If it's worth paying New Zealand Steel to reduce emissions shouldn't we first stop paying them emission units to increase emissions?

The $140 million emissions subsidy to New Zealand Steel is not just corporate welfare, it's greenwashing and it's climate bright siding and it's our insane emissions trading scheme. Can we have our 16 million free emissions units back?

I am still blown away by the Government's announcement a week ago that they will pay New Zealand Steel Ltd $140 million over three years to adopt an electric arc furnace that reduces the emissions intensity of steel smelting.

I am also blown away by the over-egging of the project by the Chris Hipkins, Megan Woods and James Shaw.

Hipkins states:

“The economics of this really stack up, especially compared to current carbon prices. The lifetime abatement cost is forecast at $16.20 per tonne. Current carbon prices are around $55 per tonne. In the long term this saves the Government and the country money.

And I am also aghast at the largely uncritical treatment of the announcement in the media. Much comment fails to look at the NZ Steel deal in the context of our dreadful emissions trading scheme (or ETS). Some comment has included basic errors of fact such as saying New Zealand Steel is exempt from the ETS.

Massive emissions cutting deal says Luke Malpass in Stuff.

James Shaw is quoted by RNZ

"The lifetime abatement cost is forecast at $16.20 per tonne. Current carbon prices are around $55 per tonne. In the long term this saves the government and the country money."

Duncan Greive at The Spinoff calls it the beginning of a new climate pragmatism.

Duncan Greive makes this factual error.

"NZ Steel was already exempt from the Emissions Trading Scheme (ETS), having baldly stated that it would have shut the factory were it to have to pay the cost of its emissions"

No, New Zealand Steel is not exempt from the emissions trading scheme (They would be more likely to face a carbon price if they were exempt). Yes, they have threatened to close the smelter. Several times

Michael Neilson in the Herald says the initiative is remarkable.

Bernard Hickey agrees with Hipkins and says it's $140m well spent at $16.20/tonne.

Even the Lawyers for Climate Change Action, who have just filed a judicial review of the December 2022 ETS price settings decision, said "This is a great initiative"

What's the relevance of Hickey and Hipkins and Shaw comparing the predicted cost per tonne of emissions reduced with the current market price of emission units?

It's emission pricing. Carbon prices are emblematic of having an emissions trading scheme. And in theory New Zealand is big on emissions pricing.

The Ministry for the Environment keeps saying "the New Zealand Emissions Trading Scheme is the Government’s main tool for reducing greenhouse gas emissions". New Zealand has had an emissions trading scheme since 2010. It includes the steel industry.

This is the emissions pricing logic.

• NZ Steel's emissions are covered by the ETS and are priced via the mandatory surrender of emission units.
• NZ Steel has a project to reduce emissions that will cost less per tonne of emissions than the current market price.
• NZ Steel's overall emissions liability under the ETS will reduce.
• The project pays for itself as it is the lower cost option.

That's what emissions trading schemes are meant to do.

So why isn't NZ Steel paying 100% of the cost? Why is the Government paying almost half? Why are Hipkins, Wood and Shaw saying this subsidy isn't just necessary but it's good policy?

The answer is the bullshit that is the emissions trading scheme Industrial Allocation rules.

Tom Pullar-Strecker of Stuff, who seems the only skeptical voice, correctly notes New Zealand Steel would never fund the electric arc furnace as they receive so many free emission units under the ETS Industrial Allocation rules.

Pullar-Strecker has also noted that in New Zealand Steel's last annual report, it received free emission units worth $117 million. And that the chief executive stated they received so many free emission units that carbon costs were "neutralised" including indirect ETS costs from electricity prices.

Just to repeat the point again. New Zealand Steel are allocated far more free emission units than needed for their actual smelter emissions.

They have never needed to buy any additional units to comply with the ETS.

Here is the chart of actual final allocations of emission units from the EPA to NZ Steel compared to the estimated actual steel emissions from the Greenhouse Gas Inventory.

What's that mean? Buying emission units and surrendering them back to the Government annually is the essence of an emissions price.

Receiving free emission units and surrendering some of them back to the Government and keeping some each year (you are always a net seller) is the opposite of an emissions price.

Receiving free emission units is in fact payment of a subsidy for New Zealand Steel's emissions.

