I thought would I whip up a quick chart from the new data with R.
I pretty much doubted that there had been any discernible decline in New Zealand's greenhouse gas emissions to justify Bennett's statement. We should always look at the data. Here is the chart of emissions from 1990 to 2015.
Although gross emissions (emissions excluding the carbon removals from Land Use Land Use Change and Forestry (LULUCF)) show a plateauing since the mid 2000s, with the actual gross emissions for the last few years sitting just below the linear trend line.
Gross 2015 emissions are still 24% greater than gross 1990 emissions.
For net emissions (emissions including the carbon removals from Land Use Land Use Change and Forestry the data points for the years since 2012 sit exactly on the linear trend line. Net 2015 emissions are still 64% greater than net 1990 emissions.
There was of course more data wrangling and cleaning than I remembered from when I last made a chart of emissions!
One method of data-cleaning would be to save the two work sheets as two comma-separated values files after removing any formatting. I also like to reformat column headings by either adding double-speech marks or by concatenating the text into one text string with no spaces or by having a one-word header, say 'Gross' or 'Net'.
Of course, that's not what I did in the first instance!
Instead, I copied columns of data from the summary Excel sheet and pasted them into Convert Town's column to comma-separated list online tool. I then pasted the comma-separated lists into my R script file for the very simple step of assigning them into numeric vectors in R. Which looks like this.
I also uploaded the chart to Wikimedia Commons and included the R script. Wikimedia Commons facilitates the use of R script by providing templates for syntax highlighting. So with the script included, the Wikimedia page for the chart is also reproducible.
For comparison, here is my equivalent chart of greenhouse gas emissions for 1990 to 2010.
This post is sort of a 'review article' post synthesizing all my previous posts about New Zealand Aluminium Smelters Limited and how their overly generous free allocation of emission units under the emissions trading scheme shields them from a carbon price. NB also posted at Robin Johnson's Economics Web page..
I have written several blog posts about these free allocations. In the very beginning, back on 7 October 2011, I wrote 150% Pure Subsidy which was also posted at Hot Topic as 120% Pure Subsidy.
In that post I argued that New Zealand Aluminium Smelters Limited, the operator of the Tiwai Point aluminium smelter, was being 'over-allocated' emission units under the New Zealand Emissions Trading Scheme (the "ETS"). That the company was being given more free emission units than the emission units it was required to surrender for it's emissions. And therefore the company was not 'facing a carbon price' under the emissions trading scheme. It was being shielded from the carbon price. In other words, the allocation of free emissions units acted as an 'insurance policy' against ever facing a carbon price.
The company was given an industrial allocation of 210,421 units for the six months from 1 July to 31 December 2010. I estimated that the smelter company was required to surrender between 143,000 and 172,000 emissions units for the six months to 31 December 2010. Therefore the estimated degree of over-allocation of units was between 120% and 147%.
The over allocation is obvious, I thought, when we compare the emissions factor (as used in our greenhouse gas inventories) of producing a tonne of aluminium, with the allocation 'baseline', the number of emission units allocated per tonne of aluminium produced.
That allocation 'baseline', 2.556 units per tonne of production, exceeded the 'inventory' emissions factor in carbon dioxide equivalent (1.67 + 0.14 = 1.81) by a factor of 1.4. As indicated in this bar chart, which you could say represents a mental model of how the free allocation works.
In that post, I was given feedback that the free allocation of units to emitting industries included extra units for "ETS electricity pass-through costs".
“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”.
However, the total free allocation for both direct emissions and the 'ETS electricity pass-through costs' "would operate within a total envelope of assistance to industry defined as 90 per cent of 2005 emission levels", (subsection 6.5.2.1 Free allocation Level of total assistance to industry).
For highly emissions-intensive trade-exposed emitters, the allocations would be based on actual production (i.e. an 'intensity' basis where allocation would increase if production increased) for the industry (Paragraph 14). The 90 percent (of historic emissions) became a "90% level of assistance" (Paragraph 20) which then became an input to the formula for calculating the allocation number; 'Allocation (in units) = Level of Assistance × Quantity of Production × Allocative Baseline' (Paragraph 32).
The 2010 Cabinet Paper "EGI Min (10) 14/9" established a proxy for the 'ETS electricity pass-through costs', the electricity allocation factor (to calculate ‘emissions’ per megawatt hour of electricity used, paragraph 8) as stated in paragraph 37:
An electricity allocation factor of 0.52 tCO2-e/MWh has been used to calculate proposed allocative baselines. This was the factor proposed in 2008 by the Stationary Energy and Industrial Process Technical Advisory Group (SEIP TAG) to offset the expected increase in electricity price as a result of the introduction of the NZ ETS. This factor was intended to reflect increases in electricity price to the end of 2012 and will need to be periodically updated.
So the counter argument is that New Zealand Aluminium Smelters Limited faces a carbon price through increased electricity costs rather than through the number of emission units surrendered for it's direct emissions.
We may say the allocation baseline has two parts; a direct emissions baseline and and an electricity/(energy) baseline. The free allocation of additional units for the ETS electricity costs lessens the impact of that carbon price (without removing it entirely). This bar chart, where the allocation baseline is less than the sum of the various emissions costs, is the mental model for this narrative for the free allocation.
