Geoff Simmons tells us a good story about dodgy uncle Trev, fake bank notes and real moro bars while he fact-checks Paula Bennett on the integrity of the surplus emission units. It's a real triple-dip!
Geoff explains the issue very well and has the numbers right. More than that, I think Geoff should get the Joe Romm language intelligence award for using a great metaphor for New Zealand's use of the 'hot air' Ukrainian and Russian emission reduction units.
Dodgy uncle Trev's fake twenty dollar note.
Your dodgy uncle Trev gives you a twenty dollar note. It looks like a ordinary twenty dollar note, but knowing uncle Trev, you have your doubts. Anyway, you use the dodgy note to buy a moro bar at a dairy and get back seventeen dollars change in valid notes. The dairy owner now has a fake twenty dollar note in the till. You have eaten the real moro bar. You still have seventeen real dollars. You could buy more moro bars.
Obviously the fake twenty dollar note represents the emission reduction units. Replace uncle Trev with the Ukrainian and Russian joint implementation projects and the carbon brokers.
The purchase of the moro bar stands in for the emitters surrendering the 'el-cheapo' emission reduction units to the Government under the emissions trading scheme. And also for the Government then using the 'el-cheapo' emission reduction units that it holds to comply the Kyoto Protocol 2008 to 2012 target.
The seventeen real dollars (and the moro bar) are the legally valid 'surplus' assigned amount units that the Government is now 'using' to meet both the 2020 and (some of) the 2030 emissions reduction targets.
Arguably, Bennett's intentions are ethically worse than the fake-note-moro-bar metaphor.
Bennett is going for a "triple dip" of using surplus/dodgy units to 'comply' with three different emissions targets in spite of the upward trend in New Zealand's GHG emissions.
You can verify for yourself that the Government intends to do some creative accounting with the surplus units so that they allow greenhouse gas emissions to increase out to 2020 while the Government can claim that New Zealand is 'meeting' it's "minus 5%" emission reduction target. Just go to Latest update on New Zealand's 2020 net position on the Ministry for the Environment's website.
That webpage states explicitly that New Zealand will have 85.7 million emission units surplus to use out to 2030 after using some to meet the 2020 target. Here is a screenshot.
Further down the page is this barchart that shows that New Zealand's gross emissions from 2013 to 2020 are expected to be 655.9 million tonnes and that the baseline is 509.8 million tonnes. I have somewhat crudely marked the increase in emissions on the left hand bar.
I fully agree with Geoff Simmon's conclusion. It's simply unethical to make a monetary gain from fake currency. Just as you should wipe the moro bar crumbs off your shirt and give the dairy owner back the seventeen dollars (or a real twenty) in place of the fake note, Paula Bennett and the Government should cancel the surplus units instead of explicitly using them to meet targets while emission volumes increase. And we should never ever let ourselves be in the position of having an uncapped internationally linked emissions trading scheme that permits creative accounting as our main climate change policy.
Geoff Simmons and the Morgan Foundation have done it again! They have just released a sequel to 'Climate Cheats', the fantastically-named 'Who’s the Real Cheat Here? Climate Cheats II: The Dozen Dirty Businesses'. Simon Johnson breathlessly reviews Climate Cheats II and concludes that while it's about time we had some transparency over Government and corporate shenanigans with emissions trading, we mustn't forget that these are symptoms of the root problem - the uncapped design of the New Zealand emissions trading scheme.
Shock Newsflash Horror! The Morgan Foundation and Geoff "Wild-Shirt" Simmons have done it again! They have just released another tell-all critique of corporate emissions trading shenanigans! A sequel in the franchise they started in April 2016 with the report Climate Cheats. As we know, 'Cheats I' outlined this sad course of events:
the 'flood' of low-cost and low-integrity Russian and Ukrainian emissions reduction units into the NZ emission unit market
which then crashed the domestic emission unit price
which allowed NZ emitters to meet emissions trading obligations for next to nothing
which allowed the Government to own surplus (but dodgy) units
which meant Paula Bennett could claim 'form over substance' compliance with climate charge targets out to 2020
not withstanding the real increases in both gross and net NZ emissions of greenhouse gases.
