New Zealand Aluminium Smelters Ltd and their excessive free allocations of emission units

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..

In each year that New Zealand has had an emissions trading scheme, the trans-national company New Zealand Aluminium Smelters Limited was given a very generous 'free allocation' of emission units. First, back in 2010, and in the years following and, bringing us up to date, in 2015.

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.

In the CRF tables/spreadsheets (20MB zip file) released with New Zealand's Greenhouse Gas Inventory 1990–2014, the 2010 emissions factor for producing a tonne of aluminium is 1.67 tonnes of carbon dioxide with an additional 0.14 tonnes of carbon dioxide equivalent for perfluorocarbon (PFC).

In October 2011, the Climate Change (Eligible Industrial Activities) Regulations 2010 specified that New Zealand Aluminium Smelters Limited was allocated 2.556 emission units per tonne of aluminium produced in 2010.

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.

Then, on 20 October 2011, I wrote 120% Pure Subsidy: Part 2 which was also cross-posted at Hot Topic.

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".

As the report "Development of industrial allocation regulations under the New Zealand emissions trading scheme: Consultation document, (MfE December 2009, ME 984) stated;

"A number of energy-intensive firms will face higher costs of production because of the electricity used in their production"

because, Q.E.D.

"The NZ ETS will increase the costs of generating electricity from fossil fuels and geothermal sources".

This was also explicit in the original Labour Government report "The Framework for a New Zealand Emissions Trading Scheme" of 2007.

It stated in the fourth bullet point to subsection '5.3.1 In-principle decision on levels of assistance through free allocation' (with my underlining), that;

“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).

This allocation 'envelope' (almost a 'cap') of 90 percent of 2005 emissions was dropped in the 2010 Cabinet Paper "EGI Min (10) 14/9".

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?

We knew it was secret, controversial and far too cheap. Brian Fallow in 2004 estimated the electricity price to be just over 5c a kilowatt hour. Another 2008 cost estimate was $52-$54 a MWh (5.2c - 5.4c a kilowatt hour. CAFCA thought the cost in 2007 was 4.7 c a kilowatt hour.

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".

As an example, there wasn't much doubt that New Zealand Steel's direct allocation of units exceeded their emissions liability.

As Jan Wright observed in her submission on the electricity allocation factor:

"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 Manapōuri. 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.

Then, on 2 November 2011, I wrote Nick Smith fails the smelter spin test, also cross-posted at Hot Topic.

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.

On 23 April 2012, I reported that New Zealand Aluminium Smelters Limited had won the 2011 Roger Award for being the worst transnational company operating in New Zealand.

On 9 September 2012, I wrote Power to the smelter? New Zealand Aluminium Smelters Limited wants to pay less for electricity for the Tiwai Point aluminium smelter. That post noted that New Zealand Aluminium Smelters Limited was renegotiating the electricity supply contract with Meridian Energy.

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.

On 11 September 2012, I riffed off a gangster meme and wrote the evocatively-titled Rio Tinto Alcan New Zealand Ltd plays godfather: nice aluminium smelter you got, be a shame if something happened to it, also at Hot Topic.

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.

For a couple of years, I didn't really think about smelter until I looked at the Official Information Act releases by the NZ Treasury about the New Zealand Government's payment of $30 million to New Zealand Aluminium Smelters Limited in 2013.

Amongst the dozens of documents was an email between officials with a familiar title which made me laugh; Email to Officials: Rio Tinto Alcan NZ Plays Godfather: Nice Aluminium Smelter you got, be a shame if something happened to it.

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.

Wrapping it all up

In hindsight, it's obvious from the June 2010 Cabinet paper Industrial Allocation under the New Zealand Emissions Trading Scheme: Group One Activities, Ref no: EGI Min (10) 14/9 that although there was a generic 'electricity allocation factor' of of 0.52 tCO2-e/MWh, that would not apply to New Zealand Aluminium Smelters Limited.

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:

1. 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.
2. 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.
3. 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.

Fixing the NZ emissions trading scheme is just flogging a dead horse

I argue that trying to incrementally 'save' or 'fix' the NZ Emissions Trading Scheme will ensure it remains ineffective in reducing domestic emissions for decades. Politically, its just flogging the dead horse. We don't have time for a unending institutionalised cultural conflict over the 'fixing the NZETS' like the one we have had for 'fixing' the Resource Management Act.

Yes, following on from my last post I am still banging on about the latest review of the New Zealand Emissions Trading Scheme.

