New Zealand Steel and the unethical two-for-one - free emission units and arbitrage profits from cheap Russian units

In this post there is still a gratuitous image of Marlon Brandon as the Godfather but the post is about one of NZ's biggest companies; New Zealand Steel. They just opposed the possible ending of the supposedly temporary "two-tonnes-for-one-unit" deal. That's a bit rich when their idea of the ideal "two-for" is to receive millions of emission units for free under the New Zealand Emissions Trading Scheme industrial allocation provisions and yet buy millions of the dubious international Russian units (ERUs) and make windfall arbitrage profits.

Well, back on 17 March we had New Zealand Steel whining to Radio NZ that the NZ emissions trading scheme review would lead to higher carbon costs which would make their business less viable

Chief Executive Andrew Garey told Radio New Zealand

"the removal of the 2 for 1 provison for big carbon dioxide emitters will undermine the viability of the business"

What is this two for one deal? On page 12 of the NZETS review discussion document, it states;

"The one-for-two surrender obligation allows participants from the liquid fossil fuels, industrial processes, stationary energy and waste sectors to surrender one unit for every two tonnes of emissions (ie, a 50 per cent surrender obligation)."

However, Garey has his facts wrong in assuming the loss of the two-for-one deal will increase his NZETS liability. On page 13 of the NZETS review discussion document, it states;

"It should be noted that if the one-for-two surrender obligation is removed, the amount of free allocation provided to emissions-intensive and trade-exposed activities will automatically be increased to correspond with the increased surrender obligation."

So New Zealand Steel will have to surrender twice as many units. But its free allocation of units will double. One bit of corporate welfare in the NZETS is removed and another takes its place! Talk about the NZETS as an insurance policy for big emitters that protects them from any incentive to reduce emissions!

I could respond by saying I sympathise with Mr Garey. I mean, really, who does understand the NZETS? However in his interview with Radio NZ he goes on to indicate that if the NZETS is toughened up, then his parent company, Bluescope Steel, may just decide to close the Glenbrook Steel Mill. Nice steel mill you got. Shame if something happens to it. That is just typical arrogant big business behaviour. So I have no sympathy for Mr Garey.

There are some obvious questions to try to answer with actual emission unit data from the New Zealand Emission Unit Register, which records legal title for all valid carbon credits/emissions units in the New Zealand. How many units were NZ Steel given for free under the industry allocation plans? What were NZ Steel's NZETS-liable greenhouse gas emissions from processing steel from iron sands? Were they allocated more units than they had to surrender? Did they also make arbitrage trades in any of the dubious Russian or Ukrainian emission units?

We know that New Zealand Steel has been receiving free allocations of emission units as the allocations are listed on the Ministry for the Environment's web page Industrial allocation decisions.

Another MfE web page Eligible industrial activities tells us the formula for the unit allocation is (LA × ∑ (PDCT × AB)) ÷ 2.

The level of assistance (LA) for New Zealand Steel is 90%. There are four products (PDCT) each with it's own allocative baseline (AB). The products and allocative baselines are 3.2613 units for each tonne of iron or steel, 0.119 units for each tonne of cast carbon steel, 0.28 units for each tonne of vanadium-bearing steel and 0.163 units for each tonne of flat hot-rolled carbon steel.

That page is just repeating what is in Regulation 23 and the Schedule Prescribed emissions intensity and allocative baselines of the Climate Change (Eligible Industrial Activities) Regulations 2010.

I have already compiled a Google sheet of all units allocated to emitters from 2010 to 2014. It was compiled from the year by year Industrial allocation decisions

We add a 'filter' to the Google sheet on the top row of the column headers and set the filter on the 'Applicants.Name' column header to 'NZ Steel'.

This tells us that New Zealand Steel Development Limited (account holder NZ-1903) received these free NZ units.

2010 494,704
2011 989,304
2012 1,003,730
2013 1,029,352
2014 1,073,489

Or a total of 4,590,579 units over the five years. NZ Steel received more units than any other industry. More than smelter operator New Zealand Aluminium Smelters Limited. I know this as back in 2012 I made a pie chart of the 2011 free unit allocation data. That showed that of the 3.472 million units allocated to industry in 2011, 90% went to thirteen NZ companies. Here is that pie chart.