Simmons and co then note that Minister Bennett has refused requests to cancel the surplus dodgy units the Government holds, giving the excuse she is 'seeking advice' (That would seem to be a perpetually applicable excuse!). So they ask 'who owned and used dodgy emission reduction units?' The dirty dozen corporates, of course.
The report then discusses three types of liability (physical, liability and transition) that may fall on companies who used the emission reduction units. To paraphrase, Simmons is thinking 'did they really think this would never come back and bite them?' And he is making the point that if Government is failing to act ethically, then why don't we shine a spotlight on our corporate citizens and ask them to shoulder some of the responsibility for the dodgy unit fiasco?
Simmons assigns highest culpability to New Zealand Steel and Fonterra. Because they are emitters who received generous free allocations of NZ units but who also owned dodgy emission reduction units. Referencing a blogger (meaning me!), the report notes New Zealand Steel booked $4.4 million Australian dollars of profit from emissions trading that is probably from arbitrage trading of their free NZ units while also owning dodgy units.
Five forestry companies are on the dozen list. Some sympathy is due to some of them as the unit price crash devalued their allocations of units. But none is due to any foresters who carried out 'forest re-registration arbitrage' in the ETS. This was exiting and re-entering the same forest in and out of the ETS several times. For each ETS 'exit', the forester would 'square-up' the refund of carbon liabilities with emission reduction units costing several cents each. For each 're-entry' to the ETS, the forester would be given an allocation of free NZ emissions units worth a few dollars each. The result being instant no-effort windfall profits. The Government took far too long to clamp down on this practice.
Finally, energy companies get their turn in the spotlight. BP, Chevron, Z Energy, Contact Energy and Genesis Energy all owned and used some dodgy international units. Did these companies price their products to NZ customers on the basis of the higher NZ unit prices or the lower dodgy unit price? The Morgan Foundation approached the energy companies for comment which is in an appendix. All give worthy statements saying they followed the rules and of course they put customers first. However, Mobil shows up the fine words of the others. Mobil never owned any dodgy international units and managed to supply fuel just as competitively as the others.
Climate Cheats II concludes by suggesting that the companies who owned dodgy international units and lowered their costs (as well as those who made windfall profits) have two options to put things right.
They could voluntarily cancel NZ units to match the dodgy units used
They could alternatively pressure Paula Bennett to cancel the surplus units the Government holds.
With NZ emission unit prices now hovering between $17 and $18 per tonne, the latter option will hurt much less than the former.
In summary, it's hard not to like a Morgan Foundation report that references me! But leaving that bias/good taste aside, Climate Cheats II is a concise readable summary of the abject state of New Zealand's emissions targets and trading policies and practices. As Kevin Anderson would say, we need to see clearly where our rose-tinted spectacles have brought us. Climate Cheats II mostly does that.
However, if anything, the report, by focusing on the top dozen owners of the dodgy international units, underplays the pervasiveness of the ownership and use of those international units. Most entities with emissions trading accounts owned some dodgy units. In 2013, more than 400 entities (out of 496 account holders) owned some share of the almost 35 million emission reduction units in private hands. You can check this with this Google sheet of Kyoto Units obtained from the Emission Unit Register at the EPA.
Finally, I have one concern which is perhaps more about how 'Climate Cheats II' will be received rather than what message it has. It seemed to me that the media response to initial splash of 'Climate Cheats I' (they loved the emotive framing - 'fraud!' - 'cheating!') really missed the fundamental point that I think both reports support, and that other assessments of the ETS support, that an emissions trading scheme that has no cap on emissions, that earns no revenue and that isn't economy-wide, is an excuse and rationalisation for doing nothing and not an effective mitigation policy at all.
