23 May 2016

An open letter to Minister for Climate Change Issues Paula Bennett cancel the dubious surplus units

In which I write to Paula Bennett and ask her to cancel the 124 million surplus emission units.

Paula Bennett's first act as the new Minister for Climate Change Issues was to announce that yes indeed New Zealand would be using creative carbon accounting and shuffling of dubious 'surplus' emissions units to meet the 2020 climate change target without actually reducing any emissions of greenhouse gases.

That approach became unstuck for Paula Bennett with the release of the Morgan Foundation's 'Climate Cheats' report.

Report author Geoff Simmons pretty convincingly put the case that if New Zealand has unethically benefited from buying dubious Ukrainian emission units, then Paula Bennett is ethically bound to cancel the remaining surplus units. I have heard no response, so I thought I would ask her myself. Hence this letter.

Hey why don't you write or email her too? Her email address is paula.bennett@parliament.govt.nz

The Hon Paula Bennett
Minister for Climate Change Issues
Parliament Office
Private Bag 18888
Parliament Buildings, Wellington 6160

23 May 2016

Your ethical duty to cancel 124 million surplus assigned amount units

Dear Minister,

I see that last Friday (20 May 2016) the Ministry for the Environment released New Zealand's Greenhouse Gas Inventory 1990–2014 and the summary 'Snapshot'.

I see that in the Snapshot summary on Figure 5, page 5, that New Zealand is still intending to use 123.7 million emission units (Assigned Amount Units or 'AAUs') that were 'surplus' from the Kyoto Protocol first Commitment Period to meet the 2020 emissions reduction target and still have a surplus of 92.6 million units.

You are aware that the Morgan Foundation's report 'Climate Cheats' and the Stockholm Environment Institute report (Kollmuss, Schneider and Zhezherin 2015) set out a persuasive case that the 97 million Emission Reduction Units ('ERUs') that were imported to New Zealand were “questionable or of low environmental integrity”. Those ERUs were surrendered by NZETS participants into Crown holding accounts.

According to the Kyoto Protocol 'True-Up' Report, in December 2015, the Ministry for the Environment cancelled (transferred Crown-owned units to cancellation accounts) 373 million emission units to comply with the Kyoto Protocol. The numbers and types of units cancelled were: the 97 million imported ERUs, 16 million imported Certified Emission Reduction units ('CERs'), 81 million removal units ('RMUs'), and 179 million AAUs . The 'surplus' units remaining in Crown holding accounts were 124 million AAUs.

In a nutshell, the only reason New Zealand (the Crown) has so many 'surplus' AAUs is because of the inflow and use of the dubious ERUs in the NZETS. Each dubious imported ERU has allowed one additional AAU to be carried forward in a Crown holding account as a 'surplus' unit. Because the ERUs have no credibility, the AAUs no longer represent carbon safely stored out of the atmosphere. No emissions were reduced. Therefore to use these surplus AAUs to comply with the national 2020 emission reduction target is simply an exercise in creative carbon accounting. It is simply unethical.

I put it to you that as Minister for Climate Change Issues, you are morally obliged to cancel these surplus units owned by the Crown. Will you cancel the units? It may hopefully to some small extent restore New Zealand’s very tarnished reputation with respect to mitigating climate change policy.

Yours sincerely

21 May 2016

Helter smelter deja vu Tiwai Point smelter uncertainty stalls renewables for more Huntly coal

I look at how unethical behaviour by New Zealand Aluminium Smelter Limited is behind the Meridian/Genesis deal keeping the Huntly Thermal Power Station burning coal as the threat of closing the Tiwai Point smelter is stalling the construction of consented renewable energy projects.

My last post at Hot Topic was about energy companies Meridian and Genesis doing a deal to keep the Huntly Thermal Power Station open (and burning coal) for an extra four years.

My post really just noted how backwards the decision was in terms of reducing emissions of greenhouse gases. And that the expected shut-down of Huntly represented the only predicted drop in energy emissions New Zealand had advised to the UNFCCC. And that reduction has just gone up in smoke.

However, New Zealand Aluminium Smelters Limited and the Tiwai Point smelter have a malignant background role in the Huntly deal. Meridian Energy said the deal was necessary to provide security of energy supply if the hydro lakes are low. That is only the case if the next 'cab off the rank' of renewable energy capacity is not built to replace Huntly. The generators don't want to build any new renewable capacity if the smelter closes and Meridian then releases cheaper Manapouri hydro electricity onto the grid.

Hence helter smelter deja vu all over again.

The last time I blogged about the smelter was in late 2012, when the Government was rolling out the partial privatisation and float of Meridian Energy. New Zealand Aluminium Smelters Limited chose that moment to threaten to close the 'unprofitable' smelter and to demand cheaper electricity from Meridian.

For a re-cap of the issue, see this summary by Bryce Edwards as of April 2013. The conclusion was in August 2013 with a new (secret) power deal with Meridian with the Government putting in a $30 million subsidy on the promise of no plant closure before the end of 2017.

In terms of climate change policy, Gareth Renowden pointed out that the closure of the smelter would be a good thing.

Electricity prices would fall as Meridian's cheaper Manapouri hydro power would enter the wholesale electricity market. The most expensive generation, from coal and gas thermal plants (such as Huntly) would be forced out of the market by price. Electricity security would be better, as Lake Manapouri's storage would be available as a buffer for droughts instead of being committed to the smelter.

Cheaper power, less emissions, more renewables, more security. That sounds like the right strategy on a planet with a finite carbon budget consistent with no more than two degrees celsius of warming. What's not to like?

