Learning to live with Kyoto

By BRIAN FALLOW economics editor

New Zealand's major companies have been given a first taste of how the Government intends implementing its greenhouse gas policy when it comes to large industrial sites.

The first negotiated greenhouse agreement, signed off last week between the Government and the New Zealand Refining Company, has been declared a win-win outcome.

Marsden Pt refinery is no longer facing the threat of closure and instead will get a $180 million upgrade so it can, from January 2006, produce the cleaner petrol and diesel specified by the new regulations.

The Government says the agreement means the upgrade will be achieved with about half the increase in greenhouse gas emissions that might otherwise have been the case.

A tax on the carbon content of fuels planned for four years from now would have cost the refining company about $25 million a year, or as much as its entire payroll, said chief executive Dr Thomas Zengerly. That tax would be raised from the energy the refinery consumed, not on the fuels it produced.

The negotiated greenhouse agreement (NGA) exempts the company from the tax in exchange for its committing to working towards world best practice in energy efficiency and, therefore, emissions.

Such agreements are a central plank in the Government's policies to implement the commitments it undertook last year in ratifying the Kyoto Protocol to combat global warming.

The need for such agreements arises from what is called "leakage". If, say, the refinery or the country's two cement works were to close because a carbon tax made them uncompetitive with imports from countries outside the Kyoto club, that would do nothing for the global atmosphere - New Zealand consumers' needs would still have to be met from somewhere - and would harm the economy.

The company was able to argue that closing Marsden Pt could even be counter-productive from a strictly environmental point of view.

Marsden Pt is among the best 25 per cent of refineries worldwide in terms of energy efficiency and emissions intensity.

The alternative refinery sources of the new fuel might not be as efficient, the company said. The most likely alternative sources of supply would be refineries in Singapore, Korea, Taiwan and Australia, none of which are subject to the protocol.

And all the Australian refineries are less efficient than Marsden Pt.

The refining company was also in a strong negotiating position in two other respects.

Energy Minster Pete Hodgson insisted that the Government did not enter the negotiations with a view of getting an agreement at any price.

But it would have been politically embarrassing if the closure of the refinery, the loss of 460 Northland jobs and a $175 million widening of the annual balance of payment deficit could be laid at the door of the Government's environmental policies.

Even from a narrow fiscal point of view, losing $24 million a year in company tax rather than forgoing $25 million a year in carbon tax would have been an own goal.

Second, the implicit threat to close the refinery in the absence of an NGA could not be dismissed as bluff.

The company could point to the recent decision by ExxonMobil to close a refinery near Adelaide because of overcapacity and tight refining margins.

NZ Refining's share register is dominated by the four major oil companies, which are also its customers: ExxonMobil, BP, Shell and Caltex.

These companies would hardly be brought to their knees if they had to write off any not-already-amortised investment in a small refinery in New Zealand.

Although they never looked like breaking down, the intensive negotiations over three or four months were sometimes tense, said Crown negotiator Brian Roche and his NZ Refining counterpart, Stuart Frazer.

"Was there tension? Yes," said Roche. "Did people have to trade? Yes.

"We always knew it was going to be difficult to achieve on the one hand the certainty the company required and on the other the flexibility the Government required in what is still an evolving policy area. I am confident we have done that."

NGAs depend on agreeing on benchmarks of what is world best practice in unit emissions and a timetable for moving towards them, with penalties for shortfall.

Frazer said: "The refinery industry is blessed with having very good benchmarking, independently provided by Solomon Associates, based in Dallas. We, like most other refineries, benchmark ourselves against them."

It may not be so easy for other companies or sector groups in other industries seeking NGAs to find a comparable benchmarking organisation.

To meet the new fuel specifications, the company will need to commission, by October 2005, a high-pressure hydrodesulphurisation unit to reduce the sulphur in diesel and a Bensat unit to reduce the benzene content in petrol.

Frazer said energy efficiency would have to be a core requirement of the design of the new plant.

But the agreement would also have implications for the way the whole refinery operated, intensifying the focus on energy management.

The refinery already monitors and reports on fuel use and emissions.

"We are already reporting our energy use and emissions to a number of [Government] departments. What we have now is more rigorous contractual obligation for reporting."

Some of the details of the agreement will remain confidential, but others have been disclosed.

The agreement runs for 20 years, with a major review in 2012, the end of the Kyoto Protocol's first commitment period.

If the company falls short of its agreed targets it will be liable to pay carbon tax on the difference.

But, Roche said, that should not be seen as a precedent for sanctions in other NGAs.

Each negotiation would be separate.

The upgrade is the refinery's biggest capital expenditure project since the 1980s.

Because of the lead times involved and the Government-imposed deadline for the new fuel specifications, the NGA negotiators were working to a deadline.

Both sides agree that helped.

What are NGAs?


* The Government plans to tax the carbon content of fuels from 2007 to combat global warming.

* Big firms whose international competitors don't face such costs could suffer, so they are able to negotiate greenhouse agreements (NGAs) that exempt them.

* In return, they must cut their "greenhouse gas" emissions to a level acceptable to the Government.

* The agreement reached over the Marsden Pt refinery is the first such deal.

* Smaller firms with the same problem may also get some relief, but the Government says details of the rules they will have to comply with are months away.