Now I want data on the greenhouse gas emissions from processing steel from iron sands. The New Zealand's Greenhouse Gas Inventory 1990–2013 reports the greenhouse gas emissions from steel production from iron sands in tonnes of CO₂-e. New Zealand Steel is the only iron sands processor so these are New Zealand Steel's emissions. The emissions are;

2010 1,646,890
2011 1,736,250
2012 1,718,930
2013 1,747,500

(There is no total for 2014 as we won't see the next greenhouse gas inventory for the 2014 year until later this year)

I want to compare the number of emissions surrendered with the number of units given as free allocation. Ideally, I would have the number of units actually surrendered by New Zeland Steel each year. In a transparent system we would know that, would we not? Unfortunately, the NZETS is not transparent and the units surrendered are not available to the public.

In 2013, I asked the Environmental Protection Authority (EPA) under the Official Information Act for the numbers of units surrendered by New Zealand Steel and some other companies. The EPA refused my request on the grounds that the Climate Change Response Act trumped the Official Information Act. In May 2014, after a delay of a year, the Ombudsmens Office agreed with the EPA. So much for transparency.

So I have to estimate the unit surrender obligation. I keep in mind the two-for-one deal. So my annual estimate of the number of units New Zealand Steel is required to surrender under the NZETS is half of the actual emissions (one unit covers two tonnes). Also NZETS surrender obligations started on 1 July 2010. So 2010 was a half year for free allocation and unit surrenders. So I take half of the 2010 actual emissions.

My data now looks like this

                            2010      2011      2012      2013      2014
Greenhouse gas emissions     823,445 1,736,250 1,718,930 1,747,500        NA
NZETS surrender  obligations 411,722   868,125   859,465   873,750        NA
Free allocations of units    494,704   989,304 1,003,730 1,029,352 1,073,489

Lets make a chart. I think a bar chart will be a suitable choice. The colour scheme is lightest pink for actual emissions, mid-pink for my estimate of the units surrendered (emissions x 50%) and purple for the free allocation of units. The purple bars (free units) are noticeably larger than the surrender estimates. It appears that New Zealand Steel are consistently being allocated more free units than they need to surrender to match their direct emissions.

In summary, in the years 2010 to 2103, the actual number of units given to New Zealand Steel exceeded the estimated number to be surrendered by 82,982, 121,179, 144,265 and 155,602.

Does the free allocation of units include compensation for any other carbon-intensive energy inputs I have not taken into account? In principle, yes, as the original September 2007 Framework for a New Zealand Emissions Trading Scheme document makes this statement about free allocation to emitters;

"indirect emissions associated with the consumption of electricity, as well as direct emissions from stationary energy and direct emissions from non-energy industrial processes will be included in the concept of emissions from industrial producers".

Also the New Zealand Aluminium Smelter free allocation included an undisclosed quantum of units for the fictional coal content of electricity inherent in their energy supply from Lake Manapouri. Yes, I know that last sentence seems to make no sense at all. You really need to read the linked blog post!

The Heavy Industry Energy Demand Update Report (by Covec, Feb 2009) provides estimates of the carbon dioxide emissions from each energy input (except electricity) used by New Zealand Steel.

The Covec report estimates that in 2008 the coal emissions were 1,615,100 tonnes (93%), the natural gas emissions were 106,200 tonnes (6%), the coke emissions were 18,100 tonnes (1%) and the diesel emissions were 3,800 tonnes (0.22%). Adding up to 1,743,200 tonnes of direct emissions. Covec don't calculate the emissions content of the 426 GWh of grid electricity used in 2008.

The estimated natural gas emissions at about 100,000 tonnes per annum almost adds up to the 'surplus' allocated units which are between 120 thousand to 155 thousand tonnes annually. So its arguably plausible that part of the free allocation of units is to compensate New Zealand Steel for the increase in the cost of natural gas caused by the NZETS.

Except that there is no evidence that the price of natural gas or electricity or coal has increased because of the NZETS. And we have known that since 2011.

Covec's 2011 report 'Impacts of the NZ ETS: Actual vs Expected Effects' prepared for the 2011 ETS Review Panel could not find any increases in electricity, natural gas or coal prices caused by the NZETS.

Officials supporting the 2012 Finance and Expenditure Select Committee queried the five major electricity generating companies about NZETS costs flowing through into wholesale electricity prices. Their reply was;

"costs being passed through directly from the NZETS are not visible or distinguishable due to the wholesale market pricing mechanism and these costs are not directly passed through due to competition factors".