Now fast forward to April 2015. Meridian has been partially floated. New Zealand Aluminium Smelters Limited is yet again stating that its electricity transmission costs are too high and linking that to the smelter's future.

Board Chair Brian Cooper said

"No decision had been made about the future of the smelter, and we are doing everything we can to secure a long-term commercially competitive electricity price for the smelter."

So back to square one. New Zealand Aluminium Smelters saying yet again "Nice smelter, you got there. Shame if something happens to it". So who do they expect to give them a handout this time? Transpower, actually. The opportunity being the Electricity Authority's review of transmission costs, in which a draft proposal was expected to give New Zealand Aluminium Smelters a windfall of fifty million dollars.

I suppose I should not be surprised by more unethical business behaviour. However, I am more interested in the electricity demand implications of a smelter closure.

Belinda Storey of Pure Advantage says that the threats to close the smelter have made future predictions of electricity demand uncertain. And therefore

"Electricity companies have delayed investments in wind, solar, and geothermal energy while the Tiwai negotiations hold to ransom the forecasting of future demand."

In November 2015, Meridian CEO Mark Binns confirmed that new electricity investments had been stalled by the possibility of the smelter closing

"because nobody wants to build a new plant if Tiwai Point can go on 12 months notice".

In December 2015, Binns confirmed to Tom Pullar-Strecker that a smelter shut-down would release about 1.15GW of electricity, which would drop wholesale electricity prices and that none of the generators wanted to build the power station that would stop first when electricity demand dropped below supply. Binns even said

"No-one wants to spend a lot of money and have a stranded asset".

So, in 2016, in New Zealand's electricity market, renewable electricity projects will be stranded assets. Pretty much because of New Zealand Aluminium Smelter Limited's preferred mode of corporate behaviour.

The only thing more bizarre are the completely contradictory media releases from Energy Minister Simon Bridges.

In August 2015 Bridges was celebrating the 2018 Huntly closure as creating renewable opportunities. In April 2016, Bridges commended the reversal of the Huntly closure as a 'transition' 'down the path of greater renewable generation'.

Is there no use of fossil fuels that Bridges won't describe as 'transitional'? Is there any other explanation for Bridges contradictory statements than the assumption that he is a complete political weather vane?

Conclusion

With that last comment of Binns, we enter a "Bizarro World" of contradiction and ridiculousness. In the rest of the world, Nicholas Stern and Mark Carney and Carbon Tracker have laid out the case that coal, oil and gas reserves are stranded assets. But in New Zealand, it is new renewable electricity generation that will be stranded assets.

All because of consistently unethical behaviour by one trans-national company. And the Minister of Energy views the situation as within his very elastic definition of 'transition' and is happy to leave direction of the market to the partially privatised generating industry. Never mind carbon budgets and the Paris Agreement.

01 May 2016

The Huntly power station decision - energy emission reductions to 2020 up in coal smoke

The decision to keep the Huntly coal thermal power station open for another four years is not only contrary to all New Zealand's commitments and climate targets, it also sends the Ministry for the Environment's projections of stabilising energy emissions to 2020 up in a cloud of coal smoke.

We seem to have had an extra dose of announcements and activities about climate change in an action-packed month of April.

We have had our Minister, Paula Bennett, signing the UN Paris Agreement. The Morgan Foundation's "Climate Cheats" report made a big splash. That lead to Jack Tame's grilling interview of Paula Bennett. Then the Royal Society of New Zealand released two major reports on climate change; one on impacts and another on policy responses. The business-backed Pure Advantage group released a report on enhancing forestry sequestration.

So what did the New Zealand energy industry do to elbow it's way into the climate change spotlight? How do you beat signing the Paris Agreement or compete with climate fraud?

Well, you just say you are going to burn more coal!

On 28th April 2016, Genesis Energy and Meridian Energy announced they had reached an 'arrangement' that would keep the coal-burning Huntly thermal power station open for an extra four years. This deal postpones the expected shut down from the planned 2018 date to 2022.

Patrick Smellie notes two interesting details of the story. First, the irony that the "100% renewable" generator Meridian Energy has led the process of negotiating with Genesis. And second, that the public announcement of the shut-down by Genesis was just 'code' for negotiating a higher price from other generators.

The Green Party's Gareth Hughes points out that on the basis of Huntly's generation of 1,277 GWh of energy in 2015, the closing of Huntly would have lifted New Zealand's proportion of renewable electricity generation from 79.9 percent to 84.5 percent. So unsurprisingly the Meridian-Genesis deal is just 180 degrees in the wrong direction in terms of the 90 percent renewable target and the need to reduce greenhouse gas emissions.

Greenpeace has given us ten reasons to shut Huntly and have started an on-line petition to keep to the plan and shut Huntly.

But what effect will this have on the Ministry for the Environment's projections of energy emissions out to 2030? These are part of the December 2015 report "NZ’s Second Biennial Report under the UNFCCC". This chart shows projected "with measures" emissions and "without measures" (i.e. business as usual).

In the chart, the projected "with measure" emissions for each sector are the circles and lines. The projected 'business as usual'/'without measures' emissions are the lines between the data points marked by triangles on 2020 and 2030. That's because the without measures projections are for only two years! It is almost as if they are an after-thought.

The other thing to note is that for agriculture, transport and industry, there is no difference between "with measures" and "without" projections. This is of course because the Ministry is reflecting the Government's intention to exempt those three sectors of the economy from any climate change policy.