In which I write to Paula Bennett and ask her to cancel the 124 million surplus emission units.
Paula Bennett's first act as the new Minister for Climate Change Issues was to announce that yes indeed New Zealand would be using creative carbon accounting and shuffling of dubious 'surplus' emissions units to meet the 2020 climate change target without actually reducing any emissions of greenhouse gases.
Report author Geoff Simmons pretty convincingly put the case that if New Zealand has unethically benefited from buying dubious Ukrainian emission units, then Paula Bennett is ethically bound to cancel the remaining surplus units. I have heard no response, so I thought I would ask her myself. Hence this letter.
Hey why don't you write or email her too? Her email address is p.bennett@parliament.govt.nz
The Hon Paula Bennett
Minister for Climate Change Issues
Parliament Office
Private Bag 18888
Parliament Buildings, Wellington 6160
23 May 2016
Your ethical duty to cancel 124 million surplus assigned amount units
I see that in the Snapshot summary on Figure 5, page 5, that New Zealand is still intending to use 123.7 million emission units (Assigned Amount Units or 'AAUs') that were 'surplus' from the Kyoto Protocol first Commitment Period to meet the 2020 emissions reduction target and still have a surplus of 92.6 million units.
You are aware that the Morgan Foundation's report 'Climate Cheats' and the Stockholm Environment Institute report (Kollmuss, Schneider and Zhezherin 2015) set out a persuasive case that the 97 million Emission Reduction Units ('ERUs') that were imported to New Zealand were “questionable or of low environmental integrity”. Those ERUs were surrendered by NZETS participants into Crown holding accounts.
According to the Kyoto Protocol 'True-Up' Report, in December 2015, the Ministry for the Environment cancelled (transferred Crown-owned units to cancellation accounts) 373 million emission units to comply with the Kyoto Protocol. The numbers and types of units cancelled were: the 97 million imported ERUs, 16 million imported Certified Emission Reduction units ('CERs'), 81 million removal units ('RMUs'), and 179 million AAUs . The 'surplus' units remaining in Crown holding accounts were 124 million AAUs.
In a nutshell, the only reason New Zealand (the Crown) has so many 'surplus' AAUs is because of the inflow and use of the dubious ERUs in the NZETS. Each dubious imported ERU has allowed one additional AAU to be carried forward in a Crown holding account as a 'surplus' unit. Because the ERUs have no credibility, the AAUs no longer represent carbon safely stored out of the atmosphere. No emissions were reduced. Therefore to use these surplus AAUs to comply with the national 2020 emission reduction target is simply an exercise in creative carbon accounting. It is simply unethical.
I put it to you that as Minister for Climate Change Issues, you are morally obliged to cancel these surplus units owned by the Crown. Will you cancel the units? It may hopefully to some small extent restore New Zealand’s very tarnished reputation with respect to mitigating climate change policy.
In which Jack Tame conducts the toughest interview ever with a New Zealand Minister for Climate Change and Paula Bennett ends up denying that the Government cheated on it's climate change commitments.
I wonder if Paula Bennett thought she would get a soft jokey interview with that nice young man Jack Tame. She certainly didn't. Tame takes the interview 110% seriously. He does not smile. He delivers his questions and his interruptions through a taught stone-face. And his questions are good questions.
We perhaps need to remember about a year ago, Jack Tame stood in for Mike Hoskins on 'Mike's Minute' and gave us a month of refreshingly different short pieces to camera. In that month, Jack Tame talked about climate change. And he concluded with a minute titled climate tipping points. So Tame takes climate change and climate change policy seriously.
Tame gives Bennett a couple of minutes to gush enthusiastically about the signing of the Paris Agreement. Then he cuts straight to the Morgan Foundation's Climate Cheats report which alleges that the New Zealand Government was complicit in allowing dubious international carbon credits (Russian and Ukrainian and emission reduction units or 'ERUs') into the New Zealand Emissions Trading Scheme.
