Nick Smith fails the smelter spin test

by Mr February on November 2, 2011

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

He has used this soundbite a few times. For example, in Parliament on 29 September 2011:

“..the aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions”.

TV One’s ‘Q and A’ programme:

“the New Zealand Aluminium Smelter in Bluff, it is the only one in the world that pays any face at all for carbon pricing”1

Parliament on September 2009:

“…the Bluff smelter, on 1 July next year, will be the very first to face a carbon price for its pollution. The European scheme excludes aluminium smelters until 2013…”

Does Nick’s soundbite stand up to scrutiny? Not very well…

The European Union Emissions Trading Scheme, which started in 2005, excludes the European aluminium smelters until 2013. But it included electricity generation from 2005. And aluminium smelting is very electricity intensive. As the International Energy Agency says: Although the primary aluminium sector is not directly covered by the (EU) ETS, the impacts of the CO2 price are felt through increases in electricity prices” (p 8). (IEA,(2008),’Climate Policy and Carbon Leakage – Impacts of the European Emissions Trading Scheme on Aluminium’)

Another example of a Smith soundbite is saying that the overly-generous free allocation of emissions units to industry in the NZETS is not a cost to the taxpayer. For example: Parliament on 29 September 2011:

“This member and other members make the gross error of trying to claim that not exposing industries or consumers to the full price of carbon over all their emissions is somehow a subsidy. A subsidy implies that there is a cost to taxpayers. That is not true…”

Unfortunately for Dr Smith, that’s not what the Auditor General, Lynn Provost, says in her accounting and auditing advice for emissions units in the public sector:

“NZUs have a market value and the issue of NZUs without charge to participants is an expense to the Government and creates a liability.”

Sorry Dr Smith, the Tiwai Point smelter is not the only aluminium smelter exposed to a carbon price in an ETS. And the European smelters probably pay a higher carbon price through their electricity costs as the Tiwai Point smelter owner is compensated for electricity costs as well as emissions through excessive free allocation of emissions units.

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

  1. NB By ‘pay any face’ I think he means ‘face any price’ []

{ 4 comments… read them below or add one }

password1 November 3, 2011 at 7:18 pm

1. The smelter is the first smelter to face a carbon cost on its direct (production) emissions. Those in the EUETS only have a price on indirect emissions (electricity). So the Minister is right, and you are wrong.

2. Smelters in the EU are allocated emission units to compensate them for the EUETS effects on their electricity costs. So you are wrong to think those smelters face a higher carbon price than ours. Depends on the size of the allocations.

3. You selectively misquoted the Minister in the first Parliament transcript. While allocations are subsidies up to the end of 2012, after that allocations have no cost to the taxpayer and the Minister is right say they are not subsidies from then unless the crown has new quantified international emissions reduction commitments.

4. The auditor general writes about public acounting treatment for liabilities incurred through legislation. That sort of thinking is a world away from economic theory about subsidies and is irrelevant.

5. I’m suprised, a little, that you always ‘pick on’ the smelter. There are many other recipents of free allocation that have no emissions. How about directing some of your criticism at rose/tomato/capsicum growers or any of the others? Are they also in this conspiracy with the Minister along with NZ steel and the smelter?

Mr February November 3, 2011 at 11:32 pm

Welcome back Password1!

Your point 1. Your first two sentences indicate good comprehension of the post’s topic. Well done. However, that is not the case for Nick Smith. In the two 2011 quotes, Smith uses very specific language. He does not make the distinction between direct and indirect carbon prices, he says Tiwai Point smelter is the only smelter to face “any price” (except the time he said “any face”). He did not say “direct carbon price”. You would have a point if he had. He did not. There are other smelters facing an indirect carbon price. Indirect carbon prices are important as they flow throughout an economy. The point isn’t whether Smith is wrong or right. The point is that Smith is simplifying a complex situation into a soundbite to politically defend a bad policy.

Your point 2. Have you got a reference that says smelters in the EU are allocated emission units to compensate them for electricity costs? Also, I said the EU smelters probably face a higher carbon price than Tiwai Point smelter. The key point is that the Tiwai Point smelter is largely cushioned from any carbon price by free allocation of units.

Your point 3. I am glad to see you agree that free allocation of emissions units is a subsidy (if only to 2012). You really are making progress. I have directly quoted Smith, not “selectively misquoted” Smith. The fact of the matter is that as long as there is a NZETS in NZ law, there will be a carbon market in NZ, emissions units will have value, and giving them away will cost the Crown.

Your point 4. A cost is a cost is a cost. It’s pretty much the same in economics and accounting.

Your point 5. This post was really about what Nick Smith has been saying about the smelter, rather than the smelter per se. Yes there are lots of others receiving free units. The Glenbrook steel mill is on my list. I agree that its pretty odd subsidising with free unit allocation all those rose/tomato/capsicum growers who probably have diesel boilers. It seems to have been an unintended consequence of rushed legislation. The incentive on these horticulturists has become “keep your diesel boilers and keep lobbying” rather than to decarbonise their galsshouses.

password1 November 5, 2011 at 9:38 am

You’re right – smelters in the euets don’t receive allocations, instead the emitters including electricity generators get allocations, meaning the passed through carbon cost is diluted. Has the same effect as an allocation to the electricity users. Which was my point.

That also means the smelter is the only smelter in the world directly participating in an ets. That is because of its production emissions; “face any price for its emissions” or “its pollution” as the Minister described it. The Minister did not say “face any carbon price.” He expressly qualified his answer to relate to its own emissions.

The peppering of condescending quips through your reply annoyed me.

Mr February November 7, 2011 at 12:06 pm

The fact that European electricity generators receive an allocation of emissions units at zero cost does not necessarily mean that the market carbon price is ‘diluted’ or not passed on to customers. If you inherited some Telecom shares from a distant relative, what would you sell them for on the NZX? Economic theory would say that free units that have a market value become part of the generators opportunity costs. For example see Why Free Allocation of Carbon Allowances Means Windfall Profits for Energy Companies at the Expense of Consumers, February 2008. Sightline.org.
However, the IEA says that what happens in actual European electricity markets depends a lot on regulation and market structure and these vary by country. CO2 Allowance & Electricity Price Interaction- Impact on Industry’s Electricity Purchasing Strategies in Europe.
This paper indicates that in Germany and the Netherlands that 60 to 100% of the carbon price is passed on in the electricity price.
Sijm, J., Neuhoff, K., Chen, Y., (2006): “CO2 cost pass through and windfall profits in the power sector”, CWPE 0639 and EPRG 0617, Working Paper.
In summary, I would say the European smelters have been subject to some pretty real indirect carbon prices through their electricity price.

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