28 October 2011

Sorry Nick its not the only aluminium smelter facing a carbon price and free allocation is an expense

What does The Hon Dr Nick Smith, Minister for Climate Change Issues, say when the Greens accuse him of subsidising greenhouse gas polluters. Well it seems he denies it and he produces instructive soundbites of spin. I am informed that at Wellington's Oxfam election and climate change debate he said that the NZ Aluminium Smelter Ltd's operation at Tiwai Point is the only aluminium smelter in the world exposed to a carbon price.

He has said this soundbite a few times. For example, in response to Kennedy Graham on 29 September 2011:
"..the aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions".
On TV One's 'Q and A' programme:
"the New Zealand Aluminium Smelter in Bluff, it is the only one in the world that pays any face at all for carbon pricing." (1)
In Parliament in September 2009,
"...the Bluff smelter, on 1 July next year, will be the very first to face a carbon price for its pollution. The European scheme excludes aluminium smelters until 2013..."
Does Dr Nick's soundbite stand up to scrutiny? The European Union Emissions Trading Scheme, which started in 2005, excludes the European aluminium smelters until 2013. But it included electricity generation from 2005. And aluminium smelting is very electricity intensive. As the International Energy Agency says: "Although the primary aluminium sector is not directly covered by the (EU) ETS, the impacts of the CO2 price are felt through increases in electricity prices" (p 8). (2)

Another example of a Smith soundbite is saying that the overly-generous free allocation of emissions units to industry in the NZETS is not a cost to the taxpayer. For example: Parliament on 29 September 2011:
"This member and other members make the gross error of trying to claim that not exposing industries or consumers to the full price of carbon over all their emissions is somehow a subsidy. A subsidy implies that there is a cost to taxpayers. That is not true.."
Unfortunately for Dr Nick, that's not what the Auditor General, Lynn Provost, says in her accounting and auditing advice for emissions units in the public sector
"NZUs have a market value and the issue of NZUs without charge to participants is an expense to the Government and creates a liability".
Sorry Dr Smith, the Tiwai Point smelter is not the only aluminium smelter exposed to a carbon price in an ETS. And the European smelters probably pay a higher carbon price through their electricity costs as the Tiwai Point smelter owner is compensated for electricity costs as well as emissions through excessive free allocation of emissions units.

Sorry Dr Smith, you can't just create and give away a permit to emit greenhouse gases that has a clear market value and say there is no cost to taxpayers as Treasury did not write out a cheque. The Auditor General says there is a cost to taxpayers of giving emissions units away to emitters.

(1) NB By 'pay any face' I think he means 'face any price'.)
(2) IEA, 2008,'Climate Policy and Carbon Leakage - Impacts of the European Emissions Trading Scheme on Aluminium'

19 October 2011

120% Pure Subsidy NZ Aluminium Smelters Limited Part 2

I have had some very good comments on the 120% Pure Subsidy post about the quantity of free emissions units that NZ Aluminium Smelters Limited (NZAS) has received under the NZ ETS in 2010. Enough good comments that they justify a second post on NZ Aluminium Smelters free units.

Simon Terry of the Sustainability Council points out that we shouldn't be surprised at the high level of free allocation of units to big emitters. Simon Terry documented this in June 2008, in the report Corporate Welfare Under the ETS, which looked at free allocation of units to eight energy intensive companies under the proposed NZ ETS.

In particular, Simon Terry reminds us that in the NZ ETS the free allocation of units includes a factor to compensate for NZ ETS related electricity price increases. As the NZ ETS will make some power generation more expensive to the extent that it uses fossil fuels (Huntly Power Station for example). This explains why the 'allocative baseline' factor for aluminium smelting is 2.645 units per tonne aluminium when the emissions factor for the MfE Greenhouse Gas inventory is 1.67 tonnes CO2-e per tonne aluminium.

This feature of using free allocation of units to compensate emitters for electricity price increases is explicit in the Labour Government's original NZ ETS proposal Framework for a New Zealand Emissions Trading Scheme, released in September 2007. As indicated by this quote under the heading "Allocation of emission units"
"indirect emissions associated with the consumption of electricity, as well as direct emissions from ... industrial processes will be included in the concept of emissions from industrial producers...The basis for allocation for electricity consumption will be one that compensates firms for the cost impact".

Another regular commenter, Password1, says my analysis is totally incorrect because I have left out the indirect emissions from using electricity, that I not comparing the same sets of data, and that I need to redo my calculations based on what is in the legislation. Further, my assertion that there has been an "overallocation" of units "is wrong, wrong, wrong".

Password1 concludes that
"The smelter is not getting a ‘refund’ – they are facing a proportion of the full cost of emissions both at the point of aluminium production and from being passed down from the electricity generator."