JACK
"I want to pivot quickly to the ETS. As you know, a report by the Morgan
Foundation has concluded New Zealand, in their words, effectively 'cheated' its way to commitments made under Kyoto by trading in international carbon credits that were of dubious integrity at best. Do you accept that term? Cheating?"
PAULA
"I accept, actually, that there were dubious carbon credits last year when the Stockholm report came out. So, actually, the Morgan report's nothing new. So half of it is kind of right, you know? Yes, there were dubious credits. We found out. We're not using them now. We don't hold any of them. And we definitely won't again. And then, quite frankly, the other half of his report is factually incorrect."
Bennett's answer is mostly spin and I'll come back to that. But what happened next was that Jack Tame peppered her with about a half dozen really pertinent follow-up questions about the New Zealand Government's failure to stop the inflow of dodgy units.
"what part of 'Climate Cheats' report is factually incorrect?"
"we did continue trading on those credits for a long period when other countries abandoned them"
"but the government allowed that trading"
"So you don't accept that was cheating?"
"it wasn't in the spirit of the commitments made under Kyoto"
"but I think the question is how do we make up for that shortfall?"
Bennett eventually tries to 'flip' the questions onto a diversionary track; the undefined way forward with the Paris Agreement. Tame then flips her diversion back on her by implying she is being a hypocrite in grandstanding over the signing of the Paris Agreement when she knows that New Zealand has 124 million surplus emission units in the bank because of the influx of the dodgy Ukrainian units into the emissions trading scheme.
JACK
"But how do you come to New York and say, 'These are our commitments. Yeah, sure, the last time we had commitments, we reached them by purchasing credits of dubious quality when internationally, these things were slagged off.' Now you come here and say, 'Believe us this time. We're not gonna buy credits of dubious quality.'"
Bennett then hides behind a false statistic - that 80% of the units were okay. I have no idea where she gets that number from. And tries, again unsuccessfully, to move the interview on. Tame goes to the ethics of the matter in his next question and focuses on what would be the right thing to do.
JACK
"Would it not be a stronger thing for the government to come to New York and say, 'Yes, we've made a mistake. We're going to rectify this by either making up that shortfall in credits that were of dubious quality by purchasing extra ones, or making greater commitments in the future.' Wouldn't that be in the spirit of the Paris agreement and in the previous commitments under Kyoto?"
Bennett resorts finally to an old trick often used by Nick Smith and Tim Groser. She invokes the old canard that New Zealand is one of the few countries that has an emissions trading scheme! She then changes to some more waffle about what a big job it is. Which seems to be her preferred form of discourse. See for example her first speech as Minister for Climate Change to the National Blue-Greens.
I could keep going. Tame asks if she accepts that doing nothing will lead to 3 or 4 degrees Celsius of global warming. And if she accepts the New Zealand's targets match avoiding that. But you should really watch and read Jack Tame's interview for your self.
So I say "Bloody well done, Jack Tame! That's the best interview a New Zealand journalist has ever given a New Zealand Minister of Climate Change! Keep it up!"
Factcheck Appendix (wonky) on surplus emission units.
Now I will come back to this statement by Bennett.
"I accept, actually, that there were dubious carbon credits last year when the Stockholm report came out. So, actually, the Morgan report's nothing new. So half of it is kind of right, you know? Yes, there were dubious credits. We found out. We're not using them now. We don't hold any of them. And we definitely won't again. And then, quite frankly, the other half of his report is factually incorrect."
"We are not using them. We don't hold any of them" (the dodgy international units)
How many units are we talking about? According to the Ministry for the Environment's Kyoto Protocol 'True-Up' Report ME 1225, of December 2015, New Zealand cancelled 373 million units to comply with the Kyoto Protocol. The numbers and types of units cancelled were: 97 million imported dodgy ERUs, 16 million imported Certified Emission Reduction units ("CERs") , 81 million removal units ("RMUs") and 179 million Assigned Amount Units ("AAUs"). The surplus units kept by the Government, after the cancelling, were 124 million AAUs.
