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Rio Tinto ETS Submission - Key Points

Finance & Expenditure Select Committee
Climate Change (Emissions Trading & Renewable Preference) Bill
Monday 12May 2008

Key Points

Company Representatives

 Xiaoling Liu, President of Primary Metal, Asia/Pacific Region, Rio Tinto Alcan Ltd
 Paul Hemburrow, General Manager, New Zealand Aluminium Smelters Ltd
 Ray Deacon, Manager, Regulatory and Government Affairs, Rio Tinto Alcan New Zealand Ltd

Rio Tinto Globally
 World’s third largest minerals company
 World’s largest producer of aluminium
 Aluminium has a future in a carbon constrained world due to its light weight and recyclability
 Aluminium is a global commodity, with price set through the London Metal Exchange
 New Zealand Aluminium Smelters Ltd is therefore a price taker – extra costs cannot be passed onto customers
 Aluminium produced at more than 200 competing smelters around the world – more than half in non-Annex B countries
 Until there is a global price for carbon emissions, the price of aluminium will not reflect the additional costs imposed in any particular country, including New Zealand
 Rio Tinto will continue to support the New Zealand operation for as long as it is a cost-competitive location
 The Bill in its current form would mean New Zealand would not remain a cost-competitive location

Rio Tinto / NZAS in New Zealand
 Single aluminium manufacturing site in Tiwai Point, near Bluff
 20% of Southland economy, sustaining more than 2,600 New Zealand jobs
 Directly employs more than 900 staff and contractors
 Wages and salaries in 2007 amounted to $78m
 Export earnings are more than NZ$1 billion a year, roughly the same as the New Zealand seafood export industry and larger than the New Zealand wool or wine industries
 World’s highest-purity aluminium
 Nearly half of the world’s hard drives and capacitors in any brand of PC or LCD screen contain aluminium from Tiwai Point
 The wings of the Airbus A380 are made from Tiwai Point aluminium because it makes the aircraft safer and more fuel-efficient
 Since 1990, production has increased by 27% while total site emissions are down 42%
 Following recent negotiations with Meridian, the smelter should remain viable in New Zealand for the foreseeable future, all things remaining equal

Bill Threatens Commercial Viability
 The Bill in its current form will significantly alter the smelter’s cost structure, threatening its continued viability until the international price of aluminium reflects a global carbon price comparable with that in New Zealand
 The Bill, if passed, would therefore likely put the smelter on a path to closure

Closure of Smelter would Harm Global Environment through Carbon Leakage
 Aluminium production is expanding in non-Annex B countries, often with electricity generated from coal or gas
 Lost production from New Zealand would therefore almost certainly be made up by increased production in these countries, resulting in an increase in global carbon emissions

Three Key Changes Necessary to Retain Viability
1. Revisiting Mandatory Phase Out of Industry Allocation
o The Government has recognised that the Bill risks New Zealand losing manufacturers that are relatively emissions intensive and in competition with firms in non-Annex B countries that do not yet face a carbon price
o The industry allocation addresses this risk but is to be phased out against an arbitrary timeline, independent from when non-Annex B countries impose a carbon price on competitors
o We recommend that the mandatory phase-out of the industry allocation should be replaced by a requirement for regular reviews of the ETS
o The transitional industry allocation should be discontinued for a particular New Zealand industry once the international price for their commodities includes a comparable price for carbon.
2. Industry Allocation Should Be Based On the Emissions-Efficiency of Production
o The Bill proposes that the pool of NZUs to be allocated be fixed at 90% of 2005 emissions in the stationary energy and industrial process sectors
o This is arbitrary
o We recommend an approach based on the emissions-efficiency of production so that we are not penalised for expanding production at the expense of less emissions-efficient manufacturers elsewhere
o A rational climate change policy would encourage us to displace less emissions-efficient producers because it would increase New Zealand’s exports while reducing global emissions
3. Industry Allocation Should Be Applied To Transport Fuels If Used For Stationary Energy Purposes
o Under the Bill, if a trade-exposed firm utilises coal or gas in a stationary energy application then they are eligible for an industry allocation of some NZUs to partially offset the increased cost of these fuel sources

o However, should a trade-exposed firm utilise a liquid fuel in a stationary energy application, there is no industry allocation of NZUs to offset the increased cost

o Under the Bill, NZAS would receive no industry allocation to cover our consumption of heavy fuel oil

o We recommend an amendment so that all fuels used in stationary energy applications are treated the same way.

Rio Tinto wants to remain committed to New Zealand.

These three changes are crucial for that to be possible.
They are crucial for the nearly 1,000 people that we employ.
If the smelter were to close, we would seek to redeploy the most skilled of those people across our global network and their skills would be lost to New Zealand.


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