Carbon Policy

Policies

1.0    Purpose

The Carbon policy regulates the purchase and use of carbon credits.

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 New Zealand Emissions Trading Scheme (“NZETS”).

  • To ensure the obligations to surrender NZUs commencing May 2014 from the Redruth Landfill are managed in line with the requirements of the NZETS.
  • To ensure the receipt of NZUs from the pre-1990 Forestry assets of TDC are managed in line with the requirements of the NZETS 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.

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

TDC is a registered Participant on the New Zealand’s Emission Unit Register (“EUR”). 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 when required.

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

Senior management of TDC, specifically the WMM, have calculated the annual greenhouse gas emissions from the Redruth Landfill, based on the default emissions factor calculation, at circa 19,000 tonnes.

TDC has received NZUs from its pre-1990 forestry assets into its Holding Account at the EUR.  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. Council is able to trade the credits internally in order to give Council flexibility depending on the market.  If any offset/internal trade was to occur a sale at market price would occur between the forestry and solid waste activities.

4.2 Management Structure and Responsibilities

Council

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

Management Team

  • Approve short, medium and long term strategies for carbon emissions surrender obligations risk management proposed by GMCS.
  • Review quarterly reports on carbon activities from GMCS.

Group Manager Corporate Services (GMCS)

  • The GMCS is TDC’s Primary Representative on the EUR.
  • As Primary Representative the GMCS is authorised to operate the Holding Account on the EUR.
  • Propose any amendments to the Carbon Policy for approval by Council.
  • Propose short, medium and long term strategies for carbon emissions surrender obligations risk management to Senior Management.
  • Execute carbon emissions transactions with authorised counterparties.
  • Ensure that the correct number of NZUs are surrendered by 31 May each year; the first surrender obligation being 31 May 2014.
  • Prepare a semi-annual Carbon Compliance Report for Council.
  • Prepare a quarterly report on carbon activities for the Management Team.
  • Audit the level of NZUs held in the Holding Account at the EUR at the end of each financial quarter.
  • Prepare an annual review for the Management Team on TDC’s carbon risk management performance post 31 May.

Waste Minimisation Manager (WMM)

  • WMM is responsible for monitoring forecast levels of emissions over a 10 year horizon.
  • WMM is to advise the GMCS should forecast emission levels increase or decline over a forecast 10 year horizon.
  • File greenhouse gas emissions report by 31 March each year.

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.

TDC estimates that greenhouse gas emissions from the Redruth Landfills will be circa 19,000 tonnes per annum over a 10 year period.

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.

The following table details the percentage of NZU’s to be held against forecast surrender obligations over a 10 year period (commencing 31 May 2015) but includes the initial specific obligation dates:

Period

Obligation Date

Minimum NZU Holding

Maximum NZU Holding

Year 1

31 May 2015

50%

100%

Year 2

31 May 2016

50%

100%

Year 3

31 May 2017

30%

80%

Year 4

31 May 2018

30%

80%

Year 5

31 May 2019

30%

80%

Year 6

31 May 2020

30%

80%

Year 7

31 May 2021

0%

50%

Year 8

31 May 2022

0%

50%

Year 9

31 May 2023

0%

50%

Year 10

31 May 2024

0%

50%

NZU purchases for longer than 10 years must be approved by Council before being transacted.

TDC’s GMCS has the authority to approve purchasing NZUs to comply with the policy parameters detailed above.  The GMCS is authorised to seek independent NZU risk management advice.

In developing strategies to purchase NZUs the GMCS is expected to take into account the following:

  • Council approved types of unit.
  • On-going amendments to the NZETS 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.

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 NZETS will develop in regard to the type of carbon unit that will be allowed to be surrendered, Council officers are only authorised to transact NZUs.

The GMCS will review pricing differentials on an annual basis to establish the discount/premium that exists between Green Certified Emission Reduction Units (“gCERs”)/Emission Reduction Units (“ERUs”) and NZUs to check whether a recommendation to amend the authorised carbon instruments to include non NZUs is justified. The Chief Executive can authorise purchase of gCERs and ERUs where these units are specifically allowed to be surrendered. 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’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.

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 GMCS or another person, authorised to undertake these activities, verbally or by email agreeing with the bank 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 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 so that the correct details of the deal can be agreed on.  Where the GMCS has transacted the deal in the first place the deal shall be ratified and signed off by a bank signatory for Council, where another person has transacted the deal in the first place the deal shall be ratified and signed off by the GMCS.  In this way there is a clear division of responsibility and a self-checking system.

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 NZ5656 held on the EUR.

4.6 Reporting

The following reports will be prepared by the GMCS 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 NZETS.

Management Team

  • Current level of NZUs held on the EUR against forecast surrender obligations for the next 10 years, to include forward carbon purchases.
  • Quarterly reconciliation of the Holding Account.
  • Quarterly transaction report.
  • Statement of carbon policy compliance, to include any breeches 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 NZETS.

Adopted Policy and Development Committee 14 October 2014

Publish Date: 03 Dec 2018