However, the bar chart isn't the last word. I just made up the numbers to show the idea.
Free allocation to the smelter includes ETS electricity costs. What could possibly go wrong?
Back in the mid-2000s, when the ETS was being developed, what else did we know about the New Zealand Aluminium Smelters Limited electricity contract with Meridian?
Brian Fallow also points out the pre-2013 contract exposed perhaps 10 per cent of the supply to the floating wholesale price and that New Zealand Aluminium Smelters were very sensitive about varying wholesale costs when the hydro lakes had low storage levels.
The design of the generous free allocation regime moved the 'discounted' (but apparently still real) ETS 'carbon' price away from the direct emissions and to the ETS electricity pass through costs of an aggressive transnational company with the largest volume, cheapest and most secretive electricity contract in New Zealand. It would be harder to think of a policy more likely to result in regulatory capture (See Internet Archive) and rent-seeking.
The fact that unit allocations include indirect energy costs may make emitters net sellers of units
There is one other important implication of upstream (ETS-related) energy costs being included in the 'allocation baseline'. The total allocation may well be greater than 100% of their direct emissions. But that doesn't matter if the emitter still faces some reduced electricity ETS cost pass-through.
The big 'emission intensive' and 'trade exposed' emitters will always be net sellers of emission units. It very hard to see how a net seller of emission units is, as Nick Smith liked to say, "facing a carbon price".
"The pertinent question, then, is how much electricity prices will increase as a result of carbon pricing. But electricity price increases are very hard to predict, due to the complexities of the New Zealand electricity market and the need to cater for rising electricity demand. Despite the difficulty, it is imperative the number of credits given to industry to offset electricity price increases should be accurately - and transparently - determined."
The critical questions are therefore "What are the extra costs to the smelter of thermally generated electricity caused specifically by the emissions trading scheme? How are these extra costs measured? Are the costs and method of measurement transparently disclosed?"
It's not classic cap and trade its a double-dip
Let's just be very clear that this idea of the allocation base including upstream ETS energy costs is conceptually a departure from the classic 'cap and trade' model of emissions trading. In strict cap and trade, with a real cap on emissions, and with 'grand-parented' free allocation of the 'capped' units to emitters, the energy sector would be allocated a share of the cap to reflect their direct emissions from energy generation. That allocation, being a part of the finite cap, could not go to both the energy companies with thermal fossil-fuel generation and to the 'downstream' industrial emitters.
In other words, the allocation of extra units to industries because of additional 'up-stream' carbon-intensive energy costs caused by the emissions trading scheme, is the allocation that would have gone to the energy companies in the classic model. That would not be possible in true 'all-sectors' emissions trading scheme with a real cap. It's only possible in our emissions trading scheme because it only applies to parts of the economy and as it is uncapped.
But lets get back to the issue of the 'ETS electricity pass-through costs'. At the time of 120% Pure Subsidy: Part 2 I argued that it was a nonsense for the free allocation of units to a smelter to include a compensation factor for upstream carbon-intensive electricity costs, when that smelter owed it's existence to a dedicated source of hydroelectric generation from Lake ManapÅuri. Also the generator the smelter contracts it's electricity from is the 100% renewable Meridian Energy.
The counter argument is that that the contract (or contracts) with Meridian prices some proportion of the electricity supplied at the whatever the wholesale price is at a point in time. And as explained by Brian Fallow, the wholesale price may include an ETS component when coal generation is setting the marginal price.
In that post, I argued that the then Minister for Climate Change Issues Nick Smith was incorrect in saying that New Zealand Aluminium Smelters faced a carbon price and that European aluminium smelters did not. Even though the European smelters were not (at that time) participants in the European emissions trading system, the (upstream) electricity sector was and therefore there was a carbon price passed 'downstream' to the smelters from the more carbon-intensive European electricity generators.
I concluded that New Zealand Aluminium Smelter Limited had breathtaking audacity in threatening to close the Tiwai Point Smelter if they didn't get lower electricity costs, when they already enjoyed the lowest electricity cost of any sector in New Zealand. In 2011 New Zealand Aluminium Smelter Limited paid the very lowest average rate for electricity in New Zealand; 5.03 cents per kilowatt-hour! Residential users paid 22.6 cents per kilowatt-hour, or four times as much.
I noted that New Zealand Aluminium Smelter Limited was again threatening to close the smelter and in effect saying "Shame if something happens to" the smelter workforce, the Southland economy, the New Zealand electricity market, Meridian Energy and the conservation program for the critically endangered kakapo.
In this email, one official noted to another that Meridian Chief Executive Mark Binns had emailed them asking if the electricity costs mentioned in my Hot Topic blog post were correct and that yes the numbers were correct!
Another couple of years went by. As they tend to. Then, on 9 April 2016 of this year, I wrote Opening up the data on emissions units in the NZ emissions trading scheme. In that post I noted with some surprise that the updated data on free emissions unit allocations showed that New Zealand Aluminium Smelter's 2013 allocation had increased by a factor of five from the 2012 allocation. And of course I made a bar chart.