Okay maybe I will redo my calculations. So off I will go down the rabbit-hole and look into this electricity factor. So what is the proportion of the 'allocative baseline' factor for aluminium smelting, 2.645 units per tonne of aluminium, is to compensate for NZ ETS-related electricity price increases?

This idea of fossil-fuel-thermal power costs (increased by the NZ ETS) affecting a smelter that only exists because of hydroelectric dams on Lakes Manapouri and Te Anau seems a bit bizarre. Especially since NZAS's supply contract is with Meridian Energy, the 100% renewable power company.

However, the wholesale electricity market works by preferentially using the lowest priced generation offer in any one half-hour trading period. Brian Fallow points out that this means that wholesale price is set by the most expensive block of electricity offered into the market which is needed to ensure demand is satisfied and that block may be from Genesis Energy's Huntly coal and gas thermal plant.

When demand is high and hydro lakes are low, thermal power sets the wholesale price. As was the case through much of 2008. When demand is low and hydro lakes are full, then the Huntly Power Plant may be on the substitutes bench and the NZETS costs won't flow through to the wholesale electricity price.

So it does seem that there is some level of carbon price from the NZ ETS reflected through the wholesale price that ends up in the electricity price paid by NZAS. However, it is quite hard to quantify this price.

Allocative baselines are discussed in June 2010 in this Cabinet paper. Paragraph 37 tells us that the electricity allocation factor is 0.52 tCO2-e/MWh. Paragraph 40 tells us that an analysis of NZAS's electricity contract with Meridian Energy indicates that the use of this factor would result in over-allocation of units as the actual extra electricity costs are less than 0.52 tCO2-e/MWh.

Unfortunately the actual extra electricity costs, the degree of over-allocation and the fiscal cost of allocation to NZAS, have all been blanked out from the cabinet paper, apparently as 'the information is commercially sensitive'. I appear to be at the end of that rabbit-hole.

The next rabbit-hole is to check the emissions factor that gives CO2-e from tonnes of aluminium produced.

In terms of emissions reported and units surrendered, Regulation 35 of Climate Change (Stationary Energy and Industrial Processes) Regulations gives a 10-variable formula for the smelter's aluminium emissions factor. I am missing about 4 of these variables. So thats also a dead end for duplicating the emissions and the units to be surrendered.

But why don't I just use actual numbers? The Ministry of Economic Development Chief Executive's Report shows that the NZ aluminium manufacturing sector has only one NZ ETS 'participant' and that the sector, and therefore the one participant, NZAS, reported emissions of 615,814 tonnes CO2-e for the 2010 year and 312,294 tonnes CO2-e for the six months from 1 July to 31 December 2010.

So 312,294 tonnes were emitted in the six month period of obligation to surrender matching units. So we divide by 2 for the two-for-one unit deal, and that results in 156,147 units to surrender.

210,421 units were allocated to NZAS for the six months according to the Ministry for the Environment.

That's 54,274 more units allocated than surrendered or alternatively the units allocated to NZAS exceeded the units surrendered by NZAS by 135%.

This result is pretty much a mid-point between my previous estimates which were from 147% to 122%, as summarised in this table.
Table 1 Low actual and high estimate of units to surrender
Units to surrender143,342156,147172,526
Units allocated210,421210,421210,421
Excess allocation (units)67,07954,24737,896
Excess allocation (per cent)147%135%122%

Summing up

  1. NZAS was allocated 210,421 emission units in the six-month NZ ETS compliance period in 2010. Without any reasonable doubt, this represents 54,274 more emission units than it surrendered to match emissions.

  2. At today's NZ unit price of $14, the value of the units allocated is $2,945,894. The value of the excess of units allocated above units surrendered is $759,836.

  3. An unknown (or undisclosed) proportion of the free units are intended to compensate NZAS for NZ ETS-related electricity price increases in a year characterised by highest level ever of renewable generation.

  4. I can't prove that the amount of free units allocated is more than the sum of the units to be surrendered for emissions plus some units as compensation for electricity price increases. But I think it is highly likely.

  5. In any case, it hardly matters whether the volume of free allocation is either just under 100% of costs or whether its 135%. Both options pretty much effectively negate the carbon price and mean no real incentive to reduce emissions.

The bottomline for me is that if NZAS were not in the NZ ETS, they would at least be paying the some carbon price as a 'downstream' electricity user where some costs of fossil-thermal power generation are factored into the wholesale electricity price when fossil-thermal power is not priced out by cheaper hydro-generation.

Under the current policy settings, the smelter would face a higher carbon price if it were exempted from the NZETS.

12 October 2011

Trans-Tasman Emissions Trading Scheme Test

Yesterday the Australian Parliament adopted legislation for its greenhouse gas emissions trading scheme.