Elsewhere on the web I see that Brian Fallow, Generation Zero and Geoff Simmons are all accepting the “fix the NZETS” framing in their comments on the review. Geoff Simmons heads up his second post on the ETS review in two days How do we save the Emissions Trading Scheme?.

Brian Fallow starts his Herald column "Possible adjustments to the Emissions Trading Scheme aren’t much, but at least they’d be a start".

Geoff Simmons and Brian Fallow do a double act of analysis on the NZETS review. I totally respect both Geoff and Brian in their intentions and views and understanding of the NZETS, except that they are both accepting this inherently incremental "fix the NZETS" framing of the politics. Here's their discussion.

I think this framing, 'fixing the NZETS' is fundamentally wrong in it’s politics.

One key point from my last post was that this NZETS review has reversed the burden of proof. The allegedly temporary and allegedly transitional 'moderating features' are now the status quo or the default settings in the NZETS.

Policy analysis and assessment now has to be prepared and presented to show that each flawed 'moderating feature' of the NZETS won't harm business interests. Queue the technical report Economic impacts of removing NZ ETS transitional measures by New Zealand Institute of Economic Research.

We need to remember there are a lots of 'cost moderating' features (flaws) still in the NZETS: unlimited international linkage and importing of overseas units (which officials are trying to restore), overly generous free allocation of units, the hang-over of surplus units in the market, the lack of auctioning (well there is no point having an auction if there is a huge surplus of units).

And the ultimate flaw is that half of New Zealand's greenhouse gas emissions, those from pastoral agriculture, seem to have a permanent get-out-of jail card.

So we have an emissions trading scheme with multiple flaws. The politically selected burden of proof provides a high hurdle for change each time the hapless officials attempt to remove the flaws. All the lobbyists join in as they have all the dates in their calendars.

You need more convincing?. Let's look at one of Tim Groser’s last statements as Minister for Climate Change.

First Groser praises Labour for their shared consensus on having an emissions trading scheme.

We have an understanding that there are certain policy frameworks in New Zealand which take decades to put in place, and where you need a very high degree of consensus - particularly amongst the two major parties of Labour and National - on at least a structure of a policy response.

Labour have supped the kool-aid and bought into this framing. As shown by this statement to Forest and Bird during the 2014 election campaign.

Labour’s preferred means of pricing is to fix the the existing ETS. Using an ETS to price carbon is the only broad area of agreement in climate change policy, particularly particularly between the two largest parties (despite National’s lip service for an ETS). Labour would not throw that agreement away lightly to start again with a carbon tax.

In other words, Labour will flog the dead horse better than National. As I noted in 2014:

National and Labour in effect have the same policy narrative that explains the problem; 'THEY undermined the NZETS', and a narrative solution, 'WE will fix the NZETS'. This creates the on-going cycle of the 'horse is under performing' and the narrative solution (keep flogging the horse). But beneath the impenetrable detail and complexity of the arguments about fixing the NZETS, it will remain ineffective.

Groser saves his well-known invective for Russel Norman and the Greens and their carbon tax policy. And stretches a very long bow to equate that policy with the Rudd-Gillard-Rudd Australian Labor Prime Ministers' revolving door.

What I didn't appreciate was that Russel Norman - then leader of the Green Party - saying you want to throw the policy structure away and have a carbon tax... I can guarantee you what that would have done - it would have set us back on a cycle of internal political conflict, which would have repeated exactly the problem in Australia.

Groser concluded:

I do not believe there is anything fundamentally wrong with the emissions trading scheme'.

I rest my case that the best science-based and ethically based climate mitigation policy is the opposite of what Groser says!

I hope Geoff Simmons is ready to do another decade's worth of white board Fridays emissions trading for dummies.

A 'horse-flogging' process of 'fixing the NZETS' will last a very long time - if it ever concludes. It could just become a social and cultural institution like the never-ending debate over the Resource Management Act. In a previous post I used the metaphor of a flogging the dead horse after the snake swallows the elephant in the room to describe this possibility.

Applying the maths of our carbon budgets, Kevin Anderson's analysis and the Paris Agreement, we just don’t have enough time for a never-ending institutionalised horse flogging debate over the NZ emissions trading scheme. The political goal must be to remove the social licence of the NZETS, to de-legitimize it in the eyes of the public and then to scrap it so a simple carbon tax can be adopted instead.

How fast over the cliff? tinkering with the train-wreck NZ Emissions Trading Scheme

I look at at the Government's latest token consultation about more tinkering with the train-wreck New Zealand Emissions Trading Scheme. We are still driving fast towards a cliff but the argument has moved from which gear to air-con versus heater. The Government has kindly given us the opportunity to make a submission about how hot or cold we should be as we go over the emissions cliff.

