Steel industry wants out of ETS

Glenbrook Steel Mill brings in $300 million in exports a year. Picture / Dean Purcell

Now is not the time to impose new costs on businesses contributing significantly to employment and export revenues, New Zealand Steel president Ross Murray told MPs reviewing the Emissions Trading Scheme yesterday.

Most of the Glenbrook plant's output is exported, which helps when domestic demand has collapsed, bringing in about $300 million a year, he said.

"But the global recession means competitive pressures are intense and our ability to bear additional costs has critically worsened."

Glenbrook employs 1200 people directly. It meets two-thirds of its electricity requirements from its co-generation plant and Murray told the select committee that 80 per cent of its emissions were the unavoidable result of turning ironsands into steel.

They would not be eliminated if the demand the plant meets were met from another elsewhere in the world.

NZ Steel wants the steel industry to be exempted from ETS - as it is in Europe, at least until 2012 - until its international competitors are subject to similar costs.

Under legislation, large industrial emitters which are exposed to international competition will get an allocation of free emissions units from a fixed pool equivalent to 90 per cent of their collective emissions in 2005. That would be phased out between 2019 and 2029, subject to reviews.

How the free allocation pool would be divided up among emitters has yet to be determined, even though the firms involved are due to come into the scheme at the start of next year - a timetable several submitters consider unrealistic.

Fletcher Building, whose interests include cement and steel production, submitted that by 2010 the free allocation would only cover an average of 80 per cent of the sector's emissions.

Being exposed to a carbon cost for the other 20 per cent would put both cement and steel manufacturing in New Zealand at risk of becoming uncompetitive with Asian producers.

A more generous allocation would still expose emitters to the price of carbon at the margin as they would still face their market value as an opportunity cost when they decided whether to use them or sell them. So the scheme's objective of changing behaviour through a price mechanism would not be compromised.

Representing the company before the select committee, Hans Buwalda said that rather than have an arbitrary time-line for phasing out free allocation, it should be determined by international competitiveness and on a basis that would give emitters certainty about their obligations for the next five years on a rolling basis.

Fletcher Building favours allocation on an "intensity" basis, under which how many free carbon credits units a plant received would depend on how its average emissions per unit of output compared with some benchmark.

Its fellow cement maker, Holcim, also advocates intensity-based allocation.

It sees the ETS as an impediment to its plans to replace a 50-year plant at Westport with a more efficient and larger one near Oamaru at a cost of around $500 million.

As the scheme stands with allocation based on historic levels, it would face a doubling of its carbon bill even though the new plant would reduce global emissions by replacing those from the old plant and those embedded in 200,000 tonnes a year which are imported, managing director Jeremy Smith said.

Intensity-based allocation based on average unit emissions across Australasian cement plants would initially penalise Holcim, because of the age of the Westport plant, but benefit it if the new one went ahead.

Methanex's managing director Harvey Weake said if its production in Taranaki became uncompetitive and shut down the replacement supply was likely to come from plants in China whose feedstock was coal, not natural gas, and whose unit emissions would be much higher.

"The loss would be $300 million to New Zealand's current account, 200 direct jobs and an increase of nine million tonnes in global emissions," Weake said.