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".
.
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.
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.