Back in September 2012, when Tim Groser and the National Government last watered down the New Zealand Emissions Trading Scheme (NZETS), I wrote a post that used an excellent metaphor for amending the NZETS, arguing about which gear to drive in while driving a car fast towards a cliff.

All credit should go to former Greens co-leader Jeanette Fitzsimons who had absolutely nailed her answer to questions from TVNZ about the relevance of amendments to the NZETS.

"Look, its like we are in a very fast car, we are heading towards a cliff, which is getting really close, and we are arguing whether to change from fifth to fourth gear".

Now we roll forward and there is another review of the woeful NZETS.

For all that has happened in the last three years, such as the Doha COP meeting, the Poland COP meeting, NZ opting out of a binding second Kyoto commitment, NZ being excluded from the international carbon markets, the 2020 target and 2030 target and the recent Paris Agreement, the fast-car-over-the-cliff metaphor still nails the state of the NZETS; that it is so far from being an effective emissions mitigation policy that 'reviews' are merely futile tinkering in the face of the impending threat of climate change. Especially when the scope of the review deliberately excludes the option of including agriculture in the NZETS.

The first stage of the review is a perfect example of futile tinkering. It is very narrowly focused on just two of the many 'cost-moderating' measures inserted in the NZETS in 2009 and extended in 2012.

1. Should we end the two tonnes-for-one unit deal, so that energy and industry emitters have to surrender one unit for every tonne of GHG emissions, rather than one unit for two tonne of emissions?
2. Should we adjust the existing $25 price cap or fixed price surrender option?

Submissions on these two issues close at 5pm on 19 February 2016. Submissions can be made online, by emailing nzetsreview@mfe.govt.nz or writing to the Ministry for the Environment, PO Box 10362, Wellington 6143.

The role of these 'cost-moderating' features is discussed in Jessika Luth Richter's masters thesis Institutional Feasibility the end or the means in emissions trading Evaluating the New Zealand Emissions Trading Scheme (106 pages, 1.8MB pdf) with the University of Lund. Richter makes several interesting observations (No really! The thesis is worth a read if you are a ETS wonk). In some ways the political influences on the NZETS design were typical of the international experience (page 60): "allocation is nearly always contentious, often free, and often heavily influenced by lobbying".

In other ways, the NZETS experience of these 'cost-moderating' features is unique to New Zealand. During the 2007 design stage, Treasury and the Ministry for the Environment assembled a complete smorgasbord of possible 'cost-moderating' features (free allocation, access to international markets, safety-valve price caps, two-for-one obligations). As these measures all had the same function (reducing cost and therefore price impacts), they felt only some were necessary in the 2008 NZETS. However, the 2009 amendments added all the cost-reducing measures into the NZETS. As Richter notes with understatement

"Additional moderating design features in the NZ ETS are also mentioned in literature and have been used in other schemes; however New Zealand is unique in the range of these features all incorporated into one ETS."

In other words, the whole kitchen sink of 'moderating features' was jammed into the NZETS in 2009. The National Government just helped Big Business New Zealand eat the whole smorgasbord.

Let's get back to the review discussion document. It describes the two-for-one deal as follows:

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). This means that these participants do not face a full obligation for their emissions. As a result, the effective carbon price they pay is half the unit price. For example, with a New Zealand Unit (NZU) price of $7, these emitters pay an effective carbon price of $3.50 for each tonne of emissions, with a maximum effective carbon price set at $12.50 due to the $25 fixed price surrender option (page 12).

What to do with the two-for-one deal. This is just a no-brainer. Of course, the two-for-one deal should just end! It was meant to end in 2012, and the 2012 extension was flagged at the time as being temporary and ending in 2015. So why are we even consulting about this non-issue? Surely the policy default is that any well-designed transitional measure should simply end on the date specified in the original decision? Of course, from the point of view of political economy, such things as policy defaults and burdens of proof can be influenced by political interests.

So we can view the Ministry for the Environment's decision to have a consultation over the end of a transitional measure (such as the two-for-one deal) as changing the burden of proof. Instead of the transitional measures (of which there are many in the NZETS) simply expiring, a process must be held to arrive at that decision. This involves policy assessment and consultation. The proposed decision to end the two-for-one deal changes in character from that of an automatic expiry, to a "yes/no" decision where the default is the status quo of indefinite extension. And so the burden of proof now falls on the advocates of change (to a tighter ETS) and is removed from the advocates of the status quo who want an eternal transition.

