I have just found this recent 2012 TED talk by James Hansen. It has been on-line since 7 March. The number of views on youtube was 13,473 when I watched it. I bet that rises.
The talk is very polished. Hansen reads from a script and has obviously run through the talk several times. Hansen discusses the natural greenhouse effect, the Earth's energy imbalance caused primarily by fossil fuel combustion, sea-level rise, species extinctions, impacts on agriculture and the need to act for the benefit of future generations as represented by his grandchildren.
09 March 2012
19 January 2012
Obama and State Department cork the Keystone XL pipeline
No really! Denial of the Keystone XL Pipeline Application, Media Note, Office of the Spokesperson, United States Department of State, Washington, DC, January 18, 2012.
And Obama's response: Statement by the President on the Keystone XL Pipeline The White House, Office of the Press Secretary, January 18, 2012
Joe Romm notes that the oil would go to China, the jobs to Canada and the extra carbon dioxide would go to global temperature increases - so Was the decision really that hard?
See News for Denial of the Keystone XL Pipeline Application
03 December 2011
The Durban UNFCCC international climate negotiations
In which I discuss the Durban UNFCCC international climate negotiations through a historic lense of the Second World War and the Rio 1992 Earth Summit.
In a very considered comment on the Hot Topic blog , David Lewis questions whether the Durban UNFCCC international climate negotiations can come up with a binding treaty that effectively reduces GHG concentrations, given the existing public will.
David Lewis compares the global demand for action in the international climate change negotiations with the changing British attitudes to 'Total War' with Hitler's Germany in 1940. Lewis implies that in the climate change negotiations, each government is "trapped in a circumstance where it can’t generate the national will that’s necessary".
In terms of the purposes served by international climate change negotiations, I would go a step further than that thoughtful comment from David Lewis. I say that the negotiations have never had the goal of producing a binding treaty to stabilise greenhouse gas concentrations. Governments instead use the negotiations as one of their reasons for not reducing emissions of greenhouse gases and for continuing with 'business-as-usual'.
Let me summarise my contention using another reference to the Second World War.
Q. Whats the difference between Neville Chamberlain's negotiations in 1938 with Hitler in Munich that lead to the annexation of Czechoslovakia and the UNFCCC international climate change negotiations?
A. Neville Chamberlain only went once to Munich.
In making my argument I am influenced by a paper my late father Robin Johnson wrote in 1992 about the political-economy of the Rio Earth Summit. Robin uses the term "political-economy" to indicate he is considering the various groups with interests in the Earth Summit and asking what interests were served by the outcomes.
Robin noted that the expected outcomes of the Rio Earth Summit were binding signed international conventions on climate change and biological diversity. However, the actual outcome was a "framework convention...full of resounding phraseology and generalities".
Robin says the reason for this outcome was the fundamental split between the 'North' (developed countries) and South (developing country) blocs. Neither bloc was was willing to put global interest ahead of national interests. Instead, the outcome of the Earth Summit consisted of "non-binding language ... adopted to get all major nations to sign".
No agreement except on non-binding rhetorical statements! Sound familiar, doesn't it? Isn't that whats happened with all the subsequent climate change talks?
Robin's paper uncannily predicts much of the next 19 years of inconclusive negotiations. He wrote "Prior to meeting in Rio, some governments expressed concern that the Earth Summit would become a "pledging conference" where world leaders would be expected to step to the podium and announce their country's contribution." Copenhagen 2009, anyone?
Robin concluded "The challenge for those seeking action will be to channel the outcomes of Rio into concrete action by member states". Substitute "Bali 2007" or "Copenhagen 2009" or "Cancun 2010" for "Rio", and we can re-use that conclusion for all subsequent international climate change negotiations.
So, from a political economy point of view, the climate change negotiations have had the effect of ensuring that international opinion stays "behind the demand curve” for decisive action. After all, that is the function they have served in the 19 years since the Rio Earth Summit in 1992.
So I think we need to let go of the idea that the negotiations as they are currently constituted and conducted will make any useful contribution to the kind of decisive international action that is required. We need to accept that the negotiations are just another forum for business and politics as usual.
In a very considered comment on the Hot Topic blog , David Lewis questions whether the Durban UNFCCC international climate negotiations can come up with a binding treaty that effectively reduces GHG concentrations, given the existing public will.
