Government giving Fonterra $90m subsidy to transition away from coal

Public Policy / news

Fonterra gets $90 million from the Government's decarbonisation fund to lower its carbon emissions by the equivalent of 120,000 cars

20th Jul 23, 1:32pm by Dan Brunskill

Fonterra Clandeboye exterior boilers

The Government will give Fonterra $90 million to co-fund initiatives that will halve the dairy producer's use of coal as part of a programme to decarbonise New Zealand industry.

Prime Minister Chris Hipkins was set to announce the deal at a Fonterra site in Hautapu on Thursday morning, but the trip was scrapped after the fatal shooting in Auckland.

In a press release, he said the commitment would help the dairy sector transition away from coal much faster.

“This is not just critical for our environment, but for our economy too,” he said.

Fonterra (and other industrial businesses) receive free emissions trading scheme (ETS) units from the government. It was given 51,400 units in 2021, equivalent to 51.4m tonnes of carbon.

This free allocation protects businesses from the rising carbon price, but also weakens their incentive to reduce emissions.

Instead, the Government has created a Government Investment in Decarbonising Industry (GIDI) Fund to help fund lower carbon processes in heavy industry.

It was created with $650 million earned from the ETS, which was paid by emitters that are not eligible for a free industrial allocation.

Fonterra will use the $90m to help fund a range of projects across six of its manufacturing sites, which are expected to reduce its carbon emissions by about 2.1 million tonnes.

This would be the equivalent of taking approximately 120,000 cars off the road and would cover 2.7% of all NZ’s required emissions reductions between 2026 and 2030.

Fonterra plans to invest approximately $700 million of its own money to achieve its decarbonisation target, which was upgraded to a 50% reduction by 2030 (up from 30%).

Hate the subsidy, love the savings

In a tweet, climate consultant Christina Hood said she loved the emissions reductions but hated the subsidy.

“If the ETS were set up better then Fonterra would have the financial incentive to do this themselves. But that will take a few years to correct.”

Emitters are currently able to offset all of their emissions with units created by low-cost permanent pine plantations.

However, the Ministry for the Environment has begun consulting on ways to better incentivise gross emissions — possibly by creating separate prices for offsets and direct reductions.

“The current govt ETS reform consultation is a first step. In the meantime, yep, swallow the subsidy rat and get on with it. We're in a climate emergency and every tonne counts,” Hood said.

Hipkins said these partnerships with big emitters were reducing pollution and ensuring New Zealand industry was keeping up with its international competitors.

“It demonstrates our Government’s commitment to climate action now, and how much further and faster we can go if we make investments sooner, rather than later.”

The Government announced a similar deal with NZ Steel in May, giving the Bluescope-owned subsidiary $140m to build an electric arc furnace at its steelworks at Glenbrook.

Megan Woods, the Minister for Energy and Resources, said both investments would cut emissions locally and reduce the amount of offshore offsets NZ will have to buy to meet its international obligations.

Earlier this year, a Treasury report found the Government would be forced to buy offshore carbon mitigation that could cost anywhere between $3.3 billion and $23.7 billion.

Any extra reductions done in New Zealand reduces the amount of credits that will have to be bought in the future at a yet-unknown price.

The GIDI investment in Fonterra has been forecast to cost the Government about $43 per tonne of carbon reduction. The spot price for ETS units was $49.75 on Thursday morning.

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37 Comments

by Advisor | 20th Jul 23, 1:53pm 1689818021

EU has adopted a carbon border tax regime and Biden is likely going to get bipartisan support for a similar scheme in the US as well. That's the only way these major markets can force the likes of India and China to be more accountable about their ecological footprint while maintaining their own industrial competitiveness.

by The Person | 20th Jul 23, 2:14pm 1689819253

That's the only way these major markets can force the likes of New Zealand to be more accountable about their ecological footprint while maintaining their own industrial competitiveness.

If we get a change of government i feel emissions reductions will be gone by lunchtime. Sure Christopher seven-houses Luxon says he believes in climate change and the need to reduce emissions, but he seems to be against any practical steps the current government is taking. Actions speak louder than words.

by Kate | 20th Jul 23, 2:19pm 1689819545

As I read it even the ACT Party agrees with you. The Nats don’t want climate mentioned during the election. They prefer to adopt an intellectually lazy approach which sees them just agree with ‘the science’ and then do their best to do as little as possibly when and if in power. Whereas ACT realises we are part of a global economy and need to participate in emissions reductions programmes.

by M0ralHazard | 20th Jul 23, 3:04pm 1689822260

"then do their best to do as little as possibly when and if in power."

Isn't that National's policy on most things?

by solardb | 20th Jul 23, 4:17pm 1689826653

nope."ACT was the only party to oppose the Zero Carbon Act".From the horses mouth.

