New Zealand’s heavy reliance on dodgy ERUs to meet its emissions targets up to 2020 makes it “party to fraud” and could spark serious repercussions from other nations, according to a report released Monday.

Some 70% of units surrendered to the New Zealand government under the nation’s ETS in the 2010-2014 period were questionable or fraudulent ERUs delivered by projects in Ukraine and Russia, said the report released by think-tank the Morgan Foundation.

NZ emitters bought millions of the offset credits after 2012 for prices as low as NZ$0.10, but a report released last year by the Stockholm Environment Institute showed most of those ERUs had little or no environmental integrity.

Under UN rules, nations hosting projects that generate ERUs can approve and issue the credits themselves rather than rely on the UN approval process.

In late 2012, when it became clear that Russia and Ukraine would not be able to sell their vast AAU surplus, they stepped up ERU issuance, ensuring that millions of credits became available to buyers.

The Ukrainian market, which has supplied 90% of ERUs bought by New Zealand, has allegedly been riddled with fraud.

The government holds 97 million such ERUs in its account, which it has used to meet its Kyoto Protocol target for 2008-2012.

This, in turn, allowed New Zealand to carry over a huge number of AAUs which it will use to meet its 2020 target, despite national greenhouse gas emissions steadily rising, the report said.

“Our government could have acted to avoid this, and limit New Zealand’s use of fraudulent credits before it got out of control. Instead, they repeatedly rejected calls to do so. We’ve certainly been a party to fraud, the only question is whether we were willing or unwitting participants,” it said.

“The most generous interpretation of facts available is that the government was reckless and negligent in its management of the ETS, by failing to put any restrictions on the use of credits that it knew were – at best – dubious. An equally credible interpretation is that they were a willing party to the crime, by condoning and approving the use of ERUs, despite knowing that most were probably fraudulent.”

In an emailed comment, Climate Change Minister Paula Bennett said she had not seen the report yet, but that she was aware of previous statements the Morgan Foundation has made about international units.

“New Zealand made the best decision based on the rules at the time. Kyoto has been replaced by the newer and better Paris Agreement,” she said.

“The ETS isn’t perfect which is why we’re reviewing it. I absolutely stand by its ability to help us transition to a lower carbon economy, and international markets have a role to play in that.”

REPERCUSSIONS

New Zealand has amassed a glut of ERUs because the government let ETS companies use UN offsets to meet 100% of their domestic compliance obligations, a policy put in place to limit the economic impact of the scheme.

Other nations, such as many EU member states, used more ERUs than New Zealand, but the latter is by far the biggest buyer of the offsets when compared to the size of national GHG emissions.

The EU in 2013 tightened up rules for certain types of ERUs for use in its ETS. This banned credits from Russia and the Ukraine that didn’t undergo further checks, but was too late to prevent hundreds of millions of units from flowing into the EU and being used for compliance.

NZ emitters can no longer import such offsets after refusing to sign up to Kyoto 2, but given that the government refuses to cancel the ERUs in question, it could have repercussions, the report said.

“Our government wants to have its cake (accumulate the proceeds of crime) and eat it as well (be absented from any binding targets).”

“Such behaviour is self-serving in the short term, but reputationally damaging and could still have serious repercussions in terms of reprisals once other countries wake up to what we have done.”

The foundation claimed one effect of the policy has been that New Zealand has breached the Kyoto principle of supplementarity, namely that emission cuts should primarily be made at home.

In New Zealand, foreign offsets make up more than 100% of the theoretical emission reductions it has achieved under Kyoto, the authors added.

“The government is now working hard to establish links to new international carbon markets for the post-2020 period. It has made our 2030 target entirely conditional on unrestricted trade in foreign credits. But why should anyone trust us based on this appalling track record? We risk undermining not only our own access, but also the international community’s faith in carbon markets as a viable solution at all.”

ETS RULE CHANGES

The government is currently undertaking a review of its ETS and is widely expected to introduce some rule changes, such as dropping the 2-for-1 provision, which allows emitters to hand over one CO2 allowance for every second tonne they emit.

But the government said in November that some 140 million allowances are sitting unused in the NZ registry, largely as a result of emitters saving the free NZUs they receive from the government while using cheap ERUs to meet targets. The NZUs can be used for compliance or sold on in future years.

The Morgan Foundation report said the government should reform the ETS as well as its overall climate policies to rectify this, and outlined three recommended changes:

– The 97 million ERUs should be cancelled rather than used offset future emissions growth. A number of European countries have cancelled their surplus Kyoto units.

– The 2-for-1 rule should be removed and free allocation to trade-exposed industries be frozen for a year, in order to boost demand that would eat into the NZU suplus in the registry.

– New Zealand should not allow more foreign offsets into its ETS until there is certainty that they represent real emission cuts. In the meantime, the government could sign bilateral deals with its Pacific neighbours to generate offsets over which it would have better oversight.

According to the report, NZ emitters have used nearly NZ$200 million ($138 million) to buy ERUs from Ukraine and Russia.

“This is $200 million removed from our economy and sent overseas to criminals for no environmental benefit; $200 million that could have been spent here in New Zealand reducing our emissions.”

By Stian Reklev – stian@carbon-pulse.com

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