Will the last business lobbyist to leave please turn out the light at the end of the tunnel to an effective NZ emissions trading scheme?

In this post Robin Johnson's Economics Web Page channels General Westmoreland and his Vietnam flashbacks to look at the National Government's latest change to the New Zealand Emissions Trading Scheme (NZETS). The NZ Parliament has just (8 November) passed amendments that indefinitely defer any greenhouse gas obligations for agriculture and indefinitely discount obligations to industries.This is a 'last helicopters off the Saigon hotel roof' point in the sad history of the always-doomed-to-fail New Zealand Emissions Trading Scheme.

According to cultural folklore the humiliating end of American engagement in the Vietnam war was foreshadowed by graffiti;

Will the last person out of the tunnel please turn out the light?

Or, alternatively

Would the last Marine to leave Vietnam please turn out the light at the end of the tunnel?

This was in frank contrast to the early (with hindsight, unjustified) optimism of General Westmoreland, who had said in 1968 that he could see the light at the end of the tunnel of the war in Vietnam.

So why am I writing about graffiti from a war that ended 37 years ago? Well, to make a 'bonkers' analogy with the New Zealand Emissions Trading Scheme, of course! Getting the NZETS established was of course more or less a civil war, and when the Labour Government in its final days in office in late 2008 finally coalesced a coalition of compromise to pass the Climate Change Response (Emissions Trading) Amendment Act 2008, it seemed there was 'light at the end of the tunnel' in terms of reducing New Zealand's emissions.

However, with the adoption last night (8 November) of the National Government's latest emitter-inspired fiddle; the Climate Change Response (Emissions Trading and Other Matters) Amendment Act, I believe we can now just be honest with ourselves and see the latest amendments to the NZETS as the last helicopter off the hotel roof and the last act of the NZ emissions trading approach, which was futile from the beginning.

I have posted before about the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill, noting that the amendments will;

1. indefinitely exclude emissions from pastoral agriculture from the NZETS, instead of including them from 2015, which was already a delay from 2013.
2. extend indefinitely the discount to industries, the 'surrender one unit for two tonnes' of emissions (half price!) that was to end this year (“maintain the 1-for-2 surrender obligation after 2012, without specifying an end date in legislation”)
3. extend indefinitely the price cap, (“maintain the $25-a-unit fixed price option after 2012, without specifying an end date in legislation”)

.

And I have previously posted that the worst aspect of the NZETS is not the corporate welfare in the form of excessive free allocation to industries.

For me the worst aspect of the NZETS is it's absolute exposure to the international carbon markets which has the effect of knee-capping the NZ carbon price down to the rock-bottom international carbon price. Today (9 November), the highest offer for a NZU for a tonne of CO2-e is $2.55 (See today's price and trend chart from OMF Ltd).

So I concluded I agree with Jeanette Fitzsimons that the NZETS is so bad at reducing GHG emissions, it no longer matters what amendments are made to it.

That is why I think that the light at the end of the NZETS tunnel was always going to be eventually turned out. The final bit of the Vietnam analogy is who was going to turn out the light. I give that role to the professional big emitter's lobby groups, led by Business New Zealand and its astro-turf subsidiary the Greenhouse Policy Coalition.

Nicky Hager in his Bruce Jesson lecture, describes how lobbyists such as Business NZ and the Greenhouse Gas Coalition have manipulated the under-resourced media to give prominence to ideas pushed by their clients;

"...the public spaces are cluttered with paid spokespeople and commercial agendas" whose technique is to establish "usefully biased ideas" by creating “some common lines that become the ‘mantra’” and then, 'keep repeating it endlessly' " so that "the angle, timing and quotes (in the media), do not come from journalists’ observations or journalists’ questions, but from the calculated efforts of PR and marketing people", and, as a consequence, the political debate is dominated by "endless hectoring from the business lobby groups"

The media 'mantra' pushed by the lobbyists is that if the NZETS establishes an effective carbon price on emitters, then jobs and exports and GDP will be lost (See GPCNZ 2008 and Business NZ 2012). Over the years of the debate over the NZETS, we have been endlessly hectored by business lobbyists that business trade competitiveness will be affected by the NZETS. Ministers Nick Smith and Tim Groser have long ago joined in and 'costs on businesses' is now routinely given as the reason for the lack of any real bite in the NZETS.

The endless hectoring that the "NZETS will affect exports and jobs" has been so successful that the big emitters wound up the the Greenhouse Policy Coalition back in March 2012. I guess they had a helicopter to catch, after they turned out that light in the tunnel.

And when I awoke I was alone the exporter had flown Norwegian wood isn't it good

Norwegian wood and newsprint transnational Norske Skog Tasman (NZ) Ltd 'exports itself'. Robin Johnson's Economics Web Page looks at the flight of another manufacturer and CO₂ emitter and exporter as it lays off staff and reduces production. Wasn't the very generous free allocation of units in the New Zealand Emissions Trading Scheme meant to keep exporters like Norske Skog Tasman in New Zealand? Or have we just removed the price signal from exporters for no valid reason and stuffed the NZETS?