"I don’t see how negotiations on an international climate treaty can proceed to an agreement that would actually stabilize the composition of the atmosphere at a level that would not cause [dangerous anthropogenic interference] without more demand for such an agreement coming from the global population".
David Lewis compares the global demand for action in the international climate change negotiations with the changing British attitudes to 'Total War' with Hitler's Germany in 1940. Lewis implies that in the climate change negotiations, each government is "trapped in a circumstance where it can’t generate the national will that’s necessary".
In terms of the purposes served by international climate change negotiations, I would go a step further than that thoughtful comment from David Lewis. I say that the negotiations have never had the goal of producing a binding treaty to stabilise greenhouse gas concentrations. Governments instead use the negotiations as one of their reasons for not reducing emissions of greenhouse gases and for continuing with 'business-as-usual'.
Let me summarise my contention using another reference to the Second World War.
Q. Whats the difference between Neville Chamberlain's negotiations in 1938 with Hitler in Munich that lead to the annexation of Czechoslovakia and the UNFCCC international climate change negotiations?
A. Neville Chamberlain only went once to Munich.
In making my argument I am influenced by a paper my late father Robin Johnson wrote in 1992 about the political-economy of the Rio Earth Summit. Robin uses the term "political-economy" to indicate he is considering the various groups with interests in the Earth Summit and asking what interests were served by the outcomes.
Robin noted that the expected outcomes of the Rio Earth Summit were binding signed international conventions on climate change and biological diversity. However, the actual outcome was a "framework convention...full of resounding phraseology and generalities".
Robin says the reason for this outcome was the fundamental split between the 'North' (developed countries) and South (developing country) blocs. Neither bloc was was willing to put global interest ahead of national interests. Instead, the outcome of the Earth Summit consisted of "non-binding language ... adopted to get all major nations to sign".
No agreement except on non-binding rhetorical statements! Sound familiar, doesn't it? Isn't that whats happened with all the subsequent climate change talks?
Robin's paper uncannily predicts much of the next 19 years of inconclusive negotiations. He wrote "Prior to meeting in Rio, some governments expressed concern that the Earth Summit would become a "pledging conference" where world leaders would be expected to step to the podium and announce their country's contribution." Copenhagen 2009, anyone?
Robin concluded "The challenge for those seeking action will be to channel the outcomes of Rio into concrete action by member states". Substitute "Bali 2007" or "Copenhagen 2009" or "Cancun 2010" for "Rio", and we can re-use that conclusion for all subsequent international climate change negotiations.
So, from a political economy point of view, the climate change negotiations have had the effect of ensuring that international opinion stays "behind the demand curve” for decisive action. After all, that is the function they have served in the 19 years since the Rio Earth Summit in 1992.
So I think we need to let go of the idea that the negotiations as they are currently constituted and conducted will make any useful contribution to the kind of decisive international action that is required. We need to accept that the negotiations are just another forum for business and politics as usual.
11 November 2011
Swallowing the elephant flogging the dead horse
A snake swallows the elephant in the room and then flogs a dead horse - The politics of climate change in the 2011 New Zealand Election campaign
So whats happening with climate change in the campaign for the 26 November 2011 election?
I was originally thinking about writing a wonkish post comparing climate change policies between parties. You know the sort of thing.
Which parties have policies that reflect the seriousness of the impacts the science predicts? Who has got the science wrong? Which politicians are all talk and no action? What are the minute details of the each party's NZ ETS policies. Such as delays to sector entry dates, partial price obligations and varying free unit allocation regimes...MEGO, anyone? (My Eyes Glaze Over....)
Then I thought, Nah! I am looking through the wrong end of the telescope.
You know what really strikes me about climate change in the election?
It's the absence. It is as if climate change is nearly completely absent from the campaign. When climate change does pop up, it's portrayed in simplistic soundbites.
Nick Smith says anthropogenic climate change is real and complex and 'wicked'. But promises more moderating, balancing and delaying of the NZ ETS. Labour says anthropogenic climate change is real and we will fiddle with some NZ ETS details for agriculture slightly earlier than National as farmers don't vote for us anyway. The Greens say anthropogenic climate change is real and we have a detailed wonk-friendly exposition on our website, but for this election we are running with "jobs, kids, rivers". oh no...MEGO...
