Note 26:  Provisions

The provision for employee entitlements represents annual leave, accrued long service leave and retiring leave, and sick leave entitlements accrued by employees. Probability assumptions about continued future service affecting entitlements accrued as at reporting date have been made using previous employment data. For entitlements that vest over a period exceeding one year a discount rate of 5.5% has been used.

New Zealand has committed under the Kyoto Protocol to reducing its average net emissions of greenhouse gases over 2008-2012 (the first commitment period of the Kyoto Protocol or CP1) to 1990 levels or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests. This obligation will crystallise when the first Kyoto commitment period is settled up post-2012.

New Zealand's net obligation as at 30 June 2008 of $NZ562 million (2007: $NZ704 million) is based on a deficit of 21.7 million Kyoto Protocol emission units and a carbon price of €12.50 per unit. The carbon price in New Zealand dollars equates to $NZ25.89, using the 30 June 2008 exchange rate of €0.48285 = $NZ1 (30 June 2007: €0.5726 = $NZ1, and a carbon price of €8.86 per unit).

The quantum of the deficit has been compiled from agricultural, forest sink and deforestation projections provided by the Ministry of Agriculture and Forestry, energy (including transport) and industrial processes projections from the Ministry of Economic Development and waste projections from the Ministry for the Environment. The projections use the latest information from the national inventory of greenhouse gas emissions and removals submitted to the United Nations Framework Convention on Climate Change Secretariat on 14 April 2008.

AEA Technology, an independent UK based firm, has assessed the robustness of the assumptions and methodologies underpinning the projections and found them to be sound and reasonable.

The movement in the projected balance of Kyoto Protocol units is set out in the Net Position Report 2008. Projected balance of Kyoto Protocol units during the first commitment period which is published by the Ministryfor the Environment. The movement in the projected emission units deficit is primarily related to the following key factors: transport sector emissions are projected to be lower than in 2007 due to actual fuel use data in 2007 being lower than projected and fuel prices being higher; agriculture emissions are projected to be lower due to the effects of drought early in 2008 and a continuing decline in sheep numbers; based on an intentions survey, emissions from deforestation are projected to be lower than in 2007 mainly due to the implementation of an Emissions Trading Scheme; and there is an increase in the estimate of removals due to the implementation of recommendations made by AEA Technology. A full copy of this report can be found on the Ministry's website: www.mfe.govt.nz .

The carbon price has been determined by the Treasury. The Allen Consulting Group have reviewed this work and are satisfied that the methodology (and data sources) applied is a robust high level approach, and that €12.50 is a reasonable carbon price estimate at this time for valuing the New Zealand Government's possible future liabilities under the Kyoto Protocol.

Provisions by their nature are more uncertain than most other items in the statement of financial position. Fluctuations in the value of the estimate may occur through changes in the assumptions underlying the quantum, movements in the price of carbon and the exchange rate with the European currency unit, and government policy changes.

The Climate Change (Emissions Trading and Renewable Preference) Bill had its third and final reading on 10 September 2008. This Bill establishes an Emissions Trading Scheme (ETS) in New Zealand. The Net PositionReport 2008 has been prepared on the basis of the government decision to introduce an ETS in New Zealand.

No liability or contingent liability for periods beyond 2012 has been recognised, as New Zealand currently has no specific obligations beyond the First Commitment Period. The architecture of any obligations in future periods has yet to be negotiated.

The Government has guaranteed superannuation schemes managed by the National Provident Fund (NPF) (refer to note 31 Contingent Liabilities and Contingent Assets for details of the guarantee). As at 30 June 2008 the NPF's DBP Annuitants' scheme was in a net deficit position of $907 million (2007:$771 million), represented by a gross estimated pension obligation of $1,020 million (2007: $994 million) with net investment assets valued at $ 113 million (2007: $223 million). No additional provision was required in the year for other pension schemes managed by NPF under the Government's guarantee .