However, have a close look at the energy sector projections. There is some 'daylight' visible between the 'with' and 'without' projections. The "without" trends ever so slightly upward and the "with" trend is a plateauing. So something is expected to change the slight upward emissions trend to a plateau. The Biennial Report states on page 39;

"Energy emissions are expected to increase between 2013 and 2015, but then fall between 2015 and 2020. The remaining coal-fired power plant in New Zealand is expected to be decommissioned by 2018, reducing emissions from coal. Coal-fired electricity generation is expected to be replaced mainly by a combination of hydroelectricity, geothermal, wind, and gas-fired peaking plants in the modelled scenario".

In other words, the 'something' was the closing of Huntly. The Ministry for the Environment was relying on Genesis Energy to honour its public statement that it was closing Huntly. Which of course would then be attributed to the New Zealand emissions trading scheme. However it looks like the projections are now out-dated.

Conclusion

The 2030 emissions projections show that New Zealand's climate change policies are intentionally not affecting three out of five sectors of the economy. Now with two power generators reaching a private agreement to keep an non competitive asset, Huntly thermal power station, emitting for four extra years, the projected savings in energy emissions out to 2030 have gone up in a puff of coal smoke.

25 April 2016

Minister for Climate Change Paula Bennett denies climate cheating with dodgy Ukrainian carbon credits

In which Jack Tame conducts the toughest interview ever with a New Zealand Minister for Climate Change and Paula Bennett ends up denying that the Government cheated on it's climate change commitments.

Minister for Climate Change Paula Bennett has just been in New York signing the UN Paris Agreement. While in New York, Bennett was interviewed by TV One USA correspondent and general nice guy Jack Tame for Television NZ's Q + A news show. And we can read a full transcript.

I wonder if Paula Bennett thought she would get a soft jokey interview with that nice young man Jack Tame. She certainly didn't. Tame takes the interview 110% seriously. He does not smile. He delivers his questions and his interruptions through a taught stone-face. And his questions are good questions.

We perhaps need to remember about a year ago, Jack Tame stood in for Mike Hoskins on 'Mike's Minute' and gave us a month of refreshingly different short pieces to camera. In that month, Jack Tame talked about climate change in two of them. So Tame takes climate change and climate change policy seriously.

Tame gives Bennett a couple of minutes to gush enthusiastically about the signing of the Paris Agreement. Then he cuts straight to the Morgan Foundation's Climate Cheats report which alleges that the New Zealand Government was complicit in allowing dubious international carbon credits (Russian and Ukrainian and emission reduction units or 'ERUs') into the New Zealand Emissions Trading Scheme.

JACK

"I want to pivot quickly to the ETS. As you know, a report by the Morgan Foundation has concluded New Zealand, in their words, effectively 'cheated' its way to commitments made under Kyoto by trading in international carbon credits that were of dubious integrity at best. Do you accept that term? Cheating?"

PAULA

"I accept, actually, that there were dubious carbon credits last year when the Stockholm report came out. So, actually, the Morgan report's nothing new. So half of it is kind of right, you know? Yes, there were dubious credits. We found out. We're not using them now. We don't hold any of them. And we definitely won't again. And then, quite frankly, the other half of his report is factually incorrect."

Bennett's answer is mostly spin and I'll come back to that. But what happened next was that Jack Tame peppered her with about a half dozen really pertinent follow-up questions about the New Zealand Government's failure to stop the inflow of dodgy units.

  • "what part of 'Climate Cheats' report is factually incorrect?"
  • "we did continue trading on those credits for a long period when other countries abandoned them"
  • "but the government allowed that trading"
  • "So you don't accept that was cheating?"
  • "it wasn't in the spirit of the commitments made under Kyoto"
  • "but I think the question is how do we make up for that shortfall?"

Bennett eventually tries to 'flip' the questions onto a diversionary track; the undefined way forward with the Paris Agreement. Tame then flips her diversion back on her by implying she is being a hypocrite in grandstanding over the signing of the Paris Agreement when she knows that New Zealand has 124 million surplus emission units in the bank because of the influx of the dodgy Ukrainian units into the emissions trading scheme.

JACK

"But how do you come to New York and say, 'These are our commitments. Yeah, sure, the last time we had commitments, we reached them by purchasing credits of dubious quality when internationally, these things were slagged off.' Now you come here and say, 'Believe us this time. We're not gonna buy credits of dubious quality.'"

Bennett then hides behind a false statistic - that 80% of the units were okay. I have no idea where she gets that number from. And tries, again unsuccessfully, to move the interview on. Tame goes to the ethics of the matter in his next question and focuses on what would be the right thing to do.

JACK

"Would it not be a stronger thing for the government to come to New York and say, 'Yes, we've made a mistake. We're going to rectify this by either making up that shortfall in credits that were of dubious quality by purchasing extra ones, or making greater commitments in the future.' Wouldn't that be in the spirit of the Paris agreement and in the previous commitments under Kyoto?"

Bennett resorts finally to an old trick often used by Nick Smith and Tim Groser. She invokes the old canard that New Zealand is one of the few countries that has an emissions trading scheme! then some more waffle about what a big job it is. Which seems to be her preferred form of discourse. See for example her first speech as Minister for Climate Change to the National Blue-Greens.

I could keep going. Tame asks if she accepts that doing nothing will lead to 3 or 4 degrees Celsius of global warming. And if she accepts the New Zealand's targets match avoiding that. But you should really watch and read Jack Tame's interview for your self.

So I say "Bloody well done, Jack Tame, that's the best interview a New Zealand journalist has ever given a New Zealand Minister of Climate Change. Keep it up!"


Appendix (wonky) on surplus emission units.

Now I will come back to this statement by Bennett.

"I accept, actually, that there were dubious carbon credits last year when the Stockholm report came out. So, actually, the Morgan report's nothing new. So half of it is kind of right, you know? Yes, there were dubious credits. We found out. We're not using them now. We don't hold any of them. And we definitely won't again. And then, quite frankly, the other half of his report is factually incorrect."

