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.

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