Back in 2014, the Greenhouse Gas Inventory ignored the dodgy imported units completely and showed that New Zealand would comply with the Kyoto Protocol and have a small surplus of only 8 million units (which would be AAUs).
The 97 million dodgy imported ERUs, 16 million imported CERs, and 10 million RMUs ended up in the Government's accounts as emitters imported them and gave them ('surrendered' them) to the Government to meet their NZ emissions trading scheme obligations.
Every unit imported and surrendered enabled the Government's 'Kyoto position' to grow significantly from the 8 million unit surplus as noted in 2014 above, to the December 2015 surplus of 124 million Assigned Amount Units.
The Government had a little flexibility in which units could be kept as a surplus. There was a limit on ERUs, a prohibition on having surplus RMUs and no limits on surplus AAUs. So the Government preferentially cancelled all the ERUs, all the CERs and all the RMUs and kept (as surplus) as many AAUs as possible.
So every dodgy Ukrainian ERU that entered the NZ emissions trading scheme allowed the New Zealand Government to have an extra 'credible' AAU in the number of surplus units carried forward. To use an analogy, the Kyoto cancellation process allowed the Government to 'launder' the dodgy international units into a 'credible' currency, the Assigned Amount Units.
The Ministry for the Environment's 2020 position report shows that the Government intends to use 123.7 million surplus units from Kyoto's Commitment Period 1 to plug the gap as expected emissions will be above the 2020 emission target.
So back to Bennett's statement on the dodgy units "we are not holding them". That is spin and semantics. The Government is holding an extra large surplus of 'credible' AAUs ONLY because millions of ERUs were cancelled.
And the statement "We are not using them". That is double spin. Firstly, the Government used the dodgy units to comply with the Kyoto Protocol. And secondly, the Government is using the surplus of AAUs, which it has in such large numbers only because of the dodgy units, to claim compliance with the 2020 target even while emissions increase. That is just grossly unethical.
In the wake of the Morgan Foundations hard-hitting report "Climate Cheats", Simon Johnson (aka Mr February) asks if New Zealand Steel received millions of emission units for free under the New Zealand Emissions Trading Scheme industrial allocation provisions and yet still bought millions of the dubious international Russian units (ERUs) to make windfall arbitrage profits. (N.B. 1 March 2017, I have added an 'Addendum' which is more detail about "ETS-electricity-pass-through costs" in response to a commenter at the cross-post at the Hot Topic blog.
The Morgan Foundation's latest report "Climate Cheats" has been sizzling across the various media in the last four days.
The language of the report is refreshingly non-neutral and unashamedly emotive. It is in equal parts compelling and condemning.
Carbon credit scheme a farce, reported the Herald. Climate change cheating, said Radio New Zealand. Dodgy deals, climate swindle, climate fraudsters, junk carbon scam, said report author Geoff Simmons.
As a consequence, "Climate Cheats" is an easy and engaging read - no mean feat given the topic - that is also thoroughly well-researched. It really is a 'high integrity' credit to it's authors (if you pardon the pun).
In this post I want to look specifically at one particular type of corporate conduct - arbitrage profiteering - covered in "Climate Cheats".
Geoff Simmons, on page 28, describes arbitrage like this:
"Meanwhile polluters in New Zealand benefited through a collapse in the price of emissions, while some even creamed off profits by exploiting the price difference between different types of carbon credits."
How does an emitting company make an arbitrage profit in an emissions trading scheme? I think a data-driven worked example might be informative.
the number emission units to surrender under the NZETS, I estimate as half of the emissions under the "two-for-one" deal
and the number of any of Geoff Simmons favourite dodgy Ukrainian or Russian Emission Reduction Units owned by New Zealand Steel, as compiled from the EPA Emission Unit Register.
Let me sum that up in a table.