"We are not using them. We don't hold any of them" (the dodgy international units)

According to the Kyoto Protocol 'True-Up' Report, of December 2015, New Zealand cancelled 373 million units to comply with the Kyoto Protocol. The numbers and types of units cancelled were: dodgy ERUs; 97 million, imported Certified Emission Reduction units ("CERs"); 16 million, removal units ("RMUs"); 81 million and Assigned Amount Units ("AAUs"). The surplus units kept by the Government, after the cancelling, were 124 million AAUs.

Back in 2014, the Greenhouse Gas Inventory ignored the dodgy imported units completely and showed that New Zealand would comply with the Kyoto Protocol and have a small surplus of only 8 million units (which would be AAUs).

The 97 million dodgy imported ERUs, 16 million imported CERs, and 10 million RMUs ended up in the Government's accounts as emitters imported them and gave them ('surrendered' them) to the Government to meet their NZ emissions trading scheme obligation.

Every unit imported and surrendered enabled the Government's 'Kyoto position' to grow significantly from the 8 million unit surplus as noted in 2014 above, to the December 2015 surplus of 124 million Assigned Amount Units.

The Government had a little flexibility in which units could be kept as a surplus. There was a limit on ERUs, a prohibition on having surplus RMUs and no limits on surplus AAUs. So the Government preferentially cancelled all the ERUs, all the CERs and all the RMUs and kept (as surplus) as many AAUs as possible.

So every dodgy Ukrainian ERU that entered the NZ emissions trading scheme allowed the New Zealand Government to have an extra 'credible' AAU in the number of surplus units carried forward. To use an analogy, the Kyoto cancellation process allowed the Government to 'launder' the dodgy international units into a 'credible' currency, the Assigned Amount Units.

The Ministry for the Environment's 2020 position report shows that the Government intends to use 123.7 million surplus units from Kyoto's Commitment Period 1 to plug the gap as expected emissions will be above the 2020 emission target.

So back to Bennett's statement on the dodgy units "we are not holding them". That is spin and semantics. The Government is holding an extra large surplus of 'credible' AAUs ONLY because millions of ERUs were cancelled.

And the statement "We are not using them". That is double spin. Firstly, the Government used the dodgy units to comply with the Kyoto Protocol. And secondly, the Government is using the surplus of AAUs, which it has in such large numbers only because of the dodgy units, to claim compliance with the 2020 target even while emissions increase.

23 April 2016

Did New Zealand Steel make windfall arbitrage profits from the New Zealand emissions trading scheme?

The Godfather In the wake of the Morgan Foundations hard-hitting report "Climate Cheats", Simon Johnson (aka Mr February) asks if New Zealand Steel received millions of emission units for free under the New Zealand Emissions Trading Scheme industrial allocation provisions and yet still bought millions of the dubious international Russian units (ERUs) to make windfall arbitrage profits.

The Morgan Foundation's latest report "Climate Cheats" has been sizzling across the various media in the last four days.

The language of the report is refreshingly non-neutral and unashamedly emotive. It is in equal parts compelling and condemning.

Carbon credit scheme a farce, reported the Herald. Climate change cheating, said Radio New Zealand. Dodgy deals, climate swindle, climate fraudsters, junk carbon scam, said report author Geoff Simmons.

As a consequence, "Climate Cheats" is an easy and engaging read - no mean feat given the topic - that is also thoroughly well-researched. It really is a 'high integrity' credit to it's authors (if you pardon the pun).

In this post I want to look specifically at one particular type of corporate conduct - arbitrage profiteering - covered in "Climate Cheats".

Geoff Simmons, on page 28, describes arbitrage like this:

"Meanwhile polluters in New Zealand benefited through a collapse in the price of emissions, while some even creamed off profits by exploiting the price difference between different types of carbon credits."

How does an emitting company make an arbitrage profit in an emissions trading scheme? I think a data-driven worked example might be informative.

I will look at New Zealand Steel because their CEO was recently whining to Radio NZ that the NZ emissions trading scheme review would lead to higher carbon costs which would make the business less viable.

The data. I need to have the following:

Let me sum that up in a table.

New Zealand Steel free unit allocation, greenhouse gas emissions,
and NZETS surrender liability and ERUs
Year20102011201220132014
Units allocated494,704989,3041,003,7301,029,3521,073,489
GHG emissions (t)1,646,8901,736,2501,718,9301,747,500N/a
Estimate of units to surrender411,722868,125868,125873,750N/a
Allocation less surrenders82,982121,179135,605155,602 N/a
Allocation/Liability (per cent)120%114%116%118%N/a
Emission Reduction Units owned at 31 December0001,022,5271,001,714

Let's visualise that dense data into a bar chart.

The first conclusion I draw from the chart is that from 2010 to 2014 New Zealand Steel's free allocation of emission units (the purple bars) materially exceeded their estimated liability to surrender units (the mid-pink bars) to match actual emissions.

The surplus units were not needed to compensate for increased energy costs caused by the NZETS as the NZETS did not cause any energy costs to increase. The free unit allocation was and is simply a transfer of wealth to New Zealand Steel in the form of a tradable right or voucher (the NZU emission unit) that is highly liquid.

The second conclusion is that although New Zealand Steel never needed to buy any extra emissions units to surrender under the NZETS, New Zealand Steel still owned about a million Emission Reduction Units at the end of both 2013 and 2014

So if New Zealand Steel always had more than enough free units to meet it's obligation to surrender units under the NZETS, why would it also buy international units? There is only one plausible answer. It is to make an arbitrage profit.

