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ETS Rules Prejudge Level of Corporate Welfare

ETS Rules Prejudge Level of Corporate Welfare Required

Media Statement – 24 June 2008

Eight of the companies set to qualify for corporate welfare under the Emissions Trading Scheme (ETS) are together likely to receive $1.4 billion or more over the next decade.

These subsides are to be set in legislation before New Zealand has even found out what additional emission cuts it will need to take responsibility for after 2013, and what reductions other countries will have to meet. There will be good cases for the Government providing transitional assistance, but it is completely unnecessary to pre-commit so far into the future, at such a high rate of subsidy to every major emitter.

The subsidies are paid partly on the basis of emissions from fossil fuels the companies burn, but more for expected increases in their power bills under the ETS. The intent of the arrangements is to provide, on average, a 90% subsidy on 2005 levels of emissions and a 90% subsidy for increases in the cost of power due to the ETS. Both apply out to 2018 before winding down over twelve more years.

The nation’s largest electricity consumer, New Zealand Aluminium Smelters, will receive the biggest individual subsidy up to the end of 2018. Its payments are likely to total around $600 million, and fellow metal maker New Zealand Steel is likely to benefit by more than $100 million (assuming a carbon price of $30 a tonne).

While payments to Fonterra are likely to be around $200 million up to 2018, these represent only a small part of the agriculture sector subsidies under the ETS. The exemption of agricultural emissions (from animals) amounts to a net subsidy to the sector of $1.31 billion for the next five years alone, after account is taken of the charges farmers pay on electricity and fuels.

Four major pulp and paper firms can be expected to receive a total of about $400 million up to 2018, nearly all of which arises from electricity subsidies. The New Zealand Refining Company is likely to receive around $70 million during this period.

These subsidies will effectively come from other consumers. Households, road users and small and medium businesses that are responsible for only a third of the nation’s emissions carry over 90% of the net charges resulting from the ETS up to 2012, and only a little lower proportion for the six years after this.

The Treasury has made clear that the Government expects to distribute the entire amount that is provided for under the legislation through criteria that have yet to be set. While some of the large emitters that qualify are to get less than the 90% cover on 2005 levels, others will get more. That is, they will only be means tested against each other. The exercise is ultimately a carve-up of the available funds between the major emitters rather than Government paying to each firm only a level of transitional assistance that is in the nation’s interest to provide.

The proposed arrangements give extraordinarily high levels of protection to the major emitters before the Government has the information to tell what levels of assistance are really needed. These rules need to be amended before any Bill is passed. They are a one-way bet for these companies at the expense of the rest of the community.

This statement is based on the Council’s background document: Corporate Welfare Under the ETS.

Estimating the scale of the subsidies requires a number of assumptions to be made about the future price of carbon, resulting electricity price rises, and how the country will perform in cutting emissions relative to the future target it is to take on after 2012. A price of $30 per tonne of carbon throughput the period has been conservatively assumed, along with a similarly conservative small gap between emissions and target after 2012, while the price of carbon is assumed to raise the cost of all units of generation, as indicated by official documentation.


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