The New Zealand Herald reports that the Norwegian-owned newsprint-maker and transnational Norske Skog Tasman NZ has joined the ranks of export businesses like Rio Tinto Alcan NZ/NZ Aluminium Smelters who are exporting jobs off shore. Incidentally Rio Tinto Alcan NZ/NZ Aluminium Smelters have just been described as New Zealand's biggest bludger.

Norske Skog is shutting down one of two newsprint machines at the Tasman Mill, in Kawerau, due to lowered demand for newsprint.

At the same time Norske Skog is investing $A84 million in new plant at the existing Boyer Mill in Tasmania with some substantial help from the Australian Federal government (A$28 million grant) and State government (A$13 million loan).

The NZ Government has been asked "what is being done for jobs"? And the NZ Government's "market will take care of everything" approach has been called naive.

The NZ Herald mentioned the NZ emissions trading scheme (NZETS) only briefly in passing, as they noted the rock-bottom NZ carbon price and the poor despairing carbon foresters.

So that prompted me to look at how Norske Skog Tasman NZ fits into the NZETS. What are the greenhouse gas emissions of the Norske Skog Tasman newsprint mill? Is Norske Skog Tasman regulated by the NZETS? Have they received a free allocation of emission units (like NZ Aluminium Smelters Ltd) to reduce the net number they have to buy? Which is meant to be the point of free allocation; ostensibly to protect their international competitiveness and to keep the jobs in NZ. Is the free allocation of units enough? Is it even a reasonable idea that free allocations of units make any difference to transnationals?

Norske Skog Tasman uses geothermal steam from the Kawerau geothermal field for heating and electricity generation in its newsprint mill. Geothermal steam naturally contains carbon dioxide and methane which are released when the heat energy is transformed.

The use of geothermal steam for energy is covered by the NZETS as an energy sector emission. So Norske Skog Tasman must report its greenhouse gas emissions and obtain and surrender emissions units to comply with the NZETS.

The Ministry for the Environment provides a specific emissions factor in the Climate Change (Stationary Energy and Industrial Processes) Regulations 2009 for calculating the mass of greenhouse gas emissions from Kauwerau's geothermal steam. The factor is 0.0275 tonnes CO2-equivalent per tonne of geothermal steam used.

Norske Skog Tasman's production of newsprint is classified as an emissions-intensive trade-exposed activity. They are therefore eligible for the highest level of assistance; covering "90%" of their production in the form of a free allocation of 0.4911 emission units per tonne of uncoated newsprint.

So far, so much like NZ Aluminum Smelters/Rio Tinto Alcan NZ. Except there is the peculiarity that the free unit allocations are calculated from a different variable from the GHG emissions. Emissions are calculated from tonnes of geothermal steam used, and free units are calculated from tonnes of newsprint.

Let's start with a 'back of envelope' calculation of the units Norske Skog Tasman should surrender (the NZETS gross carbon price).

According to the Kawerau Geothermal Field Background Study, Mighty River Power supplies 285 tonnes of geothermal steam per hour to Norske Skog Tasman, who on-sell 26 tonnes to Carter Holt Harvey Wood Products. So net use is 259 tonnes per hour.

Assuming 24/7 production, the annual use is 259 * 24 * 365 = 2,268,840 tonnes of steam per annum. And 2,268,840 * 0.0275 = 62,393.1 tonnes CO2-e. So in a typical year, Norske Skog Tasman should be surrendering very roughly about 62,000 emission units under the NZETS.

How many free emission units were allocated to Norske Skog Tasman? In both 2010 and 2011, Norske Skog Tasman received the fifth largest free allocation of units (after the Smelter, NZ Steel, Methanex and Fletcher Concrete). In 2010, Norske Skog Tasman received 122,826 New Zealand Units (NZUs) for the six-month 2010 NZETS compliance period. In 2011 Norske Skog Tasman received 237,752 NZUs.

Assuming 24/7 production in 2011, Norske Skog Tasman was allocated 381% more units than it needed to surrender (237752/62393.1 * 100 = 381.0550). Thats a way more excessive free allocation than NZ Aluminium Smelters!

However, I might not have the right numbers. My calculation may be wrong. Why don't I ask the Environmental Protection Authority under the Official Information Act for the exact number of units surrendered by Norske Skog Tasman. Watch this space.

Alternatively lets look at Norske Skog Tasman's annual financial statements (PDF) as filed at the NZ Companies Office for the 2011 calendar year.

Note 24 helpfully records that Norske Skog Tasman received 119,646 units in 2010 and 241,825 units in 2011. They surrendered only 10,754 units and sold 160,000 units, and had 190,717 units left at 31 December 2011.

The accounts show that in 2011 Norske Skog Tasman was allocated 22 times more units than it needed (241,825/10,754 = 22.49). The units allocated to protect jobs and export competitiveness, were not 90% of units surrendered. They were not 100% of units surrendered. The units allocated exceeded the units surrendered by a factor of 22!.

I can still here an echo of voice saying "You have left out the electricity allocation factor! You are wrong wrong wrong!" Well, yes, the industrial free allocation factor of 0.49 units per tonne of newsprint allegedly includes compensation for NZETS-related electricity price increases our manufacturing emitter is subject to. This rationale and the factor of 0.49 units per tonne were approved in this Cabinet paper. However, the cabinet paper provides no explanation of how the factor of 0.49 units per tonne of newsprint was calculated.