Why am I so sure New Zealand Steel carried out arbitrage trades with its NZUs and surrendered cheap dubious ERUs rather than the free gifted NZUs for 2013 and 2014? It's the maths.

Data from the Emissions Unit Register, NZEUR Holding & Transaction Summary, which I have summed into a Google sheet, tells us that for 2013 the total numbers of NZUs surrendered by all emitters was 732,667 and 576,470 NZUs were surrendered for 2014.

If New Zealand Steel had used its free NZUs to meet its 2013 unit surrender obligation, the number of NZUs would have to be roughly consistent with my estimate of half of it's emissions or 873,750 units. All NZETS emitters collectively surrendered fewer units (732,667) for 2013! It is mathematically impossible for New Zealand Steel to have met those surrender obligations with NZUs. It must have used ERUs.

Here is a hypothetical example of what New Zealand Steel might have done.

According to a Carbon Forest Services webpage that tracks emission unit prices, on 11 October 2013, New Zealand units (NZUs) had a market price of $4.20 each and the Russian or Ukrainian Emission Reduction Units (ERUs) had a market price of 35 cents each. One NZU was worth 12 times as much as an ERU.

If New Zealand Steel had purchased 1 million ERUs on 11 October 2013 at 35 cents each or $350,000, it could then surrender 873,750 of them to the Government to match it's 2013 emissions.

Based on that 'if', New Zealand Steel would then be in a position to sell all the 1,029,352 New Zealand units of the 2013 allocation at $4.20 each for a possible value of $4,323,278. The hypothetical profit would be $3,973,278.

Alternatively New Zealand Steel would keep the 1,029,352 NZUs and wait for their price to appreciate. In that case, the hypothetical but unrealised profit would be greater than $3,973,278.

That is just one possibility based on NZU and ERU prices on one date. I suggest you browse over to the Carbon Forest Services emission unit price chart and hover over it to see the differences between ERU and NZU prices from early 2013 to 2015.

Even when NZUs hit a historic low price of $1.60 in February 2013, they were still 9 times more valuable than ERUs. Choose your own combination of price difference and possible profit from buying ERUs and selling NZUs.

My final piece of evidence is Bluescope Steel Australia's 2015 concise annual financial report which includes New Zealand Steel's finances.

Note 6 Other Income says that in 2015 Carbon Permit income was $AUD 4.4 million. Footnote (a) says that the income is from the NZETS as the Australian Carbon Pricing scheme was abolished in July 2014.

Note 7 on page 63 says that 'Direct carbon emission expense' was a credit of $AUD 1 million.

Footnote (d) page 64 says that the current year carbon emission credit was due to the carbon 'true-up' of the Port Kembla steelworks.

So Bluescope Steel Australia made a carbon profit both sides of the Tasman! New Zealand Steel made $AUD 4.4 million out of the NZETS. So much for facing a carbon price at the margin!

Conclusion

New Zealand Steel really have achieved the ultimate emission trading scheme "two-for".

New Zealand Steel received a free allocation of emission units that is greater than the number needed to surrender for emissions. The availability of the cheaper imported Russian and Ukrainian international units highlighted by "Climate Cheats" gave New Zealand Steel the opportunity to make windfall arbitrage profits. New Zealand Steel did not pay a carbon price at the margin. New Zealand Steel probably made windfall arbitrage profits.

14 April 2016

New Zealand Steel and the unethical two-for-one - free emission units and arbitrage profits from cheap Russian units

The Godfather In this post there is still a gratuitous image of Marlon Brandon as the Godfather but the post is about one of New Zealand's biggest companies; New Zealand Steel. They just opposed the possible ending of the supposedly temporary "two-tonnes-for-one-unit" deal. That's a bit rich when their idea of the ideal "two-for" is to receive millions of emission units for free under the NZETS industrial allocation provisions and yet buy millions of the dubious international Russian units (ERUs) and make windfall arbitrage profits.

Well, back on 17 March we had the Chief Executive of New Zealand Steel whining to Radio NZ that the NZ emissions trading scheme review would lead to higher carbon costs which would make their business less viable

Chief Executive Andrew Garey told Radio New Zealand

"the removal of the 2 for 1 provison for big carbon dioxide emitters will undermine the viability of the business"

What is this two for one deal? On page 12 of the NZETS review discussion document, it states;

"The one-for-two surrender obligation allows participants from the liquid fossil fuels, industrial processes, stationary energy and waste sectors to surrender one unit for every two tonnes of emissions (ie, a 50 per cent surrender obligation)."

However, Garey has his facts wrong in assuming the loss of the two-for-one deal will increase his NZETS liability. On page 13 of the NZETS review discussion document, it states;

"It should be noted that if the one-for-two surrender obligation is removed, the amount of free allocation provided to emissions-intensive and trade-exposed activities will automatically be increased to correspond with the increased surrender obligation."

So New Zealand Steel will have to surrender twice as many units. But its free allocation of units will double. One bit of corporate welfare in the NZETS is removed and another takes its place! Talk about the NZETS as an insurance policy for big emitters that protects them from any incentive to reduce emissions!

I could respond by saying I sympathise with Mr Garey. I mean, really, who does understand the NZETS? However in his interview with Radio NZ he goes on to indicate that if the NZETS is toughened up, then his parent company, Bluescope Steel, may just decide to close the Glenbrook Steel Mill. Nice steel mill you got. Shame if something happens to it. That is just typical arrogant big business behaviour. So I have no sympathy for Mr Garey.

There are some obvious questions to try to answer with actual emission unit data from the New Zealand Emission Unit Register, which records legal title for all valid carbon credits/emissions units in the New Zealand. How many units were NZ Steel given for free under the industry allocation plans? What were NZ Steel's NZETS-liable greenhouse gas emissions from processing steel from iron sands? Were they allocated more units than they had to surrender? Did they also make arbitrage trades in any of the dubious Russian or Ukrainian emission units?

We know that New Zealand Steel has been receiving free allocations of emission units as the allocations are listed on the Ministry for the Environment's web page Industrial allocation decisions.

Another MfE web page Eligible industrial activities tells us the formula for the unit allocation is (LA × ∑ (PDCT × AB)) ÷ 2.

The level of assistance (LA) for New Zealand Steel is 90%. There are four products (PDCT) each with it's own allocative baseline (AB). The products and allocative baselines are 3.2613 units for each tonne of iron or steel, 0.119 units for each tonne of cast carbon steel, 0.28 units for each tonne of vanadium-bearing steel and 0.163 units for each tonne of flat hot-rolled carbon steel.

That page is just repeating what is in Regulation 23 and the Schedule Prescribed emissions intensity and allocative baselines of the Climate Change (Eligible Industrial Activities) Regulations 2010.

I have already compiled a Google sheet of all units allocated to emitters from 2010 to 2014. It was compiled from the year by year Industrial allocation decisions

We add a 'filter' to the Google sheet on the top row of the column headers and set the filter on the 'Applicants.Name' column header to 'NZ Steel'.

This tells us that New Zealand Steel Development Limited (account holder NZ-1903) received these free NZ units.

2010 494,704
2011 989,304
2012 1,003,730
2013 1,029,352
2014 1,073,489

Or a total of 4,590,579 units over the five years. NZ Steel received more units than any other industry. More than smelter operator NZ Aluminium Smelters Limited. I know this as back in 2012 I made a pie chart of the 2011 free unit allocation data. That showed that of the 3.472 million units allocated to industry in 2011, 90% went to thirteen NZ companies. Here is that pie chart.

Now I want data on the greenhouse gas emissions from processing steel from iron sands. The New Zealand's Greenhouse Gas Inventory 1990–2013 reports the greenhouse gas emissions from steel production from iron sands in tonnes of CO2-e. New Zealand Steel is the only iron sands processor so these are New Zealand Steel's emissions. The emissions are;

2010 1,646,890
2011 1,736,250
2012 1,718,930
2013 1,747,500

(There is no total for 2014 as we won't see the next greenhouse gas inventory for the 2014 year until later this year)

I want to compare the number of emissions surrendered with the number of units given as free allocation. Ideally, I would have the number of units actually surrendered by New Zealand Steel each year. In a transparent system we would know that, would we not? Unfortunately, the NZETS is not transparent and the units surrendered are not available to the public.

In 2013, I asked the Environmental Protection Authority (EPA) under the Official Information Act for the numbers of units surrendered by New Zealand Steel and some other companies. The EPA refused my request on the grounds that the Climate Change Response Act trumped the Official Information Act. In May 2014, after a delay of a year, the Ombudsmens Office agreed with the EPA. So much for transparency.

So I have to estimate the unit surrender obligation. I keep in mind the two-for-one deal. So my annual estimate of the number of units New Zealand Steel is required to surrender under the NZETS is half of the actual emissions (one unit covers two tonnes). Also NZETS surrender obligations started on 1 July 2010. So 2010 was a half year for free allocation and unit surrenders. So I take half of the 2010 actual emissions.

My data now looks like this

                            2010      2011      2012      2013      2014
Greenhouse gas emissions     823,445 1,736,250 1,718,930 1,747,500        NA
NZETS surrender  obligations 411,722   868,125   859,465   873,750        NA
Free allocations of units    494,704   989,304 1,003,730 1,029,352 1,073,489

Lets make a chart. I think a bar chart will be a suitable choice. The colour scheme is lightest pink for actual emissions, mid-pink for my estimate of the units surrendered (emissions x 50%) and purple for the free allocation of units. The purple bars (free units) are noticeably larger than the surrender estimates. It appears that New Zealand Steel are consistently being allocated more free units than they need to surrender to match their direct emissions.

In summary, in the years 2010 to 2103, the actual number of units given to New Zealand Steel exceeded the estimated number to be surrendered by 82,982, 121,179, 144,265 and 155,602.

Does the free allocation of units include compensation for any other carbon-intensive energy inputs I have not taken into account? In principle, yes, as the original September 2007 Framework for a New Zealand Emissions Trading Scheme document makes this statement about free allocation to emitters;

"indirect emissions associated with the consumption of electricity, as well as direct emissions from stationary energy and direct emissions from non-energy industrial processes will be included in the concept of emissions from industrial producers".

Also the NZ Aluminium Smelter free allocation included an undisclosed quantum of units for the fictional coal content of electricity inherent in their energy supply from Lake Manapouri. Yes, I know that last sentence seems to make no sense at all. You really need to read the linked blog post!

The Heavy Industry Energy Demand Update Report (by Covec, Feb 2009) provides estimates of the carbon dioxide emissions from each energy input (except electricity) used by New Zealand Steel.

The Covec report estimates that in 2008 the coal emissions were 1,615,100 tonnes (93%), the natural gas emissions were 106,200 tonnes (6%), the coke emissions were 18,100 tonnes (1%) and the diesel emissions were 3,800 tonnes (0.22%). Adding up to 1,743,200 tonnes of direct emissions. Covec don't calculate the emissions content of the 426 GWh of grid electricity used in 2008.

The estimated natural gas emissions at about 100,000 tonnes per annum almost adds up to the 'surplus' allocated units which are between 120,000 to 155,000 tonnes annually. So its arguably plausible that part of the free allocation of units is to compensate New Zealand Steel for the increase in the cost of natural gas caused by the NZETS.

Except that there is no evidence that the price of natural gas or electricity or coal has increased because of the NZETS. And we have known that since 2011.

Covec's 2011 report 'Impacts of the NZ ETS: Actual vs Expected Effects' prepared for the 2011 ETS Review Panel could not find any increases in electricity, natural gas or coal prices caused by the NZETS.

Officials supporting the 2012 Finance and Expenditure Select Committee queried the five major electricity generating companies about NZETS costs flowing through into wholesale electricity prices. Their reply was;

"costs being passed through directly from the NZETS are not visible or distinguishable due to the wholesale market pricing mechanism and these costs are not directly passed through due to competition factors".

As the New Zealand Emissions Trading Scheme evaluation report 2016 states on page 38;

The prices of emission units have been too low to affect business costs either for participants or those who receive costs passed down from participants.

So from 2010 to 2014 New Zealand Steel consistently received a free allocation of emission units that materially exceeded their estimated liability to surrender units to match actual emissions. The surplus units were not needed to compensate for increased energy costs caused by the NZETS as the NZETS did not cause any energy costs to increase. The free unit allocation was and is simply a transfer of wealth to New Zealand Steel in the form of a tradable right or voucher (unit) that is highly liquid.

So New Zealand Steel, the emitter receiving the most free units in the NZETS, has faced no NZETS-related carbon price at the margin or in any sense. Instead of acting as a carbon price at the margin, the free unit industrial allocation regime in conjunction with the lack of energy cost pass-through has acted as an insurance policy or hedge contract - protecting New Zealand Steel from the carbon price!

This is the embodiment of fundamentally flawed design in the NZETS and it is symptomatic of the National Government's unethical approach of rewriting the NZETS to suit the whims of big business. It's also symptomatic of the earlier big business campaign that pressured the earlier Labour Government to drop a carbon tax and move to the inherently less transparent NZETS.

You would think that this case study into New Zealand Steel could not get worse. However, it does get worse. From 2013 to 2015 New Zealand Steel engaged in arbitrage profiteering using the most dubious international emission units, the Emission Reduction Units.

To see if New Zealand Steel has owned any Emission Reduction Units, we go to another Google sheet Kyoto Unit Holdings by Account 2008 - 2014 which compiles data from the EPA Emission Unit Register. We add a 'filter' to the Google sheet on the top row for 'NZ Steel Limited' on the 'Account.Holder' column of the Google sheet.

We find that New Zealand Steel Limited did own some Emission Reduction Units.

2013 1,022,527
2014 1,001,714

I have amended the bar chart and added the Emission Reduction Units owned by New Zealand Steel as extra orange bars. It is interesting to note that the number of ERUs is fairly close to the number of free NZUs. Both were more or less 1 million for 2013 and 2014.

We have fairly persuasive evidence that New Zealand Steel was consistently allocated more free units than it needed to surrender for its actual emissions. Therefore New Zealand Steel never needed to buy any extra emissions units to surrender under the NZETS. Yet New Zealand Steel owned about a million Emission Reduction Units at the end of both 2013 and 2014

So if New Zealand Steel always had more than enough free units to meet it's obligation to surrender units under the NZETS, why would it also buy international units? There is only one plausible answer. It is to make an arbitrage profit.

Why am I so sure New Zealand Steel surrendered cheap dubious ERUs rather than the free gifted NZUs for 2013 and 2014? It's the maths.

Data from the Emissions Unit Register, NZEUR Holding & Transaction Summary, which I have summed into another Google sheet, tells us that the total numbers of NZUs surrendered by all emitters were 732,667 in 2013 and 576,470 in 2014.

As those numbers (for the whole of the NZETS) are less than New Zealand Steel's estimated surrender obligations, it is mathmatically impossible for New Zealand Steel to have met its surrender obligations without having used ERUs.

Here is a hypothetical example of an arbitrage trade similar to what New Zealand Steel might have done. According to a Carbon Forest Services webpage that tracks emission unit prices, on 11 October 2013, New Zealand units (NZUs) (the same type of units allocated to New Zealand Steel) had a market price of $4.20 each. On the same day the Russian or Ukrainian Emission Reduction Units had a market price of 35 cents each. One ERU was worth only one twelfth the price of an NZU.

If New Zealand Steel had purchased 1 million ERUs on 11 October 2013 at 35 cents each or $350,000, it could then surrender 873,750 of them to the Government to match it's 2013 emissions. Based on that 'if', New Zealand Steel would then be in a position to sell all the 1,029,352 New Zealand units of the 2013 allocation at $4.20 each for a possible value of $4,323,278. The hypothetical profit would be $3,973,278.

That is just one possibility based on NZU and ERU prices on one date. I suggest you browse over to the Carbon Forest Services New Zealand Unit & Emission Reduction unit Chart and hover over the chart to see the differences between ERU and NZU prices from early 2013 to 2015. Even when NZUs hit a historic low price of $1.60 in February 2013, they were still 9 times more valuable than ERUs. Choose your own combination of price difference and possible profit from buying ERUs and selling NZUs.

It's not just me saying that this is unethical profiteering. Here are statements from forest consultant Ollie Belton, Herald Economics Editor Brian Fallow and Green MP Kennedy Graham.

Carbon forest consultant Ollie Belton said this;

"..trade exposed industries that were gifted up to 90% of their surrender obligations were able to meet all their obligations with the super cheap ERUs and bank the gifted NZUs. Since 2012, NZUs have had much higher market value than ERUs, generally more than five times as high, hence the arbitrage opportunity. Never have polluters had it so good. They have made hundreds of millions in arbitrage profits."