As the New Zealand Emissions Trading Scheme evaluation report 2016 states on page 38;

The prices of emission units have been too low to affect business costs either for participants or those who receive costs passed down from participants.

So from 2010 to 2014 New Zealand Steel consistently received a free allocation of emission units that materially exceeded their estimated liability to surrender units to match actual emissions. The surplus units were not needed to compensate for increased energy costs caused by the NZETS as the NZETS did not cause any energy costs to increase. The free unit allocation was and is simply a transfer of wealth to New Zealand Steel in the form of a tradable right or voucher (unit) that is highly liquid.

So New Zealand Steel, the emitter receiving the most free units in the NZETS, has faced no NZETS-related carbon price at the margin or in any sense. Instead of acting as a carbon price at the margin, the free unit industrial allocation regime in conjunction with the lack of energy cost pass-through has acted as an insurance policy or hedge contract - protecting New Zealand Steel from the carbon price!

This is the embodiment of fundamentally flawed design in the NZETS and it is symptomatic of the National Government's unethical approach of rewriting the NZETS to suit the whims of big business. It's also symptomatic of the earlier big business campaign to pressure the Labour Government to drop a carbon tax and move to the inherently less transparent NZETS.

You would think that this case study into New Zealand Steel could not get worse. However, it does get worse. From 2013 to 2015 New Zealand Steel engaged in arbitrage profiteering using the most dubious international emission units, the Emission Reduction Units.

To see if New Zealand Steel has owned any Emission Reduction Units, we go to another Google sheet Kyoto Unit Holdings by Account 2008 - 2014 which compiles data from the EPA Emission Unit Register. We add a 'filter' to the Google sheet on the top row for 'NZ Steel Limited' in the 'Account.Holder' column of the Google sheet of New Zealand Steel's emission reduction units.

We find that New Zealand Steel Limited did own some Emission Reduction Units.

2013 1,022,527
2014 1,001,714

I have amended the bar chart and added the Emission Reduction Units owned by New Zealand Steel as extra orange bars. It is interesting to note that the number of ERUs is fairly close to the number of free NZUs. Both were more or less 1 million for 2013 and 2014.

We have fairly persuasive evidence that New Zealand Steel was consistently allocated more free units than it needed to surrender for its actual emissions. Therefore New Zealand Steel never needed to buy any extra emissions units to surrender under the NZETS. Yet New Zealand Steel owned about a million Emission Reduction Units at the end of both 2013 and 2014

So if New Zealand Steel always had more than enough free units to meet it's obligation to surrender units under the NZETS, why would it also buy international units? There is only one plausible answer. It is to make an arbitrage profit.

Why am I so sure New Zealand Steel carried out arbitrage trades with its NZUs and surrendered cheap dubious ERUs rather than the free gifted NZUs for 2013 and 2014? It's the maths.

Data from the Emissions Unit Register, NZEUR Holding & Transaction Summary, which I have summed into another Google sheet, tells us that the total numbers of NZUs surrendered by all emitters were 732,667 in 2013 and 576,470 in 2014.

As those numbers (for the whole of the NZETS) are less than New Zealand Steel's estimated surrender obligations, it is mathematically impossible for New Zealand Steel to have met those surrender obligations without having used ERUs.

Here is a hypothetical example of what New Zealand Steel might have done.

According to a Carbon Forest Services webpage that tracks emission unit prices, on 11 October 2013, New Zealand units (NZUs) (the same type of units allocated to New Zealand Steel) had a market price of $4.20 each. On the same day the Russian or Ukrainian Emission Reduction Units had a market price of 35 cents each. One NZU was worth 12 times as much as an ERU.

If New Zealand Steel had purchased 1 million ERUs on 11 October 2013 at 35 cents each or $350,000, it could then surrender 873,750 of them to the Government to match it's 2013 emissions. Based on that 'if', New Zealand Steel would then be in a position to sell all the 1,029,352 New Zealand units of the 2013 allocation at $4.20 each for a possible value of $4,323,278. The hypothetical profit would be $3,973,278.