The electricity allocation factor has also been the subject of a consulation process and there is an emitters contact group for it as well.

However I think the idea that manufacturing emitters need compensation for NZETS-related electricity price increases is a smoke-screen. Norske Skog Tasman has not had its electricity price increased by the NZETS.

According to the Kawerau Geothermal Field Background Study (PDF), Norske Skog Tasman and Mighty River Power (MRP) have "..a power purchase agreement whereby NST (Norske Skog Tasman) contracted to take a majority of MRPs generation. Due to the fact that MRPs plant is grid tied, this is effectively a financial agreement offering NST price certainty and MRP a customer contracted to take the majority of supply."

The Tasman Mill is not just a plant connected to the grid. It was built to use geothermal power, just as Tiwai Point Smelter was built to use Lake Manapouri's hydro power. The Tasman Mill is joined at the hip to the Kawerau geothermal field. The newest Mighty River Kawerau geothermal generation plant was built on the Tasman Mill site (see picture above). Norske Skog is buying geothermal steam from Mighty River Power and paying MRP as if it was electricity via a financial derivative contract.

To conclude the free allocation part of the analysis; for Norske Skog Tasman, the NZETS free unit allocations are not just a discount of part of the full NZETS carbon price, the allocations are a transfer of substantial corporate welfare. The units allocated exceed the units they have to surrender by an estimated factor of 22.

And in terms of protecting the international competitiveness of Norske Skog Tasman and keeping jobs in New Zealand, the free allocations have not made the slightest difference. Thats in spite of National Party scaremongering back in 2008 that the NZETS would cause the mill to close.

And Catherine Beard of Business New Zealand (formerly boss of the big polluters advocate the Greenhouse Policy Coalition) is still scaremongering in October 2012 that any real cap in the NZETS will cause more job losses Talk about slamming the stable door after the horse has bolted.

Lets look at the real factors affecting whether a transnational commodity manufacturer stays in a country like New Zealand or Australia.

If you are a transnational like Norske Skog, you always have the choice of playing off more than one jurisdiction. The country with the smaller economy, like New Zealand, can't match the money of a larger economy like Australia. If Fletcher Challenge had not sold the Tasman Mill to Norske Skog in 2000, this 'regulatory arbitrage' would not be possible.

Corporate aquisitions that seemed a good idea before the Global Financial Crisis, look much more risky after the Global Financial Crisis. In 2000, Norske Skog paid $NZ5 billion for Fletcher Challenge's paper and pulp assets. Those assets included both the Tasman Mill in Kawearau and the mill at Boyer, Tasmania. In 2011, Norske Skog was faced with falling international demand and prices and it was considering selling some assets to avoid default on its debt.

Incidentally, Rio Tinto Alcan shares most of these international commodity trader issues; the over-priced debt-funded purchase of Alcan and Comalco by Rio Tinto before the GFC, the Rio Tinto's plan to sell Pacific Aluminium (including NZ Aluminium Smelters Ltd), the low demand for aluminium from the stagnant economies of the Eurozone and the USA and the price and supply competition from Chinese smelters in the huge and growing Chinese market.

Imagine a fictional conversation between NZ Prime Minister John Key and the CEO of Norske Skog.

"So, Yon, you don't mind if I call you Yon? For the Tasman Mill, you kiwis are all online, the demand for newsprint is down. You give me quarter of million of these NZ units that are worth $NZ3 each. No other ETS accepts them. Thats pretty low quality carbon credit, Yon. Now, Yulia Gillard, she gives us $A28 million for new plant at the Boyer mill in Tasmania. Can you match that, Yon? Can you?"

That is the bottom-line, isn't it? New Zealand could never have matched $A28 million, either as a direct grant, or through manipulation of the NZETS free allocation provisions.

To me, the Norske Skog Tasman job losses are a good demonstration of how futile it was to have an NZETS designed mainly to completely avoid any carbon price on transnational exporters. The carbon price has not just been reduced or discounted to Norske Skog, the sign has been reversed so that its an off-balance sheet transfer of corporate welfare to them in the form of emission units. Such transfers are no doubt sought by local managers who are rent-seeking, but they will be irrelevant to the international commodity trade movements that will ultimately determine whether these transnationals stay or go.

Brother can you spare $3.10 for a tonne of carbon dioxide?

In which Robin Johnson's Economics Web Page laments the homelessness and begging now seen each day on Lambton Quay in Wellington. And a lament for both the downward spiral of the NZ Emissions Trading Scheme and the downward spiral of the New Zealand spot price for a tonne of carbon dioxide - now less than the cost of a flat white. Brother, can you spare $NZ3.10 for a tonne of carbon dioxide?

The other day I looked up the old Tin Pan Alley song "Brother can you spare a dime?" The experience of poverty and the Depression in America summed up in a popular song. The lyrics were written by Yip Harburg in 1931, and the music was composed by Jay Gorney. The version by Al Jolson is very well known, but I like this version by Charlie Palloy and his Orchestra.