Brian Fallow of the Herald described the arbitrage trades as corporate welfare.

"This is where the corporate welfare comes in. The ETS is designed to ensure that large emissions-intensive trade-exposed operations like the Tiwai Point smelter or the Glenbrook steel mill are only exposed to a carbon price at the margin - and a pretty narrow margin at that...But the collapse in international carbon prices has presented the smokestack sector with an arbitrage opportunity too.
They have been able to hoard their NZUs, in the expectation they will be more valuable in the future, and meet their obligations in the meantime with cheap imported Kyoto units instead".
.

Kennedy Graham placed it on the record at Parliament that he regarded the arbitrage trades as morally reprehensible.

"Emission-intensive, trade-exposed entities, which include aluminium, iron, steel, cement, whey, wood, and paper, are free to bank profits from the emissions trading scheme — cash for pollution. They receive free allocations of New Zealand Units as compensation for any energy price rises brought about by the emissions trading scheme...
These industries are also required to surrender units to clear liabilities. This is dependent on calculations based on their emissions profile. They can surrender New Zealand Units or Kyoto Units, such as emission reduction units and certified emission reduction units. These overseas units are valued between 10c and 40c.
They are engaging in the arbitrage by receiving free New Zealand Units from the Government, then selling them at market prices of $3 to $4, then buying cheaper overseas units such as the certified emission reduction units and emission reduction units for anything from 10c to 40c to surrender back to the Government.
They bank the profit. In some cases, this is in addition to existing tax-paid subsidies running into the tens of millions of dollars. Let me acknowledge that these activities are entirely legally, but they are morally reprehensible and they reflect Government stupidity and cynicism of the highest order".

Conclusion

New Zealand Steel really have achieved the ultimate emission trading scheme "two-fer". The NZETS's free allocation regime over allocates them more emission units than they need to surrender for their emissions and the availability of the imported international units gave them the opportunity to make windfall arbitrage profits. So instead of a carbon price there were unearned windfall profits.

I agree completely with Ollie Belton, Brian Fallow and Kennedy Graham that such arbitrage profiteering is morally reprehensible corporate welfare where the polluters have never had it so good. It seems that the more free emission units you give a company, the more it abuses the privilege of having an emissions trading scheme. This is just one example of how deeply unethical the implementation of the New Zealand Emissions Trading Scheme has been. The scheme is now so morally tainted it has no valid ethical basis to continue. The New Zealand Emissions Trading Scheme should be abandoned.

09 April 2016

Opening up the data on emissions units in the NZ emissions trading scheme

The Godfather In this post I include a gratuitous image of Marlon Brandon as the Godfather because all this wonky open data stuff I have been doing lately might be a bit boring. But I do eventually get around to a worked example of how to find out how many free units were given to NZ Aluminium Smelters Ltd.

Following on from the post about the data on internationally-sourced emission units that have been imported into New Zealand, I have uploaded more two data files to Google Sheets. They are in comma separated values (CSV) format.

The first sheet is NZETS-2010-2014-final-allocations-for-eligible-activities-csv which is five years of data on the free allocation (gifting) of New Zealand Units (NZUs) to emitting industries under the New Zealand emissions trading scheme (or NZETS).

This file combines into one sheet the numbers of allocated units (which are recorded in separate 'by year' tables) from the 'Industrial allocation decisions' pages on the Ministry for the Environment's climate change website.

The second sheet is Kyoto Unit Holdings by Account 2008 - 2014 which is seven years worth of data listing all account holders in the Emission Unit Register who held a balance of Kyoto Protocol emission units at 31 December of each year. This sheet combines all the seven year by year sheets linked to on the post about Kyoto emission units

The Kypto units are the Assigned Amount Units (AAUs), the Emission Reduction Units (which are otherwise known as the the dubious Russian or Ukrainian emission units), the Removal Units (RMUs) and the Certified Emission Reduction units (CERs). Oddly, there is no requirement for the Emission Unit Register to disclose the year end balances of NZUs held by account holders.

How do we use this data? We need a worked example.

Let's assume we are interested in New Zealand Aluminium Smelters Limited, the operator of the Tiwai Point aluminium smelter. I mean, who isn't interested in the Godfather of the NZ emissions trading scheme?

All we have to do with our Google sheet is apply a filter to the top row, the column headings, select the third or 'C' column 'Activity', and then open a drop down dialogue box and then hit 'clear selection' then select 'Aluminium smelting'.

That tells us that New Zealand Aluminium Smelters Limited were given the following emission units

2010 210,421
2011 437,681
2012 301,244
2013 1,524,172
2014 755,987

In other words, NZ Aluminium Smelters were given millions of NZ emission units for free from 2010 to 2014. A total of 3,229,505 to be exact. A bar plot of the annual allocations looks like this.

So what happened in 2013? NZ Aluminium Smelters free allocation increased by a factor of five. Maybe that can wait for another post.

Here is the R script for the bar chart.

nzal <- matrix(c(210421,437681,301244,1524172,755987), nrow = 1, ncol=5, byrow=TRUE, 
+ dimnames = list(c("row1"), c("2010", "2011", "2012","2013","2014")))

png("Smelter-2010-2014-560by420-v1.png", bg="white", width=560, height=420,pointsize = 14)

par(mar=c(4, 4, 4, 1)+0.1)

barplot(nzal/10^6,las=1), title(cex.main=1.4,main="NZETS Units Allocated to NZ Aluminium Smelters Ltd",
+ ylab="NZ Units (millions)")

mtext(side=1,line=2.5,cex=1,expression(paste("Source: EPA NZ Emission Unit Register")))

dev.off()