Between 22 and 24 July, the International Accounting Standards Board (IASB) made a groundbreaking decision in a London meeting room: corporate climate targets are no longer just about sustainability—they now have direct financial implications for companies’ balance sheets.
Key Clarifications from the IASB
Constructive Obligations: A climate target must not be legally enforceable to matter. Even voluntary targets can create a financial obligation if the company is committed to their delivery.
Provisioning for Carbon Credits: Companies must provide financial support for the cost of carbon credits to offset excess emissions annually, treating them as a liability.
These clarifications are crucial for New Zealand, potentially impacting the government’s financial statements with billion-dollar consequences.
This is particularly significant for Climate Change Minister Hon. Simon Watts and Associate Climate Change and Finance Minister Hon. Nicola Willis.
Implications for New Zealand’s NDC
New Zealand’s internationally determined contribution (NDC) under the Paris Agreement, set for 2021 to 2030, is increasingly scrutinised for its legal and financial accounting status. With a growing gap between domestic emissions and targets, New Zealand must purchase offshore carbon credits to bridge this gap.
The estimated cost of these offshore credits is substantial, ranging from $4 billion for cooperation with developing countries to $9 billion if Emissions Trading Scheme (ETS) linking is used. According to the IASB’s interpretation, a provision should be made in the government’s financial statements for these costs.
Learn More: New Zealand's $1.3 Trillion Decade of Liability
Government Commitment and Financial Risks
Numerous statements, legislative amendments, trade agreements, and international processes demonstrate the government's commitment to the NDC. Failure to meet the NDC could result in serious trade and financial risks, including dispute resolution proceedings and political pressure from European lobby groups.
Read More: The Carbon Border Adjustment Challenge
Ratings Agencies and Creditworthiness
Rating agencies will likely be concerned if New Zealand walks away from a billion-dollar obligation, given their emphasis on transparent reporting and climate risk management. New Zealand's reputation and creditworthiness could be at stake.
The Path Forward: Domestic Action and Offshore Integrity
The size of New Zealand’s NDC liability will depend on domestic actions to reduce emissions. Initiatives like Rewiring Aotearoa and Recloaking Papatūānuku can help by accelerating electrification and restoring indigenous forests, reducing the need for offshore credits.
Additionally, ensuring the integrity of offshore emissions reductions is critical. Projects like the Singapore Monetary Authority’s initiative to retire coal-fired power stations in the Philippines can be models for impactful offshore components of New Zealand’s NDC.
Recent IASB Decisions and Their Relevance
The IASB update in July 2024 highlights preliminary decisions affecting various projects, including Dynamic Risk Management, Financial Instruments with Characteristics of Equity, and the Post-implementation Review of IFRS 15 Revenue from Contracts with Customers. These updates reflect the evolving landscape of accounting standards, reinforcing the need for transparent and accurate financial reporting.
The IASB’s decisions on rate-regulated activities and the comprehensive review of the IFRS for SMEs Accounting Standard underscore the importance of aligning accounting practices with current financial realities. For instance, the tentative decisions on extending the measurement proposals and refining transition requirements are crucial for entities managing financial risks.
We have a solution
Our BRRP facilitates the flow of capital for building waste-to-energy systems to achieve gross emissions reductions and offset emissions. Our platform tracks waste destruction in waste-to-energy plants, creating marketable carbon credits.
How it Works
Waste Diversion and Measurement: Waste is diverted to a bioenergy facility, measured using IPCC standards, and verified bi-annually by agencies like Verra/Gold Standard.
Calculating Gross Emissions Reduction: The waste and energy data measure Gross Emissions Reduction (GER) in CO2 equivalents (CO2eq).
Validation and Authentication: CO2eq tonnes are validated against the national carbon budget/NDC and authenticated against the Open Earth register.
Issuing Tokens: Non-fungible tokens (NFTs) representing carbon credits are issued and sold based on compliance market values.
Alignment with Global IPCC Standards
As of early 2024, Toitū Envirocare, New Zealand’s leading carbon certification and advisory services provider, will transition away from accepting New Zealand carbon credits issued under the Permanent Forest Sinks Initiative (PFSI) and Permanent Post-1989 Forest category (PP89) of the Emissions Trading Scheme. This strategic shift aligns with the evolving standards in the global Voluntary Carbon Market (VCM), reflecting heightened demand for integrity and transparency in carbon credit projects. At Alimentary Systems, we align our practices with these global standards to ensure our carbon credits meet the latest international best practices.
Importance of Gross Emissions Reduction
The Commission has missed its target by 100 million, underscoring the urgency of effective interventions. Treasury's Paris Agreement Cost Projection. New Zealand’s obligations under the Paris Agreement could cost $23.7 billion by 2030, adding financial strain.
Current Situation
Businesses generate emissions, with the government providing a free allocation and businesses offsetting the remaining 14% through forestry projects. However, the government remains liable for the remaining 86%. We believe that with waste-to-energy reform, we can enable
Real-time carbon credit creation.
Green bonds linked to waste reduction and clean energy actions.
Biodiversity and UN SDGs-linked carbon credits.
Accelerated bioenergy adoption to reduce emissions shortfall.
Mitigation of on-farm emissions liabilities.
Restoration of trade balance.
Outcomes from BRRP
Reduce 1,330,000 CO2e emissions by 2030, equivalent to $102.4 million annually.
Address all emissions from organics, constituting 5% of Gross Emissions.
Contribute to 48% of Gross Reductions in the Primary Sector.
Develop clean energy projects in the Pacific Islands.
Our platform uses SCADA data and specialised hardware to measure and validate energy performance, storing data on-site and in the cloud. Compliance with IPCC standards is managed in the cloud, with tokens issued and available for purchase. These tokens are also assessed against UNSDGs, adding further value.
Conclusion
While New Zealand must face the challenge of meeting its climate targets and taking concrete actions to reduce emissions, we have a solution. We can secure a sustainable future by investing in ambitious initiatives and ensuring the integrity of both domestic and offshore emissions reductions.