That is just one possibility based on NZU and ERU prices on one date. I suggest you browse over to the Carbon Forest Services New Zealand Unit & Emission Reduction unit chart and hover over the chart to see the differences between ERU and NZU prices from early 2013 to 2015. Even when NZUs hit a historic low price of $1.60 in February 2013, they were still 9 times more valuable than ERUs. Choose your own combination of price difference and possible profit from buying ERUs and selling NZUs.

It's not just me saying that this is unethical profiteering. Here are statements from forest consultant Ollie Belton, Herald Economics Editor Brian Fallow and Green MP Kennedy Graham.

Carbon forest consultant Ollie Belton said this;

"..trade exposed industries that were gifted up to 90% of their surrender obligations were able to meet all their obligations with the super cheap ERUs and bank the gifted NZUs. Since 2012, NZUs have had much higher market value than ERUs, generally more than five times as high, hence the arbitrage opportunity. Never have polluters had it so good. They have made hundreds of millions in arbitrage profits."

Brian Fallow of the Herald described the arbitrage trades as corporate welfare.

"This is where the corporate welfare comes in. The ETS is designed to ensure that large emissions-intensive trade-exposed operations like the Tiwai Point smelter or the Glenbrook steel mill are only exposed to a carbon price at the margin - and a pretty narrow margin at that...But the collapse in international carbon prices has presented the smokestack sector with an arbitrage opportunity too.
They have been able to hoard their NZUs, in the expectation they will be more valuable in the future, and meet their obligations in the meantime with cheap imported Kyoto units instead".

.

Kennedy Graham placed it on the record at Parliament that he regarded the arbitrage trades as morally reprehensible.

"Emission-intensive, trade-exposed entities, which include aluminium, iron, steel, cement, whey, wood, and paper, are free to bank profits from the emissions trading scheme — cash for pollution. They receive free allocations of New Zealand Units as compensation for any energy price rises brought about by the emissions trading scheme...
These industries are also required to surrender units to clear liabilities. This is dependent on calculations based on their emissions profile. They can surrender New Zealand Units or Kyoto Units, such as emission reduction units and certified emission reduction units. These overseas units are valued between 10c and 40c.
They are engaging in the arbitrage by receiving free New Zealand Units from the Government, then selling them at market prices of $3 to $4, then buying cheaper overseas units such as the certified emission reduction units and emission reduction units for anything from 10c to 40c to surrender back to the Government.
They bank the profit. In some cases, this is in addition to existing tax-paid subsidies running into the tens of millions of dollars. Let me acknowledge that these activities are entirely legally, but they are morally reprehensible and they reflect Government stupidity and cynicism of the highest order".

Conclusion

New Zealand Steel really have achieved the ultimate emission trading scheme "two-fer". The NZETS's free allocation regime over allocates them more emission units than they need to surrender for their emissions and the availability of the imported international units gave them the opportunity to make windfall arbitrage profits. So instead of a carbon price there were unearned windfall profits.

I agree completely with Ollie Belton, Brian Fallow and Kennedy Graham that such arbitrage profiteering is morally reprehensible corporate welfare. Yes, the polluters have never had it so good. It seems that the more free units you give a company, the more it abuses the privilege of having an emissions trading scheme. This is just one example of how deeply unethical conduct in New Zealand Emissions Trading Scheme has been. The whole scheme is now so morally tainted it has no valid ethical basis to continue. The New Zealand Emissions Trading Scheme should be simply abandoned.

Kennedy Graham memo to John Key and Tim Groser - you are on the wrong side of history

Kennedy Graham gave a great speech in response to the annual Prime Minister's statement. This is the full speech

"Lord Nicholas Stern acknowledged just days ago that he had "got it wrong". Climate change is already far worse than he thought it would be only 6 years ago when he released his report."

"We are no longer likely to achieve the 2 degrees Celsius limit that the international community set for itself only 2 years ago. We are now on target for 3.5 degrees to 6 degrees. That takes us beyond the dangerous dimension of climate change, which the 1992 UN Framework Convention on Climate Change sought to prevent, and into what the World Bank calls "cataclysmic" climate change."

"What to say to a Government that in face of these developments guts its domestic climate legislation and refuses to enter a second binding international commitment period?"

"What to say to a Prime Minister who, in his annual statement to Parliament, omits climate change on the grounds that he touched on it last year?"

"What to say to a Minister for Climate Change Issues who says that New Zealand is ahead of the curve, that it is time to move beyond the Kyoto Protocol and join the largest polluters of the world, and who derides the global civil society when it criticises New Zealand for being one of the chief obstacles to progress at the UN conference in Doha?"