I looked up "Brother can you spare a dime?" as I was thinking about homelessness and poverty in New Zealand. I am not the only one. Churchs, charities, politicians, experts and academics are also concerned about poverty in New Zealand.

I see homelessness and poverty every weekday in Wellington's main CBD thoroughfare, Lambton Quay. I walk along Lambton Quay looking forward to the first coffee of the day. I usually note how many people are begging. There are almost always a few people begging on Lambton Quay. 'Brother can you spare a dime' is alive and well even on Lambton Quay.

Except it's sad cardboard signs saying 'Homeless and need help'. Also its at least $3 to $4 for a coffee.

The other price thats less than the cost of a flat white is the spot price of carbon dioxide in NZ. The carbon trader OMF reports NZ spot prices each day at CommTrade Carbon. Guess what? On 17 October, the day Parliament's Finance and Expenditure Select Committee reported on the latest amendments to the NZETS, the last trade of a New Zealand Unit ('NZU', a tonne of carbon dioxide) was at $3.10.

OMF also display a chart. It shows the collapse of the international carbon price reflected in our own plucky little battler NZETS. It certainly looks pear-shaped.

As the political philosopher Simon Caney and economist Cameron Hepburn note with a little British understatement, when the demand for permits falls to the extent that the permit price approaches zero, it is difficult to conclude that an ETS is working to reduce emissions.

Can any sane person look at this chart and reach any other conclusion than the NZETS has completely failed as a carbon price policy incentivising reduction in GHG emissions?

OMF originally committed the chart sin of not starting the vertical (price) axis at $0. However, reality has intruded. As the New Zealand Unit (NZU) price has relentlessly declined towards $0, they keep having to move the bottom of their chart closer to zero. That would almost be a small bit of humour in a pretty sad story. If it wasn't the empirical evidence of the failure of the design of the NZETS as a policy to price greenhouse gas emissions.

If the $3.10/tonne NZU price is the death notice of the NZETS, the funeral must be the latest Finance and Expenditure Select Committee process to amend the NZETS. On 17 October 2012, this committee released its report Climate Change Response (Emissions Trading and Other Matters) Amendment Bill

This is the National Government's bill to further weaken the NZ Emissions Trading Scheme. You know, indefinitely delay the entry of agriculture, make the half-price "two-for-one" transition permanent.

If you can quickly recover your will to live after digesting page after page of bureaucratic and political policy denial and excuse-making, and the complete failure of the National Government majority to engage at all with the minority political parties or submitters or ENGOs or the Parliamentary Commissioner for the Environment, download and read the 117-page report.

Otherwise, just read Patrick Smellie's report "No restrictions on foreign-sourced carbon credits confirmed"

"The Climate Change Response (Emissions Trading and Other Matters) Bill was reported back to parliament by the finance and expenditure select committee with only technical amendments, and a decision that capping the use of foreign credits would compromise the emissions trading scheme principle of "least cost of compliance".
The policy has seen major emitters such as oil and electricity companies snap up some of the lowest cost carbon units available on global markets, where prices have slumped to as little as $2 a tonne.
New Zealand Units, issued by the government, continue to be worth slightly more, at around $3 a tonne, but well below the $25 a tonne maximum price put on carbon when the ETS was introduced in 2009."

Or just read the press release from WWF-New Zealand.

This is another nail in the coffin for New Zealand's credibility on climate change and suggests the government has no intention of trying to set this country's emissions on a downward path. Other parties in the UN climate talks will rightly see New Zealand's claims to be doing something to reduce emissions as all spin and no substance."

What a complete shambles! Why didn't we just have a no-exceptions carbon tax in the first place?

They used to tell me I was building a dream,
and so I followed the mob,
When there was earth to plow, or guns to bear,
I was always there right on the job.
They used to tell me I was building a dream,
with peace and glory ahead,
Why should I be standing in line, just waiting for bread?

Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it's done. Brother, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it's done. Brother, can you spare a dime?

Once in khaki suits, gee we looked swell,
Full of that Yankee Doodly Dum,
Half a million boots went slogging through Hell,
And I was the kid with the drum!

Say, don't you remember, they called me Al; it was Al all the time.
Why don't you remember, I'm your pal? Buddy, can you spare a dime?

New Zealand's Minister of Economic Development Steven Joyce goes ferally pro-coal and attempts to influence the Environment Court and Court of Appeal

Today I was absolutely gobsmacked by a statement by Steven Joyce, the New Zealand Minister of Economic Development, in an official New Zealand Government press release.

Joyce explicitly took the side of and promoted the cause of Australian coal miners, Bathhurst Resources, in two up-coming court cases.

Joyce said:

"The Escarpment Mine is an open cast mining project that is ready to go and would provide 225 jobs and incomes for workers and their families on the West Coast straight away. The developer is being held up from opening the Escarpment Mine by on-going litigation that has gone through the Environment Court, the High Court and the Court of Appeal. These on-going objections are to resource consents which were granted more than a year ago. The whole consenting process for this development has now taken a staggering seven years. I call on those objectors to the mine to reconsider their appeals and consider the economic future of the West Coast and its people."

I know Joyce is very pro-development, Joyce even has his own archive of posts on the Hot Topic blog, where Joyce's preference for fossil fuel developments is obvious.