The discussion document even expands the unnecessary scope of the decision by presenting three options (page 13); maintain the 2-for-1 deal indefinitely, or extend the term then review it, or scrap it and make emitters pay for each tonne of greenhouse gases. The document at least states the real world implication of keeping the 2-for-1 deal indefinitely: NZ unit prices would remain less than $NZ12.50 per unit, i.e. half of the price cap of $NZD25.

The discussion document describes the the second issue about the $25 price cap/fixed price option as follows:

The $25 fixed price surrender option allows businesses to surrender an NZU by paying the Government $25 per unit. It was established as a transition measure in 2009 to protect firms and the economy from price spikes or excessive costs. It acts to cap the maximum carbon price in the NZ ETS, and in combination with the one-for-two surrender obligation, it currently ensures that the maximum effective carbon price any non-forestry participant will face is $12.50 per tonne (page 14).

Again it is a no-brainer that this price cap should be removed. It was always obvious that it in the long term it would cap NZ unit prices at $12.50 per tonne. However, to the best of my recollection, this is the first time the Ministry for the Environment has explicitly said so. The existence of the price cap in itself indicates a lack of real commitment to an emissions trading approach. If the Government was that concerned about upward volatility in emission unit prices, they should have implemented a carbon tax instead.

Rather than discouraging me, writing this post has made me more determined to make a submission. Perhaps even two, as the trustees of carbon forest project I am involved in, also want to make a submission. Both submissions will probably use the expression "no brainer" several times.

To end this post I give you this cultural mash-up by American performance artist Vin Diesel which blends car crashes, train wrecks, cliffs and even a bit of Butch Cassidy and the Sundance Kid.

The Burning Question - highly recommended

The Burning Question by Duncan Clark and Mike Berners-Lee is a book I recommend highly. So I am very pleased to find this talk by Duncan Clark given at University College London on 2 July 2013.

Is it ‘doing our fair share’ to use creative accounting to meet New Zealand’s 2020 climate change target?

I look at how the National Government intends to use creative carbon accounting to ensure that New Zealand meets it’s 2020 climate change target (a five percent reduction) in spite of a projected trend of increasing emissions of greenhouse gases (GHG) to 2020.

On 10 April 2015, when he was releasing the latest inventory of greenhouse gases, the Minister for Climate Change Issues Tim Groser made this very confident statement; “We’re well on track to meet our 2020 target"

That target is to reduce greenhouse gas emissions to five per cent below 1990 levels by 2020.

When this was announced in 2013 the ambition (-5%) of the target was criticised as useless, pathetic and inadequate.

The five percent reduction stands in stark contrast to the Ministry for the Environments projections of increasing emissions out to 2020. The Ministry estimates that the increase in gross (total) emissions in 2020 will be 29% above the 1990 baseline (from 60 to 77 million tonnes) and the increase in net emissions (gross less any increase in the stock of carbon stored in forests) to 2020 will be 130% (from 33 to 75 million tonnes). So why is Tim Groser so confident that the target will be achieved?

Simon Terry of the Sustainability Council has commented on the ‘kicking the can down the road’ features of the Government’s climate change policies: the mismatch between the emissions target and the predicted emissions, the absence of a credible plan or carbon budget approach and the deferring of liabilities into the future.

Taking Simon Terry’s work as a starting point, I am going to look at how the Government intends to apply the accounting rules for carbon credits to achieve the 2020 target in spite of the likely predicted increase in gross and net greenhouse gas emissions.

So how is New Zealand going to reduce emissions by five percent by 2020?

In December 2014, at the climate change conference in Lima, Peru, our climate ambassador Jo Tyndall was asked that specific question. Her answer was that New Zealand was going to achieve the 2020 target and reduce emissions through a combination of four methods;

1. domestic emissions reductions,
2. removal of carbon dioxide by forests,
3. participation in international carbon markets and,
4. recognising surplus emissions units from the first commitment period of the Kyoto Protocol.

Domestic emissions reductions are unlikely. In 2013, Tim Groser told the Herald that his "strong advice" from officials was that the 2020 target could be met without any changes to settings of the New Zealand emissions trading scheme (or "ETS"). The relevant Cabinet Paper for the 2020 target also states that the 2020 target can be met without changing policies or ETS costs. In other words, the ETS will remain in its current induced coma, and stay ineffective in reducing domestic emissions.

New Zealand can’t meet the target by buying carbon credits from international carbon markets as access was blocked at the Doha meeting because we didn’t sign up to a formal Kyoto Protocol second commitment period target.

That leaves two ways of meeting the 2020 target; removal of carbon dioxide by forests, and recognising surplus units from the first commitment period of the Kyoto Protocol. I will look at the removal of carbon dioxide by forests next.