So what happened in 2013? The free allocation increased from 301,244 units in 2012 to 1,524,172 units.
What happened was that the 2013 allocative baseline for aluminium production changed from 2.062 units per tonne to 10.441 units per tonne. As you can see from this bar chart.
They would instead have a 'bespoke' arrangement for the electricity component of the allocation baseline.
This apparently involves an annual "reading" of the highly confidential ultra-cheap electricity supply contract with Meridian. There are a number of potentially ambiguous statements about how this is done.
Paragraph 38 states;
"Specific electricity supply arrangements mean it is appropriate to prescribe specific allocative baselines for aluminium smelting. The Act contains the ability to adjust allocative baselines where particular electricity supply arrangements affect the electricity price increase a particular firm faces. The rationale for this power is to prevent large over-allocations where electricity related contracts prevent a full pass-through of electricity costs."
Paragraphs 40 is in first-person and active tense (think of Nick Smith speaking confidently) and it states (with my underlining)
"I have since used my powers under section 161D of the Act to request electricity contracts and related information from NZAS. [Deleted] In particular the analysis suggests:
An average pass-through of electricity costs to NZAS during the transition phase (until 2013) of [Deleted] compared with the pass through of 0.52 tCO2-e/MWh that would otherwise be assumed.
Using the default pass-through of 0.52 tCO2-e/MWh would result in an average over-allocation to NZAS of [Deleted] during the transition phase.
The actual pass-through to NZAS during the 2010 to 2012 period is likely to be significantly higher or lower than the average value above".
So it's not just a matter of reading the contract. There is also "related information" from New Zealand Aluminium Smelters Limited. There is also an "analysis". This "analysis" suggests that actual annual pass-through electricity costs vary from year to year and may be more or less than than the electricity allocation baseline. However, in spite of this variability, the average pass-through electricity costs for the years 2010 to 2012 is known (but has been deleted to keep it confidential) and is less than 0.52 tCO2-e/MWh.
Paragraph 9 of the Executive Summary states a fairly firm conclusion;
"Information obtained from New Zealand Aluminium Smelters Limited (NZAS) enables electricity pass-through costs that NZAS faces for 2010 to be determined with reasonable certainty at this point."
Paragraph 41 states; "to reflect the actual electricity costs to NZAS, the allocative baseline for NZAS would need to be amended at the beginning of 2011, 2012 and 2013 to ensure that final allocations more accurately reflect the pass-through of electricity costs to NZAS".
So, in conclusion, the Ministry for the Environment has set up a regulatory process where New Zealand Aluminium Smelters Limited is enabled and encouraged to annually provide the Ministry with "related information" and "analysis" of the electricity contract - in order to set the allocation baseline and therefore the number of free units they will be allocated. And this information analysis is not disclosed. It's hard not to conclude that this bespoke process allows New Zealand Aluminium Smelters to annually nominate it's preferred free allocation of emission units.
Radio New Zealand reports that 2016 was the new record warmest year in the instrumental record, so I will pitch in too. But with an extra touch of open data and reproducible research.
When I made those charts, I had to do some 'data cleaning' to convert the raw data to tidy data (Wickham, H. 2014 Sept 12. Tidy Data. Journal of Statistical Software. [Online] 59:10), where each variable is a column, each observation is a row, and each type of observational unit is a table. And to convert that table from text format to comma separated values format.
There is no 'audit trail' left of how I manipulated the data and created the chart. So after a few years even I can't remember the steps I made back then to clean the data! That then can be a disincentive to update and improve the charts.
One package is the Global Temperature Time Series. From it's web page you can download two temperature data series at monthly or annual intervals in 'tidy' csv format. It's almost up to date with October 2016 the most recent data point. So that's a pretty good head start for my R charts.
But it is better than that. The data is held in a Github repository. From there the data package can be downloaded as a zip file. After unzipping, this includes the csv data files, an open data licence, a read-me file, a .json file and a cool Python script that updates the data from source! I can run the script file on my laptop and it goes off by itself and gets the latest data to November 2016 and formats it into 'tidy' csv format files. This just seems like magic at first! Very cool! No manual data cleaning! Very reproducible!
Here is a screen shot of the Python script running in a an X-terminal window on my Debian Jessie MX-16 operating system on my Dell Inspiron 6000 laptop.
The file "monthly.csv" includes two data series; the NOAA National Climatic Data Center (NCDC), global component of Climate at a Glance (GCAG) and the perhaps more well-known NASA Goddard Institute for Space Studies (GISS) Surface Temperature Analysis, Global Land-Ocean Temperature Index.
I just want to use the NASA GISTEMP data, so there is some R code to separate it out into its own dataframe. The annual data stops at 2015, so I am going to make a new annual data vector with 2016 as the mean of the eleven months to November 2016. And 2016 is surprise surprise the warmest year.
Here is a simple line chart of the annual means.
Here is a another line chart of the annual means with an additional data series, an eleven-year lowess-smoothed data series.
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.
"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.
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;
(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.
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".
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.
"..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.
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.
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
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
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.
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.
