Can you dig it?

by Bryan Walker on December 15, 2010

On the same day that I wrote a post about the proposed lignite development in Southland I emailed the Minister for Economic Development, Gerry Brownlee, to express my dismay at the news. I have received a letter in reply which explains all too clearly how such a development could, and presumably will, proceed under current policy.

In my email to the Minister I pointed out that simply offsetting the massive emissions from lignite development would hardly be in line with the intention of the Emissions Trading Scheme (ETS) and the imperative to reduce greenhouse gas emissions. I wrote that unless there are clear plans to capture and sequester the carbon dioxide which will be released the company should not be permitted to undertake any of the proposals. The government is the owner of Solid Energy, able to tell the company it is not to proceed with the plans, and if necessary able to legislate to prevent the development of lignite until such time as sequestration technology is established. I spoke of the Minister’s duty to prevent such development at this time, and stated in conclusion that his obligation to protect our descendants from the potentially terrifying effects of climate change far outweighs any responsibility he carries for present economic development.

 

The Minister’s reply first assured me that, like me, the Government is concerned about climate change and is committed to doing its “fair share” in reducing New Zealand’s greenhouse gas emissions. The fair share theme is a constant in government statements about climate change these days. It’s a politically useful term: it reminds those who want to do considerably less than we are doing that we can’t afford to appear laggard, and it also serves to placate those who feel we are less than whole-hearted in tackling the issue. It’s hard to argue with, and I can understand its attraction for the government. Nevertheless it’s hardly the kind of term that immediately leaps to mind if one really is concerned about climate change. It suggests that the Government worry is not so much climate change as political positioning.

The Minister goes on to say the ETS is the Government’s principal policy response to climate change. It puts a price on greenhouse gases, he explains, and provides an incentive to reduce emissions and to encourage tree planting. He then adds that it does not provide a cap for existing (or future) emissions and hence is not prescriptive about what developments should or should not progress. This strikes me as a very clear admission that the ETS may not, in fact, result in any reduction of emissions at all.  It is a remarkable act of faith in the power of incentives, and an abdication of responsibility for the outcome.

That abdication becomes clearer as the letter proceeds. It is admitted that lignite developments of the scale being investigated by Solid Energy will create significant greenhouse gas emissions, depending on the particular projects chosen. However any development will be “carbon compliant” with New Zealand’s greenhouse gas emission management frameworks. That looks like meaning that Solid Energy will pay whatever is required under the ETS to cover the cost of its emissions, and if the project remains profitable under such a regime it will go ahead whatever the level of its  emissions.

But if Geoff Bertram and Simon Terry have it right in their book The Carbon Challenge, Solid Energy, far from paying for the emissions from a plant to manufacture urea from lignite, may well be entitled to subsidies in the form of free emission units for its operations provided it meets certain benchmark standards for ‘emissions intensity’. Bertram and Terry estimate that subsidy could go as high as between $500 million and $1 billion dollars in nominal terms over the first twenty years of the plant’s life. This, even though it would be the country’s biggest single industrial emitter of greenhouse gases after the Huntly power station.

Back to the Minister’s letter. A paragraph follows noting that to potentially mitigate against CO2 emissions Solid Energy is actively following the progress of Carbon Capture and Storage (CCS). The letter referred me to a page on the Ministry of Economic Development website for information about government-industry collaboration on the active investigation of the feasibility of CCS in New Zealand. Maybe I missed something but the page looked pretty sleepy to me. There’s little sign there that CCS is likely to figure prominently in Solid Energy’s lignite projects.

The Minister’s letter then emphasises that projects of this scale have long lead times. He is aware of investigative drilling and pre-feasibility studies, but as yet the decision to commence project construction has not been made. As no formal proposal has been lodged he cannot pre-empt outcomes. I don’t know what pre-empting means in this context, but it seems pretty clear from the rest of the letter that he won’t be looking to create any obstacles.

A final paragraph points out that a development of this scale “that can effectively manage its emissions profile” would provide significant opportunities for New Zealand, maybe even bringing about “a step change” in New Zealand’s growth.  Given that the bar for the management of emissions is set so low what this seems to mean is that we’re soon to enjoy major economic benefit from the development of lignite. Am I being unfair in drawing the conclusion that this counts for the Minister ahead of any climate change concern?

