New Zealand’s Emission Trading Register (“ETR”). The registration is under Schedule 3, Sector-Waste, Activity-Part 6, Operating a disposal facility, and therefore it must submit an online Carbon Emissions return annually between January and March (this must be submitted by 31 March each year for the previous calendar period).

Obligations must be settled with the Crown on or before 31 May following the end of each calendar year.

TDC’s account number is NZ5656 and the account type is a Holding Account.

Senior management of TDC, specifically the WMM, have the responsibility of calculating the annual greenhouse gas emissions from the Redruth Landfill, based on the default emissions factor calculation. It is the responsibility of the WMM to ensure measurement procedures are up to date and measurement frequency is sufficient to provide TDC with accurate actual and forecast exposures for risk management purposes. To provide some context, historical exposures have been estimated at 19,000 tonnes per annum.

TDC has received NZUs from its pre-1990 forestry assets into its Holding Account at the ETR.  TDC’s policy is for these NZUs to be held in the Holding Account to offset any obligation that may arise from deforestation, for whatever reason. TDC’s landfill carbon exposures are managed on a gross basis. There is no co-mingling or netting of forestry units for the purposes of measuring or relinquishing its annual carbon exposures.

4.2 Management Structure and Responsibilities

[The management structure and responsibilities, provisions relating to the operation of the holding account and provisions relating to the authorising of transactions, as contained in the previous policy, may be utilised by the management team on a transitional basis in order to settle Council’s surrender obligations as at 31 May 2020 in relation to the 2019 emissions year, and to achieve policy compliance where within budget or otherwise approved by Council prior to 30 June 2020]

Council

  • Approve the Carbon Policy.
  • Receive reports on compliance with the requirements of the NZ ETS twice a year

Management Team (CE, GM Commercial and Strategy, CFO, GM Infrastructure, GM Community Services)

  • Approve strategies for carbon emissions surrender obligations risk management as proposed by GM Commercial and Strategy.
  • Review quarterly reports on carbon activities from CFO.

Chief Executive (CE)

  • Authorised to approve purchase of NZ ETS approved carbon credits, within financial delegations;
  • Authorised to execute carbon emissions unit transactions with authorised counterparties, within financial delegations.
  • The CE is TDC’s the secondary representative on the ETR, and is authorised to operate the Holding Account on the ETR as an approver.

Group Manager Commercial and Strategy

  • The GM Commercial and Strategy is TDC’s primary representative on the ETR.   As primary representative the GM Commercial and Strategy is authorised to operate the Holding Account on the ETR as an approver.
  • Propose any amendments to the Carbon Policy for approval by Council.
  • Provide oversight and monitoring of CFO in relation to CFO’s duties below.
  • Authorised to execute carbon emissions unit transactions with authorised counterparties, within financial delegations.

Chief Financial Officer (CFO)

  • Registered on Council’s Holding Account of the ETR, as a preparer.
  • Propose short, medium and long term strategies for carbon emissions surrender obligations risk management to the Management Team.
  • Review the emissions return prepared by the WMM for submission each year by 31 March.  Certify as correct with GM Commercial & Strategy.
  • Ensure that the correct number of NZUs are surrendered by 31 May each year based on the emissions return filed by 31 March each year.  Certify as correct with GM Commercial & Strategy.
  • Prepare a semi-annual Carbon Compliance Report for Council.
  • Prepare a quarterly report on carbon activities for the Management Team.
  • Prepare an annual review for the Management Team on TDC’s carbon risk management performance post 31 May.
  • Report any non-compliance in relation to either the Carbon Policy or to the NZ ETS and the implications of this non-compliance.
  • Oversees an audit of the level of NZUs held in the Holding Account at the ETR at the end of each financial year (post May relinquishment). This role may be delegated, but not to the GM Commercial and Strategy, who is the primary operator of the Holding Account.
  • Authorised to execute carbon emissions unit transactions with authorised counterparties, within financial delegations.

Financial Accountant

  • Supporting the CFO in carrying out the CFO duties above.
  • Registered on Council’s Holding Account of the ETR as a preparer.

Waste Minimisation Manager (WMM)

  • WMM is responsible for monitoring forecast levels of emissions over a 10 year horizon in relation to Council’s landfill activities.
  • WMM is to advise the GM Commercial and Strategy and CFO should forecast emission levels increase or decline over a forecast 10 year horizon.
  • Prepare and File Annual Emissions Return with the Environmental Protection Authority (via the New Zealand Emissions Trading Register by 31 March each year.  Seek review by CFO prior to filing.

4.3 Carbon Risk Management Parameters

TDC’s policy is that the pre-1990 forestry asset NZUs will be held in the Holding Account.  Therefore, the following risk management parameters only apply to the surrender obligations due to the greenhouse gas emissions from the Redruth Landfill. These calculations are made on a gross basis only.

Purchasing NZUs ahead of an obligation surrender date for each year can be achieved by either buying NZUs at spot and then placing in TDC’s Holding Account or transacting NZUs for forward delivery into TDC’s Holding Account in the future.  Forward delivery NZU pricing is a function of the cost of carry (financing cost) over a spot price for delivery (spot delivery is within 3 days).  TDC‘s policy is to transact NZUs in the most financially efficient method based on comparing its cost of funds to the forward price quoted by an authorised counterparty.

Where there is a compelling case to do so, a price fixing mechanism (for example the Fixed Price Option) may also be utilised and the units currently held for surrender for that year may be carried over to future period.

The following table details the percentage of NZU’s to be held against forecast surrender obligations over the current budget period (each 12 month period commencing 1 January and ending on 31 December):

Obligation PeriodCompliance requirements as at (month of current calendar year)Minimum hedging as a percentage of annual gross obligations
Current calendar year30 June75%
31 December100%
Next calendar year31 December50%

Beyond the current and next calendar years, TDC’s NZU holdings are also managed as follows:

Calendar yearsMinimum NZU HoldingMaximum NZU Holding
Year 3 to 50%50%

NZU purchases for Council’s projected liability beyond 5 years must be approved by Council before being transacted.

TDC’s CE, GM Commercial and Strategy and CFO each have the authority to approve purchasing NZUs to comply with the policy parameters detailed above, where within their respective financial delegations. The GM Commercial and Strategy is authorised to seek independent NZU risk management advice.

In developing strategies to manage obligations under the NZ ETS the GM Commercial and Strategy is expected to take into account the following:

  • Council approved types of unit.
  • On-going amendments to the NZ ETS and the potential for regulatory change.
  • To ensure that compliance at the obligation surrender date is achieved.
  • The prevailing spot NZU price and cost of funding purchases.
  • The availability of an alternative mechanism for settling obligations with the Crown which will enable price certainty (for example the availability of a fixed price option or cost containment reserve price).

4.4 Authorised Instruments and Counterparties

Key objectives of TDC’s Carbon Policy are to be conservative and risk averse, therefore, TDC’s policy adopts a conservative approach to the type of carbon unit it is authorised to transact to achieve its surrender obligations.  Given the uncertainty as to how the NZ ETS will develop in regard to the type of carbon unit(s) that will be allowed to be surrendered, Council officers are only authorised to transact  units allowable under the NZ ETS.

The Chief Executive can authorise purchase of approved International units where these units are specifically allowed by the Crown to be surrendered under the NZ ETS. These units are not to be held for a period beyond 2 years. If purchased, these units are to be transacted and reported on consistent with the NZU’s listed in this policy.

TDC will assess the most efficient method to purchase NZUs as counterparties are able to provide long term pricing of NZUs, or TDC could purchase on the spot market and finance the holding cost over a long-term period.  A key decision as to the preferred option would be the respective ‘funding cost’ of TDC compared to the yield curve utilised by the authorised counterparty to calculate the forward price of NZUs:

  • TDC can transact spot NZUs.
  • TDC can transact forward contracts on NZUs.
  • TDC may utilise other mechanisms to settle obligations that are permitted under the NZ ETS (e.g. the Fixed price option or once the auction system becomes available).

TDC’s exposure to counterparty credit risk will be managed by entering into NZU transactions, spot or forward, with only approved counterparties.  Approved counterparties are defined as follows:

  • An approved counterparty must be a New Zealand Registered Bank with a long term credit rating of A+ or above by Standard & Poor’s (“S&P”), or the Moody’s Investor Services or Fitch Ratings equivalents.
  • For spot transactions (that will not cause counterparty credit risk) TDC may make use of the services of a registered exchange platform to obtain NZU’s on the open market.
  • New Zealand Government

4.5 Operations and Procedures

Arranging and agreeing transactions with external counterparties are required to occur in a framework of control and accuracy.  It is vital to the internal control of TDC that all NZU transactions are captured, recorded, reconciled and reported in a timely fashion within a process that has the necessary checks and balances, so that unintentional errors and/or fraud are identified early and clearly.

Transaction Origination NZUs

The following authorities shall apply in respect of the execution of NZU transactions with bank dealers at authorised counterparties on behalf of TDC that can commit TDC to all the related contractual obligations under these transactions.

  • Transacting NZUs spot or forward, with an approved bank counterparty entails the CE, GM Commercial and Strategy or CFO, where authorised to undertake these activities, verbally or by email agreeing with the bank or other approved dealer the number, value date and price accepted.
  • Once the deal is agreed details of the transaction shall be entered on the relevant internal system.
  • Once the bank or other approved dealer confirmation of the transaction is received the details should then be checked to ensure that the bank confirmation is in accordance with the details on the internal system.

Any discrepancies in the above procedures should be immediately communicated to the bank or other approved dealer so that the correct details of the deal can be agreed on.  Where the GM Commercial and Strategy, CE or CFO has transacted the deal in the first place the deal shall be ratified and signed off by a separate bank signatory for Council.  In this way there is a clear division of responsibility and a self-checking system.

Direct contracts with other holders of NZUs may be considered, and will be permitted, but only where the credit risk is able to be reduced to negligible levels, such as through escrow arrangements.

Settlement Procedures

All NZU transactions are to be confirmed and reconciled to external confirmations before settlement.

All NZUs must be delivered into TDC’s account (number NZ5656) held on the ETR.

4.6 Reporting

The following reports will be prepared by the CFO and authorised by the GM Commercial and Strategy and will include the following:

Semi Annual Council Report

  • Forecast greenhouse gas emissions for next 10 years and percentage of NZUs held against forecast obligation.
  • Commentary on strategy to achieve compliance with NZ ETS.

Quarterly Management Team

  • Current level of NZUs held on the ETR against forecast surrender obligations for the next 10 years, to include forward carbon purchases.
  • Quarterly reconciliation between the Holding Account (ETR) and internal records detailing NZU’s held and contract for receipt under forward agreements (reconciling items) and how these will meet surrender obligations set out within this policy.
  • Quarterly transaction report.
  • Statement of carbon policy compliance, to include any breaches of policy.
  • Weighted average cost of carbon credits to be utilised for landfill pricing.
  • Commentary on the outlook for carbon prices and potential regulatory amendments to NZ ETS.

Adopted by Timaru District Council 2 June 2020

Last updated: 03 Jul 2020