Sunday, May 21, 2023

Climate Change: A big deal

If you thought about Aotearoa's non-agricultural emissions a few years ago, four mega-emitters stood out: the Marsden Point oil refinery, the Huntly power station, the Glenbrook steel mill, and the Motunui methanol plant. Marsden Point shut down last year and is being dismantled; Huntly has been scheduled for shutdown for years, but Genesis keeps extending and extending them - currently they're meant to be off coal in 2025 except in "exceptional circumstances" (which probably means "whenever it is profitable for us to do so"). But now the government has stepped in over Glenbrook, announcing a $140 million deal to halve its emissions by 2030. It is the biggest single action to reduce emissions in Aotearoa's history, and it will make a real difference, lopping a full 1% off our annual emissions, and getting us 5% of the way to meeting our 2026-2030 carbon budget. Which sounds small, but doing that in one hit is a massive change, equivalent to shooting 200,000 cows.

This is a good deal: the lifetime cost of the emissions reductions is apparently $16.20 / ton - much cheaper than the current lowball carbon price of $54 / ton, let alone the 2030 cost of ~NZ$200. Its so cheap in fact that you have to wonder why NZ Steel didn't pay for it themselves, especially given that it would have cost them less than a year's profit. Which just goes to show the perverse incentives the ETS sets: While economists talk about "marginal prices", in practice as long as polluters receive subsidies, they have every incentive to keep receiving them, and no incentive to reduce emissions. Especially when reducing them requires (horror) capital investment, which could be paid out to foreign shareholders as dividends.

Which gets us to another perverse incentive: the fact that Aotearoa pays these subsidies means we then have an incentive to pay again to reduce emissions. $140 million is a lot of money - but its in the same ballpark as the 2.15 million tons of carbon credits we give this company every year. Reducing its emissions therefore becomes profitable for the government, provided the reduction cost is lower than the market price (or the 2030 price, if you think beyond the next election). In this case, if the expected emissions reduction leads to an equivalent reduction in subsidies, then this pays off for the government in 5 years (quicker if carbon prices rise; or just one year if you think in 2030 prices). Which is a much better return than the average Auckland motorway.

But while this is a good deal, thanks to the shitty policy structure Labour has saddled itself with, its also morally repugnant. Corporate welfare. We should not be paying companies to do things they can and should pay for themselves, and the fact that its profitable for the government to do so is an indictment of the current policy structure. We should also not be handing over 25% of the total value of a company (Bluescope's New Zealand and Pacific segment has a net value of A$530.9 million according to its latest annual report (p88)) without getting some equity and control. If we want to do this sort of deal, we should be investing in these companies (maybe through the Cullen Fund), and sharing in the long-term returns, rather than just shovelling money at their foreign shareholders. And if they're reluctant, we should be regulating the living shit out of them until they are not.

And all that said, on the gripping hand this is 800,000 tons a year. Now do Motunui please.