So I thought I would write another post on the theme of the Trans-Tasman Emissions Trading Scheme Tests, this time looking at the key differences between the New Zealand Emissions Trading Scheme and the Australian Emissions Trading Scheme. The number one key difference between the two emissions trading schemes is in how clearly each scheme sets the carbon price.

1. Unequivocal carbon price vs volatile carbon price.

Unlike the NZ ETS, the Australian ETS will set an absolutely clear and unequivocal price on greenhouse gas emissions.

The price will be $AU23 per tonne from 1 July 2012, then $AU24.15 in 2013-14 and $AU25.40 2014-15 (Securing a Clean Energy Future, The Australian Government's Climate Change Plan, p 26). From 1 July 2015, the carbon price will float within and upper and lower ceiling with the Government setting an overall 'Cap' or limit on GHGs (Securing a Clean Energy Future p 27).

The price for "New Zealand Units" under the NZ ETS is being set at a discount to the price of international Kyoto units in the volatile international carbon. So the NZ price is ...well...it's yeah whatever. As in this chart for 2010. Did you note that the Australian minimum carbon price of 23.00 Australian Dollars converts to 29.50 New Zealand Dollars? A price of 29.50 NZ dollars is off the scale of this chart!

And as in this updated chart for September, showing the fall in the international price driven by the Euro-Zone debt crisis is further pushing the NZ unit price down.

This direct importing of the international price into the NZ unit price is because of two intrinsic design features of the NZ ETS. The NZ ETS has no cap on domestic GHG emissions (or on free allocations of units). The NZ ETS allows almost all international Kyoto units to be imported and surrendered by emitters. So an emitter would say to a seller of NZ units "Why should I buy your NZ units instead of international units, which I could sell in a much wider market, unless the NZ units are at a discount?"

Of course, the Australians, influenced by Ross Garnaut and Bob Brown of the Green Party, are not having a bar of this price volatility. In terms of the economics literature, this is absolutely the right way to go. A clear and consistent carbon price set out for several years will clearly signal to emitters which emission reduction technologies to adopt - ones that will break even at the set carbon price!

The same goes for developers of windfarms and producers of biofuels. A clear carbon price into the future will give investors confidence that they will not lose their shirts putting capital into windfarms and biofuel plants. Carbon price volatility, like in New Zealand, just makes investment in either mitigation or substitution of fossil fuels a bad bet.

So why on earth would a big industrial emitter want to have an emission trading scheme where they have an unpredictable and volatile liability to pay a carbon price instead of an unequivocal and consistent-over-time carbon price?

The only answer I can give is that if like Rio Tinto NZ Alcan Limited, you are given more emissions units than you need for your actual emissions then it just doesn't matter what the price is.

11 October 2011

NZ ETS news items

Firstly, did you know that NZ has had a an online spot trading platform for carbon instruments since May 2011? I did not know that.

According to BusinessGreen.com in this article Coming of age: New Zealand’s carbon market gets an exchange, the new trading platform is called Carbon Match.

Today they are reporting spot prices between $14 and $15. Bid to but at 14.10, offer to sell at 14.50 and last sale at 14.80. It's enough to make a carbon trader cry into their key board

05 October 2011

150% Pure Subsidy - Industrial allocation of free emissions units to Rio Tinto Alcan NZ

Last week, (back on 29 September 2011 actually), Green MP Kennedy Graham was questioning Climate Change Issues Minister Nick Smith over his apparent lack of consistence over subsidies for fossil fuel industries.

Kennedy Graham was wondering why Nick Smith and Climate Change and Trade Negotiations Minister Tim Groser were happy on the one hand to oppose billion dollar subsidies to fossil fuel industries on the international stage, while on the other hand have the New Zealand Emissions Trading Scheme include subsidies in the form of generous free allocation of emissions units to big industrial emitters of GHGs.

The Hon Dr Nick Smith replied:
"...this Government is not providing subsidies to greenhouse gas polluters. I remind the member that we are the only country outside the EU to have an emissions trading scheme. Our aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions".
Lets examine this assertion in two parts; that the Tiwai Point Aluminum Smelter, receives no subsidies from Government and it faces a carbon/GHG price.

A brief recap, Tiwai Point Aluminum Smelter at Bluff, out on the edge of Foveaux Strait near Invercargill, is operated by NZ Aluminium Smelters Limited, which in turn is owned by Rio Tinto Alcan NZ Limited, a subsidiary of Canadian multinational Rio Tinto Alcan.

NZ Aluminium Smelters Limited has received an allocation of free emissions units under the NZ ETS. That is clear from that un-labelled pie chart I have been banging on about. The chart shows that iron, steel and aluminium production are to receive 40% of all free industrial allocation of emissions units.

However, we don't need to do any guessing as the Ministry for the Environment has just released an analysis of how many free emissions units were allocated to whom under industrial allocation for the half-year compliance period 1 July to 31 December 2010.