The kindest thing one can say of the Minister and the Government he represents is that they have as yet no adequate conception of the magnitude of the threats that come with climate change. I’ll do them the courtesy of presuming that if they did they would have made it very clear by now that the lignite will stay in the ground.

[Mock Turtles]

{ 27 comments… read them below or add one }

Mr February December 15, 2010 at 8:40 pm

Good on you, Bryan, for sending off your email of concern to Brownlee.
Brownlee is now explicitly saying that the NZ ETS is the “fig leaf” of “carbon-compliant” respectability for carbon-intensive proposals like L & M’s and Solid Energy’s lignite uses. (The term “carbon-compliant” will soon be just as much an oxymoron as “military intelligence”)

The fact that the lignite proposals can be contemplated under the NZ ETS (never mind being probably eligible for free allocation of NZ units) proves that the NZ ETS is completely ineffective in creating a meaningful carbon price.

Anon December 15, 2010 at 9:01 pm

What would be an ‘effective’ carbon price, when the atmosphere doesn’t care where emission reductions are made? Why should NZ limit its economic potential if those emissions are just created elsewhere and imported into NZ?

The ‘fair share’ concept I beleive is more about meeting international obligations than domestic political positioning. NZ will do its fair share according to what it and other countries agreed to under Kyoto and the UNFCCC. Doing anything more than ‘fair share’ is meaningless in terms of global environmental outcomes, but has economic effects that might be less than desirable.

That said, I think there are some serious problems with the NZ ETS if a new entrant is immediately eligible for the maximum allocation, at such a scale as the lignite scheme. Should all new entrants in other highly trade exposed industries also recieve allocations? Or should there be a pool to each industry that shrinks annually, to be shared via auction? I guess the NZ ETS review next year will look at these things.

R2D2 December 15, 2010 at 9:11 pm

“hardly be in line with the intention of the Emissions Trading Scheme (ETS) and the imperative to reduce greenhouse gas emissions.”

This is not the purpose of the ETS. The purpose is to reduce emissions from business as usual levels (and comply with NZs international obligations. Read the purpose statement of the legislation before making claims to its purpose.

Bertram and Terry are not worth the carbon they are written on.

Have you heard of emissions leakage? This is the reason we have allocations, stopping production of urea here will result in simple importing of urea. Allocations are based on output of good, not factory emissions, so the allocation received for whatever good (diesel, urea etc) will be based on the established benchmarks for that good. SE will pay for the emissions over and above what normal production results in (ie Kapuni urea production). So the extra emissions associated with this process will be included in the investment decision.

And it wont be a subsidy. The ETS raises money, not dishes it out. The logic here is that any emission not paid for must be a subsidy. This is flawed logic. The price of NZUs is not the ‘external cost’, it is the world abatement price. ETS are desinged to give high marginal cost of emissions to encourage abatement, in this sense it is renewable fuel that is being subsidised.

CTG December 16, 2010 at 12:10 am

Very good assessment of the NZ ETS, R2.

Le Chat Noir December 16, 2010 at 12:24 am

Dr. Jan Wright, the PCE, seems to take a different view:

In its current form the ETS exposes the Government – and therefore the taxpayer – to potentially enormous financial risk. This is because of the rules governing the allocation of free carbon credits. For ‘free carbon credits’, read ‘taxpayer subsidy’. New lignite developments may well qualify for significant subsidies under the scheme. The subsidy for one lignite-to-diesel plant would be likely to be billions of dollars over its lifetime. It makes no sense for taxpayers to subsidise new investment in carbon-intensive technology. This is the opposite of what the ETS is intended to achieve. The review of the scheme in 2011 provides an opportunity to address this and other serious shortcomings.

R2D2 December 16, 2010 at 4:49 pm

Where is the cost to the tax payer coming from? There is no Kyoto liability post 2012. Is the subsidy calculated by the revenue forgone by not charging 100%? What if one assumed that the plant would never go ahead (in New Zealand) without an allocation? Then there is no revenue forgone.

Australis December 16, 2010 at 7:33 pm

“any emission not paid for must be a subsidy”

This widespread assumption has been based on the expectation that there would be a Second Commitment Period under the Kyoto Protocol, and that NZ taxpayers would have to buy foreign carbon credits to cover every incremental tonne of CO2 emitted. If the emitter does not have to buy NZUs.

But Cancun made it clear there will be no Kyoto 11. The “subsidy” argument no longer flies.