But this time he has crossed a line. Joyce is using his position as a Minister of the Crown to explicitly try to influence decisions yet to be made by the New Zealand Environment Court and the New Zealand Court of Appeal on the resource consents sought by Bathurst.

Joyce is breaching the Sub judice rule.

Let me back up and start at the beginning. The resource consents for Bathurst's open cast Escarpment mine proposal were applied for in August 2010. Not seven years earlier as alleged by Joyce. Bathurst took over the project from L and M Coal Ltd.

In August 2011, the hearing commissioners acting for the West Coast regional and district councils considered with some anguish that resource consents could be approved.

This was in spite of the many adverse effects on native species habitat, water quality and the coal-measure limestone landforms within the Mt Rochfort Conservation Area. Yes the proposed mine is within a conservation area. The commissioners refused to factor in climate change effects from the eventual release of carbon dioxide from the coal. In other words, it was a pretty marginal decision.

However, the resource consents are not legally granted, as environmental NGOs Forest and Bird and the West Coast Environmental Network immediately lodged appeals with the New Zealand Environment Court. This is Joyce's second factual error; in an appeal of a resource consent, the council's decision ceases to exist. The Environment Court starts from a blank piece of paper, examines the facts and makes it's own decision. It considers consent appeals on a 'de novo' basis.

Then Bathurst started the cycle of litigation - by applying to the Environment Court, separately from the consent appeal, to have the effects of climate change barred from the consent appeal. Bathurst succeeded. So Forest and Bird and the West Coast Environmental Network appealed that decision to the High Court. Bathurst won that appeal. However, Forest and Bird and the West Coast Environmental Network have appealed the High Court decision to the Court of Appeal.

So there are two court hearings yet to happen.

1. The Environment Court is yet to decide on the facts; if the resource consents 'promote sustainable management' of resources as required by the Resource Management Act and may be granted.

2. The Court of Appeal is yet to decide on the law; whether it permits or prohibits the Environment Court considering the greenhouse effects of the carbon dioxide emissions from the downstream combustion of the coal.

Now Steven Joyce, a Minister within the Executive branch of Government, is expressing an opinion on what the outcome of the Court's process should be.

This is contrary to the 'sub judice' rule; which is simply speaking "Don't comment on undecided Court cases".

Or as set out in Parliament's Standing Order 112.

"112 Matters subject to judicial decision
(1) Matters awaiting or under adjudication in, or suppressed by an order of, any New Zealand court may not be referred to in any motion, debate, or question, including a supplementary question, subject always to the discretion of the Speaker and to the right of the House to legislate on any matter or to consider delegated legislation."

Or as set out in the Office of the Clerk of the House of Representatives document "Sub judice rule". Chapter 16 in 'Parliamentary Practice in New Zealand'. New Zealand Parliament (14 October 2010).

"The Standing Orders prohibit reference in any debate to any matters awaiting or under adjudication in a court from the time the case has been set down for trial or otherwise brought before the court, if it appears to the Speaker that there is a real and substantial danger of prejudice to the trial of the case...This is the implicit acknowledgment by the legislature that the proper forum in which to resolve legal disputes is the courts and that the legislature, above all other institutions, should take extreme care not to undermine confidence in the judicial resolution of disputes by intruding its views in individual cases...The House's sub judice rule takes effect in criminal cases from the moment a charge is made and in other cases from the time proceedings are initiated by filing the appropriate document in the registry or office of the court."

Or as set out by the Speaker, Margaret Wilson, on 16 October 2007, in "Speaker's Rulings Sub Judice Rule Operation.

"It seems to me that it is important in any consideration of it to emphasise the high constitutional nature of the rule. It stands as an expression of the relationship between the different branches of government; the legislative branch and the judicial branch. This House determines what the law should be, but it is for the courts to determine in each particular case how the law is to be applied. In criminal matters, it is not for this House to decide guilt or innocence. That is a matter for a court of law."

Obviously, Joyce and the rest of the National Government just don't give a stuff about anything of a high constitutional nature or the rule of law, or Joyce driving his Bagger 2000 coal excavator through the 'sub judice' rule. Clearly such things are just the concerns of those pesky people who obstruct progress when government tries to remove roadblocks in the way of business development.

Even not-so-stellar Minister of Energy Phil Heatley knew better than to comment on the Bathurst Environment Court appeal when he was asked about it on a Q and A interview.

"Well, you appreciate, Shane, this is before the courts. I'm a bit limited about how much I can discuss this. But the reality is Denniston, like any other application, has to go through a process, and there is a balance between the economic benefits and the- what impact it'll have on the environment."

Kevin Hackwell of Forest and Bird has responded promptly to Joyce's call and raised the issue of how independent other decision making may be, such as the Minister of Conservation's decision to grant Bathurst access for mining in a conservation area, which is also yet to be made by the Minister Kate Wilkinson.

"There would be a serious question, given his public advocacy, about whether such a decision has been influenced by government policy."

That's an important point. Especially since the Government wants to make stop the Minister of Conservation making the decisions on mining access to conservation areas on the basis of conservation purposes.

The Government has just introduced amendments to the Crown Minerals Act which add the Minister of Energy as joint decision-maker and add economic matters to the mandatory conservation purposes the Minister of Conservation must consider.

