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

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

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

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

Hipkins states:

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

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

Massive emissions cutting deal says Luke Malpass in Stuff.

James Shaw is quoted by RNZ

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

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

Duncan Greive makes this factual error.

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

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

Michael Neilson in the Herald says the initiative is remarkable.

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

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

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

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

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

This is the emissions pricing logic.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That is how insane the emissions trading scheme is.

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

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

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

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

Data and R code.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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