R2D2 December 16, 2010 at 7:53 pm

Even under a second agreement the NZ govt does not pay for every emission. Government would agree to a target level, proposal is 80-90% of 1990. So the subsidy only occurs if the New Zealand government is in deficit from signing that agreement due to too generous an allocation regime. That would have been unlikely.

erentz December 15, 2010 at 10:39 pm

You’ve expected our dear ruler Gerry to be able to understand large and complex systems, and be rational and reasonable. That won’t work with 80% of our current MPs. :-(

Artful Dodger December 16, 2010 at 5:50 am

A politician’s connection to Money is similar to the way a dog’s nose is obedient to it’s stomach. It’s not complicated.

Dappledwater December 15, 2010 at 11:15 pm

One surmises that Brownlee, like others, feels he won’t be around when climate chaos starts to affect rich nations. A reasonable view given that he looks like one myocardial infarction waiting to happen.

R2D2 December 16, 2010 at 4:53 pm

That is just crass.

Bob Bingham December 16, 2010 at 7:07 am

The scramble to dig for coal in New Zealand while at the same time sending a team to work at Cancun is typical of the World situation. Ironically the CO2 count clicked up another notch to 391ppm. When are politicians going to take this seriously? At some point there has to be a direct connection between digging and burning coal and the destruction of civilisation with excess CO2.

Dappledwater December 16, 2010 at 7:44 am

Ironically the CO2 count clicked up another notch to 391ppm.

2010 is likely to be a record year for CO2 emissions, despite the global financial crisis. Given the drought there for most of this year, the Amazon rainforest has probably been a net source of carbon dioxide, as was the case in the 2005 drought.

eltoro December 16, 2010 at 8:23 am

Brownlee does and says nothing more (or less) than his `puppet masters` bidding and is a front man to absorb the punches aimed at John Key and not smart (or nimble) enough to duck.
In reality the ETS is nothing more than a shuffling of the deck chairs.

Mr February December 16, 2010 at 1:00 pm

In reply to ‘Anon’ (the second commenter). Yes, we should be doing ‘our fair share’. Here is a brief outline of a ‘fair shares’ international emissions trading regime.
We take the volume of carbon that can be emitted into the atmosphere without causing ‘dangerous interference’ with the climate, we divide that into per capita shares amongst the world’s population, and distribute carbon credits equal to the per capita share annually to every person on Earth. We prohibit emissions not matched by surrendered carbon credits. We have international carbon emissions trading with a ‘fair share’ distribution of the property right vested in the atmospheres and oceans ability to absorb carbon..

Mr February December 16, 2010 at 1:22 pm

As well as the odd grammar, R2D2 has the facts completely wrong in asserting that “The ETS raises money, not dishes it out.”

In theory, if 100% of the tradable emissions units (carbon credits) are auctioned by Government, then yes, an ETS raises revenue for the Govt in direct proportion to the price placed on carbon (and the carbon intensity of activities). So in theory, an ETS with 100% auctioning equates to a no-exceptions carbon tax.

The NZ ETS is designed exactly the opposite of this.

No units will be auctioned. All NZ units created will be gifted to emitters and 1990 foresters and fishers. See Will the Government sell emission units and how will they do it? on the MfE www.

So under the current NZ ETS, there is NO revenue to government.

These free NZ units will immediately have a market value set by a slight discount on the price of a international CER (Certified Emission Reduction unit). This is about $19 per tonne at the moment. The value to the recipient of gifted units is quantity x $price.

Whether the gifting of units that have a real market value is better termed a subsidy or a transfer of wealth is just semantics.

R2D2 December 16, 2010 at 4:59 pm

“In the short term, the Government is unlikely to sell emission units because the Kyoto units allocated to New Zealand will be needed to support New Zealand’s international obligations, as well as allocation to eligible sectors under the emissions trading scheme.

In the long term, the Government may sell emission units if it has a surplus of units or if market conditions make it necessary. As the allocation of NZUs in the emissions trading scheme is phased out, the Government will have more units which it may choose to sell.”

My comment was in relation to your subsidy comment, from a business point of view the ETS is not a subsidy as it raises money. At the moment that money goes to foresters. But when they harvest their forests they will have to surrender the units to the government. Many foresters have taken a punt that there will be no post Kyoto agreement and sold their NZUs/AAUs on the international market. When they harvest there forests they will have to buy these credits from Government in the form of auction or set price, raising money for the government.

