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?
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