ACT thinks they are been clever ,saying to match our carbon price to the average(I guess they just say "to" )carbon price of our top 5 trading partners. because Britain left the Eu that doesnt include the EU , whose current price is 3 times ours.At the moment it would be a bargain, but if biden gets another term , and China starts to counter climate extremes, and the EU comes back into the top 5, it could get expensive.

but of course , what Seymour the slimy rat thinks he is saying is that they wont have to do anything.

by blobbles | 20th Jul 23, 3:48pm 1689824930

Exactly, National are professional can kickers when it comes to real emission changes. Perpetually telling farmers they will delay their entry into the ETS has been their strategy to keep farmers onside for the entire last time they were in.

Labour are at least acting to move the needle, probably with lots of pushing from the Greens. Pity they are hopeless at almost everything else.

by AndrewRiddell5886 | 20th Jul 23, 6:23pm 1689834200

China has the highest renewable generation going.

And most of the ecological footprint assigned to China is really just transferred from other industrialised countries using China for manufacturing the goods they used to manufacture themselves.

by fat pat | 21st Jul 23, 5:53pm 1689918783

That's the only way these major markets can force the likes of India and China to be more accountable about their ecological footprint while maintaining their own industrial competitiveness.

or that's the only way these major markets can adopt protectionism by stealth while appearing to uphold neoliberal economic values. It's a win-win because they can virtue signal climate religion which is popular with some voters.

by nktokyo | 20th Jul 23, 1:49pm 1689817773

Much better use of money than consulting on vanity projects.

The northern half of the planet is cooking right now. Hopefully the younger generation holds more governments to account and governments have the balls to tax carbon footprint.

by blobbles | 20th Jul 23, 3:18pm 1689823132

Yes, this looks like the next step up to a new normal for the Northern Hemisphere. AGW goes up in steps, complex systems work this way as they find a new balance, where they sit for a few years until the next step up.

by Casual Observer | 20th Jul 23, 4:53pm 1689828819

Not everywhere in the northern hemisphere. A rule of thumb is when UK has a heatwave EU get rains and vice versa. The UK isn't in a heat wave - quite wet infact:

https://www.independent.co.uk/weather/weather-forecast-uk-heatwave-b237…

by murray86 | 21st Jul 23, 8:54am 1689886494

"Much better use of money than consulting on vanity projects." This got my attention. I had been thinking about how much profit Fonterra had been making and was asking myself why should the Government be funding a program that the company is well capable of funding itself? But I do agree with you that it is a better spend than vanity projects or virtue signalling. Still the question remains.....?

by solardb | 21st Jul 23, 9:05am 1689887139

It's ETS money, collected to be spent on reducing carbon. If there was a project that could get more than 120 000 cars off the road for 90 million, that should get the funding instead.thats $750 per car equivalent.

by murray86 | 21st Jul 23, 5:31pm 1689917474

I don't disagree Solar, but why couldn't the Government just regulate to limit GHG emissions, and penalise companies who continue? Fonterra is a private company and they make a lot of money. Could the ETS money go to other public projects to achieve similar goals?

by solardb | 21st Jul 23, 6:57pm 1689922669

Not sure about fonterra, but the likes of NZ Steel were given credits , because it was claimed they couldnt compete with overseas operations if they had to pay full price.

by The Person | 20th Jul 23, 1:55pm 1689818124

It's not clear, given the government is now paying for fonterras emission reductions, does that mean the free allocation of ETS credits will end? Or does fonterra double dip and they can now sell these on the secondary market?

Second, why the obsession with reducing gross emissions? If someone plants a pine forest on land they own to offset their emissions instead of investing in some hideously expensive plant upgrade, well that's their private business right? All that matters to the plant is net emissions.

by mfd | 20th Jul 23, 2:03pm 1689818636

There is a risk if planting pine is cheaper that most actual emission reduction. We're supposed to be gliding towards zero net emissions in 2050, and that won't work if we spend the first decade or two offsetting the hell out of everything until we run out of land to plant more pine trees. We'd wake up one day with nowhere left to offset and have to drop our gross emission precipitously to keep moving on the path to net zero.

At some point we actually have to change our behaviour and we need to start at least some of that now without the fig leaf (pine needle?) of offsets.

by The Person | 20th Jul 23, 2:13pm 1689819231

thanks

by kiwimm | 21st Jul 23, 10:29am 1689892142

Offsetting is a diversion - at best it buys some time to get the gross emissions down. What did the world look like before humans terraformed it? Adding back the trees just gets you back to where we used to be, it does not remove the excess fossil fuel emissions. The gross emissions from human activity are the problem.

by Advisor | 20th Jul 23, 3:15pm 1689822905

hideously expensive plant upgrade

I wouldn't necessarily call it that. The aged coal boilers that Fonterra is running across several sites have to be replaced one way or another and the high cost of imported coal plus ETS makes an electrical boiler a far better choice.

