The number of Emission Trading Scheme (ETS) units given to exposed industries for free will soon be greater than those sold to other businesses through government auctions.
Advice provided by the Climate Change Commission last week recommended halving the number of units sold in auctions from 2025 onwards to correct for a historic oversupply.
However, the Commission does not have authority to provide advice on the number of free units given to certain industries. These have a phase out schedule written into law.
This means the number of units up for auction will drop below the number given away free after 2025, if the Government adopts the Commission’s advice.
Climate Change Commissioner Catherine Leining said the industrial allocation settings are written into legislation and therefore the Commission did not give advice on volumes.
“It is certainly very striking … to see that we're now entering a period where the volume of the free allocation is greater than the auction volume,” she said.
There was potential for the Commission to advise on “either speeding up or slowing down” the legislated phase out rate, but it would need the Government to ask for that advice first.
No plan but no fan
Associate Climate Minister Nicola Willis said the Government was not currently proposing any changes to those settings but also that she was not a fan of emission subsidies.
“I’m really wary of any policy that, whether upfront or by a backdoor, is subsidizing people to pollute”.
The industrial allocation protects businesses in emissions-intensive activities that may be competing with rivals overseas who are not subject to a carbon tax.
If emissions pricing pushed production into countries with looser rules and dirtier energy, New Zealand would lose economic activity and global emissions would increase anyway.
New Zealand Steel Development was by far the largest recipient of free units in 2022. It received 1.9 million units, which would have cost $147 million if bought at auctions.
Methanol producer Methanex was the next biggest recipient with 838,400 free units worth $65 million. Fletcher Concrete and NZ Aluminium Smelters each got roughly $50 million worth.
The subsidy also goes to other smaller businesses such as a handful of rose growers and capsicum producers. Tomato growers got almost $3 million for their heated greenhouses.
In total, almost half a billion dollars worth of free units were given away during 2022.
Faster phase out?
Leining said previous advice had suggested maintaining the current phase out rate would not necessarily be consistent with the 2050 target.
However, since then the Government has passed some amendments that should lower future allocations. Those updated calculations have not yet been released or baked into forecasts.
Current forecasts show the industrial free allocation is likely to make up approximately 25% of the total emissions volume allocated to ETS sectors between 2025 and 2029.
However, much of that 75% has already been issued in previous auctions and from more forestry being recognised in the system.
This means the Climate Change Commission has recommended selling just 5.9 million units at auction during 2025 — equal to the number of units expected to be given away for free.
By 2030, the industrial free allocation will be more than double the number of units up for auction based on the current forecasts and settings recommendations.
A 2021 paper by economic research firm Motu suggested using a “more refined and more frequent assessment of emissions leakage” to ensure the free allocation was only being handed out where necessary.
However, some level of free allocation would be needed to prevent emissions leakage in the absence of some global cooperation on carbon pricing.
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