What's happened is that climate change, the 'elephant in the room', has been swallowed up whole by the 'snake in the room' -- politics. Along with all other serious political issues.
This snake is the real theme of the election. Russell Brown calls it the politics of absence. Brown says "cultivated political absence...shapes the almost unprecedented popularity of John Key". John Key's political success is because of this successful strategy of "de-politicising" himself. Key's politics-free radio chat show was the perfect example.
The media have largely just played along with the politics of absence. The election is discussed as a poll-driven horse race. Or a rugby game "of two halves" with "kicking for touch". Who looked confident? Who had the best sound bites? Who mispronounced his/her New Zild the least or most. Restructure or "reeshrukcha"?
The media have trivialised and objectified political debate. I give this example. The most discussed electoral contest in 2011 appears to be Auckland Central which the Herald calls "the battle of the babes" as the candidates, Jacinda Ardern and Nikki Kaye, are both relatively young women, whose shared Herald columns are called "Broadsides". Do I need to say more?
After the snake has swallowed the elephant in the room, the snake becomes the dead horse that needs some more flogging.
Climate change has been politically institutionalised. Its now "flogging a dead horse". Everyone has a policy (a horse). Everyone talks their policy. No one does anything.
These policies all have a narrative that explains the problem (the horse is under-performing) and a 'narrative' solution (keep flogging the horse).
It is here that the metaphor of "flogging the dead horse" fits so well. Firstly, the probability of the two main political parties really acting to reduce our emissions of greenhouse gases is the same as the probability of the flogged horse springing back to life.
The second reason is that the best dead horses can be repeatedly flogged.
Take the Resource Management Act (RMA). It's the ultimate flogged dead horse of NZ politics. In its 20 years of life, it has been in an almost eternal state of being vilified from all sides: for environmental failures and for economic inefficiency.
Both National and Labour have both been subjecting it to interminable reviews and amendments. The basics remain the same. Plans are written with lofty goals. Plans don't reflect consent practice. But then consent decisions rarely reflect plan goals. Consents are needed for some activities not others. Some consents need more evidence and take longer than others.
The NZ ETS is the new dead horse in the flogging stable. Its perfect. Like RMA issues, the NZ ETS is fiendishly complex. To most people, the NZ ETS is a MEGO topic. My Eyes Glaze Over. A recital of any of the detail of the NZ ETS is usually enough to induce that response. Thus deflecting most criticisms.
Being complex, if not incomprehensible by design, the NZ ETS can be fitted, usually negatively, into any political viewpoint. Farmers can still oppose it with vitriol despite their generous treatment. It is just as good a political punching bag as the RMA.
National's 2009 amendments institutionalise that most Kiwi of practices -- a five yearly review by committee. To me this is the statutory recognition of the near-permanent state of "fixing" the RMA is subject to. Labour have said they will continue the 5-yearly reviews if they become Government. Thus they have bought into Nick Smith's approach of eternal moderating of the NZ ETS. Labour get a payoff of needing less specific policies.
So debates on the NZ ETS, like this one, between Nick Smith's soundbites and Russel Norman's observations on perverse price incentives, on TV One's Q and A programme, don't really matter politically. The debate itself is just more MEGO. The snake swallows the elephant.
Interestingly, TV One had Jeanette Fitzsimons as their 'pundit' for the Smith/Norman debate. She cut right through the snake punditry by analysing the NZ ETS on the meta level. She said the NZ ETS was now so weak and distorted that it no longer mattered what tinkering Smith did to it. "It's like driving a car fast towards a cliff and arguing whether to go in fourth gear or fifth".
The horse is dead and no amount of flogging will make it trot again.
09 November 2011
An all-sectors NZETS should include agriculture
Gareth notes that Nick Smith has confirmed that agriculture will be unlikely to enter the New Zealand Emissions Trading Scheme.
"Hon Dr Nick Smith... explained the recent decision to indefinitely delay bringing agriculture into the scheme, stating the technology to do so practically does not yet exist"
Nick Smith yet again gets away with a soundbite of spin that is contradicted by the orthodox economic rationale for having an all-sectors all-units and all-gases international emissions trading scheme for greenhouse gases.
Just for the sake of argument, let's ignore the Sustainability Council's work on agricultural emissions reduction and assume that Dr Smith is correct that there are no practical technologies that will enable the agricultural sector to reduce emissions.
