Ministers rejected advice to review climate grants

Ministers rejected advice to take a hard look at hundreds of millions of dollars in climate grants to the likes of NZ Steel, Methanex, Rio Tinto, and Fletcher Building.

Inland Revenue and Treasury told the government there was no proper evidence that yearly subsidies to some of the country's biggest carbon polluters were needed.

Their recommendation for a thorough review was met with a no thanks from Minister Simon Watts.

"The fact that the Minister blocked this is disappointing," said Alex Johnston of the Don't Subsidise Pollution campaign.

"It's raising the question of whether this is an expensive system that's inconsistent with our carbon targets, but might not actually be based on any evidence of real risk."

The free carbon credits were meant to be a transitional measure to shield firms from unfair competition from countries without carbon prices and climate targets.

The scheme mainly benefits five firms deemed to be exposed to trade competition: Methanex, Fletcher Building, the Tiwai Point smelter, Ballance, and NZ Steel, which is owned by Bluescope.

Together, these producers of methanol, concrete, aluminium, fertiliser and steel receive hundreds of millions of dollars a year in the form of free carbon credits, which the government could otherwise sell.

Inland Revenue and Treasury said a review might show a cheaper scheme would achieve the object, meaning the government could re-allocate some of that money to other priorities.

The subsidies were meant to be a transitional measure, running from 2010-2030, but they have been extended.

At the current rate of phaseout - of 1 percent a year, rising to 3 percent in the 2040s - the government could still be subsiding heavy emitters in 2060.

That is despite the government having a goal of being carbon neutral in 2050.

Saving jobs

The scheme is meant to stop carbon pricing pushing industries to other countries, where they might create even higher emissions.

That would increase global emissions and result in job losses here - a lose-lose for New Zealand.

But climate campaigners have long accused the scheme of propping up pollution.

The latest advice released under the Official Information Act shows Inland Revenue and Treasury wanted the scheme properly analysed.

They said there was no analysis showing whether the subsidies were a "proportionate response" to the real risk and impact of shifting production.

They recommended getting staff of other ministries to assess each of the individual sectors benefitting most from the scheme, to see if the subsidies were justified.

The advice was obtained by the Don't Subsidise Pollution campaign, which has petitioned against the scheme.

Johnston, the campaign's co-leader, said ministers should have listened. He wanted to see the money spent supporting green jobs, instead of some of the heaviest emitters.

It is the third call in four years to look at alternatives.

The Climate Change Commission said the risk of emissions moving overseas is real - but the current system threatens New Zealand's ability to meet its climate targets.

Thinktank Motu has also published a report, suggesting several alternatives to the system.

One major concern is that giving out freebies blunts the incentive for firms to switch to cleaner, lower-emissions technology - because companies do not feel the force of the carbon price.

Treasury and Inland Revenue said the scheme was "ultimately, inconsistent with the Government's market-driven approach to meeting emissions budgets."

But the system has its strong supporters.

In a recent meeting of the environment select committee, ACT MP Simon Court twice asked Climate Commission chief executive Jo Hendy to justify claims that the subsidies reduced incentives to lower emissions.

Hendy told MPs that while companies could improve their emissions somewhat by tweaking their processes and still keep their subsidies, they would lose their eligibility if they switched to a different, cleaner way of manufacturing.

"It's like giving out free petrol vouchers to local industries who have got petrol driven cars... it really incentivises them to tune their engines to use less fuel, but what it doesn't do is give them an incentive to upgrade to an EV," she told the committee.

The commission said the freebies also reduced incentives for customers to choose cleaner products, such as substituting wood for steel.

That is because when a company does not pay for most of its carbon emissions, it does not pass the carbon cost on to its customers.

Hendy told MPs that "leaking" carbon to other countries was a real risk, however there were "legitimate concerns" about the hundreds of millions being spent on the current scheme and the perverse incentives it created.

She said the scheme meant the country could not meet the Government's 2050 climate target without "additional cost."

'Perverse incentives

The commission gave MPs the example of NZ Steel, which lost some of its subsidy when it switched from melting raw ironsand to steel recycling.

Recycling steel is eligible for a lower rate of carbon subsidy than melting ironsand, precisely because it is a lower-emissions process.

Firms that lose some or all of their subsidies stand to lose millions - at one point, NZ Steel was earning over a $100 million a year from the scheme.

The previous Labour government got around the problem by offering NZ Steel another subsidy, also worth tens of millions of dollars, to switch from its coal-fired iron sand process to electric powered recycling.

The National-led coalition, though, slammed such grants.

It said it wanted the carbon market to encourage companies to lower emissions - not taxpayer subsidies.

Neither the Climate Change Commission nor Thinktank Motu landed on a preferred option, saying more work was needed if the government wanted to look at possible replacements.

NZ Initiative economist Eric Crampton said the incentives would work better if payouts were pegged to what competing countries are doing.

For example, if Chinese steel was competing with New Zealand steel, and started out dirtier per tonne than New Zealand's, New Zealand manufacturers would qualify for a subsidy.

But if Chinese competitors lowered their emissions until they were cleaner per tonne, the support would be phased out.

"If the company in New Zealand is able to reduce their own emissions and you penalise them for doing that by giving them fewer credits, that mutes their incentives...scaling instead by how emissions change overseas gets the incentive right," Crampton said.

Change might be coming, but what kind is not clear.

Revenue and Climate Change Minister Simon Watts said the scheme was important to keep heavy-emitting exporters cost competitive.

But the government wanted to make sure it had the "right incentives" to keep jobs and economic benefits here, and gives firms the certainty they needed to invest in lower-emissions technology.

Watts said the government expected to make announcements "this year".