We will have to see how this 'sub judice' breach plays out for Joyce, given his party and Prime Minister have no problem with John Banks and his unknowingly non-anonymous donations.

However, I could not think of a better reason to reject the proposal for mining access over conservation land to be a joint Ministers decision based on economics and conservation criteria, than Steven Joyce's attempted interference in the Environment Court and the Court of Appeal cases concerning the Escarpment mine.

Solid Energy and the declining price of coal; neither unforeseen or dramatic or a crash

On Monday Don Elder the Chief Executive of New Zealand's Solid Energy confirmed that a major restructuring of the NZ coal miner would require closure of the Spring Creek underground mine and the loss of 460 jobs over the company.

This move had been signaled in advance, but it is still making most news broadcasts today. Elder attributes the need to downsize to trends in international coal prices. For example Elder told Radio New Zealand;

an unforeseen, and dramatic, global price crash had rocked the industry.
"In the second week of July the markets tanked, demand fell through the floor," he said. In up to six weeks the price plummeted 40 to 50 percent and did not show any sign of bouncing back anytime soon."

The new chair of the board of directors, Mark Ford, said in a press release;

“The price for Spring Creek’s semi-soft coking coal would need to be somewhere from NZ$180-200 a tonne for the operation to deliver a profit and pay off the investment made in it,” Mr Ford said. “International semi-soft contracts are now being made at around NZ$120 a tonne.”

New Zealand PM John Key seems to have accepted the Elder view that prices are to blame.

"The issue isn't that we're not on their side, the issue is that international coal prices aren't on their side."

"In the case of Solid Energy it's a victim of falling commodity prices."

The NZ media seem to have uncritically accepted the price explanation. In one story, Fairfax reported the reason for the mine closure and job losses as being due to a severe downturn in global coal prices

Not so, "Chalkie", of the Fairfax NZ business section. "Chalkie" took Solid Energy to task for blaming their troubles entirely on the international coal price. Chalkie also satirised Elder's cornucopian Think Big-style lignite and coal-gas proposals.

Chalkie says he doesn't believe Elder has credibility when he says current coal prices in NZ$ are 20% lower than at the bottom of the 2008 global financial crisis. Chalkie points out that Elder's quoting of a coal price of $330 USD per tonne, as the top of the price mountain that the price has now fallen off, is just unrealistic.

In June 2011, a record price of $US330 a tonne for Australian hard coking coal, was reached because of supply shortages following the January 2011 Queensland floods which drowned most of Queensland's coal mines.

Chalkie also notes that a coking coal price of $USD126 a tonne is still well above the norm before the GFC. I have complied some prices for Australian hard coking coal. Data at Google Docs. Coking or metallurgical coal is used in steel making, and usually trades at a premium price above 'thermal' coal supplied to power stations. I prepared a chart of prices per tonne in $USD from 2006 to 2012. Spring Creek Mine coal is 'semi-soft' coking coal, which I think means its price is not quite the same as coking coal, but still more than thermal coal.

The post Queensland flood price of $USD330 a tonne sticks out as a spike or outlier as does the 2008 high of $USD250 tonne, which also followed a La Nina mine flooding event. Coal producers might not want to know about global warming, but global warming certainly knows about Queensland's coal mines.

And here is a chart of 2012 monthly hard coking prices in $USD. The data.

The price for Aussie had coking coal has fallen consistently in 2012. However,there is no cliff the price has fallen off in July 2012. The hard coking coal price did not plummet 40 to 50 percent in 6 weeks as Dr Elder says. The price trend is neither "unforeseen" nor "dramatic" and nor is it a "crash".

It's not hard to find reasons for the decline in the price. of coal. Reuters reports a number of reasons. Demand for coal is down in China. While the floods stopped the Aussie supply, steel makers looked to substitute other suppliers. Mongolia is increasingly eating into Australia's share of coal exports to China.

Chalkie also notes that the Huntly East underground mine has had some safety issues. Work to install a $NZ40 million ventilation tunnel, the sort of thing Dr Elder criticised Pike River Coal for not having, stopped in August 2012. Could it be that Solid Energy is using the international coal price as an excuse to avoid spending the money needed to make its underground mines as safe as the public now expect in a post-Pike River Coal disaster world?

Chalkie also notes a "field of dreams" approach to the Taupo wood pellet plant, (later written down in value by $NZ30 million) and delays in the Mataura lignite briquette plant. Given the execution of these smaller projects, Chalkie questions Solid Energy's ability to deliver on the grander lignite conversion plans.

I will leave the last word to Chalkie.

Every day at 8.30am sharp, management at Solid Energy would gather for morning prayers at the company shrine.
The small room was dominated by a huge gleaming slab of coking coal, etched with phrases from an early foreign exchange hedge contract. The dozens of executives stood facing it, arms by their sides, palms turned towards the slab in unison.
It was always a brief, uplifting affair. The CEO would begin with a chant: "Every day in every way, we expect coal prices to rise."
The executives would respond: "And rise they shall."
CEO: "With wood pellets and lignite we will rule."
Response: "Nothing bad will happen."
CEO: "Our big ideas are worth squillions."
Response: "Yes, probably more."
CEO: "Gentlemen, make it so."
And with that they would shuffle out shiny-cheeked into the morn.