Forest carbon and Kyoto gross-net carbon accounting

By saying “removal of carbon dioxide by forests”, politicians and officials actually mean that carbon credits will be accounted for using the Kyoto Protocol’s gross-net forest carbon accounting rule.

This sounds innocuous, if a bit sleep-inducing. It is in fact a method of creative accounting that New Zealand has already relied on to meet the 2008-2012 Kyoto first commitment period target.

The 'baseline’, 1990 emissions, is “gross” - the sum of all emissions without subtracting any “credit” for carbon absorbed into sinks such as growing forests and land use changes. The target (2008 to 2012) emissions are “net", as credits for carbon absorbed in growing forests are recognised and are subtracted from the gross emissions. This is called gross-net accounting. This makes the comparison between baseline and target inconsistent - it is not an “apples with apples” comparison.

I have blogged on this before but Professor Martin Manning, an IPCC author and formerly of the Climate Change Research Institute at Victoria University of Wellington, explained it better in 2012.

"..achieving the Kyoto Protocol target can be quite misleading because it compares net emissions over the first commitment period, 2008 – 2012, with the gross emissions in 1990. If one compares the net emissions in 2012 with those for 1990, then the increase in New Zealand has actually been more than 100%."

The National Government intends to repeat this gross net accounting for the 2013 to 2020 target. As long as forest growth exceeds deforestation, this will allow both net and gross emissions to increase up to the quantity of carbon absorbed in forests that was ignored in the 1990 baseline.

The Climate Action Tracker website thinks the credit for carbon absorbed in forests could be up to 25 million tonnes CO2e a year and the ‘recognition’ (under Kyoto rules) of all the units would allow New Zealand's gross emissions to increase up to 35% above the 1990 baseline.

Surplus Kyoto units from first Commitment Period 2008 - 2012

Jo Tyndall’s final method of achieving the 2020 target is to recognise surplus emission units from the first commitment period of the Kyoto Protocol. According to the latest Ministry for the Environment net position statement for the Kyoto Protocol, New Zealand will finish the first commitment period (2008-2012) with a surplus of 90.8 million units.

Even though New Zealand has no formal 2013-2020 Kyoto ‘commitment’, New Zealand intends to ‘carry over’ millions of these surplus Kyoto units to the 2013-2020 period in accordance with the Kyoto Protocol rules.

The carry-over rules are of course complicated, but I calculate that NZ will be able to ‘carry over’ almost all of them - 86 million units of the various types of units (see final paragraph - Appendix ‘Carry-over’ of Kyoto first period units).

What’s wrong with having a surplus of units? An effective emissions trading scheme with a real cap would never have surplus units. Units would be scarce and realistically priced. A surplus of units is of itself evidence of a failed implementation of cap and trade frameworks such as Kyoto and the EU ETS.

A surplus of units is one consequence of emissions trading with no cap, unlimited access to international carbon markets and over-allocation of units to industry and a rock-bottom unit price. Which is exactly what we have had with the NZ ETS.

We need to remind ourselves why NZ has a surplus of units for the Kyoto Protocol first period. Although net and gross emissions increased, NZ gained surplus units by using the gross-net forest carbon accounting rule and allowing the nearly unlimited import of low-priced international units with dubious integrity which were surrendered by ETS participants to match their emissions.

According to Climate Analytics, internationally, the Kyoto first commitment period ended with 14 billion surplus units; enough to allow all the signatory countries to “comply” with their 2020 targets without restricting business as usual emissions growth.

And this is exactly what the Government intends to do.

Each Kyoto unit carried forward will be counted towards NZ’s 2020 target and will allow an additional tonne of domestic GHG emissions above the 1990 baseline.

Similarly, each carbon credit recognised for carbon absorbed in forests between 2013 and 20120 will be counted towards NZ’s 2020 target and will allow an additional tonne of domestic GHG emissions above the 1990 baseline.

Our politicians and bureaucrats could have focused on policies to reduce domestic emissions to meet the 2020 target. Achieving the 2020 target won’t be an outcome of policies to reduce emissions. Like fixing the emissions trading system. It will be an outcome of the accounting rules chosen for the carbon credits the Government can hold. That’s called creative accounting.

Appendix “Carry-over” of Kyoto first period units

The Kyoto Protocol has “carry-over” rules for unused units at the end of the 2008 - 2012 first commitment period. Some surplus units may be 'carried over’ to the second commitment period and then be used to comply with a country’s official commitment. Although NZ has not taken up a Kyoto second period commitment, NZ none the less intends to mimic the application of Kyoto rules designed to carry over surplus units from CP1 to CP2.

