Polluters get money for nothing
Companies could be profiting from a scheme meant to impose a cost on their emissions,
Cabinet paper on inaccuracies in the Electricity Allocation Factor
‘‘This presents a significant and ongoing fiscal risk to the Crown.’’
Major polluters have potentially been making ‘‘windfall gains’’ from an oversight within the country’s main tool for addressing climate change.
The Government is pledging to urgently fix an issue within the Emissions Trading Scheme (ETS), after it emerged some polluters are likely being overcompensated with taxpayerfunded carbon credits.
It has also agreed to broadly review the extent of the subsidies, which have been controversial. Any changes would likely require further amendments to an amendment bill going through Parliament.
The news of a review surprised subsidised companies, and prompted several to question their future investments in New Zealand.
The extent of the overcompensation is unknown, but is large enough to ‘‘represent a windfall gain to these firms’’ and a ‘‘significant and ongoing fiscal risk to the Crown,’’ according to a December Cabinet paper from Climate Change Minister James Shaw.
The paper details an inaccuracy in the formula used to calculate how free credits are allocated, which may be overcompensating some recipients.
It is significant because freely allocated credits represent a liability to the Government, as they could otherwise be auctioned off for revenue. Free credits also place a burden on other parts of the economy to reduce emissions.
The value of free credits last year was around $170 million, and will increase alongside the carbon price, which is expected to rise quickly over the coming decade.
Some companies within the ETS are heavily subsidised to protect them from overseas competition. The logic is if they’re forced to pay for all of their emissions, it would advantage competitors in countries without an emissions price, a phenomenon known as emissions leakage.
The largest of these companies – together labelled Emissions Intensive, Trade Exposed (EITE) – has the vast majority of its annual emissions covered in the form of free carbon credits granted by the Government. The companies are heavy energy users, and together contribute around 7 per cent of New Zealand’s emissions.
Among them are the Tiwai Point aluminium smelter, the Glenbrook steel mill, and the Marsden Point oil refinery.
Eighty-four companies receive free credits, but a Stuff analysis in October found the bulk of credits had gone to just four companies, which would be eligible for subsidies worth billions of dollars in the coming decades.
The quantity of free credits each company gets is based on a formula with various factors. Among them is the Electricity Allocation Factor (EAF), a rate calculated in 2011 that estimated future electricity price increases caused by the ETS.
It has since emerged the EAF is inaccurate. Numerous assumptions made in setting the rate did not come to fruition, including lower than expected electricity demand and lower gas prices.
It means polluters are being compensated for price increases that never happened.
‘‘The EAF needs to be urgently reviewed because it ... likely no longer reflects the impact of the NZ ETS on electricity prices,’’ the Cabinet paper, dated December 19, says.
‘‘As the EAF is out of date it is likely that some participants are being over-allocated for their electricity use. This presents a significant and ongoing fiscal risk to the Crown.’’
The paper does not detail the extent of that fiscal risk, or name any specific companies benefiting from the overcompensation, although sections of the paper are redacted.
When asked for an estimate of the financial cost to the Government of any overcompensation, Shaw said: ‘‘We’re working on developing the evidence base for this.’’
Areview into the EAF would take place this year, followed by a broader review into industrial allocation generally, some time after 2020. Both could have significant consequences for companies receiving subsidies.
The second review will look at allocative baselines, which are an estimate of the emissions produced to make one tonne of product in a given industry on average. They are a major factor in deciding how many free credits a polluter gets.
The baselines are even more out of date than the EAF – they were estimated from data collected between 2006 and 2009. Under the law, the Government has been unable to obtain updated data.
‘‘One of our challenges has been the fact that recipients of industrial allocations are not required to report emissions or production to the Government,’’ Shaw says.
‘‘None of the top 10 allocation recipients provide public reports on the emissions from their business. This is something we are working our way through, but it may take some time.’’
He noted the bill before Parliament would require ETS participants to publish emissions data.
Because the data used to calculate the baselines is more than a decade old, it does not account for increased emissionsefficiency – say, less usage of coal, or a move to more energyefficient technology. There is no
cap on free credits given to EITE companies; the number scales with output, meaning better efficiency increases the extent of the subsidy.
It is unclear how much efficiency has improved, but in a report last year, major EITE companies said there had been ‘‘significant improvement in the given amount of [emissions] per tonne of product produced.’’
It raises the possibility that some companies are getting a taxpayer subsidy of more than 100 per cent, essentially profiting from a scheme meant to impose a cost on their pollution. When asked if there was evidence this was happening, Shaw said: ‘‘This is something we are working our way through.’’
The reviews complicate the already politically challenging issue of industrial allocation.
Critics have said the subsidies are far too generous, but recipients say they are vital for protecting against overseas competition. Several recipients are major employers in regional New Zealand.
Upon learning about the review shortly before Christmas, several companies questioned their future investments in New Zealand.
‘‘[The reviews] were not signalled in advance, which has sort of undermined the predictability of policy settings going forward,’’ John Harbord, chairman of the Major Electricity Users Group, told MPs in a select committee hearing recently.
‘‘We’re already seeing that have a chilling effect on business confidence and potential investment decisions that could lead to a reduction in emissions,’’ Harbord said.
Individual companies, too, have argued any changes would cause them to rethink investments.
Among them is Refining NZ, which operates the Marsden Point oil refinery in Northland.
The company had been feeling ‘‘optimistic’’ about the proposed ETS changes until it became aware of the review into allocative baselines. The uncertainty had ‘‘markedly increased’’ the risk of investing in New Zealand, it said in its submission on the ETS changes.
An implication of ‘‘inadequate and unpredictable’’ industrial allocation policy could be to ‘‘hasten the possibility of the refinery’s closure, with a consequent loss of 1100 Northland jobs, GDP contribution to the regional and national economies, and ultimately, the security of New Zealand’s transport fuels supply chain,’’ it said.
That view was echoed by NZ Steel, which operates the Glenbrook steel mill south of Auckland and employs 1400 people.
‘‘[U]ntil recently, there was no suggestion that any changes to allocative baselines were being considered,’’ it said in its own submission.
‘‘However, NZ Steel was recently made aware that changes to allocative baselines are being considered privately by Government departments... We have not yet been consulted on this review and are entirely unclear as to its scope, timing or purpose.’’
The company had already raised the prospect of closing down as a response to climate change policy before the review was being considered.
The framework of the review had yet to be set, Shaw said, but would take into account any changes made to the ETS in the interim.