Let's go back to basics. Why do we even have emissions trading including all greenhouse gases across all sectors and across national borders?
The whole point is so that 'cheaper emissions reductions' can, in the short to medium term, largely carry the can for 'expensive emissions reductions', in meeting emissions limits or caps.
In economics speak, a sector of an economy with 'expensive emissions reductions' options is more or less just the same as a sector without practical technologies to enable reductions of emissions. Agriculture, for example, according to Nick Smith!
To paraphrase from another Nick, Lord Stern, in a well-functioning "deep and liquid" market for emissions permits, emitters with expensive mitigation options become buyers of permits and purchase permits from emitters with cheaper mitigation.
The role of the all-gases ETS, is to provide a wider variety of cheaper markets for emissions reductions, than would be the case in a single-gas ETS (such as a ruminant methane ETS, if there was one).
So the role of the emitting industries with fewer mitigation options (or more costly options) is to provide a flow of funds to reward those industries that have the cheaper emissions reduction options!
Logically, the lack of immediate practical mitigation technology in any one sector, is not a valid reason for leaving a sector out of an all-gases ETS.
"Hon Dr Nick Smith... explained the recent decision to indefinitely delay bringing agriculture into the scheme, stating the technology to do so practically does not yet exist"
Nick Smith yet again gets away with a soundbite of spin that is contradicted by the orthodox economic rationale for having an all-sectors all-units and all-gases international emissions trading scheme for greenhouse gases.
Just for the sake of argument, let's ignore the Sustainability Council's work on agricultural emissions reduction and assume that Dr Smith is correct that there are no practical technologies that will enable the agricultural sector to reduce emissions.
Let's go back to basics. Why do we even have emissions trading including all greenhouse gases across all sectors and across national borders?
The whole point is so that 'cheaper emissions reductions' can, in the short to medium term, largely carry the can for 'expensive emissions reductions', in meeting emissions limits or caps.
In economics speak, a sector of an economy with 'expensive emissions reductions' options is more or less just the same as a sector without practical technologies to enable reductions of emissions. Agriculture, for example, according to Nick Smith!
To paraphrase from another Nick, Lord Stern, in a well-functioning "deep and liquid" market for emissions permits, emitters with expensive mitigation options become buyers of permits and purchase permits from emitters with cheaper mitigation.
The role of the all-gases ETS, is to provide a wider variety of cheaper markets for emissions reductions, than would be the case in a single-gas ETS (such as a ruminant methane ETS, if there was one).
So the role of the emitting industries with fewer mitigation options (or more costly options) is to provide a flow of funds to reward those industries that have the cheaper emissions reduction options!
Logically, the lack of immediate practical mitigation technology in any one sector, is not a valid reason for leaving a sector out of an all-gases ETS.
02 November 2011
Nick Smith fails the smelter spin test
What does The Hon Dr Nick Smith, Minister for Climate Change Issues, say when the Greens accuse him of subsidising greenhouse gas polluters. Well it seems he denies it and he produces instructive soundbites of spin. I am informed that at Wellington's Oxfam election and climate change debate he said that the NZ Aluminium Smelter Ltd's operation at Tiwai Point is the only aluminium smelter in the world exposed to a carbon price.
He has said this soundbite a few times. For example, in response to Kennedy Graham on 29 September 2011:
Another example of a Smith soundbite is saying that the overly-generous free allocation of emissions units to industry in the NZETS is not a cost to the taxpayer. For example: Parliament on 29 September 2011:
Sorry Dr Smith, you can't just create and give away a permit to emit greenhouse gases that has a clear market value and say there is no cost to taxpayers as Treasury did not write out a cheque. The Auditor General says there is a cost to taxpayers of giving emissions units away to emitters.
Footnotes
(1) NB By 'pay any face' I think he means 'face any price'.)