If New Zealand Steel increases it's emissions they receive more units

If New Zealand Steel reduces it's emissions they would receive fewer units

So if New Zealand Steel installed the electric arc furnace, and reduced emissions from its Glenbrook mill by 800,000 tonnes, they would be financially worse off as they would lose more than 800,000 emission units.

That is how insane the emissions trading scheme is.

This chart shows the $308 million value of the unit allocation subsidy to NZ Steel from 2010 to 2021 and highlighted is the Government's electric arc furnace grant of $140 million over three years 2022 to 2024.

Our emissions pricing scheme is so flawed it incentivises maintaining and increasing emissions. It is 180 degrees in the wrong direction. This is emissions trading insanity.

If it's worth paying New Zealand Steel to reduce emissions shouldn't we first stop paying them to increase emissions?

Double dip Fonterra also wants to be paid for increasing emissions and paid for reducing emissions

Data and R code.

Check this out from Radio New Zealand. No doubt following the New Zealand Steel double dip precedent, Fonterra has also got it's hand out to the Government to double dip government subsidies for both increasing and reducing emissions.

Fonterra says $100m in carbon credit costs could help pay for clean energy

Fonterra chief operating officer Fraser Whineray told Morning Report today that it was working to reduce emissions, but more government assistance would help.

At the moment, for each tonne of greenhouse gases the company must pay into the government's Emissions Trading Scheme, but Whineray said he would like to see more of that be given back to Fonterra to help it introduce more clean alternative energy sources.

"Our total off-farm emissions in New Zealand at the moment is about 1.5 - 1.6 million tonnes [per year], and so you times that by the carbon price, and that's roughly the cost of surrendering carbon for our emissions in New Zealand each year.

"The ETS is supposed to recycle funds back into decarbonisation. And if we're spending more than $100m a year on carbon credits, getting a little bit of that back to help pay for the actual projects - some of which we've got under way and some much larger ones in front of us, that sounds like a pretty reasonable starting point."

But Fonterra has been paid and continues to be paid to increase their coal thermal emissions under the 'Industrial Allocation' rules of the crazy emissions trading scheme.

Here is a bar chart of free emission units given to Fonterra under the 'Industrial Allocation' rules. The total number of units given to Fonterra over the 12 years since 2010 is 450,413 emission units.

Allocation of units is proportional to production. That method is called "output intensity" based allocation.

If Fonterra increases its production it gets more units. The allocation of units incentivises increasing emissions.

How come Fonterra doesn't mention its already being given a government hand out for maintaining and increasing its emissions?

Here is a chart of the year by year value of the free emission units given to Fonterra.

The U shaped dip reflects the collapse of carbon prices when the market was flooded by dodgy imported international 'hot air' emission units in 2012 and 2013.

The 2021 sharp upward increase in value of the allocations is caused by the 2020 changes to the emissions trading scheme. Out went paying for unit surrender liabilities with unlimited volumes of units at a fixed price of $25 per tonne. In came auctions of units four time a year.

If it's worth paying Fonterra to reduce it's emissions shouldn't we first stop paying them to increase their emissions?

New Zealand Steel reduces emissions - gets paid millions: New Zealand Steel increases emissions - gets paid millions

The Government made an extremely exaggerated announcement on Sunday 21 May 2023 that it will contribute $140 million to a New Zealand Steel project to electrify (replace coal thermal heat) their steel and iron recycling process. Thus reducing future emissions of greenhouse gases.

NZ’s biggest ever emissions reduction project unveiled the title breathlessly gushed.

If only the hyperbole flowing from the joint Government and Te Tari Tiaki Pūngao/EECA announcement matched the appalling reality of how dysfunctional New Zealand Steel's treatment is under the emissions trading scheme.

New Zealand Steel has never faced an emissions price under the emissions trading scheme.

In every year since 2010, New Zealand Steel has been allocated far more free emissions units than the number it has had to surrender back to the Government.

Here is a chart of the allocated emissions units and the estimated emissions trading scheme liability to surrender units.

The effect of the excessively generous allocation of units is to completely insulate New Zealand Steel from an emissions price.

Notwithstanding this extremely generous subsidy, New Zealand Steel still engaged in windfall arbitrage profiteering by buying international hot air emissions units back in 2012 and 2013.

The annual amount of free emissions units allocated is proportional to the steel production. If production and emissions increase, the amount of free emission units increases.

Conversely, if steel production and emissions decline, the amount of free emission units decreases. Free allocation of emission units incentivises increased emissions. And disincentivises reduced emissions.