New Zealand Aluminium Smelter Ltd do a Godfather; Nice smelter you got. Be a shame if something happened to it

Robin Johnson's Economics Web Page argues that Rio Tinto-owned New Zealand Aluminium Smelters Ltd, the owner of the Tiwai Point aluminium smelter, is "Godfathering" the smelter, its workforce, the Southland economy, the NZ electricity market, Meridan Energy and the poor critically endangered slow-breeding kakapo, as well as "Godfathering" the NZ emissions trading scheme to get excessive free allocations of emissions units.

I have invented a new term for climate change blogging.

Godfathering!

Its a bit like Grandfathering, which is a bit of jargon from emissions trading. But different. Grandfathering in an emissions trading scheme (an ETS), is giving the emission units for free to the existing emitters in the ETS on a historic pro-rata calculation.

The units of course representing the desired cap on emissions. Alternatively the units could be sold by auction to emitters which is logical if we treat the units as shares in a public commons owned by the Government on behalf of citizens.

Of course our NZETS is not so simple. If our NZETS just applied simple "grandfathering" as outlined, then it would have a real cap, it would not allow importing of unlimited international units, and it would be impossible for any emitter to receive more units than their emissions.

Thats not the case under the NZETS, at least for some emitters. In 2010, the Rio Tinto Alcan subsidiary NZ Aluminium Smelters Ltd, which is roughly New Zealand's third largest point source of greenhouse gas emissions, was a net seller of units, not a net payer. Their free allocation of units was 135% more than the units they needed to surrender for their emissions.

That's excessive. The justification given for this is that in order to maintain their export competitiveness, NZ Aluminium Smelters Ltd needed to be compensated for the rather unfathomable and diluted ETS costs that may flow through their secret contract with Meridian Energy and the electricity wholesale market. I will come back to this later in the post.

Let me update the smelter emissions and unit allocations for the 2011 year.

In 2011, NZ Aluminium Smelter Limited produced 354,030 saleable tonnes of aluminium. The 2011 Ministry of Economic Development Chief Executive's Report shows that the New Zealand aluminium manufacturing sector (a.k.a. NZ Aluminium Smelter Ltd) reported emissions of 601,370 tonnes CO2-e for the 2011 year. We divide by two for the 'two tonnes for one unit' deal, and that results in 300,685 units to surrender.

The NZ Ministry for the Environment allocated 437,681 units to NZ Aluminium Smelter Ltd for the 2011 calendar year.

That's 136,996 more units allocated than surrendered or alternatively the units allocated to NZ Aluminium Smelter Ltd exceeded the units surrendered by 146%.

So that's even more excessive than 2010's 135% over-allocation!

How did NZ Aluminium Smelter Ltd achieve that beneficial treatment under the NZETS? Simple really. They threatened to close the smelter and move production offshore if the NZETS really imposed a real carbon price on them.

"Thats a nice aluminium smelter you got. Be a shame if something happened to it."

Now thats what I call "Godfathering"! But wait there is more.

In July, NZ Aluminium Smelters announced an annual loss.

The smelter CEO Ryan Cavanagh said the smelter's financial difficulties were due to falling world aluminium prices. And that they needed to revise their electricity supply contract with Meridian Energy to get input costs down.

A day later, the parent company Rio Tinto Alcan indicated what may happen to it's unprofitable smelters. They will be shut down. No pressure, Meridian Energy!

"Thats a nice aluminium smelter you got. Be a shame if something happened to it."

According to New Zealand Herald economics editor Brian Fallow, if the smelter closes, there could be a "seismic" knock-on effect on the electricity market. Supply would exceed demand by the 14% of New Zealand's electricity generation used by the smelter. Wholesale electricity prices would react. Some generation assets might be crowded out.

"Thats a nice wholesale electricity market you got. Be a shame if something happened to it."

Brian Fallow notes the electricity contract with Meridian Energy, that the smelter wishes to renegotiate, represents 40% of Meridian's sales. Closure of the smelter or renegotiation of the contract put the spanner of uncertainty into the Government's planned partial sale of Meridian and the other generators.

"Nice plan for partial privatising some state-owned power generators you got. Shame if something happened to it."

The closure of the smelter would also have an impact on the local Invercargill and Southland regional economy.

"Nice regional economy you got. Shame if something happened to it."

Next we hear that the smelter is fast-tracking the redundancies of it's highly-trained and highly-paid workforce.

"Nice well-trained professional smelter labour force you got. Shame if something happened to it."

And NZ Aluminium Smelter also wants to withdraw from partly funding the successful Kakapo Recovery Programme.

"Nice charismatic endangered species programme you got. Shame if something happened to it."

That's a lot of Godfathering!

Let's look at New Zealand Aluminium Smelter's electricity use and costs in 2011. How much do they use? How much do they pay? Does their power cost justify extra allocations of emissions units? Is it realistic for New Zealand Aluminium Smelter to try to get Meridian Energy to give them cheaper power?

