BusinessNZ Energy Council


Oji says decarbonisation investments at risk from ETS proposal

Apr 24, 2023 | News

SourceEnergy News

Felicity Wolfe – Mon, 24 Apr 2023

Oji Fibre Solutions says a $500 million-plus investment it has proposed at Kinleith will not be economic under proposed changes to the rules for carbon credit allocations to heavy industry.

Oji has already invested hundreds of millions of dollars in decarbonisation since buying the business in 2014 and is scoping the South Waikato project with Te Uru Rākau.

It says the proposed bio-products hub— a potential $500 million to $1.6 billion investment — would reduce emissions by up to 140,000 tonnes per annum, create 200 new jobs in the region, and aligns closely with the goals of the Government’s Forest Industry Transformation Plan to develop the bio-economy.

However, Oji calculates that the proposal to reduce free emission allocations to industry would reduce its return on that investment by at least $7 million each year.

“This clearly undermines the project viability, which we believe is an undesirable outcome for the environment and the Government’s targets,” the company says in its submission on the Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill.

In 2009, firms in emissions-intensive, trade-exposed industries were allocated ‘free’ credits in the emissions trading scheme. The purpose was to support industries which would otherwise shut down or relocate off-shore if their 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The Bill says the eligibility and allocation settings for these firms have become outdated and “are leading to substantial over-allocation” due to carbon price increases.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 were trading at $61.75 this morning, down from highs of $87 last year but up from below $55 in March. With the free allocation developed in 2009, based on a $25 carbon price, 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 eligibility criteria for EITE companies to account for current carbon prices and to allow future resets every 10 years or after five years at the Climate Change Minister’s discretion.

Oji’s position

Oji mainly produces pulp and paper-based packaging products, and directly employs more than 1,500 people, primarily in regional New Zealand, including South Waikato and the Bay of Plenty.

Its facilities run on more than 80 per cent renewable energy, including biomass and geothermal steam for process heat requirements. It also generates about 350 gigawatt hours of electricity a year from biomass cogeneration.

The firm notes its Kinleith and Penrose paper machines are essential to New Zealand’s paper recycling infrastructure. They process roughly a third of the country’s paper and cardboard waste into high-quality packaging products, including for primary sector exports, including milk powder, kiwifruit, meat, and other produce.

With the country’s energy-intensive and trade-exposed firms unable to pass ETS costs on to their customers, there is an “ongoing and material risk of emissions leakage” which supports the need for the allocation.

It notes competitor countries are “aggressively attracting investment in bio-energy and high-tech wood processing by way of direct subsidies” which would likely lure companies facing increased costs off-shore.

“Any premature closure forgoes opportunities to transition these industries to lower-emissions operations as technologies mature. Once these industrial companies cease operation, they will not return to operation.”

Oji also notes that the bill in its current form “also appears to contradict other Government policies, such as theForest Industry Transformation Plan where there is a clear intent to encourage such investments”.

It says that relatively minor changes to the bill’s proposals would maintain the intent of the ETS to incentivise emissions reductions while ensuring EITE allocation addresses the leakage risk. Specifically, not undertaking allocative baseline reviews of companies which have made material investments to reduce emissions.

Challenging responses

The Climate Change Commission says there is evidence that allocation rates are higher than needed but says the bill risks preventing that over-allocation from being corrected.

It says the changes could see all ‘moderately’ intensive activities reclassified as ‘highly’ intensive solely because of rising carbon costs.

The commission says eligibility thresholds introduced in 2009 were only intended as a gateway. They were never intended to be changed with pricing and were not amended when carbon prices fell in 2011.

Nor was there ever a perpetual entitlement promised that free allocation must be maintained at 2 per cent of revenue for moderate emitters and at least 4 per cent for high emitters, as was the case in 2009.

“To be successful, this bill should seek to manage the risk of emissions leakage while avoiding overpaying to do so,” the commission says.

