BusinessNZ Energy Council


Gas investments threatened by ETS changes

Apr 26, 2023 | News

SourceEnergy News

Felicity Wolfe – Wed, 26 Apr 2023

Frequent changes to the allocation of carbon credits to Emissions Intensive, Trade Exposed businesses could harm future investments in New Zealand’s gas supply, OMV New Zealand says.

OMV notes that a key purpose of the industrial allocation is to avoid ‘emissions leakage’ whereby New Zealand-based industries become uncompetitive because they are exposed to carbon costs that their overseas competitors are not.

“While OMV is not an EITE entity, Methanex is, and we are very aware of the vital role that Methanex play in supporting the overall gas market and therefore supporting other gas consumers.”

In its submission on the Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill, the Taranaki gas producer says Methanex can commit to significant off-takes of yet-to-be-developed gas, which ensures the development is commercially viable. The gas then becomes available for much smaller consumers. Without Methanex, coordinating those customers would be too difficult for an upstream producer’s investment decision process, OMV says.

“With the project underwritten, the gas producer can then market the rest of the gas to other consumers (many of which have no feasible alternative to gas and may be in hard-to-abate industries important to the New Zealand economy) in line with their contracting timeframes.”

If ETS uncertainty resulted in the closure of the Methanex plant, its methanol production would be replaced overseas, possibly with higher emissions if the New Zealand gas-based plant is replaced by coal-based industrial plants.

“Such an outcome would have no benefit to global emissions but would harm the New Zealand economy and lose jobs.”

“In this context, we note that most methanol-producing countries don’t impose carbon costs on their producers and our understanding is that the marginal supply of methanol remains coal-based in China.”

Decarbonisation investments

In 2009, firms in emissions-intensive, trade-exposed industries were allocated ‘free’ credits in the emissions trading scheme to ensure they did not shut down or relocate off-shore if international competitors were not also facing similar carbon costs.

The Bill says the eligibility and allocation settings for these firms have become outdated and “are leading to substantial over-allocation” due to carbon price increases.

New Zealand carbon units are currently trading at about $61, compared with the $25 price when the free allocation was developed in 2009. The Bill says that industries are receiving support beyond their actual emissions costs, at a significant cost to the Crown, and undermining New Zealand’s climate goals.

It proposes resetting the allocation eligibility criteria in-line with current pricing, while also allowing future criteria resets every 10 years or after five years at the Climate Change Minister’s discretion.

Businesses submitting on the Bill are concerned about the uncertainty frequent resets could create, with no guarantee that investments made with the support of the allocation would remain commercially viable in the future.

Most are calling for the Bill to require the Minister to take carbon reductions and investments into account during future resets. Some are asking for the ability to apply for individual exemptions, based on emissions-reducing investments.

The Business NZ Energy Council says New Zealand’s EITE firms want to decarbonise.

“Their customers, shareholders, and wider stakeholders demand action. To remain competitive and retain a social license to operate, these firms are committed to decarbonisation. Many have announced significant investments to make material emission reductions while setting their sights on more substantial investments out to 2030 and beyond.”

It points to the large investment Methanex is making at its Motunui methanol plant. New technology will cut the methanol producers’ carbon emissions by 50,000 tonnes each year.

“The company is pursuing work to produce methanol using renewable natural gas, biomass, and green hydrogen, while setting its sights on methanol as a cleaner-burning marine fuel. The latter is promising.”

BEC also highlights the work by Golden Bay Cement, which has invested more than $200 million since 2004 in decarbonisation projects.

“Its Whangarei cement plant now substitutes 50 per cent of the coal used to power its cement kiln with used tyres and construction waste that were once destined for landfills,” BEC says in its submission. “The company has a well-developed plan to replace the rest of its coal use with biofuels derived from waste streams. This plan requires investments in the order of $300m+ to meet its targets.”

Recycling risks

Auckland-based Visy Glass says there is a need to reset the scheme to bring it into line with current carbon pricing.

But the proposal to periodically review the eligibility of firms every five to 10 years will result in uncertainty around regulatory costs that could impact its future investments in emissions-reducing technologies and upgrades.

The firm, which currently qualifies as a “moderate EITI business”, operates the country’s only glass food and beverage packaging manufacturing plant. The Penrose site employs about 275 people, and Visy plays a substantial role in New Zealand’s glass recovery and recycling system.

In 2020 it invested in cutting-edge technology to increase its use of recycled crushed glass, known as cullet. This decreases the need for virgin raw materials, reducing upstream extraction and transportation emissions, and avoiding the “one-off emissions event” of melting soda ash and limestone used in glass production from raw materials.

Cullet also melts at a lower temperature than raw materials, reducing the overall emissions intensity of the production process, Visy says.

“For example, a Visy container with 70 per cent recycled content can be up to 30 per cent lower emissions intensity than a container made with 100 per cent virgin content.”

Visy suggests that the Bill allow the Climate Change Minister discretion to not review companies every 10 years if they are “satisfied there is evidence of material emissions reduction investments”.

It says that when reviewing ETS regulations, the Climate Change Minister should be required to take such investments into account and be satisfied that any changes to the allocative baseline will not “increase the risk of emissions leakage in respect to the relevant activity, or otherwise adversely impact on emissions reduction”.

Pulp industry pressure

Timber pulp manufacturer Winstone Pulp International says the ETS is causing considerable cost increases that are not covered by the allocation criteria – and should be.

It says firms being incentivised by the Government to switch their process heat from fossil fuels to biomass is driving up wood chip and forest residue costs “and this can be expected to reach parity with the equivalent ETS inclusive fossil fuel cost”.

Winstone calls for a “Biofuel Allocation Factor” to be included in its industrial allocation assessments, saying the sector is in jeopardy of not being able to afford feedstock.

“As this problem is a direct result of the ETS policy settings, it needs to be addressed through the IA regime. This problem needs urgent Government attention to avoid the risk that it could precipitate the commercial collapse of New Zealand’s pulp sector, and the associated value add that domestic wood processing provides to the New Zealand economy.”

Each year, Winstone produces over 220,000 tonnes of high-grade mechanical pulp for export. Its adjacent sawmill produces more than 120,000 cubic metres of sawn timber for export and the domestic market. In total, it adds value to more than 660,000 tonnes of logs and fibre each year.

Investments underway

The firm has also made significant and ongoing investments in using biomass residues from its sites to generate process heat for its pulpmill at Karioi, near Ohakune.

“This has allowed us to significantly reduce the use of fossil fuels, achieving further emission reductions of around 25,000 t CO2e per annum.”

However, it still relies on LPG for high-temperature process heat, using about 4.8 million litres of fuel per year.

So far, Winstone has reduced its use of the gas by 20 per cent over the past three years and has an ongoing research and development programme targeting further reductions and eventually elimination of LPG from its operations.

“We are currently evaluating a project to completely remove our reliance on LPG which will require an investment in excess of $12 million.”

As a “price taker” in the international industry, the investments to date were enabled by the regulatory certainty of the ETS and Energy Intensive Trade Exposed regime, Winstone says. Future emissions reductions will come at a higher cost and significant and complex process plant upgrades, it says. “These are long-term investments requiring payback periods of around 20 years and it is important that the Industrial Allocations settings do not disincentivise this type of investment.”

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