Politicking and pleading over climate crisis regulation

Seven of our largest manufacturers - all beneficiaries of decade-old policies designed to minimise the impact of the emissions trading scheme on them - are now pleading for even more favourable treatment. They are doing themselves and the country no favours, writes Rod Oram.

Special pleading is always debasing because it is self-serving and imposes damage on others, and never more so than when climate change is involved.

The latest climate pleaders to Government are seven of our largest manufacturers. Under the auspices of Business New Zealand, Fonterra, NZ Steel, Rio Tinto, NZ Refining, Golden Bay Cement, Methanex and Pan Pac Forest Products are arguing for more subsidies and an even easier ride in the Emissions Trading System than they have enjoyed over the past decade.

Expect much more of such politicking as Parliament fights over the zero carbon amendment to our climate response legislation. With agricultural sectors, backed by the National Party, seeking to minimise their obligations to act, many other sectors and companies will seek to carve out their own such deals.

But not all. Some businesses understand the transition to a climate safe, low emissions economy is the very best strategic opportunity they will ever have. Rapid changes in technologies, markets, societal values, consumer preferences, national goals, government policies and many other drivers are creating abundant commercial opportunities for them.

The seven big industrial emitters are the prime beneficiaries of a decade-old fudge of policies designed to minimise the impact of the ETS on companies that are emissions intensive and trade exposed, or EITE for short.

From the companies’ perspective, the policies were a triumph. The ETS has been essentially meaningless to them. The reductions they have made in energy use and emissions would have been good business practice and commercially beneficial anyway.

The highly favourable treatment they have received has come at a considerable cost to many other businesses and the country at large. In 2017, 82 emitters out of the 300 companies with direct obligations in the ETS qualified for free credits under the EITE rules. They received 5.6 million free credits, equal to 20 percent of the 28.6m units all companies surrendered to meet obligations.

But logically, given the low carbon price in recent years, they would have bought cheap units and stockpiled their free credits to use when the carbon price rises. It is already $25 a tonne and will rise much further when the Government removes the price cap in the next few years.

The 10 largest emitters, which includes the seven companies backing the Business NZ report, received 90 percent of the free allocations in 2017. As their output increases, they get more allocations. The free units are an output subsidy to them, which pushes up the cost of emissions for others.

While units are free to the EITE businesses, they are a cost to taxpayers. The Government loses out on the revenue from auctioning those credits in the ETS, while bearing the cost of buying international credits if needed.

Many companies here can turn robust climate strategies into competitive advantages. That’s particularly true for the big seven manufacturers featured in this report. ...But they aren’t using that distinguishing feature to enhance their brand, revenues or profitability.

On current Government estimates, the cost is escalating very fast. Under the current rules, it expects to allocate 143m free units from 2021 to 2030. It also estimates an auction price of $30-50 per unit, for a total of $4.3 billion to $7.2bn - which is the value of the subsidy to the EITE businesses.

The Business NZ report, which it commissioned from Castalia, a consulting firm, makes only a few perfunctory comments about the global climate crisis and its members’ roles in helping to solve it.

The closest it gets to any gesture towards responsibility is: “Emissions Intensive Trade Exposed (EITE) businesses are acutely aware of the importance of emissions reduction targets. Significant effort has been put towards reducing emissions by EITE businesses already, and more is planned. EITE businesses are also acutely aware of the potential risks and unintended consequences that emissions reduction policy can impose on the economy.”

The report does itself and the country no favours in many other respects. Above all, it argues EITE companies would become less competitive if they made more of an effort to reduce emissions. Then, any reduction in output here would result in increased production in other countries, possibly in plants emitting higher emissions.

That’s wrong on four grounds:

- Under the Paris climate agreement, every country has to deal with all increases in emissions, whether from such “imports” or from internal growth. Thus “carbon leakage” is far less of a threat than it was a decade ago when the current EITE giveaways were gifted by the government of the day.

- Companies here already accept higher costs of doing business thanks to the likes of minimum wages, health and safety standards, environmental regulation and social obligations they could avoid elsewhere. So why can’t they accept their climate change responsibilities too?

- Companies here need to be on the forefront of technology to maintain their international competitiveness.

- Many companies here can turn robust climate strategies into competitive advantages. That’s particularly true for the big seven manufacturers featured in this report. Fonterra, Rio Tinto, Methanex, Pan Pac and NZ Steel are exporters with lower emissions profiles than most of their competitors overseas. But they aren’t using that distinguishing feature to enhance their brand, revenues or profitability. The same applies to Golden Bay Cement and NZ Refining as domestic businesses competing against imports.

The report overplays the importance of these seven companies by stressing the large roles they play in their local economies. Meanwhile, it underplays their emissions. It says they are only “6 percent of New Zealand’s total emissions.”

In fact, that only counts their industrial process emissions. Each has a larger total greenhouse gas footprint, with Fonterra having the biggest of all. Including on-farm emissions generated in producing the milk it processes, Fonterra single-handedly is responsible for 20 percent of New Zealand’s entire greenhouse gas emissions.

Overall, the seven companies argue for continuing the current generous breaks they get in the ETS, while suggesting Government co-funding to help them on some other emission reduction projects they suggest. But that approach would only tinker with a system which was deeply flawed at its inception a decade ago, and the world has changed much since. Such advice is sadly too typical of vested interests seeking to resist powerful forces driving beneficial change.

What the country really needs is a first-principles investigation of the industries which will be the bedrock of our low-emissions economy, then to devise strategies with them to achieve that fundamentally important goal over the next few decades.

The seven companies represented in this report could play leading roles in that. To do so they would have to take full responsibility for their emissions and commit to being global leaders in the transformation of their sectors. Then they would deserve support, and in turn encourage many other businesses to tackle our climate catastrophe head on.

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