New Zealand Steel free unit allocation, greenhouse gas emissions, and NZETS surrender liability and ERUs
Year
2010
2011
2012
2013
2014
Units allocated
494,704
989,304
1,003,730
1,029,352
1,073,489
GHG emissions (t)
1,646,890
1,736,250
1,718,930
1,747,500
N/a
Estimate of units to surrender
411,722
868,125
868,125
873,750
N/a
Allocation less surrenders
82,982
121,179
135,605
155,602
N/a
Allocation/Liability (per cent)
120%
114%
116%
118%
N/a
Emission Reduction Units owned at 31 December
0
0
0
1,022,527
1,001,714
Let's visualise that dense data into a bar chart.
The first conclusion I draw from the chart is that in each year from 2010 to 2014 New Zealand Steel's free allocation of emission units (the purple bars) always materially exceeded their estimated liability to surrender units (the mid-pink bars) 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 (the NZU emission unit) that is highly liquid.
The second conclusion is that although New Zealand Steel never needed to buy any extra emissions units to surrender under the NZETS, New Zealand Steel still 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.
If New Zealand Steel had used its free NZUs to meet its 2013 unit surrender obligation, the number of NZUs would have to be roughly consistent with my estimate of half of it's emissions or 873,750 units. All NZETS emitters collectively surrendered fewer units (732,667) for 2013! It is mathematically impossible for New Zealand Steel to have met those surrender obligations with NZUs. It must have 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) had a market price of $4.20 each and the Russian or Ukrainian Emission Reduction Units (ERUs) 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.
Alternatively New Zealand Steel would keep the 1,029,352 NZUs and wait for their price to appreciate. In that case, the hypothetical but unrealised profit would be greater than $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 emission unit price chart and hover over it 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.
Note 6 Other Income says that in 2015 Carbon Permit income was $AUD 4.4 million. Footnote (a) says that the income is from the NZETS as the Australian Carbon Pricing scheme was abolished in July 2014.
Note 7 on page 63 says that 'Direct carbon emission expense' was a credit of $AUD 1 million.
Footnote (d) page 64 says that the current year carbon emission credit was due to the carbon 'true-up' of the Port Kembla steelworks.
So Bluescope Steel Australia made a carbon profit both sides of the Tasman! New Zealand Steel made $AUD 4.4 million out of the NZETS. So much for facing a carbon price at the margin!
Conclusion
New Zealand Steel really have achieved the ultimate emission trading scheme "two-for".
New Zealand Steel received a free allocation of emission units that is greater than the number needed to surrender for emissions. The availability of the cheaper imported Russian and Ukrainian international units highlighted by "Climate Cheats" gave New Zealand Steel the opportunity to make windfall arbitrage profits. New Zealand Steel did not pay a carbon price at the margin. New Zealand Steel probably made windfall arbitrage profits.
It seems that the more free units you give a company, the more it abuses the privilege of having an emissions trading scheme. "Climate Cheats" gives us an excellent history of the deeply unethical way the National-led Government has managed the New Zealand Emissions Trading Scheme. The whole scheme is now so morally compromised it has no valid ethical basis to continue. Where I differ from the Morgan Foundation is what to do about it. They want to fix it. I think it should be abandoned.
I think overall you are probably right that allocation has been a windfall to NZ Steel.
But there are some things that your analysis seems to be missing. NZ Steel are the second largest consumer of electricity in NZ and the electricity market passthrough costs (not emissions) associated with this form part of the Govt’s compensation. This means that the windfall might not be as large as your analysis suggests (as their ETS costs depend on more than just their direct emissions).
My reply was;
Troy,
Yes I skimmed fairly lightly over the issue of ‘NZETS energy/electricity market pass-through costs’. It is a very wonky issue to blog about.
It all depends what the NZETS ‘energy/electricity market passthrough costs’ to New Zealand Steel actually are. These costs must have declined if emissions units prices drop from dollars to multiples of ten cents. I think I am fairly safe in assuming they are insignificant if not zero to NZ Steel. Check these references.
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”.
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”.
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.
"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.
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;
(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.
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".
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.
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.
"..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".
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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.
In this post I include a gratuitous image of Marlon Brandon as the Godfather because all this wonky open data stuff I have been doing lately might be a bit boring. But I do eventually get around to a worked example of how to find out how many free units were given to New Zealand Aluminium Smelters Limited.
Following on from the post about the data on internationally-sourced emission units that have been imported into New Zealand, I have uploaded two more data files to Google Sheets. They are in comma-separated values (CSV) format.
This file combines into one sheet the numbers of units allocated (which are recorded in separate 'by year' tables) from the 'Industrial allocation decisions' pages on the Ministry for the Environment's climate change website.
All we have to do with our Google sheet is apply a filter to the top row, the column headings, select the third or 'C' column 'Activity', and then open a drop down dialogue box and then hit 'clear selection' then select 'Aluminium smelting'.
In other words, New Zealand Aluminium Smelters were given millions of NZ emission units for free from 2010 to 2014. A total of 3,229,505 to be exact. A bar plot of the annual allocations looks like this.
So what happened in 2013? The free allocation to New Zealand Aluminium Smelters increased by a factor of five. Maybe that can wait for another post.
Update: 2 January 2017. I have updated the urls as the register has had a change of name to the New Zealand Emissions Trading Register. The New Zealand Emission Unit Register, which records legal title for all valid carbon credits/emissions units in the New Zealand Emissions Trading Scheme, can be searched.
What interests me is who owned these units? Who imported them? As Brian Fallow pointed out, the cheaper units collapsed the price of all units in 2011 and 2012
The imported units were not only too cheap and too plentiful. Most of them it appears were fraudulently issued.
In two scathing blogposts last December, No Right Turn traced the serial numbers of some Emission Reduction Units and Certified Emission Reduction units that New Zealand had "retired" to comply with the Kyoto Protocol, back to fraudulent projects in the Ukraine and Russia.
I have taken the annual lists of unit holders from the html tables on the Emissions Unit Register's website and uploaded them to Google Sheets. Here they are from 2008 to 2014. At some stage I will do some analysis. In the meantime, feel free to download them.
The New Zealands Emissions Trading Scheme doesn't work to cap emissions. It has just far too many surplus emission units sloshing around because of the big buy-up of low-priced dodgy Russian-sourced international units.
The New Zealand Emissions Trading Scheme Review discussion document includes this statement about surplus emission units on page 10.
"There is a substantial number of banked NZUs owned by market participants, which combine with current ETS settings to weaken the effectiveness of the NZ ETS to assist New Zealand to meet its international obligations...This stockpile of banked NZUs amounts to around 140 million units. This is several times the total number of units surrendered under current NZ ETS settings each year, which typically amounts to less than 30 million units. Some of these units are held by foresters, who banked the NZUs they received as their trees grew. Other participants banked units they received via one-off allocations when the NZ ETS was first put in place, or accumulated NZUs by surrendering cheaper international units to meet their obligations and banking NZUs they purchased or received from the Government".
Did you notice the specific use of language? The word 'surplus' is not used. The preferred term is 'banked NZUs owned by market participants'. 'Banked units' implies that it's the fault of the market participants. Surplus units implies faulty design. As I have posted previously.
An effective emissions trading scheme with a real cap would never have surplus units. Units would be scarce and realistically priced. A surplus of units is of itself evidence of a failed implementation of cap and trade frameworks such as Kyoto and the EU ETS.
How many surplus units are there? The discussion document says 140 million units. I have doodled away with the R programme and some data from the Environmental Protection Authority's Emissions Units Register and have made a graph of the cumulative total of units held in the NZ Emissions Unit Register at the end of the calendar year, up to 2014.
The key point being that the cumulative total of all types of units, 588 million, at the end of 2014, exceeds the total 'compliance demand', 110 million, the number surrendered by emitters/ market participants from 2009 to 2014 by a factor of almost six.
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.