To make it easier to understand, the GIDI fund has only covered the additional cost (less than 12% of overall investment) for Fonterra to get the top, most fuel-efficient model instead of the mid-range option.

by solardb | 20th Jul 23, 8:02pm 1689840137

Do you have a link to that info on the boilers , Advisor. not questioning it , just interested in that sort of thing.

I laughed when I first visited MOTAT, the steam boiler they had on display was the same model and year we were still using in the Freezing works I did my apprenticeship in. that was in the mid eighties. at the time we were replacing heat exchangers the size of a railway tank car , with a modern one about the size of a fridge, and getting more heat out of the waste steam/water. I'd say the whole process was maybe 10 -20 % efficient , by the time it got to providing hot water and space heating.

by solardb | 20th Jul 23, 4:09pm 1689826189

The big emitters get a reducing number of credits each year , but the reduction is nowhere near big enough to encourage change.

by Kate | 20th Jul 23, 2:14pm 1689819278

Great to hear they will be de-carbonising - but does anyone know what the average Fonterra pays in tax per annum? That's really the only way to judge whether the subsidy is equitable to the wider taxpayers providing it.

by morepork | 20th Jul 23, 3:34pm 1689824061

About 160m in FY2022

by Kate | 20th Jul 23, 10:41pm 1689849663

Thanks. That's good to hear.

by solardb | 20th Jul 23, 4:08pm 1689826091

The wider taxpayer is notpaying it , its coming out of proceeds form the ETs scheme.Other emitters are paying it .

by Kate | 20th Jul 23, 10:41pm 1689849709

Thanks, that's good.

by Grattaway | 20th Jul 23, 2:16pm 1689819368

Fonterra (and other industrial businesses) receive free emissions trading scheme (ETS) units from the government. It was given 51,400 units in 2021, equivalent to 51.4m tonnes of carbon.

and now they get a subsidy. WTF

Some of us get neither and pay for our own energy source changes

and strongly object to this rort -Why should my business pay taxes to subsidise my competitors (twice) to do what they should be doing anyway

by blobbles | 20th Jul 23, 3:49pm 1689824964

They are paying for most of it, we are just giving them a subsidy for doing so.

Nothing wrong with this IMO given that the subsidy is <20% of the total cost. Fonterror are unfortunately very necessary for our economy and rather large also in our emissions profile. Knocking our emissions by 2-3% for $90m is pretty good value. Consider that for us to offset emissions in the future is likely to cost 10s of billions of dollars. Prevention better than cure and we need any emissions reductions we can damn well get right now, or we risk systemic collapse.

by Hans Brink | 20th Jul 23, 8:19pm 1689841182

Totally agree blobbles, I think this is a good plan and the right thing to do with consumer requirements in export markets of the future in mind.

by Poission51 | 20th Jul 23, 4:40pm 1689828050

A large part of the government funding is for the electrical expansion component (transpower) GXP points and new lines and substations,the new demand is sustained from savings across the GIDI upgrades.

by nigelh | 20th Jul 23, 5:49pm 1689832181

So all these trade agreements we have exclude emissions tariffs imposed on the commodities we export, China excluded? If emissions tariffs are forced on us by the countries with whom we trade then we have to do no more than what our trading partners are actually doing, not what they say they will do. I suspect most EU, the UK and other countries are back peddling quite substantially on emissions and will do so for the next decade at least. We have to do no more than that but I also suspect we are/will be doing too much.

by Hans Brink | 20th Jul 23, 8:28pm 1689841692

Hard to say nigelh, you may be right. But looking at recent meetings between US and China it could go either way. Can't help thinking they are both looking for common ground and the emissions thing could help. As a very small nation dependent on basic commodities I think it is best to do more than we need.

by kiwimm | 21st Jul 23, 10:32am 1689892378

Better to be ahead of change than lagging it

by solardb | 21st Jul 23, 9:09am 1689887356

My question is the lead in times. Fonterra is talking 12 years per boiler.

And how hard is it to convert a coal boiler to biomass. Or just feed 10% biomass into all coal boilers for immediate gain.

by fat pat | 21st Jul 23, 6:12pm 1689919935

How precisely are these measures going to reduce fuel consumption? If they're substituting fuel->heat with electricity->heat, and if the electricity is generated with fuel then it's a false economy! Chris-M pointed this out the comments section of the NZ Steel article.

by The Person | 25th Jul 23, 10:19pm 1690280374

define fuel? There's allot of new geothermal and wind power going in at the moment, and allot more consented and waiting for demand. On the other hand i'm not aware of any consented coal or gas plants. So unless you class the radioactive decay of the earths core as fuel, then they will indeed reduce fuel consumption (all else remaining equal).