The smelter’s carbon credit subsidy is reduced


Sustainable future

The government has drastically reduced the annual allocation of free carbon credits to the Tiwai Point aluminum smelter, reports Marc Daalder

The annual subsidy the Tiwai Point Aluminum Smelter (NZAS) receives to shield it from the costs of the New Zealand carbon price has been cut by around $60 million.

The decision, detailed in Cabinet documents published on the Department of the Environment’s website on Thursday, was approved by Cabinet in December. It will see the smelter receive around 600,000 New Zealand Units (NZU) – carbon credits used in the Emissions Trading System (ETS) – every year for the next four years, up from around 1.5 million which would have otherwise been granted.

Climate Change Minister James Shaw acknowledged in a Cabinet document that the change “is likely to be controversial and have significant tax implications within the NZ ETS”. It comes after the smelter renegotiated its electricity contract with Meridian, securing a preferred deal which the Electricity Authority says will see household electricity bills rise by $200 to make up the difference.

NZAS chief executive Chris Blenkiron said the company accepts the decision, but Cabinet documents make it clear it strongly opposes a reduction in the grant.

Like other large industrialists who export their products, the smelter is entitled to a free allowance from NZU to level the playing field when competing with foreign companies that do not face a carbon price. Some of these free units are linked to greenhouse gas emissions resulting from the merger process – this allocation remains unchanged, although the government is reviewing methodologies for all beneficiaries to ensure they are not over- subsidized, as Newsroom reported last year.

Most of the smelter’s allocation (around 61%, according to Cabinet documents) results from indirect carbon price pressure. As a major consumer of electricity, responsible for approximately 13% of the electricity used in New Zealand each year, Tiwai is able to earn units to offset any price increases from the electricity it pays for due to the application of the carbon price to fossil fuels. power generation powered.

However, government-commissioned independent modeling has revealed that the smelter’s new contract with Meridian provides it with electricity at such a cheap price, pegged at a specific rate until the end of 2024, that it does not is not affected by the carbon price on electricity.

“Evidence suggests that there is no indirect cost of the NZ ETS on the electricity price agreed in the main contract,” officials wrote in a regulatory impact statement. As a result of this discovery, Shaw offered to remove Tiwai’s credit allowance for electricity costs entirely – estimated to be over NZU 900,000 for 2021. At the current market price of $74 per unit, this allowance reportedly worth nearly $70 million.

In the Cabinet document, Shaw wrote that these units could potentially be auctioned off in years to come, bringing in tens of millions of dollars for the government’s climate fund, which comes from ETS revenue.

Blenkiron touted the foundry’s green credentials in a statement to Newsroom. Photo: Marc Daalder

The Cabinet document and regulatory impact statement make it clear that the smelter opposed the change. Meridian was also consulted, but its opinions have been redacted in the published documents.

“NZAS prefers the status quo, which I believe overstates program costs and results in an over-allocation of $60 million per year to NZAS,” Shaw wrote in the newspaper.

Officials reported that the NZAS believed the government had promised not to change the allowances in a December 2020 letter from Finance Minister Grant Robertson. However, they said: “The letter does not include an agreement regarding the NZUs that NZAS receives under the [Climate Change Response Act] CCRA. Changes to unit allocation are simply unaffected by this proposal, and changes under the CCRA may still be considered. »

The smelter also accused the independent modeler of being biased and said the modeling could not reflect the complexity of the impact of the carbon price on NZAS’ electricity price.

“The modeler has demonstrated in a previous analysis a consistent view that EAFs should be based on long-term (as opposed to short-term or combination) considerations and therefore should be lower than they are,” said argues the NZAS in its submission. It is unclear whether this is an exact quote or a paraphrase of MfE officials.

The officials responded to the argument by insisting that “the independent electricity modeler used the standard EAF to simulate the carbon price effect on general electricity prices. The NZAS perspective according to which the modeler has a bias does not offer sufficient evidence or technical argument.”

They concluded by noting that the smelter had raised no concerns about its continued viability.

“It should be noted that NZAS’ argument did not refer to economic viability. This indicates that the investment and operation of the additional production line is not jeopardized by the use of an EAF different from the status quo.”

Blenkiron touted the foundry’s green credentials in a statement to Newsroom.

“The recent decision to set the electricity allocation factor under the New Zealand Emissions Trading Scheme to zero for the current NZAS Electricity Agreement is a decision we accept, but we note that aluminum production accounts for less than 1% of New Zealand’s total carbon emissions as aluminum continues to play a critical and growing role in a global economy focused on decarbonisation. we are proud to produce one of the lowest carbon aluminums in the world, while many of our international competitors producing high carbon metals do not face a carbon price.



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