Thursday, August 01, 2019

Climate Change: NZ's subsidised polluters

Yesterday, the government announced that it planned to continue ETS pollution subsidies for our dirtiest industries until well beyond 2050, when we're supposed be carbon neutral. So who gets these subsidies, and how much are they?

The industrial subsidy scheme is laid out in s81 of the Climate Change Response Act 2002. Polluting industries get subsidised based on their production and an "allocative baseline" - basicly a certain amount of tons of carbon per ton of production. Highly polluting industries start at a 90% subsidy, while moderately polluting industries start at 60%. In both cases, this rate is reduced linearly at 1% each year after 2012, so they're currently getting 83% and 53% respectively. Which industries are highly-polluting and which are moderately-polluting, as well as the industry-specific subsidy rates are laid out in schedule 2 of the Climate Change (Eligible Industrial Activities) Regulations 2010.

So who gets these subsidies? It will come as no surprise to learn that they are mostly foreign-owned multinationals, and are frequently being subsidised to retain dirty production methods rather than upgrade to clean ones. Here's some highlights:

  • Aluminium smelting: There is just one aluminium smelter in New Zealand, at Tiwai Point. Its owned by Rio Tinto, a foreign multinational which makes nearly US$9 billion a year in profit. last year the smelter made an NZ$207 million profit. It produces 340,000 tons of aluminium a year, meaning that it received 2.86 million tons of carbon credits with a value of roughly $70 million. So, we're subsidising a profitable company by a third of their profit.

    What really stinks is that their direct reported emissions in 2017 (the latest year for which figures are available) were only 606,000 tons. So we're subsidising them roughly 4.7 times their actual emissions. This is supposedly as "compensation" for high electricity prices, but a) they don't pay those prices due to a sweetheart deal with Meridian (itself a subsidy); and b) their use of 13% of the country's entire electricity supply drives up prices for everyone else by forcing the use of expensive and dirty thermal generation to meet demand. So we're subsidising them $70 million a year to cause around 2 million tons of electricity sector emissions and drive up prices for everyone else. Whether this is a good deal for New Zealand is left as an exercise for the reader.

  • Iron and steel making: There are two steel-makers in New Zealand: New Zealand Steel at Glenbrook, and Pacific Steel in Auckland. Both are owned by Bluescope, an Australian multinational which made a $1.6 billion profit last year. According to the Stuff article on New Zealand's biggest polluters, Bluescope admitted receiving a subsidy of 1.4 million tons of carbon in 2017, or roughly $35 million a year. That same article noted that Glenbrook was particularly dirty, emitting roughly 2.5 tons of CO2 per ton of steel produced, vs an international benchmark of two tons. So why are we subsidising them? If we want global emissions to reduce, the best thing that can happen is for Glenbrook to shut down, and for its production to be replaced by a cleaner factory overseas.

  • Urea production: There is only one urea manufacturer in New Zealand: Ballance Agri-Nutrients runs a former Think Big plant at Kapuni, turning natural gas into nitrogen fertiliser which then pollutes our waterways. Unlike most of the rest of the polluters, they're actually New Zealand-owned, and made a profit of $71 million last year. According to their annual report, $6.6 million of that was "Government grants including NZ ETS credits". They have no direct emissions surrender obligation - urea production is not an ETS activity - so that's just a straight subsidy, as "compensation" for the ETS's effect on gas prices.

    Interestingly, Ballance has recently embarked on a joint venure to use a wind farm to supply hydrogen to its plant, as a replacement for natural gas. They're cleaning up their act. So why do we need to subsidise them for another 30 years again?

  • Methanol production: Again there is only one producer in New Zealand: Methanex, a Canadian-owned multinational with an annual profit of over half a billion dollars. It produced 1.6 million tons of methanol at its three plants in 2018, which means they would have received 1.06 million tons of carbon credits, worth $26.5 million. And again, there's no direct surrender obligation - this is solely due to the ETS effect on gas prices. But wait, it gets better! Because methanol is an "embedded product", Methanex is entitled to receive credits for any methanol it exports as a "removal activity" (importing methanol, however, does not attract ETS obligations because it is not an "obligation fuel"). Methanex exports 95% of its production, and is given 1.375 tons of carbon credits for every ton of methanol it exports, so that's another 2.1 million tons, worth another $52 million. So all up, we're giving this hugely profitable, foreign-owned company over $75 million a year to burn natural gas and destroy the global climate.

    Do we need to do this? As Methanex's annual report points out, its production facilities in Canada and Chile already attract carbon charges. It has other production facilities in the US, Trinidad and Egypt, but its probably only a matter of time before some or all of them start having to pay their way too. In their submissions on ETS reviews, Methanex argue that the marginal methanol producers are in China and make it from coal, which is dirtier than their natural gas method. But China has just introduced an ETS, and while it does not yet cover methanol production, it will inevitably be expanded to do so. Predicating policy on the idea that this will not happen in the next thirty years seems like a mistake. Its also worth pointing out that there are other ways of making methanol (biosynthesis, from corn ethanol, or direct air synthesis), but thse are currently priced out of the market by dirty production. The best way of forcing polluters to innovate and scale up these methods is to stop subsidising dirty ones.
These are just some of New Zealand's subsidised polluters. There's a lot more - maybe some enterprising journalist could look them up? - but this post is long enough already. But it should be obvious that the case for continuing these subsidies is very weak indeed. We should not be subsidising these companies to continue their dirty activities. Instead, we should be cutting these subsidies off in no more than a decade, forcing them to innovate and clean up their act or go out of business. It is that simple.