“There could be merit to improving the eligibility assessment for both existing and new industrial allocation but only if it is grounded in a wider assessment of how leakage risk has changed over time and how eligibility should change in response.

“It is important that any such assessment also consider how the industrial allocation regime can be made consistent with achieving Aotearoa New Zealand’s emission targets.”

Simon Upton, the Parliamentary Commissioner For the Environment, says the bill’s proposal to change the scheme’s emissions-intensity thresholds should be deleted, pending “more comprehensive analysis than it has received to date.”

He says the rationale for industrial allocation — to protect firms competing with international rivals that don’t pay carbon costs — is fair, as is the intention to bring the thresholds for that protection up to date.

But he says the proposal only considers the rising price of carbon and isn’t a proper assessment of whether the risk of firms closing or relocating production has changed.

“In the papers supporting the policy decisions on the bill no evidence is presented that the actual risk of carbon leakage has increased nor that there is a problem with the current thresholds. It seems the bill is attempting to fix a theoretic risk without actually identifying a real-world problem.”

Interconnected business

The Business NZ Energy Council and Business NZ say that the Bill could jeopardise supply chains, increasing costs to other firms and consumers.

“New Zealand’s businesses are vastly interconnected. Outputs from one firm are critical inputs for others. For example, lime is a critical input for steel, water treatment, and pulp and paper; hydrogen peroxide goes into the bleaching of pulp and paper; cement and steel are critical for infrastructure; urea is a key ingredient in resins and nitrogen-rich fertilizers. The absence of one firm can have deep and costly consequences throughout the supply chain, increasing costs and harming consumers.”

Another example is the loss of carbon dioxide supply from the now decommissioned Marsden Point refinery, which has resulted in a nationwide CO2 shortage.

“Among many uses, carbon dioxide is often used in food packaging, to put the ‘fizz’ in beer and to increase the growth of vegetables, such as tomatoes. The shortage has increased the cost of producing many goods. It would have been difficult to predict, without further examination, that the closure of an oil refinery would increase the price of beer and tomatoes.”

Trade conditions

BEC also highlights that the underlying trade conditions that prompted the free allocations have not changed significantly since 2009.

BEC points to a report released in March by the International Carbon Action Partnership showing only 17 per cent of all global greenhouse gas emissions are covered by an ETS.

“China’s emissions trading scheme is the world’s largest in nominal terms, covering 4 billion tCO2 or the equivalent of 44 per cent of its aggregate emissions, slightly behind New Zealand at 49 per cent coverage,” BEC says. “However, China’s ETS only covers power generation, and does not cover industry.”

It also says the European Union’s move to replace its industrial allocations policy will take more than a decade to phase in. It also is limited to specific industries, “while industrial allocations will remain in place for other participants”.

Outside of the EU, the only countries that include industry within their ETS is South Korea, the United Kingdom, Mexico, Kazakhstan, Montenegro, and New Zealand, it says.

While BEC acknowledges the importance of meeting New Zealand’s emissions targets, it “reiterates the vital role industrial allocations play, not only in reducing the likelihood of carbon leakage, but also in providing a strong signal to invest in step-change decarbonisation projects”.

It says it supports a one-off reset to allocative baselines to support the future integrity of the ETS. But mandating fresh resets every five-to-ten years “strips away the signal to invest in step-change decarbonisation projects”.

“Large projects resulting in significant step changes would not proceed, as the economic returns would not outweigh the large opex and capex associated with a project.”

BEC recommends adding a requirement that the Minister must consider a firm’s opex and capex before resetting allocative baselines and amending phase-down rates.

It says there are aspects of the bill it supports, including changes to the eligibility threshold, protecting against the increased risk of carbon leakage from a higher carbon price. Also, BEC supports provisions that will cover new activities arriving in New Zealand to be eligible for allocations. “This flexibility ensures eligible activities continue to receive allocations when they change their activity, encouraging the changes that arise from decarbonisation.”

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