New Zealand Steel has been allocated a total of 16 million emission units between 2010 to 2021.

New Zealand's emissions units now have an enhanced value due to the 2020 amendments to the Climate Change Response Act.

This is a chart of the annual values of the New Zealand Steel unit allocations when priced with a mean May price. May is the month when the units are transferred to New Zealand Steel's ownership.

The 16 million emissions units allocated to New Zealand Steel have a total value of $308 million. The proposed grant to reduce steel recycling emissions by electrification, is $140 million.

New Zealand Steel has already received twice as much money ($308 million vs $140 million) to maintain it's emissions, as the value of the proposed electrification grant.

That's why I say that New Zealand Steel may be getting paid to reduce emissions but it has already been paid twice as much to keep emitting.

Industrial Allocation - free emission units for big business - is worse policy than 100% industry exemption from NZ ETS

In a recent post I argued that the New Zealand emissions trading scheme industrial allocation policy exempts from emissions pricing twice as many tonnes of emissions than the total emissions counted in the Greenhouse Gas Inventory for the New Zealand industrial sector.

I have a thought experiment. Can I look at the emissions 'footprint' of the free emissions units of industry allocation through the lens of the provisional emissions budget?

The Climate Change Commission's recent recomendation on ETS settings describes how industrial allocation is treated within the emission budgetting process (page 36).

"Step 4: Account for industrial free allocation. Industrial free allocation refers to the amount of NZUs provided by the Government for free to entities whose activities are both emissions-intensive and trade-exposed (EITE). These units use up part of the emissions budget available to the NZ ETS and reduce the total amount of NZUs that the Government can sell at auction".

Therefore the emission units given to emitters have to be subtracted from the emissions budget to get to the amount of emission units available to auction.

Here is a chart of the provisional emissions budget for the years 2021 to 2025. The emissions budget calculation involves subtracting parcels of emissions to get to the amount of units to auction. For Industry Allocation, 43 million tonnes of emissions are deducted. In other words, these units are 'unpriced' or 'exempt' from pricing, the same treatment as for pastoral agriculture emissions.

What would the emissions budget look like if assumed all NZ industry emissions from the Greenhouse Gas Inventory are exempt from the emissions trading scheme?

There would be no subtraction of units for industrial allocation. Instead the emissions budget would subtract an amount of units equal to the industrial emissions from the Inventory.

This chart presents that scenario. An allocation of 27 million units is made from the emissions budget to account for all industry emissions being exempt from the emissions trading scheme. There is no allocation for industrial allocation.

Completely exempting industry from the emissions trading scheme results in a higher amount of emissions units to auction. Ninety seven million tonnes compared to 90 million tonnes over the period 2021 to 2025.

This bar chart compares the two auction volumes under industry exemption and under the status quo of industrial allocation.

As the units auctioned represents emissions priced under the emissions trading scheme, the industry exemption scenario is an unequivocally a better policy for reducing emissions than industrial allocation.

Explaining the emissions budget it's the bodge that gives the number of emissions units to auction

I feel I need to do a deep dive into emissions budgets.

The emissions budget is the bodge that papers over all the cracks and flaws in the emissions trading scheme. It calculates the number emissions units to auction into the New Zealand carbon market.

Emissions budgets are part of the huge blob that is New Zealand's climate policy framework, along with:

• the "Zero Carbon Act" that was an amendment not an original statute.
• the Climate Change Commission
• the Paris Agreement
• the Net Zero by 2050 goal
• the 2030 emissions target

Specifically emissions budgets are a relatively new tool (added in the 2020 reforms) to calculate the amount of emissions units that will be auctioned to emitters under the New Zealand Emissions Trading Scheme. The first auction of emission units was in March 2021.

The Ministry for the Environment's web site has an explanation of how the emissions budgets help calculate the amount of units to auction into the emissions trading scheme each quarter.

The web page features this chart showing the working parts of the emissions budget.

The web page then shows this table of the annual auction volumes.

However, the table and the chart don't match. They cover different five year periods. There is also an error in the html code of the table. There is a blank cell missing in the first row and first column. And the column headings need to be moved one cell to the right so that 'TOTAL' is above '75.2'.

I emailed the Ministry back in mid February to let them know. However, nothing has changed.