New Zealand electricity use data is available from the Energy Data File 2012. The specific data is Spreadsheet G worksheet G.6.a. now at stored Google Docs.

This dotchart is of electricity use data from the sheet G worksheet G.6.a.

The chart makes it very clear that the Tiwai Point Smelter is, by a huge margin, the biggest single consumer of electricity in New Zealand. A single company at a single plant used 5.3 million MWh out of 38.8 million MWh consumed in 2011, or 13.67% of the total consumption. Only the combined 4.4 million people in homes (the residential sector) used more, with 13 million MWh or 33% of the total. If we just look at industrial use of electricity, and leave out the residential sector, the smelter uses 20.6% of all electricity used by industry.

This chart shows industrial electricity sectors sorted by average rate (including line costs) in cents per kilowatt hour (i.e. its MWh divided by sales $$ times 100). You need to look at the bottom left hand corner for aluminium smelting, not the top. Thats because NZ Aluminium Smelter Ltd pays the very lowest average rate for electricity in New Zealand; 5.03 cents! Residential users pay 22.6 cents per KWh, or four times as much.

No industry in New Zealand uses more electricity than New Zealand Aluminium Smelters. No industry pays less per unit for electricity than they do. They even get excessively allocated emissions units to help with the lowest priced power contract in New Zealand. And now New Zealand Aluminium Smelters are going for "Godfather" gold by trying to bully their power price even lower.

How fast shall we drive over the cliff? More amendments to the New Zealand Emissions Trading Scheme

Robin Johnson's Economics Web Page looks at at the Government's amendments to the New Zealand Emissions Trading Scheme and concludes we are arguing about what gear to drive in as we speed towards the cliff. The Government has kindly given us the opportunity to make a submission about how fast fast we should go over the emissions cliff. Time to fasten your seatbelts.

Back in July, New Zealand Minister for Climate Change Issues Tim Groser announced more watering-down of the New Zealand Emissions Trading Scheme (NZETS).

About a week ago, on 23 August 2012, Groser introduced the amending legislation - the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill.

Consistent with previous New Zealand emissions trading scheme legislation, the bill will be fully and rationally considered by Parliament's Finance and Expenditure Select Committee in an insultingly short period of time - ten working days. The closing date for public submissions is Monday, 10 September 2012.

What does this NZETS amending bill do?

• It indefinitely postpones the entry of pastoral agriculture into the NZETS.
• The 'two-for-one' deal, which halved the number of carbon credits each emitter had to surrender for a tonne of carbon dioxide equivalent greenhouse gases, is extended for another three years. It was to end on 31 December 2012, but will now run on at least to 2015.
• The price cap of $12.50 per tonne ($25 for two tonnes) will also extended. It was to end on 31 December 2012, but will now run on at least to 2015.

What doesn't the bill do?

• It ignores the recommendation from the 2011 ETS review committee to stop the unlimited use of international carbon credits by New Zealand emitters. Which as we know, makes the NZETS the weakest link.

Whats the cliff we are driving off? Well, it's climate change. And it's the price of the New Zealand emissions unit.

NZ Unit price 2009 to 2012 from OMF Financial Ltd

Who said what about the bill?

Simon Terry of the Sustainability Council said that the NZETS is now in a state of eternal transition".

Former PM Helen Clark stated the obvious, that pastoral agriculture must be in the NZETS; “You can’t have your major sector generating greenhouse gases outside the scheme."

Federated Farmers said the deferral of agriculture was huge win for New Zealand's farmers

Business New Zealand seem unusually silent. I guess for them it is all going to plan. Back in July they welcomed Tim Groser's announcement of the delays to the NZETS. So why waste space repeating the message?

However, I do offer some relief from this dreary "business-as-usualism".

Green MP Kennedy Graham has given some strong speeches accurately reflecting both the scientific reality of the cumulative carbon dioxide emissions and the ethical challenge of the failure of politics and governance to respond.

None more so than in his 'first reading' speech in which he summed up the bill thusly.

"Today's bill will defer agriculture indefinitely, defer any increase in the price cap, defer the one-for-one surrender obligation, allow a greater switch from forestry to dairying, and enable importers to increasingly use dangerous synthetic gases. What remarkable, steel-like resolve!"

I do recommend you read Kennedy Graham's speech in full.

Graham, a much more experienced diplomat than Tim Groser, walks us through more than 20 years worth of futile international climate change negotiations, all the while as the relentless accumulation of emissions in the atmosphere uses up the carbon budget consistent with limiting warming to two degrees. And with no faux-realist "get people on the bus" cliches we have come to expect from Tim Groser.

Kennedy Graham concludes that we don't have to accept this state of affairs. He calls on us to make a submission to the Finance and Expenditure Select Committee.

Greenpeace are also saying get stuck in with a submission. What to say?

How about "the NZETS is completely ineffective in reducing GHG emissions due to it's many design flaws - the use of unlimited international junk credits, the delays and exemptions, the partial coverage, the lack of a cap, the price ceiling, the lack of revenue recycling due to the excessive free allocation to emitters."

Something brief and to the point.

However, I will leave the last word to Jeanette Fitzsimons speaking on TV Ones's Q+A: Panel after a Nick Smith/Russel Norman debate back in September 2011.

"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".