Climate Change Minister James Shaw yesterday moved to tighten up the so-called “free” allocations of Emissions Trading Scheme units to highly polluting industries.

In the process, he is revealing the real costs that combatting climate change might impose on the New Zealand economy.

But some businesses are warning that if he tightens up too much, they may be forced to close down.

Not only would that cost hundreds of jobs, but it would impact the supply of critical components for industries like construction and agriculture.

In that case, ironically, New Zealand might have to rely on imports of products like cement or urea fertiliser from countries like China or Saudi Arabia, which impose no carbon price on polluting industries.

Shaw does have one other weapon up his sleeve to help the New Zealand industries.

He could impose special carbon adjustment tariffs on those imported products.

Earlier this week, he confirmed that both he and Revenue Minister David Parker were looking at that contingency.

But first, he is proposing to tighten up the free allocation.

“When the Emissions Trading Scheme (ETS) began, it was decided that some companies would receive up to 90 per cent of their pollution credits for free,” he said yesterday.

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“The purpose of this was to protect these companies from more lightly regulated competitors outside of New Zealand.

However, the baseline used to decide how many credits each company would receive is exactly the same today as it was 12 years ago. 

“Over the last decade, major polluters have changed how they do business and are now receiving many more credits than they need.

“The government at the time said it would begin phasing down the free allocation of credits from 2013, slowly driving up the cost of pollution.

“However, this did not happen, meaning we’ve been stuck with an out-of-date system that has directed large amounts of taxpayers’ money towards big polluters while keeping emissions higher than they should be.”

Firms which receive a surplus of ETS units are able to sell them, thus making a windfall profit.

A Ministry for the Environment consultation paper lists other reasons why the free allocation needs to be addressed. Most controversially, it suggests that over-allocation dampens the incentive to reduce production.

Shaw’s announcement yesterday that our biggest polluters would receive only the ETS credits they needed contained another sentence that is likely to be more controversial than the tightening up.

“Together with our plan to phase out free allocation over time, this will push the big polluters to make a larger contribution towards meeting our goal of building a net-zero future,” he said.

The Golden Bay Cement Company (GBC), which operates New Zealand’s only cement works at Whangarei, said in a submission to the Ministry that the Over-allocation definition was “incorrect terminology.”

“There are firms such as GBC that over a significant period of time have invested considerable amounts in emissions reductions to stay below the reduction path, and be industry-leading which has resulted in a current surplus,” their submission said.

“This surplus is critical to make any investment in emission reductions and manufacturing in New Zealand viable.”

And Golden Bay rejected the idea that they should cut production.

“Production capacity, market and profitability drive output decisions,” their submission said.

“Industrial Allocation does not incentivise partial reductions in output.

“It can assist an activity to continue, or it can make it not financially viable to continue, and the activity will stop in New Zealand.”

GBC warned that the move announced yesterday by Shaw, changing the baseline and allocation settings, would increase New Zealand production costs above the costs of imports, “which will shut down New Zealand operations in favour of imports increasing global emissions as a result.”

This is the fine distinction that Shaw must draw.

If he tightens up too much, industries could close, and New Zealand would be dependent on imports from countries that did not impose emissions controls on those industries.

Winstone Pulp International, which operates the Karioi Pulp Mill near Ohakune and exports $US125 million of pulp a year, was concerned about the possibility of the phasing out of the Industrial Allocations altogether.

They said that would gradually erode their competitive situation internationally. and that would result in processing capacity being transferred offshore.

Methanex, which produces three per cent of the world’s methanol from natural gas in the Taranaki, told a similar story.

“Our competition is global, with major methanol production occurring in China, Saudi Arabia, Iran, Trinidad and Tobago, the United States, and Qatar, among other locations.” their submission said.

“None of these countries listed applies a carbon cost to methanol production today; in fact, over 90% of methanol production globally does not attract an emissions cost, and therefore the Industrial Allocation is essential for Methanex to continue operating in New Zealand.

The company said half the world’s methanol was produced from coal which had an emissions profile five times that of the natural gas they use.

Though the vast bulk of the submissions supporting a clamp down on the free allocations were emails from climate change activists, some mainstream environmental organisations did support the clamp down.

The Nelson-based Ecologic Foundation, whose executive director, Guy Salmon, was one of the founders of the National Party’s Blue Greens sector group, was particularly critical of the free allocations.

“While Parliament has declared a climate emergency, the political impetus behind free allocation policy is to create a privileged class of industries that do not need to act as though there is an emergency,” the submission said.

“If agriculture is included, the sectors so privileged amount to almost 60 per cent of New Zealand’s total emissions.

“This makes a mockery of the emergency.’

Ecologic said this shifted an “impossible burden” onto “the remnant, non-privileged portion of the economy, especially non-farming small businesses and households on median-to-low incomes and encouraged politicians to set an inadequate Nationally Determined Contribution (of Greenhouse Gas cuts) whose effect in relation to meeting the global atmospheric budget for 1.5 degrees of warming, was to shift the burden on to other countries, notably less developed countries.

“The Government’s policy commitment to price agricultural emissions means that the free allocation regime eventually agreed on will have important implications for Ministers’ currently weak bargaining position with the powerful agriculture sector when it comes to free allocations of allowances to agriculture.”

Just as the considerations over agriculture’s He Waka Eke Noa proposals are complex and have exposed divisions among farmers, so the industrial allocation will also expose divisions in industry.

That is not surprising; dealing with climate change was never going to be easy.