I find that quite comical. The web site administrator and the external relations person just got so bored talking with the emission policy person that they fell to sleep. If it's comedy, it's really a tragedy-comedy. One day far in the future, alien anthropologists will discover that the planet Earth missed it's global warming goals because they were too "My Eyes Glaze Over" for any one to understand.

Specifically, the emissions budget is the 2020 provisional emissions budget for the years 2021 to 2025. This comes from a Q and A document attached to a Government media release dated 2 June 2020 Emission trading reforms another step to meeting climate targets by James Shaw Minister for Climate Change Issues.

These five year emissions budgets roll forward as each year passes. So the current emissions budget is 2023 to 2027.

What is the point of the five year emissions budget?

It is to drag down the trend line in New Zealand's gross and net emissions of greenhouse gases. This is helpfully shown by this chart from the Climate Change Commission's advice to the Government. We can see the three jaffa and blue coloured bars representing the three five year budgets 1 , 2 and 3 sequentially reducing and pulling down the trend line of emissions.

This next chart, 'Figure 7' from the Ministry for the Environment presents what looks like an area chart (Except its actually a barplot of five time intervals). Look at the area underneath the black dashed line of net emissions and the solid red line of a trajectory towards the 2030 emissions target. A wedge shaped area of 'additional reductions' is needed to drag the forecast line down to the trajectory to the target. The area under the trajectory (to the target) is 354 million tonnes of net emissions. So the decreases in emissions are squeezed to the later years.

Here is my version of the same bar chart of five years of emissions. It uses the same area 354 million tonnes of net emissions (derived from the 2030 target) and the same colours.

The next step is to add the target trajectory red line and the annual amounts of net emissions from 72 million tonnes in 2022 to 68 million tonnes in 2025.

So, okay, we have an emissions trading scheme. Those 354 million tonnes of greenhouse gases will be represented by 354 million emission units that could be auctioned to emitters. As basic economics says that will be the most efficient way of allocating the emissions to buyers.

Ha ha ha! Of course that's not what is done! Instead we have to do a 'bodge' and subtract millions of tonnes from the emissions budget to deal with the fundamental flaws in the emissions trading scheme.

This is the crux of the problem. However, neither James Shaw or the Ministry for the Environment discuss this 'budgetting' as the crude bodge that it is.

The emissions of pastoral agriculture are not yet subject either to a methane-based emissions levy or to the emissions trading scheme. And perhaps may never be subject to emissions pricing if Beef and Lamb NZ's latest anti-regulation campaign succeeds.

So the first step is a 'bodge' to subtract the emissions of agriculture. This is 194 million tonnes, more than half the emissions budget of 354 million tonnes.

So are the remaining 160 million tonnes going to be auctioned? No, there's another subtraction. Under the emissions trading scheme industrial allocation rules, emissions-intensive industries are given free emissions units...which they then surrender back to the Government.

So those emissions are not priced. Free allocation of units has the same effect as the exemption of agriculture, the units have to be subtracted from the emissions budget as you can't auction units that have already been given for free to emitters. The numbers are 8.6 million units per year or 43 million for 2021 to 2025.

Is that it? No, there's another bodge. There are too many emission units in private hands. There were 164,329,773 emission units at 31 December 2022. This surplus is called the stockpile. These units could be sold into the market at any time. Which would allow more emissions. Thus emissions would exceed the emissions budgets. The Climate Change Commissions and the Government would like to reduce the stockpile. So another 27 million tonnes are subtracted.

Now my chart of the 2020 provisional emissions budget is almost the same as the Ministry of the Environment's chart. That final bodge leaves a budget of 90 million tonnes left to auction into the carbon market. Or 18 million per year. Or 4.75 million emissions units to be auctioned from the first quarterly auction of emission units held on 17 March 2021.

This chart displays the same unit numbers and shows the sum of the bodges, how 264 million tonnes out of 354 million tonnes are not priced through the emissions budget process.

This chart has the same axes as the previous chart but just shows the number of units to be auctioned. Only 90 out of 354 million tonnes of emissions are priced via the auctions.

This chart now summarises the message of the two previous charts. Because the design flaws in the emissions trading scheme require bodges (by subtraction) to the emissions budget, only a quarter (25%) of the 2021 to 2025 emissions budget is expected to be priced via auction sales to emitters.

Summary points to note. The emissions trading scheme has fundamental flaws in it's design:

1. the exclusion of agricultural emissions from ETS obligation,
2. the excessively generous industrial allocation of free emissions units to emitters,
3. the excessive surplus of privately held emission units reflecting the importing of 'hot air' international units.