(2) IEA, 2008,'Climate Policy and Carbon Leakage - Impacts of the European Emissions Trading Scheme on Aluminium'
He has said this soundbite a few times. For example, in response to Kennedy Graham on 29 September 2011:
"..the aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions".On TV One's 'Q and A' programme:
"the New Zealand Aluminium Smelter in Bluff, it is the only one in the world that pays any face at all for carbon pricing." (1)In Parliament in September 2009,
"...the Bluff smelter, on 1 July next year, will be the very first to face a carbon price for its pollution. The European scheme excludes aluminium smelters until 2013..."Does Dr Nick's soundbite stand up to scrutiny? The European Union Emissions Trading Scheme, which started in 2005, excludes the European aluminium smelters until 2013. But it included electricity generation from 2005. And aluminium smelting is very electricity intensive. As the International Energy Agency says: "Although the primary aluminium sector is not directly covered by the (EU) ETS, the impacts of the CO2 price are felt through increases in electricity prices" (p 8). (2)
Another example of a Smith soundbite is saying that the overly-generous free allocation of emissions units to industry in the NZETS is not a cost to the taxpayer. For example: Parliament on 29 September 2011:
"This member and other members make the gross error of trying to claim that not exposing industries or consumers to the full price of carbon over all their emissions is somehow a subsidy. A subsidy implies that there is a cost to taxpayers. That is not true.."Unfortunately for Dr Nick, that's not what the Auditor General, Lynn Provost, says in her accounting and auditing advice for emissions units in the public sector
"NZUs have a market value and the issue of NZUs without charge to participants is an expense to the Government and creates a liability".Sorry Dr Smith, the Tiwai Point smelter is not the only aluminium smelter exposed to a carbon price in an ETS. And the European smelters probably pay a higher carbon price through their electricity costs as the Tiwai Point smelter owner is compensated for electricity costs as well as emissions through excessive free allocation of emissions units.
Sorry Dr Smith, you can't just create and give away a permit to emit greenhouse gases that has a clear market value and say there is no cost to taxpayers as Treasury did not write out a cheque. The Auditor General says there is a cost to taxpayers of giving emissions units away to emitters.
Footnotes
(1) NB By 'pay any face' I think he means 'face any price'.)
(2) IEA, 2008,'Climate Policy and Carbon Leakage - Impacts of the European Emissions Trading Scheme on Aluminium'
20 October 2011
120% Pure Subsidy NZ Aluminium Smelters Limited Part 2
I have had some very good comments on the 120% Pure Subsidy post about the quantity of free emissions units that NZ Aluminium Smelters Limited/Rio Tinto Alcan NZ Limited (I will just call them 'the smelter') has received under the NZ ETS in 2010. Enough good comments that they justify a second post on NZ Aluminium Smelters free units.
Simon Terry of the Sustainability Council points out that we shouldn't be surprised at the high level of free allocation of units to big emitters. Simon Terry documented this in June 2008, in the report Corporate Welfare Under the ETS, which looked at free allocation of units to eight energy intensive companies under the proposed NZ ETS.
In particular, Simon Terry reminds us that in the NZ ETS the free allocation of units includes a factor to compensate for NZ ETS related electricity price increases. As the NZ ETS will make some power generation more expensive to the extent that it uses fossil fuels (Huntly Power Station for example). This explains why the 'allocative baseline' factor for aluminium smelting is 2.645 units per tonne aluminium when the emissions factor for the MfE Greenhouse Gas inventory is 1.67 tonnes CO2-e per tonne aluminium.
This feature of using free allocation of units to compensate emitters for electricity price increases is explicit in the Labour Government's original NZ ETS proposal Framework for a New Zealand Emissions Trading Scheme, released in September 2007. As indicated by this quote under the heading "Allocation of emission units"
Password1 concludes that
This idea of fossil-fuel-thermal power costs (increased by the NZ ETS) affecting a smelter that only exists because of hydroelectric dams on Lakes Manapouri and Te Anau seems a bit bizarre. Especially since NZAS's supply contract is with Meridian Energy, the 100% renewable power company.
However, the wholesale electricity market works by preferentially using the lowest priced generation offer in any one half-hour trading period. Brian Fallow points out that this means that wholesale price is set by the most expensive block of electricity offered into the market which is needed to ensure demand is satisfied and that block may be from Genesis Energy's Huntly coal and gas thermal plant.
When demand is high and hydro lakes are low, thermal power sets the wholesale price. As was the case through much of 2008. When demand is low and hydro lakes are full, then the Huntly Power Plant may be on the substitutes bench and the NZETS costs won't flow through to the wholesale electricity price.
So it does seem that there is some level of carbon price from the NZ ETS reflected through the wholesale price that ends up in the electricity price paid by the smelter. However, it is quite hard to quantify this price.
Allocative baselines are discussed in June 2010 in this Cabinet paper. Paragraph 37 tells us that the electricity allocation factor is 0.52 tCO2-e/MWh. Paragraph 40 tells us that an analysis of the smelter's electricity contract with Meridian Energy indicates that the use of this factor would result in over-allocation of units as the actual extra electricity costs are less than 0.52 tCO2-e/MWh.
Unfortunately the actual extra electricity costs, the degree of over-allocation and the fiscal cost of allocation to the smelter, have all been blanked out from the cabinet paper, apparently as 'the information is commercially sensitive'. I appear to be at the end of that rabbit-hole.
The next rabbit-hole is to check the emissions factor that gives emissions of CO2-e from tonnes of aluminium produced.
In terms of emissions reported and units surrendered, Regulation 35 of Climate Change (Stationary Energy and Industrial Processes) Regulations gives a 10-variable formula for the calculating the smelter's emissions from production. I am missing about 4 of these variables. So thats also a dead end for duplicating the emissions and the units to be surrendered.
But why don't I just use actual numbers? The Ministry of Economic Development Chief Executive's Report shows that the NZ aluminium manufacturing sector has only one NZ ETS 'participant' and that the sector, and therefore the one participant, the aluminium smelter, reported emissions of 615,814 tonnes CO2-e for the 2010 year and 312,294 tonnes CO2-e for the six months from 1 July to 31 December 2010.
So 312,294 tonnes were emitted in the six month period of obligation to surrender matching units. So we divide by 2 for the two-for-one unit deal, and that results in 156,147 units to surrender.
210,421 units were allocated to the smelter for the six months according to the Ministry for the Environment.
That's 54,274 more units allocated than surrendered or alternatively the units allocated to the smelter exceeded the units surrendered by the smelter by 135%.
This result is pretty much a mid-point between my previous estimates which were from 147% to 122%, as summarised in this table.
Summing up
Because of the allocation of units for power price increases, the smelter faces a lower carbon price than if it was exempt from the ETS and just paid its power bills.
There was an argument that the NZ ETS might be weak but at least it was better than nothing. In the case of the smelter, its game over for that argument.
Simon Terry of the Sustainability Council points out that we shouldn't be surprised at the high level of free allocation of units to big emitters. Simon Terry documented this in June 2008, in the report Corporate Welfare Under the ETS, which looked at free allocation of units to eight energy intensive companies under the proposed NZ ETS.
In particular, Simon Terry reminds us that in the NZ ETS the free allocation of units includes a factor to compensate for NZ ETS related electricity price increases. As the NZ ETS will make some power generation more expensive to the extent that it uses fossil fuels (Huntly Power Station for example). This explains why the 'allocative baseline' factor for aluminium smelting is 2.645 units per tonne aluminium when the emissions factor for the MfE Greenhouse Gas inventory is 1.67 tonnes CO2-e per tonne aluminium.
This feature of using free allocation of units to compensate emitters for electricity price increases is explicit in the Labour Government's original NZ ETS proposal Framework for a New Zealand Emissions Trading Scheme, released in September 2007. As indicated by this quote under the heading "Allocation of emission units"
"indirect emissions associated with the consumption of electricity, as well as direct emissions from ... industrial processes will be included in the concept of emissions from industrial producers...The basis for allocation for electricity consumption will be one that compensates firms for the cost impact".Another regular commenter, Password1, says my analysis is totally incorrect because I have left out the indirect emissions from using electricity, that I am not comparing the same sets of data, and that I need to redo my calculations based on what is in the legislation. Further, my assertion that there has been an "overallocation" of units "is wrong, wrong, wrong".
Password1 concludes that
"The smelter is not getting a ‘refund’ – they are facing a proportion of the full cost of emissions both at the point of aluminium production and from being passed down from the electricity generator."Okay maybe I will redo my calculations. So off I will go down the rabbit-hole and look into this electricity factor. So what is the proportion of the 'allocative baseline' factor for aluminium smelting, 2.645 units per tonne of aluminium, is to compensate for NZ ETS-related electricity price increases?
This idea of fossil-fuel-thermal power costs (increased by the NZ ETS) affecting a smelter that only exists because of hydroelectric dams on Lakes Manapouri and Te Anau seems a bit bizarre. Especially since NZAS's supply contract is with Meridian Energy, the 100% renewable power company.
However, the wholesale electricity market works by preferentially using the lowest priced generation offer in any one half-hour trading period. Brian Fallow points out that this means that wholesale price is set by the most expensive block of electricity offered into the market which is needed to ensure demand is satisfied and that block may be from Genesis Energy's Huntly coal and gas thermal plant.
When demand is high and hydro lakes are low, thermal power sets the wholesale price. As was the case through much of 2008. When demand is low and hydro lakes are full, then the Huntly Power Plant may be on the substitutes bench and the NZETS costs won't flow through to the wholesale electricity price.
So it does seem that there is some level of carbon price from the NZ ETS reflected through the wholesale price that ends up in the electricity price paid by the smelter. However, it is quite hard to quantify this price.
Allocative baselines are discussed in June 2010 in this Cabinet paper. Paragraph 37 tells us that the electricity allocation factor is 0.52 tCO2-e/MWh. Paragraph 40 tells us that an analysis of the smelter's electricity contract with Meridian Energy indicates that the use of this factor would result in over-allocation of units as the actual extra electricity costs are less than 0.52 tCO2-e/MWh.
Unfortunately the actual extra electricity costs, the degree of over-allocation and the fiscal cost of allocation to the smelter, have all been blanked out from the cabinet paper, apparently as 'the information is commercially sensitive'. I appear to be at the end of that rabbit-hole.
The next rabbit-hole is to check the emissions factor that gives emissions of CO2-e from tonnes of aluminium produced.
In terms of emissions reported and units surrendered, Regulation 35 of Climate Change (Stationary Energy and Industrial Processes) Regulations gives a 10-variable formula for the calculating the smelter's emissions from production. I am missing about 4 of these variables. So thats also a dead end for duplicating the emissions and the units to be surrendered.
But why don't I just use actual numbers? The Ministry of Economic Development Chief Executive's Report shows that the NZ aluminium manufacturing sector has only one NZ ETS 'participant' and that the sector, and therefore the one participant, the aluminium smelter, reported emissions of 615,814 tonnes CO2-e for the 2010 year and 312,294 tonnes CO2-e for the six months from 1 July to 31 December 2010.
So 312,294 tonnes were emitted in the six month period of obligation to surrender matching units. So we divide by 2 for the two-for-one unit deal, and that results in 156,147 units to surrender.
210,421 units were allocated to the smelter for the six months according to the Ministry for the Environment.
That's 54,274 more units allocated than surrendered or alternatively the units allocated to the smelter exceeded the units surrendered by the smelter by 135%.
This result is pretty much a mid-point between my previous estimates which were from 147% to 122%, as summarised in this table.
| Table 1 Low actual and high estimate of units to surrender | |||
|---|---|---|---|
| Low | Actual | High | |
| Units to surrender | 143,342 | 156,147 | 172,526 |
| Units allocated | 210,421 | 210,421 | 210,421 |
| Excess allocation (units) | 67,079 | 54,247 | 37,896 |
| Excess allocation (per cent) | 147% | 135% | 122% |
Summing up
- The smelter was allocated 210,421 emission units in the six-month NZ ETS compliance period in 2010. Without any reasonable doubt, this represents 54,274 more emission units than it surrendered to match emissions.
- At today's NZ unit price of $14, the value of the units allocated is $2,945,894. The value of the excess of units allocated above units surrendered is $759,836. That is the value of the taxpayer's gift to the smelter.
- An unknown (or undisclosed) proportion of the free units are intended to compensate the smelter for NZ ETS-related electricity price increases in a year characterised by highest level ever of renewable generation.
- I can't prove that the amount of free units allocated is more than the sum of the units to be surrendered for emissions plus some units as compensation for electricity price increases. But I think it is highly likely.
- In any case, it hardly matters whether the volume of free allocation is either just under 100% of costs or whether its 135%. Both options pretty much effectively negate the carbon price on the smelter and mean no real incentive to reduce emissions.
Because of the allocation of units for power price increases, the smelter faces a lower carbon price than if it was exempt from the ETS and just paid its power bills.
There was an argument that the NZ ETS might be weak but at least it was better than nothing. In the case of the smelter, its game over for that argument.
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