NZ will have a surplus of 91million units after transferring 378 million units to a cancellation account for the 378 million tonnes of emissions between 2008 and 2012.

There are limits on which and how many units can be “carried over”. All assigned amount units (AAUs) can be carried over; forest removal units (RMUs) cannot be carried over, carry-over of Certified Emission Reduction units(CERS) and Emission Reduction Units(ERUs) are limited to 2.5% of NZ’s initial assigned amount or 7.7 million each. See the UNFCCC Reference Manual

The Government will probably prefer to retire units that cannot be carried over in order to maximise the number it may carry forward.

On that basis, all 72 million RMUs will be cancelled, 37.3 millions CERs and 37.3 million ERUs will be cancelled, leaving 7.7 million each of CERs and ERUs carried forward. Then 231.4 AAUs need to be cancelled to make up to 378 million units.

The total carried over will be 86 million units composed of 7.7 million CERs, 7.7 million ERUs and 70.6 AAUs.

Labour's climate change policy; something old something blue somethings borrowed not much new

As I was saying in my previous post Labour do have a seven page climate change policy that is at first look pretty comprehensive.

Labour will

• begin the transition to a low carbon clean energy economy
• set ambitious greenhouse gas reduction targets and plans to achieve them
• set up an independent climate change commission
• will implement a comprehensive risk assessment framework in order to develop a comprehensive climate change response plan
• establish a carbon budget process
• achieve 90% renewable electricity generation target by 2025
• reduce per capita domestic transport emissions 50% by 2040 from a base year of 2007
• ensure that there is no retail carbon price gouging of consumers
• manage the transition to ensure social justice particularly with respect to low income families
• restore the carbon price to the NZETS (NZ Emissions Trading Scheme)
• require emitters to cover at least half their emissions with NZ issued Units (not the cheap international 'hot air' units).
• bring agriculture into the NZETS from 1 January 2016
• give agriculture a free allocation of NZ units equal to 90% of 2007 production

Something borrowed

This really does appear to be a great list of policies. Interestingly, some of these policies have been borrowed from a variety of people.

The carbon budget idea is borrowed from the Sustainability Council back in 2011 and in 2012 and from Generation Zero's "Big Ask" Report of July 2014.

The independent climate commission idea is also borrowed from the Sustainability Council in 2012 and from Generation Zero's "Big Ask" Report of July 2014.

The comprehensive risk assessment framework and climate change response plan is borrowed from the Wise Group.

The policy requiring ETS emitters to use at least 50% NZ units is borrowed from the long-suffering carbon forest industry who in 2012 asked for limits on the amount of ultra cheap 'hot air' imported units that emitters can use to meet their ETS obligations.

Labour's policy also has a swipe at National for ignoring the foresters request to do something about the catastrophic decline in the NZ carbon price.

"Also, National sat on its hands as an influx of cheap, imported, international emission units collapsed the price of NZUs.

So, Labour's fix for the price collapse is to;

"..restrict international units by requiring at least 50% of all units surrendered to meet obligations under the ETS to be NZUs (on an ongoing basis).

The problem with this measure is that it won't work. It won't stop the cheap dumpster diver international units holding down the NZ unit price. If its compulsory for 50% of units surrendered to be NZ units, then thats the same as permitting 50% to be cheap international units. So the international units will still drag down the NZ unit price.

I have argued in a previous post that allowing use of international units was a fundamental flaw in the design of the NZETS (along with the lack of a cap). Previous partial restrictions on international units have not had any impact on prices.

The ironic thing about the Labour policy swipe at National "sitting on its hands", given that their 50% restriction fix won't work, is that that the unlimited importing of international units into the NZETS was hardwired into the original design of the NZETS in the Labour government's 2007 Framework for a New Zealand Emissions Trading Scheme document. In other words, it was originally Labour's idea that the NZETS be so open to international units that they set the NZ carbon price.

The only way to set a "real" carbon price in the NZETS is to ban the use of all international units and manage the supply of NZ units and assigned amount units so that the carbon price is sufficient to incentivise changes in behaviour. If Labour won't do that, then their position is closer to Tim Groser's view that the international price should set the NZ price than to the views of the environmental NGOs and foresters who want an effective carbon price.

Something old

The rest of Labour's policy to "fix" the emissions trading scheme is to largely return it to the 2008 version Labour originally enacted.

Labour's "something old" policies on the ETS are to:

• strengthen the ETS by bringing agriculture in on 1 January 2016
• base the amount of free emissions units allocated to agriculture on 90 per cent of its 2005 emissions
• continue with free allocations for carbon-intensive industries exposed to export competition, such as steel and aluminium.