These three flaws require bodges to the emissions budgetting process that reduce the quantity of emissions subject to an emissions price via auctions.

End the industry allocation subsidized free emission units given to polluting industry to fund Cyclone Gabrielle recovery

Every year since 2010, emissions intensive emitters have received a subsidy of millions of free emissions units under the emissions trading scheme 'industrial allocation' rules.

Is it still morally conscionable for the emissions trading scheme to keep giving emitters millions of dollars worth of free emissions units, when the costs of recovery from the climate tragedy Cyclone Gabrielle are going to be billions of dollars?

I penned this message to Prime Minister Chris Hipkins, Finance Minister Grant Robertson and Minister for Climate Change James Shaw.

"Tena koe Prime Minister Hipkins,

The Dominion Post has reporting that the Minister of Finance the Hon Grant Robertson has said that billions of dollars will be needed for the recovery from Cyclone Gabrielle. I don't think anyone reasonable is disagreeing with him about the scale of the challenge helping impacted communities.

I have a suggestion to help provide funds for Cyclone Gabrielle without either raising new taxes or new borrowing or by reducing funding of important existing programs.

The Ministry for the Environment and the Climate Change Commission both expect that in calendar year 2023, 6.4 million emissions units will be allocated at no cost to industries.

At Tuesday's spot price of $67.50, these units would be valued at $432 million. My suggestion is to quickly amend the Climate Change Response Act 2002 (or it's related regulations) and add the industrial allocation units to the quarterly auctions of emission units and commit the proceeds to recovery from Cyclone Gabrielle.

You will need to get officials to act promptly as emitters will be applying for units from January to April 2023.

As the amount of forecast allocation units is over 6 million units through to 2027, there is an ongoing stream of about 400 to 500 million dollars (depending on unit prices) available for another 5 years.

What could be a better source of funding for recovery from a climate crisis event than diverting funding from emitter industries?"

The Climate Change Commission's estimate of the free emission units allocated is from page 38 of their report "Advice on NZ ETS unit limits and price control settings for 2023-2027".

Let's make a bar plot of the free emission units.

The Ministry for the Environment says that the spot market NZU price has followed the cost containment reserve trigger price (page 25 of Proposed changes to New Zealand Emissions Trading Scheme limit and price control settings for units 2022: Consultation document);

Since the NZ ETS closed to international markets in 2015, the market price of NZUs has closely tracked the upper limit price controls, the $25 and then $35 fixed price option, and the more recent $50 and then $70 cost containment reserve trigger price.

What is the cost containment reserve trigger price? The Climate Change Commission (Op cit) says: "The cost containment reserve (CCR) is a reserve of NZUs available for sale if the auction clearing price is at or above a specified trigger price".

The cost containment reserve trigger price is set in Schedule 3 of the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020.

The reserve trigger prices are also listed on the Ministry for the Environment's website Price control settings.

Clearly we need a bar plot of the cost containment reserve trigger prices.

Assuming that from now until 2027 the spot price for NZUs follows the cost containment reserve trigger price as it did in 2022, then the market values of the 'industrial allocation' free emission units are the volumes (about 6 million units per annum) multiplied by the trigger prices.

Which results in about half a billion $NZD per year for recovery from Cyclone Gabrielle.

2023 $516,096,000
2024 $577,143,000
2025 $650,412,000
2026 $718,208,000
2027 $792,817,000

By 2027 this will add up to a total fund of over $3 billion $NZD ($3,254,676,000).

We need to make another bar plot.

While I have received automated email replies to my emails to Hipkins, Robertson and Shaw, I have not received a substantative reply.

It just seems a no brainer to me that it is morally unconscionable to have an emissions trading scheme that subsidizes emissions intensive industry with $3 billion worth of free emissions units when those funds could be put into recovery from Cyclone Gabrielle.

New Zealand Steel Limited's annual surplus of emissions units to 2021

Updated estimates of the over allocation of emission units to New Zealand Steel Limited to 2021.

There is an updated report on the Environmental Protection Authority's website. It is titled ETS Participant Emissions for the calendar year 2021.

This is the document that discloses the actual reported emissions of greenhouse gases of all particpants in the New Zealand emissions trading scheme.

This provides the actual emissions for 2021 of New Zealand Steel Limited.

Previously I charted the annual surplus and the accumulated surplus or 'stockpile' of emissions units held by New Zealand Steel up to 2020. I have now updated my charts to include calendar year 2021.

All my data analysis scripts and data are in this Github repository NZ Steel emission units.

As in 2020, New Zealand Steel's emissions are split between three categories;

1. Importing coal 989,459 tonnes page 17
2. Producing iron or steel 43,466 tonnes page 21
3. Stationary energy purchasing coal 856,363 tonnes page 33

43466 + 989459 + 856363 = 1889288 tonnes or 1,889,288 tonnes of emissions.

Here is my updated chart.

The estimated accumulated stockpile of emission units is now 5 million units! (actually 4,998,943 units).

At today's spot price of $73.00 the 5 million odd emission units are worth $364,922,839.

Industrial allocation exempts from pricing twice as many tonnes of emissions than the actual total for the Industry sector

I reach back in time to 2009 when the Hon Dr Nick Smith was the Minister for Climate Changes Issues and his introduction to the emissions trading scheme of the supermarket special the "two for one" deal.

I left the previous post on Industrial Allocation noting that in the 11 years from 2010 to 2020 there were 162 entities that were given, at no cost, 55 million emission units as they are deemed to be "emissions-intensive and trade-exposed".

In the same period the total actual emissions recorded in the Greenhouse Gas Inventory for all industries was 53 million tonnes of carbon dioxide equivalent.

My data analysis is at this Git hub page Industrial Allocation.

Here is a barplot of the allocation (gifting, giving for free, donating) of the 55 million emission units to selected emitter industries.

Here is a barplot of the 53 million tonnes of actual emissions from the New Zealand industrial sector from the Greenhouse Gas Inventory.

Here is a line chart of the 53 million tonnes of actual emissions and the Industrial Allocation - the free allocation of the 55 million emission units.

So at first glance it appears that the amount of free emission units allocated cancel out the actual industry emissions. This suggests that in a net sense the industry sector emissions are not priced at all under the emissions trading scheme They are more than 'offset' by the allocation of free units. So it's the same net result as if the industry sector was completely exempted from the emissions trading scheme requirements to surrender emission units equal to their emissions.

However I am missing a step in my analysis. In my detailed examples for New Zealand Steel and New Zealand Aluminium Smelters, I estimated the actual liability to surrender units by multiplying the Greenhouse Gas Inventory steel and aluminium emissions by a variable representing the "two for one" discount introduced in 2009 by the Hon Dr Nick Smith when he was the Minister for Climate Changes Issues.

On 1 September 2009 with Dr Smith's approval "Emissions trading bulletin No 11: Summary of the proposed changes to the NZ ETS" was published. It stated that the emissions trading scheme would be amended by adding a transition phase lasting to 31 December 2012 which would feature a "progressive obligation".

A transition phase will operate until December 2012. The transition phase will be implemented through....a progressive obligation requiring SEIP and LFF participants to surrender only one unit for every two tonnes of CO2-e emitted

The 'progressive obligation' was effectively a 50% discount on the 'surrender obligation', the quantity of emissions units that emitters had to surrender. Each firms industrial allocation of emission units would in consequence also be halved as well.

Then in 2012, Minister for Climate Change Issues Tim Groser introduced the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill. This bill extended the life of the "two for one" 'progressive obligation' indefinitely.

Finally, in 2016, Minister for Climate Change Issues Paula Bennett introduced a bill to "phase out" the 'progressive obligation' over three years from 2017 to 2019 by increments from the original "two for one" - 2 units per tonne to 1.5 to 1.2 to 1 unit per tonne of emissions. See the "EPA document ETS Surrender Obligations One for two phase out factsheet"

So I need to include a discount variable that is applied to the free emission units allocated to result in the "emissions footprint" of the allocation of units. The discount variable is 0.25 for 2010 (half obligation for half a year),then 0.5 from 2011 to 2016, 0.67 in 2017 ,0.83 in 2018 and finally one for one for 2019 and 2020.

This allows me to estimate of the carbon footprint or emissions footprint of all the units given under Industrial Allocation. As in this chart.

I can then add the 'emissions footprint' values or the emissions allowed by the free Industrial Allocation units to the chart of allocated emission units and actual industry emissions.

The chart shows a huge gap between the emissions footprint and the allocated units until 2017 when the two lines start to converge.