Post 2012 there is no Kyoto liability so the Government can create NZUs without cost. Carbon stored in forests is forecast to decrease as the age class of production pine changes, meaning there is no competition for supply of units. So the government will raise money. There is also the prospect of the end of the 1-for-2 surrender obligations.

oildepletionz December 16, 2010 at 3:24 pm

Jan Wright’s report is scathing in its assessment of coal to lignite plans.

For a summary of her conclusions and other commentary on why this plan is insane check this out …

http://oilshockhorrorprobe.blogspot.com/2010/12/10-reasons-why-converting-lignite-coal.html

Barry December 16, 2010 at 6:59 pm

Our “fair share” is actually quite a stringent target.

Our “fair share” is to drop our per-capita carbon emissions to at most the world average.

At the moment we are emitting much more than our “fair share”.

Bryan Walker December 16, 2010 at 7:10 pm

Yes, it would be exciting if the Government understood the words to mean what they say. I’d find them unexceptionable in that case.

Tony December 16, 2010 at 8:14 pm

I think that what Gerry and his cronies don’t seem to appreciate is that when Nature decides to crash around our ears, there will be no prior discussion with Treasury to ensure that it is fiscally responsible. The ETS and all the world’s current watered down agreements are woefully well short of what will be required to solve the GHG issue. You can’t expect a car whose engine has blown out pistons will start running smoothly again just by applying a bit of polish to the front bumper. That seems about the level at which all governments such as ours seem to be prepared to commit to.

Dappledwater December 16, 2010 at 9:33 pm

Tony, that comment is an absolute classic.

Mr February December 17, 2010 at 2:24 pm

In response to R2D2’s last comment, we need to be very clear in our use of ETS language and terminology in order for our assertions about the merits of the NZ ETS to be understood. We also need to be aware of when the Government is trying defend what I regard as design errors in the NZ ETS.

A good example of this is the paragraph R2D2 quotes from the MfE web page I linked to.

“In the short term, the Government is unlikely to sell emission units because the Kyoto units allocated to New Zealand will be needed to support New Zealand’s international obligations, as well as allocation to eligible sectors under the emissions trading scheme.
In the long term, the Government may sell emission units if it has a surplus of units or if market conditions make it necessary. As the allocation of NZUs in the emissions trading scheme is phased out, the Government will have more units which it may choose to sell.”

This statement is asserting “Can’t sell them, need them later”.
In other words, because the Government’s obligation under the Kyoto Protocol is to have sufficient “Kyoto units” on its Emissions Unit Register in 2013 to match actual emissions for 2008 to 2012, the Government cannot, before then, auction any ‘Kyoto’ emission units in to the market (as recommended by the economics literature),

The first part of this is correct, but the second part, is factually incorrect, and does not follow logically from the first assertion.

The basic Kyoto Protocol obligation – for a country to own enough emission units in 2013 to match its 2008 to 2012 emissions (estimated to be about 376 million tonnes for NZ) – is entirely consistent with the annual auctioning either NZUs or NZ’s Assigned Amount Units.

In a well-designed ETS, the buyers will be domestic GHG emitters with clear obligations to annually surrender units back to Government!

The Kyoto Protocol was expressly designed to enable domestic emissions trading, as well as international emissions trading.

So I consider that the MfE statement, which attempts to justify the Government policy of not selling emission units, is just spin. We all need to realise this.

R2D2 December 17, 2010 at 4:48 pm

Yes good observation.

The reason the government is not auctioning units is because there is demand for them, because of all the forestry units at the moment. And like you say if they auctioned them they would be purchased by overseas interests and not surrendered back.

Mr February December 17, 2010 at 7:02 pm

Lets just try to de-construct that last comment.
“The reason the government is not auctioning units is because there is demand for them”.
(1) No auctions equals not selling.
(2) Demand equals presence of willing buyers.
So, because there are willing buyers for emission units (a ‘demand’) (2) , the Government is not selling emission units (1)

That makes absolutely no sense at all.

Secondly, I said in a well-designed ETS, domestic emitters (not international emitters) would ‘surrender’ (give back) virtually all auctioned units to the Government where they would be held on the NZ Emissions Unit Register.

R2D2 December 20, 2010 at 12:55 pm

So yes I should have said no domestic demand, as the units foresters have are already being sold overseas. Sorry a small typo. But I was actually agreeing with you. Your original observation is a good one.

{ 1 trackback }

Previous post:

Next post: