120% Pure Subsidy

Nick SmithLast week, (29 September 2011 to be precise), Green MP Kennedy Graham was questioning Climate Change Issues Minister Nick Smith over his apparent lack of consistency on subsidies for fossil fuel industries. Graham was wondering why Nick Smith and Climate Change and Trade Negotiations Minister Tim Groser were happy on the one hand to oppose billion dollar subsidies to fossil fuel industries on the international stage, while on the other hand have the New Zealand Emissions Trading Scheme include subsidies in the form of generous free allocation of emissions units to big industrial emitters of GHGs.

Nick Smith replied:

“…this Government is not providing subsidies to greenhouse gas polluters. I remind the member that we are the only country outside the EU to have an emissions trading scheme. Our aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions”.

Lets examine this assertion in two parts; that the Tiwai Point Aluminum Smelter, receives no subsidies from Government and it faces a carbon/GHG price.

A brief recap, Tiwai Point Aluminum Smelter at Bluff, out on the edge of Foveaux Strait near Invercargill, is operated by NZ Aluminium Smelters Limited, which in turn is owned by Rio Tinto Alcan NZ Limited, a subsidiary of Canadian multinational Rio Tinto Alcan.

Tiwai Point Aluminium Smelter, via Wikimedia Commons

NZ Aluminium Smelters Limited has received an allocation of free emissions units under the NZ ETS. That is clear from that un-labelled pie chart I have been banging on about. The chart shows that iron, steel and aluminium production are to receive 40% of all free industrial allocation of emissions units.

However, we don’t need to do any guessing as the Ministry for the Environment has just released an analysis of how many free emissions units were allocated to whom under industrial allocation for the half-year compliance period 1 July to 31 December 2010.

NZ Aluminium Smelters Limited received 210,421 NZ emissions units or 12% of the total allocated of 1.77 million units. By the way, only New Zealand Steel, the operator of the Glenbrook Steel Mill, received more units. They got 494,704 units.

How does this allocation of free emissions units compare with the number of emissions units that would need to be surrendered? Is the allocation more or less than the number of units surrendered?

With a bit of ferreting, I have found enough data to make some back-of-envelope-but-on spreadsheet calculations. Here are the inputs and constraints I used.

  1. 2010 production of aluminium: 343,335 tonnes. From 2010 Sustainability Report , NZ Aluminium Smelters Limited.
  2. Emissions factor for aluminium: Low estimate . 1.67 tonnes CO2-e per tonne Aluminium. From Ministry for the Environment’s New Zealand’s Greenhouse Gas Inventory 1990–2009.
  3. Emissions factor for aluminium: High estimate. 2.01 tonnes CO2-e per tonne Aluminium. From Heavy Industry Energy Demand Update Report Prepared for Ministry of Economic Development February 2009, Covec Ltd.
  4. The compliance period for surrendering units is from 1 July 2010 to 31 December 2010, a half-year.
  5. The obligation to surrender units is a half obligation because of the two units for one tonne of GHGs deal.
  6. Free allocation of units is also reduced by a half.
  7. Free allocation is calculated as 90 per cent of the allocative baseline (a benchmark number of NZUs per unit output)
  8. The aluminium allocative baseline is 2.645 units per tonne of aluminium produced. From Section 7 of the Climate Change (Eligible Industrial Activities) Regulations 2010

I will first check my input assumptions by calculating my own estimate of the actual units allocated; 210,421.


Estimate of emissions units allocated
2010 production tonnes Aluminium     343,335
Half year production /2 (1 July 31 Dec 2010) 171,668
Half obligation /2 (one unit/2 tonnes) 85,834
90% emissions-intensive-trade-exposed allocation 77,250
Allocation baseline (tCO2-e/t output) 2.645
Equals estimate of Units allocated 204,327
Difference (approx. 2.9%) 6,094
Actual Units allocated 210,421

My estimate of units allocated is 204,327, which is only 6,000 odd units (or 2.9%) less than the actual units allocated of 210,421. So it seems my inputs are roughly good enough.

Estimates of emissions units to surrender
Low High
2010 production tonnes Al   343,335     343,335
MfE Emissions factor (t Al/t CO2-e) 1.67 2.01
Estimated emissions 2010 t CO2-e 573,369 690,103
Half year compliance period (1 July 31 Dec 2010 /2) 286,685 345,052
Half obligation (one unit 2 tonnes /2) 143,342 172,526
Estimated Units to surrender 143,342 172,526
Actual Units allocated 210,421 210,421
Excess allocation (units) 67,079 37,896
Excess allocation (per cent) 147% 122%


Nick Smith implies that the free allocations reduce but do not remove the exposure to the carbon price. This is simply not correct. If it was correct, units allocated to NZ Aluminum Smelters would be less than units surrendered. However, units allocated exceed my estimates of units needed for surrenders.

I estimate that NZ Aluminium Smelters Limited were required to surrender between 143,000 and 172,000 emissions units for the six months to 31 December 2010. NZ Aluminium Smelters Limited were given, under ‘industrial allocation’, 210,421 units. My low and high estimates of the units to be surrendered exceed the actual units allocated by 37,000 and 67,000 units respectively.

Nick Smith says emitters are not being subsidised by free allocation. This too is simply not correct. Allocations greater than surrenders equals over-allocation or a net gain to NZ Aluminium Smelters Limited. The estimated over-allocation is from 124% to 147%. NZ Aluminium Smelters do not face a positive carbon price at all. If the NZ ETS was a carbon tax, NZ Aluminium Smelters would have a negative carbon tax rate!

This perverse outcome is exactly why carbon taxes are in practice simpler, more effective, and a more robust way of carbon pricing than emissions trading.

15 thoughts on “120% Pure Subsidy”

  1. With such generous allocations Nick Smith makes us an attractive country for carbon intensive industries. Well done sir. Between that and our new petroleum exploration subsidy scheme the government is well on the way to trashing what green credentials we had left.

    Some of the other allocations in the government list are also odd.
    I note that one group which has a provisional allocation is “Gourmet Mokai Limited.” Curious, because their hothouses are heated by geothermal steam.

    And this arrangement is touted as reducing CO2 emissions:

    So why the allocation?

  2. To get a full picture of the subsidy arrangements, you need to also look at compensation for electricity price increases that the major emitters receive – 90% of the price increase resulting from ETS charges on fossil inputs to power generation. That compensation is paid via the “over allocation” of credits for emissions that you are calculating. Hence the smelter does face costs relative to business as usual, but so diluted is the price impact that the ETS has no meaningful effect on emissions under current settings.
    For information on the general structure of the subsidies and estimates I produced of the expected value of the subsidies to the biggest emitters when the scheme was first proposed, see “Corporate Welfare Under the ETS”, June 2008, http://www.sustainabilitynz.org/news_item.asp?sID=210 but note that the scheme has since changed considerably so the level of subsidy will be different.

  3. @ST,
    Yes you hit the nail on the head. The extra allocation of free units vs units surrendered is due to “compensation” for notional increases in electricity price due to the NZ ETS. This was pointed out by the Sustainability Council in the report you link to. It’s also in the original 2007 document “Framework for the NZ ETS”. I was thinking of writing a post on it. Probably still will. Cheers.

  4. Mr February – do you seriously think allocations should not include compensation for the ETS component of elctricity cost increases? Why on earth have you left that factor out in your analysis above? Is it something to do with the smelter’s contract for electricity from the hydro schemes? If that is your thinking, then you’re opening up a whole lot of issues with a piecemeal approach to determining the ETS electricity costs faced by each individual. And if Tiwai wasn’t operating, then electricity emissions would decrease as the hydropower is used elsewhere in the country.

  5. Obviously yes. The ETS forces all energy costs up, including electricity. Allocation compensates for those increases in order to avoid net negative short term social, environmental and economic outcomes.

  6. Well I guess I take the diametrically opposite view that in order to avoid the net negative long-term social, environmental and economic outcomes of anthropogenic climate change, emitters like the smelter have to face a carbon price, not a carbon ‘refund’.

    1. Can you agree then that under current policy settings there has been no overallocation of units? The current policy includes allocations for increased costs from the ETS. I think you’re arguing the policy settings are wrong – which is a totally differnt issue as to whether there is an overallocation now.

      Your repeated insistence that there are overallocations is wrong, wrong, wrong. The smelter is not getting a ‘refund’ – they are facing a proportion of the full cost of emissions both at the point of aluminium production and from being passed down from the electricity generator. Have you noticed that not all sources of emissions are included in allocative baselines? That is, there is no allocation for some emissions at the production level, including liquid fossil fuels.

      I’ve pointed out in almost all of your threads how your analyses are wrong, but you’ve not changed any of the conclusions. I guess this will be another one eh?

  7. Password1, you ask “Can you agree then that under current policy settings there has been no overallocation of units?”
    So you want me to change my opinion based on your tautology? Sorry, I don’t think so!
    If you don’t like my data and analysis, how about you come up with your own?
    Here’s the electricity allocation factor for you to start with. Its 0.52 tCO2-e/MWh, from the MfE Development of Industrial Allocation Regulations.
    Another input: The Parliamentary Commissioner for the Environment telling MfE that the electricity allocation factor is overstated by a factor of 2.6.

  8. I don’t see any tautology. I was using logic: look at the legislation, see that it includes certain sources of emissions, then redo your calculations.

    One last time: emissions ‘allocative baselines’ include electricity use. You say there has been overallocation but ignore the policy. Your analysis is totally incorrect because you don’t count the indirect emissions from using electricity.

    You’re not comparing the same sets of data. Emissions at the firm level (your ‘demand’) is not the same data as emissions at the energy level (the ‘allocative baseline’)

    If allocative baselines were based on emissions at the firm level, then the allocation would have been much lower. Not exactly rocket science is it.

    But you’ve been shown to mix up data several times already and drawn conclusions of conspiracy and collusion. There is some name for that sort of argument – fitting an analysis to an already held position. Perhaps you can name it.

  9. Password1,
    So I am a ‘something’ that mixes up data, and fits it to my preconceived position. Sticks and Stones! Sticks and Stones!
    Which of my calculations do you question? The aluminium allocative baseline, which I have used (2.645 units per tonne) already includes an electricity factor. On the emissions reporting side, Regulation 35 of Climate Change (Stationary Energy and Industrial Processes) Regulations gives a 10-variable formula for the Aluminium emissions factor. I am missing about 4 of these variables. So thats out.

  10. You need to be consistent in your treatment of electricity emissions. Yes, the allocative baseline includes them. But the aluminium emissions factor does not (because they are someone else’s responsibility, even though electricity use decisions are made at the smelter).

    You need to either remove from your calculations the units allocated for electricity used, or add (to the units to be surrendered) the indirect emissions caused from electricity generation (at a national level) and supplied to the smelter.

  11. Password1,
    This cabinet paper says that NZAS has its own specific electricity factor. But it has been withheld. It is less than the 0.52 tCO2-e/MWh general electricty factor, as the paper says that use of that factor would result in “over-allocation” (their choice of word). So what you suggest can’t be done on the basis of what information is available to the public.

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