Then in 2019, the emissions foot print is the same as the units allocated as finally, under the emissions trading scheme, one emission unit does in fact equate to one tonne of emissions.

The total of the Industrial Allocation 'emissions footprint' over 2010 to 2020 is 89 million tonnes. Meaning that those 89 million tonnes have been "de-priced" by the emissions trading scheme.

Just a reminder. What is an emission unit? It's a right to emit greenhouse gases to the atmosphere.

Owning an emission unit is the same as permission to emit a quantity of greenhouse gases whether from smelting or just from burning coal oil or gas.

Being allocated a unit is the same as being told "go for it - you can just burn coal or oil or gas without penalty until a tonne of carbon dioxide is in the atmosphere".

It's the opposite of a price on carbon. It's a permit or licence to burn carbon.

The emissions footprint of Industrial Allocation, from 2010 to 2020, at 89 million tonnes, is twice as much as the actual emissions of the whole industry sector for the same period.

How can that possibly be the case? It is because of the energy allocation factor.

Industrial Allocation "de-prices" and removes the emissions price signal from some energy sector emissions in addition to the direct industry process emissions.

In a net sense Industrial Allocation is worse as a policy to reduce industry emissions than a complete exemption of industry from the emissions trading scheme. In a scenario of 100% exemption, at least all energy sector carbon emissions would in theory be priced.

Hence my headline conclusion Industrial allocation exempts from pricing twice as many tonnes of emissions than the actual total emissions for the industry sector.

Industrial over allocation - why were there 55 million free emission units when total industry sector emissions were 53 million tonnes?

How does it make any sense that the 55 million free emission units gifted to big emitters under Industry Allocation exceed the total emissions of the industry sector, 53 million tonnes, from 2010 to 2020?

In my last post I noted that 55 million free emission units had been allocated to industries over the eleven years from 2010 to 2020.

I presented a barplot of the 'Industrial Allocation' of free emissions units given to emitting industries by the Environmental Protection Authority under the New Zealand emissions trading scheme.

I left open the question "is 55 million free emission units (over eleven years) a big number?"

The Ministry for the Environment doesn't seem to think so. Their website page on Industrial Allocation states the following

Industrial allocation contributes to unit supply in the NZ ETS

Industrial allocation is a relatively small proportion of unit supply in the NZ ETS. In 2016, the total number of units provided through industrial allocation in the NZ ETS was 4.3 million.

The total number of units surrendered from sectors other than forestry was 19.5 million (i.e. industrial allocation amounted to about 22 per cent of annual unit demand).

I call this the consultants fallacy. It has the form "put small number next to big number" and therefore "effects are minor" and grant me my resource consent.

You have a number you wish to defend; 4.3 million free units allocated in 2016. You compare it to a related bigger number; in 2016 emitters surrendered 19.5 million emission units under the emissions trading scheme. Premises then conclusion: 4.3 million is smaller (only 22 per cent of) than 19 million. A relatively small proportion therefore it's a small number of units being given away for free to dirty polluting emitters.

Wouldn't the actual emissions from the industry sector as recorded in the Greenhouse Gas Inventory be a better comparion with the actual free allocation of units? The inventory tells us the actual emissions from industries were 4.6 million tonnnes in 2016.

How does that fit with my theory that industrial allocation is over allocation? Fewer units were allocated (4.3m) than the 2016 actual industry emissions! (4.6mt) Well at least 300,000 tonnes of industry emissions were in some sense 'priced' by the emissions trading scheme in 2016.

What's the result if we add up the inventory emissions from industry for the same period as the Industrial allocation spreadsheet from the EPA (11 years 2010 to 2020).

The result is that the industry emissions (from the inventory) were 53 million tonnes and the emissions units given away under Industrial Allocation were 55 million.

So to make it simple. The emissions trading scheme makes New Zealand industry liable to surrender emissions units for it's emissions.

Okay we get it. It's "polluter pays". But the Industrial Allocation rules have given some industries more emission units than the emissions of the entire industry sector! It's almost equivalent to exempting the whole industrial sector from the emissions trading scheme.

But it's worse than that. The allocations of emissions units are heavily weighted towards the highest quantity emitters. The top ten recipients received 89% of the units. The other 152 recipients got 11% of the units. New Zealand Aluminium Smelters Limited and New Zealand Steel Limited received about 45% of all the allocated free units.

There is a little bit more to tease out. I will put that in a separate post.