This means that Labour will continue gifting excessive amounts of carbon credits to major polluters like Tiwai Point smelter owner Rio Tinto Alcan NZ and Norske Skog Tasman. The base for allocation will change from past production intensity to historic 2005 production levels - which may end up being pre-Global Financial Crisis peaks.

Forestry lecturer Euan Mason points out that once agriculture is in the ETS with 90% free allocation, they too will be able to take advantage of the price differences in the ETS, just like the carbon intensive industries have. They will be able to surrender half of their free NZ units back to the government, with the other half of their obligation satisfied by buying 11c international units. They can then sell their remaining NZ units for say $4.00 each. They then pocket the arbitrage difference between the prices of the units.

It's important to remember that Labour's original NZETS wasn't particularly well designed or effective. As Jeanette Fitzsimons said in the documentary "Hot Air", the Greens only unwillingly voted for it as it was "the only game in town", a first step and better than nothing.

In 2009, economist Geoff Bertram gave one of those Victoria University Institute of Policy Studies talks about the Labour and National emissions trading schemes. After about 30 minutes of carbon supply and demand curves, some one asked Geoff to sum up in plain language. Geoff Bertram's reply is the only part of the lecture I can remember to the letter. He explained that both schemes were patchwork quilts of exemptions and loopholes and delays. Both schemes lacked caps on emissions. Both schemes introduced unnecessary NZ units whose pricing would be at the whim of the international markets. He concluded:

"Well the Labour ETS is a dog, and the National ETS is a complete dog"

Something blue

Are you surprised that I am saying that Labour's climate change policy includes "something blue', as in from the National Party? I am surprised as well. Any climate change policy in common with National would seem almost to be logically impossible given that in National's list of policies has no climate change policy.

This statement from the the third page is what I mean.

"Labour is committed to achieving a lasting consensus among New Zealand’s main political parties on an ETS. We have consistently tried to work with the National Party to reach common ground. But we aren’t prepared to compromise our fundamental principles to do so."

Labour also gave a similar answer to Forest and Bird in their "Polling the Pollies 2014" report. Forest and Bird asked why Labour wasn't supporting the Green's 'carbon tax cut' policy.

"Labour's preferred means of pricing is to fix the the existing ETS. Using an ETS to price carbon is the only broad area of agreement in climate change policy, particularly particularly between the two largest parties (despite National's lip service for an ETS). Labour would not throw that agreement away lightly to start again with a carbon tax."

Reading these statements removes any doubts I may have had about being too hard on Labour's climate change policy. Ultimately Labour are just borrowing the headline ideas of the NGOs to make their policy appear effective. The truth is that in terms of how they intend to price carbon via an ETS, they would rather be "something blue", closer to National than to the Greens. This is just raw political expedience masquerading as high principle. A compromise being justified on the grounds we can't let the perfect be the enemy of the good.

In an enigmatically named post I wrote three years ago for the 2011 election, The snake swallows the elephant in the room and then flogs a dead horse, I suggested that climate change politics and particularly the NZETS could potentially descend into a politically institutionalised ritual of "flogging the dead horse".

My fears appear to have been realised. National and Labour in effect have the same policy narrative that explains the problem; "THEY undermined the NZETS", and a narrative solution, "WE will fix the NZETS". This creates the on-going cycle of the 'horse is underperforming' and the narrative’ solution (keep flogging the horse). But beneath the impenetratable detail and complexity of the arguments about fixing the NZETS, it will remain ineffective.

In summary, it is not enough for Labour's climate change policy to borrow some good policies from the NGO's when the fundamental problems of the NZETS are not addressed. It needs a cap on emissions. The number of units or carbon credits or permits must be limited to the cap. It needs to exclude all international units. There should be no free allocation of units. It should apply to all sectors. All the ducks must be in a row. All the cogs must turn in the same direction. Returning the ETS settings to the 2008 design doesn't achieve this. Seeking a 'flog the dead horse' consensus with National also doesn't achieve this. Isn't climate change important enough to warrant policies better than something old, something blue, something borrowed and not much new?

Swallowing the elephant flogging the dead horse

A snake swallows the elephant in the room and then flogs a dead horse - The politics of climate change in the 2011 New Zealand Election campaign

So whats happening with climate change in the campaign for the 26 November 2011 election?

I was originally thinking about writing a wonkish post comparing climate change policies between parties. You know the sort of thing. e.g. see Interest.co.nz

Which parties have policies that reflect the seriousness of the impacts the science predicts? Who has got the science wrong? Which politicians are all talk and no action? What are the minute details of the each party's NZ ETS policies. Such as delays to sector entry dates, partial price obligations and varying free unit allocation regimes...MEGO, anyone? (My Eyes Glaze Over....)

Then I thought, Nah! I am looking through the wrong end of the telescope.

You know what really strikes me about climate change in the election?

It's the absence. It is as if climate change is nearly completely absent from the campaign. When climate change does pop up, it's portrayed in simplistic soundbites.

Nick Smith says anthropogenic climate change is real and complex and 'wicked'. But promises more moderating, balancing and delaying of the NZ ETS. Labour says anthropogenic climate change is real and we will fiddle with some NZ ETS details for agriculture slightly earlier than National as farmers don't vote for us anyway. The Greens say anthropogenic climate change is real and we have a detailed wonk-friendly exposition on our website, but for this election we are running with "jobs, kids, rivers". oh no..... MEGO....

What's happened is that climate change, the 'elephant in the room', has been swallowed up whole by the 'snake in the room' -- politics. Along with all other serious political issues.

This snake is the real theme of the election. Russell Brown calls it the politics of absence. Brown says "cultivated political absence...shapes the almost unprecedented popularity of John Key". John Key's political success is because of this successful strategy of "de-politicising" himself. Key's politics-free radio chat show was the perfect example.

The media have largely just played along with the politics of absence. The election is discussed as a poll-driven horse race. Or a rugby game "of two halves" with "kicking for touch". Who looked confident? Who had the best sound bites? Who mispronounced his/her New Zild the least or most. Restructure or "reeshrukcha"?

The media have trivialised and objectified political debate. I give this example. The most discussed electoral contest in 2011 appears to be Auckland Central which the Herald calls "the battle of the babes" as the candidates, Jacinda Ardern and Nikki Kaye, are both relatively young women, whose shared Herald columns are called "Broadsides". Do I need to say more?

After the snake has swallowed the elephant in the room, the snake becomes the dead horse that needs some more flogging.

Climate change has been politically institutionalised. Its now "flogging a dead horse". Everyone has a policy (a horse). Everyone talks their policy. No one does anything.

These policies all have a narrative that explains the problem (the horse is under-performing) and a 'narrative' solution (keep flogging the horse).

It is here that the metaphor of "flogging the dead horse" fits so well. Firstly, the probability of the two main political parties really acting to reduce our emissions of greenhouse gases is the same as the probability of the flogged horse springing back to life.

The second reason is that the best dead horses can be repeatedly flogged.

Take the Resource Management Act (RMA). It's the ultimate flogged dead horse of NZ politics. In its 20 years of life, it has been in an almost eternal state of being vilified from all sides: for environmental failures and for economic inefficiency.

Both National and Labour have both been subjecting it to interminable reviews and amendments. The basics remain the same. Plans are written with lofty goals. Plans don't reflect consent practice. But then consent decisions rarely reflect plan goals. Consents are needed for some activities not others. Some consents need more evidence and take longer than others.

The NZ ETS is the new dead horse in the flogging stable. Its perfect. Like RMA issues, the NZ ETS is fiendishly complex. To most people, the NZ ETS is a MEGO topic. My Eyes Glaze Over. A recital of any of the detail of the NZ ETS is usually enough to induce that response. Thus deflecting most criticisms.

Being complex, if not incomprehensible by design, the NZ ETS can be fitted, usually negatively, into any political viewpoint. Farmers can still oppose it with vitriol despite their generous treatment. It is just as good a political punching bag as the RMA.

National's 2009 amendments institutionalise that most Kiwi of practices -- a five yearly review by committee. To me this is the statutory recognition of the near-permanent state of "fixing" the RMA is subject to. Labour have said they will continue the 5-yearly reviews if they become Government. Thus they have bought into Nick Smith's approach of eternal moderating of the NZ ETS. Labour get a payoff of needing less specific policies.

So debates on the NZ ETS, like this one, between Nick Smith's soundbites and Russel Norman's observations on perverse price incentives, on TV One's Q and A programme, don't really matter politically. The debate itself is just more MEGO. The snake swallows the elephant.

Interestingly, TV One had Jeanette Fitzsimons as their 'pundit' for the Smith/Norman debate. She cut right through the snake punditry by analysing the NZ ETS on the meta level. She said the NZ ETS was now so weak and distorted that it no longer mattered what tinkering Smith did to it. "It's like driving a car fast towards a cliff and arguing whether to go in fourth gear or fifth".

The horse is dead and no amount of flogging will make it trot again.