Christina Hood, head of Compass Climate, has published a research note, to complement a draft discussion paper from the McGuinness Institute, on financial liability issues around New Zealand’s commitment to buy carbon units offshore under the Paris Agreement.

Hood says that, three years into the first nationally determined contribution (NDC) period, the shortfall in emissions reductions isn’t as large as predicted. “The mildly good news is that lower-than-projected domestic emissions over the last couple of years mean New Zealand is ‘only’ around 15.3Mt above levels consistent with our NDC so far (yellow area). This gap that has already occurred will need to be compensated with offshore mitigation.”

Graph based on the New Zealand government's December 2023 emissions projections to 2050. IMAGE: Christina Hood/Compass Climate

This is relatively low compared to the total expected shortfall across 2021-30, estimated by the Climate Change Commission at 99Mt, because net emissions only diverge slowly from the NDC Pathway for the first few years. For future years after 2024 the annual gap is projected to be larger. 

To meet the gap, the government needs to buy carbon units through what is known as Internationally Transferred Mitigation Outcomes (ITMOs).

Hood says that purchase can happen between now and 2030, “but the need to do so is already locked in.”

At about US$25 per tonne - the ballpark price being reported for ITMOs -  that would be around NZ$600M liability accrued so far to the end of 2023, Hood says.

The gap up to 30 June 2024 is projected to be around 20.1Mt, or around NZ$800M to that point in time.

How much more we will need to purchase offshore to cover future years' emissions gaps depends on how much action is taken to reduce domestic emissions, Hood says. “The future is still able to be changed, the past unfortunately is not.”

New Zealand's domestic emissions budgets under the Climate Change Response Act were set leaving a gap to the NDC that would require offshore mitigation. “The cost of meeting the NDC 100% domestically was seen as far too high.”

The plan to meet such a high proportion of the target through buying offsetting offshore, while allowed by the United Nations, has met with international criticism.

Hood says that New Zealand’s NDC situation is relatively unique. “Many countries have set NDCs that they intend to meet domestically, so excess emissions now might plausibly be compensated with future domestic action.”

There is currently no “off the shelf” market for ITMOs, and New Zealand will need to negotiate bilateral cooperation agreements with other countries. 

“Robust professional management and governance will need to be put in place for ITMO purchasing, to deliver both cost and environmental integrity objectives. Policy decisions will be needed on whether purchase obligations and/or management will be devolved to the private sector which could create more of an incentive to identify and secure least cost ITMOs,” Hood says.

Other countries such as Switzerland, Sweden, Singapore, Korea and Japan have ITMO programmes already underway.

In August 2022, the Australian Government’s Climate Change Authority published a review of International Offsets for possible future use in Australia with a view to helping make it possible to import ITMOs into Australia in the future.

“At the same time, the Australian Government has signed bilateral agreements for future Article 6 trading with Fiji and Papua New Guinea. Japan has signed bilateral agreements with 28 countries.”

But New Zealand still has nothing in place. “This raises concerns that New Zealand is behind where it should be in terms of preparing to meet its Paris Agreement target through the import of ITMOs into New Zealand, and that it risks higher future costs due to this delay.”

With some advocates suggesting quantitative limits on the cumulative or annual use of ITMOs, due to concerns that use of international cooperation may be used to substitute for domestic action, effectively ignoring excess emissions until 2028 could be seen as validating those concerns, Hood says. 

“Clearly, entering the market to purchase ITMOs in 2028 as opposed to much earlier is also likely to lead to additional costs being placed upon the New Zealand economy.”