"We say this to John Key and Tim Groser. We say this: you are on the wrong side of history, both of you, in your respective ways."

Kia kaha, Kennedy!

How fast over the cliff? Kennedy Graham's speech on the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill

I really like Green MP Kennedy Graham's speech on the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill. Its is worth listening to.

"The Green Party will vote against this bill, the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill, on the grounds that it weakens an already weak emissions trading scheme to the point of irrelevance."

"The deliberate weakening of the emissions trading scheme reflects a fundamental misperception of the nature of the climate change challenge...[the] Government's flawed world view....subordinates climate change to economic growth...It implies that economic growth is the principal criterion of the quality of life. It asserts a narrow and myopic view of the nature of climate change...

Climate change is not just another tough problem today and a potential crisis tomorrow. It is part of an ecological crisis today. It is the first of the nine planetary boundaries we must stay within if human civilisation is to continue to flourish. It is 20 years now since we agreed to avoid excessive carbon concentration in the atmosphere that would cause dangerous anthropogenic interference with the climate system.

It took 18 years to identify a 2 degree temperate rise and 450 parts per million concentration as the limit for avoiding that danger. The global carbon budget for the climate boundary is 1,600 billion tonnes of net greenhouse gas emissions for the period 1990 to 2100. In 20 years we have used almost half of that.

The remaining budget from now to 2100 is 870 billion tons, about one third of the remaining fossil fuel reserves. We have to learn to say no to fossil fuel extraction. Such a global budget allows future annual global emissions of 9.5 billion tons. This is 20 percent of current emissions, so the global emissions reduction curve will need to be steep if we are to avoid dangerous climate change.

This requires global emissions to peak before 2020, and to drop by 8 percent in 2020 and by some 56 percent by 2050. The developed countries—the global North—are required now to reduce their national emissions by about 35 percent by 2020, and 80 percent by 2050. These are not matters of choice. This is not the stuff of currency speculation, dealing with toxic debt, or hedging risk through derivatives and futures trading.

Emissions reduction is an ecological imperative. Nature does not do deals, other than with itself, and certainly not with humanity. Nature is what it is. Human notions of choice will prove as ephemeral as a feather in an evolutionary storm if we court dangerous climate change, yet this is what we are doing.

So where does New Zealand stand? We are called upon to reduce national emissions by up to 40 percent by 2020 and 80 percent by 2050. What have we pledged? We have promised conditionally a mid-point of 15 percent by 2020 and 50 percent by 2050. It is simply not possible for New Zealand to achieve these weak targets with the spineless market instrument it has fashioned for the purpose over these past 3 years.

An 80 percent reduction by 2050 would mean a drop from 63 million tons to 13 million tons. How might we conceivably achieve this? Not by the 2008 Labour emissions trading scheme , not by the weakened 2009 National emissions trading scheme, and certainly not by this limpid legislative construct masquerading as a model of responsibility and balance that is before us today.

Today's bill will defer agriculture indefinitely, defer any increase in the price cap, defer the one-for-one surrender obligation, allow a greater switch from forestry to dairying, and enable importers to increasingly use dangerous synthetic gases. What remarkable, steel-like resolve!"

How fast shall we drive over the cliff? More amendments to the New Zealand Emissions Trading Scheme

I look at at the Government's amendments to the New Zealand Emissions Trading Scheme and conclude we are arguing about what gear to drive in as we speed towards the cliff. The Government has kindly given us the opportunity to make a submission about how fast fast we should go over the emissions cliff. Time to fasten your seatbelts.

Back in July, Minister for Climate Change Issues Tim Groser announced more watering-down of the New Zealand Emissions Trading Scheme (NZETS).

About a week ago, on 23 August 2012, Groser introduced the amending legislation - the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill.

Consistent with previous emissions trading scheme legislation, the bill will be fully and rationally considered by Parliament's Finance and Expenditure Select Committee in an insultingly short period of time - ten working days. The closing date for public submissions is Monday, 10 September 2012.

What does this ETS amending bill do?

* It indefinitely postpones the entry of pastoral agriculture into the NZETS.