NZ Aluminium Smelters Limited received 210,421 NZ emissions units or 12% of the total allocated of 1.77 million units. By the way, only New Zealand Steel, the operator of the Glenbrook Steel Mill, received more units. They got 494,704 units.

How does this allocation of free emissions units compare with the number of emissions units that would need to be surrendered? Is the allocation more or less than the number of units surrendered?

With a bit of ferreting, I have found enough data to make some back-of-envelope-but-on spreadsheet calculations. Here are the inputs and constraints I used.
  1. 2010 production of aluminium: 343,335 tonnes. From 2010 Sustainability Report , NZ Aluminium Smelters Limited.

  2. Emissions factor for aluminium: Low estimate . 1.67 tonnes CO2-e per tonne Aluminium. From Ministry for the Environment's New Zealand’s Greenhouse Gas Inventory 1990–2009.

  3. Emissions factor for aluminium: High estimate. 2.01 tonnes CO2-e per tonne Aluminium. From Heavy Industry Energy Demand Update Report Prepared for Ministry of Economic Development February 2009, Covec Ltd.

  4. The compliance period for surrendering units is from 1 July 2010 to 31 December 2010, a half-year.

  5. The obligation to surrender units is a half obligation because of the two units for one tonne of GHGs deal.

  6. Free allocation of units is also reduced by a half.

  7. Free allocation is calculated as 90 per cent of the allocative baseline (a benchmark number of NZUs per unit output)

  8. The aluminium allocative baseline is 2.645 units per tonne of aluminium produced. From Section 7 of the Climate Change (Eligible Industrial Activities) Regulations 2010
I will first check my input assumptions by calculating my own estimate of the actual units allocated; 210,421.

Table 1. Estimate of emissions units allocated
2010 production tonnes Aluminium    343,335
Half year production /2 (1 July 31 Dec 2010)171,668
Half obligation /2 (one unit/2 tonnes)85,834
90% emissions-intensive-trade-exposed allocation 77,250
Allocation baseline (tCO2-e/t output)2.645
Equals estimate of Units allocated204,327
Difference (approx. 2.9%)6,094
Actual Units allocated210,421

My estimate of units allocated is 204,327, which is only 6,000 odd units (or 2.9%) less than the actual units allocated of 210,421. So it seems my inputs are roughly good enough.

Table 2 High and low estimate of units to surrender
2010 production tonnes Al    343,335     343,335
MfE Emissions factor (t Al/t CO2-e)1.672.01
Estimated emissions 2010 t CO2-e573,369690,103
Half year compliance period (1 July 31 Dec 2010 /2) 286,685345,052
Half obligation (one unit 2 tonnes /2)143,342172,526
Estimated Units to surrender143,342172,526
Actual Units allocated210,421210,421
Excess allocation (units)67,07937,896
Excess allocation (per cent)147%122%

Nick Smith implies that the free allocations reduce but do not remove the exposure to the carbon price. This is simply not correct. If it was correct, units allocated to NZ Aluminum Smelters would be less than units surrendered. However, units allocated exceed my estimates of units needed for surrenders.

I estimate that NZ Aluminium Smelters Limited were required to surrender between 143,000 and 172,000 emissions units for the six months to 31 December 2010. NZ Aluminium Smelters Limited were given, under 'industrial allocation', 210,421 units. My low and high estimates of the units to be surrendered exceed the actual units allocated by 37,000 and 67,000 units respectively.

Nick Smith says emitters are not being subsidised by free allocation. This too is simply not correct. Allocations greater than surrenders equals over-allocation or a net gain to NZ Aluminium Smelters Limited. The estimated over-allocation is from 124% to 147%. NZ Aluminium Smelters do not face a positive carbon price at all. If the NZ ETS was a carbon tax, NZ Aluminium Smelters would have a negative carbon tax rate!

This perverse outcome is exactly why carbon taxes are in practice simpler, more effective, and a more robust way of carbon pricing than emissions trading.

03 October 2011

Nick smith denies polluter subsidies Hot air certified emissions reduction units under review

On Scoop the Greens MP Kennedy Graham takes Nick Smith to task for denying that the NZ ETS provides large subsidies to NZ's industrial emitters of GHGs. Graham points out the irony given Smith and Trade Minister Groser have promoted a multi-lateral climate change group called Friends of Fossil Fuel Subsidy Reform

Kennedy Graham questions Smith

Other news.

The New Zealand Emissions Trading Scheme Review 2011 recommended that 'Ick Smith and the Ministry for the Environment should look at the 'integrity' of some certified emission reduction units allowed in the New Zealand Emissions Trading Scheme.

MfE are now consulting on this issue and it is called Consultation on Proposed Regulations Restricting the Use of HFC-23 and N2O CERs in the NZ ETS

I will download, read and have some thoughts on this.

This seems to just reflect what the CDM Board is doing