* The 'two-for-one' deal, which halved the number of carbon credits each emitter had to surrender for a tonne of carbon dioxide equivalent greenhouse gases, is extended for another three years. It was to end on 31 December 2012, but will now run on at least to 2015.

* The price cap of $12.50 per tonne ($25 for two tonnes) will also extended. It was to end on 31 December 2012, but will now run on at least to 2015.

What doesn't the bill do?

* It ignores the recommendation from the 2011 ETS review committee to stop the unlimited use of international carbon credits by New Zealand emitters. Which as we know, makes the NZETS the weakest link.

Whats the cliff we are driving off? Well, it's climate change. And it's the price of the New Zealand emissions unit.

NZ Unit price 2009 to 2012 from OMF Financial Ltd

Who said what about the bill?

Simon Terry of the Sustainability Council said that the NZETS is now in a state of eternal transition".

Helen Clark stated the obvious, that pastoral agriculture must be in the NZETS; “You can’t have your major sector generating greenhouse gases outside the scheme."

Federated Farmers said the deferral of agriculture was huge win for New Zealand's farmers

Business New Zealand seem unusually silent. I guess for them it is all going to plan. Back in July they welcomed Tim Groser's announcement of the delays to the NZETS. So why waste space repeating the message?

However, I do offer some relief from this dreary "business-as-usualism".

Green MP Kennedy Graham has given some strong speeches accurately reflecting both the scientific reality of the cumulative carbon dioxide emissions and the ethical challenge of the failure of politics and governance to respond.

None more so than in his 'first reading' speech in which he summed up the bill thusly.

"Today's bill will defer agriculture indefinitely, defer any increase in the price cap, defer the one-for-one surrender obligation, allow a greater switch from forestry to dairying, and enable importers to increasingly use dangerous synthetic gases. What remarkable, steel-like resolve!"

I do recommend you read Kennedy Graham's speech in full.

Graham, a much more experienced diplomat than Tim Groser, walks us through more than 20 years worth of futile international climate change negotiations, all the while as the relentless accumulation of emissions in the atmosphere uses up the carbon budget consistent with limiting warming to two degrees. And with no faux-realist "get people on the bus" cliches we have come to expect from Tim Groser.

Kennedy Graham concludes that we don't have to accept this state of affairs. He calls on us to make a submission to the Finance and Expenditure Select Committee.

Greenpeace are also saying get stuck in with a submission. What to say?

How about "the NZETS is completely ineffective in reducing GHG emissions due to it's many design flaws - the use of unlimited international junk credits, the delays and exemptions, the partial coverage, the lack of a cap, the price ceiling, the lack of revenue recycling due to the excessive free allocation to emitters."

Something brief and to the point.

However, I will leave the last word to Jeanette Fitzsimons speaking on TV Ones's Q+A: Panel after a Nick Smith/Russel Norman debate back in September 2011.

"Look, its like we are in a very fast car, we are heading towards a cliff, which is getting really close, and we are arguing whether to change from fifth to fourth gear".

150% Pure Subsidy: the NZETS gives Rio Tinto Alcan NZ more emissions units than its emissions

Last week, (back on 29 September 2011 actually), Green MP Kennedy Graham was questioning Climate Change Issues Minister Nick Smith over his apparent lack of consistency over subsidies for fossil fuel industries.

Kennedy Graham was wondering why former Minister for Climate Change Issues Nick Smith and Climate Change and Trade Negotiations Minister Tim Groser were happy on the one hand to oppose billion dollar subsidies to fossil fuel industries on the international stage, while on the other hand have the New Zealand Emissions Trading Scheme include subsidies in the form of generous free allocation of emissions units to big industrial emitters of GHGs.

The Hon Dr Nick Smith replied:

"...this Government is not providing subsidies to greenhouse gas polluters. I remind the member that we are the only country outside the EU to have an emissions trading scheme. Our aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions".

Lets examine this assertion in two parts; that the Tiwai Point Aluminum Smelter, receives no subsidies from Government and it faces a carbon/GHG price.

A brief recap, Tiwai Point Aluminum Smelter at Bluff, out on the edge of Foveaux Strait near Invercargill, is operated by NZ Aluminium Smelters Limited, which in turn is owned by Rio Tinto Alcan NZ Limited, a subsidiary of Canadian multinational Rio Tinto Alcan.

NZ Aluminium Smelters Limited has received an allocation of free emissions units under the NZ ETS. That is clear from that un-labelled pie chart I have been banging on about. The chart shows that iron, steel and aluminium production are to receive 40% of all free industrial allocation of emissions units.

However, we don't need to do any guessing as the Ministry for the Environment has just released an analysis of how many free emissions units were allocated to whom under industrial allocation for the half-year compliance period 1 July to 31 December 2010.

NZ Aluminium Smelters Limited received 210,421 NZ emission units or 12% of the total allocated of 1.77 million units. By the way, only New Zealand Steel, the operator of the Glenbrook Steel Mill, received more units. They got 494,704 units.

How does this allocation of free emissions units compare with the number of emissions units that would need to be surrendered? Is the allocation more or less than the number of units surrendered?

With a bit of ferreting, I have found enough data to make some back-of-envelope-but-on spreadsheet calculations. Here are the inputs and constraints I used.

1. 2010 production of aluminium: 343,335 tonnes. From 2010 Sustainability Report , NZ Aluminium Smelters Limited.


2. Emissions factor for aluminium: Low estimate . 1.67 tonnes CO2-e per tonne Aluminium. From Ministry for the Environment's New Zealand’s Greenhouse Gas Inventory 1990–2009.


3. Emissions factor for aluminium: High estimate. 2.01 tonnes CO2-e per tonne Aluminium. From Heavy Industry Energy Demand Update Report Prepared for Ministry of Economic Development February 2009, Covec Ltd.


4. The compliance period for surrendering units is from 1 July 2010 to 31 December 2010, a half-year.


5. The obligation to surrender units is a half obligation because of the two units for one tonne of GHGs deal.


6. Free allocation of units is also reduced by a half.


7. Free allocation is calculated as 90 per cent of the allocative baseline (a benchmark number of NZUs per unit output)


8. The aluminium allocative baseline is 2.645 units per tonne of aluminium produced. From Section 7 of the Climate Change (Eligible Industrial Activities) Regulations 2010

I will first check my input assumptions by calculating my own estimate of the actual units allocated; 210,421.

Table 1. Estimate of emissions units allocated
2010 production tonnes Aluminium	343,335
Half year production /2 (1 July 31 Dec 2010)	171,668
Half obligation /2 (one unit/2 tonnes)	85,834
90% emissions-intensive-trade-exposed allocation	77,250
Allocation baseline (tCO2-e/t output)	2.645
Equals estimate of Units allocated	204,327
Difference (approx. 2.9%)	6,094
Actual Units allocated	210,421

My estimate of units allocated is 204,327, which is only 6,000 odd units (or 2.9%) less than the actual units allocated of 210,421. So it seems my inputs are roughly good enough.

Table 2 High and low estimate of units to surrender
2010 production tonnes Al	343,335	343,335
MfE Emissions factor (t Al/t CO2-e)	1.67	2.01
Estimated emissions 2010 t CO2-e	573,369	690,103
Half year compliance period (1 July 31 Dec 2010 /2)	286,685	345,052
Half obligation (one unit 2 tonnes /2)	143,342	172,526
Estimated Units to surrender	143,342	172,526
Actual Units allocated	210,421	210,421
Excess allocation (units)	67,079	37,896
Excess allocation (per cent)	147%	122%

Nick Smith implies that the free allocations reduce but do not remove the exposure to the carbon price. This is simply not correct. If it was correct, units allocated to NZ Aluminum Smelters would be less than units surrendered. However, units allocated exceed my estimates of units needed for surrenders.

I estimate that NZ Aluminium Smelters Limited were required to surrender between 143,000 and 172,000 emissions units for the six months to 31 December 2010. NZ Aluminium Smelters Limited were given, under 'industrial allocation', 210,421 units. My low and high estimates of the units to be surrendered exceed the actual units allocated by 37,000 and 67,000 units respectively.

Nick Smith says emitters are not being subsidised by free allocation. This too is simply not correct. Allocations greater than surrenders equals over-allocation or a net gain to NZ Aluminium Smelters Limited. The estimated over-allocation is from 124% to 147%. NZ Aluminium Smelters do not face a positive carbon price at all. If the NZ emissions trading scheme was a carbon tax, NZ Aluminium Smelters would have a negative carbon tax rate!

This perverse outcome is exactly why carbon taxes are in practice simpler, more effective, and a more robust way of carbon pricing than emissions trading.