Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill

Members, the House is in committee on the Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill. Members, we come now to Part 1.

I seek leave for all provisions to be taken as one.

Leave is sought for that purpose. Is there any objection? There is none.

Thank you very much, Madam Chair. I’d like to ask the Minister some questions on the Supplementary Order Paper 409 that is on the table, in regards to proposed amendments on clauses 2, 5, 14, and 17. I note in the commentary to this that these are minor and technical amendments to some errors that were noted in the legislation. As was noted before, there are a number of formula and other aspects within the legislation. I’d be interested if the Minister could provide some assurance around the background for these amendments—the basis in which they were identified, assurance that you’re comfortable that there is nothing further remaining that needs to be updated, and any other context that may be useful in us considering this Supplementary Order Paper.

The question is that Parts 1 to 3, the Schedule, and clauses 1 to 3 stand part.

Thank you, Madam Chair. ACT does not support the bill proceeding in its current form. But the ACT Party would be prepared to consider supporting the bill in the interests of having a more efficient, effective, transparent, reliable, and enduring emissions trading scheme, and in the interests of reducing the potential liabilities that the New Zealand Government might have to face in having to cover the cost of allocating emissions credits or these allocations to industries in the future.

So ACT supports the target of net zero carbon by 2050. But, Minister, the problem, ACT would contend, is with some of the announcements that you yourself have made in the name of this Government to reduce emissions—or, at Glasgow, a new target to reduce New Zealand emissions by 50 percent by 2050, net. The emissions reduction plans set out targets for reductions with no real understanding of what the cost of meeting them is, Minister. And then, having gone around the country, allocating funds to different industries from the Government Investment in Decarbonising Industry fund, which is supported by the emissions trading scheme revenues—there are so many parts at play. This Government’s approach to reducing emissions and providing New Zealand businesses and consumers with a long-run view of what a pathway to zero carbon 2050 looks like is really confused right now.

Would it be helpful if you could explain for the committee the purpose of the amendment that you have proposed in Supplementary Order Paper (SOP) 409? Because this relates to the formula that appears in the bill, which is one of the ways that emissions allocations are treated. Now, the formula that appears in the bill, prior to the amendment that you tabled, actually was only offered to the select committee in the few days before the report was finalised. Select committee members—myself and Simon Watts of National—asked officials to please demonstrate how this formula works. Because it’s not clear that the allocations that this formula would give to New Zealand industry would be sufficient so that they could remain competitive with their overseas competitors, either with goods manufactured overseas that aren’t subject to a carbon price or goods manufactured here that our exporters might want to send to another jurisdiction.

The whole point of industrial education is so that our businesses remain competitive with overseas businesses, so that New Zealanders’ jobs are secure, so that in the regions which depend on manufacturing jobs in order to sustain their schools and all the other things that make the regions strong and communities strong—the whole purpose of this is to prevent carbon leakage when New Zealand’s carbon price is higher than that of our competitors overseas. And so New Zealand business is subject to a high carbon price, such as under the emissions trading scheme or whatever other scheme this Government might dream up—a high carbon price means they will leave. They won’t invest in decarbonisation; they won’t invest at all. They will close the factory gates, they will lay off their workers, and they will leave, when what we could do is encourage them to stay here in New Zealand and continue to invest.

But the choice that this Government has made and, in fact, you’ve made personally is to go around the country handing out money from the emissions trading scheme (ETS) through the Government Investment in Decarbonising Industry fund—the GIDI fund, for short—which has created the sense that if businesses only wait for Minister Shaw to turn up with some of this money from the emissions trading scheme revenues, then they’ll be saved from this risk of having to leave New Zealand.

Now, Minister, it’s a very dangerous precedent that you’ve set. So I’d like you to explain how this SOP will work in terms of amending the formula. Will we know whether New Zealand businesses are getting a fair shake, when it comes to a carbon price? And, Minister, what is your behaviour doing to undermine the ETS?

Thank you, Madam Chair. I just wanted to address a couple of questions there. So I had a question from Simon Watts about a couple of the points in Supplementary Order Paper (SOP) 409, just testing whether they are, in fact, minor and I think—if I’m interpreting the question correctly—that they are in fact minor and technical, and you know, we’re not opening ourselves up to any more. I’ve sought assurance from officials, and I’m assured that they are.

In relation to the question from Simon Court, quite a lot of that commentary was well outside the scope of the bill; it relates to other matters of climate policy that have got nothing to do with this, however, there was one relevant sub-question there in relation to the formula. Broadly speaking, the intention here is to ensure that industries aren’t receiving more free units than they need to in order to remain competitive, and then that is, in fact, the purpose of the entire bill.

I want to mention the work that the Environment Committee did on this, you know, which has led to this SOP, because when we introduced the bill into the House at first reading, I was not wholly sure that we had landed where we needed to; I was a bit queasy about it and invited the select committee to look at this. The select committee worked very hard on this, and you know, I acknowledge that it is a very technical area and the work that the Climate Change Commission, the Parliamentary Commissioner for the Environment, independent experts like Dr Christina Hood and the officials did for Ministry for the Environment—coming back to select committee a number of times in order to work through those quite complicated matters. To arrive at this amendment, I think, gives me all the assurance that I need that the formula does do what it is intended to do and that the bill does what it is intended to do, which is to ensure that companies receive the support that they need in order to remain competitive against competition from foreign companies that aren’t exposed to the same level of carbon price, but without going beyond that, into, essentially, over-subsidising them.

It’s heartening for some, no doubt, to hear the Minister of Climate Change’s confidence, but not for the ACT Party. Minister, the bill allows Ministers, future Ministers—could be you—to re-evaluate the allocative baseline for industries as often as every five years. So, this is the amount of so-called free credits that industries get in terms of the emissions trading scheme, which means they don’t have to pay for their carbon emissions, or all of them—they get a proportion allocated for free.

Minister, every five years: submitters pointed out that this is likely to undermine the incentives that they potentially have to invest in emissions reductions which have a longer payback period than five years, because if for example they want to invest in a $200 million piece of equipment to reduce emissions by a significant amount, the payback period from that for heavy industrial equipment is typically 15-plus years, potentially not returning a profit or return on that investment for over 15 years. So they identified the risk that having their industry or having their activity called in or re-evaluated after five years and therefore a risk that their allocation would be reduced means that for executives going to a board saying, “Can we have $200 million, please, to invest in decarbonisation equipment?”, their board might say, “Well, yes, but if this thing happens where a Minister calls in our industry for a reassessment and we lose that allocation, then we’re going to be underwater.” Minister, do you just want to address that concern?

Yeah, very happy to. So, under the existing legislation, the way it’s set up at the moment, there is no time, and it’s entirely arbitrary and up to the Minister. So there’s a level of uncertainty that companies already face, because they could face a review at any moment. And because it has been over a decade since we last looked at it, when I did initiate a review to say are we—you know, we kind of had a sense that perhaps there were companies that were receiving over their allocation, in fact in some cases well over 100 percent, so they were actually receiving more free pollution permits than they were emitting in total. You know, we kind of looked into it and discovered that a number of businesses were.

Now, what that means is that companies who have kind of been counting on that or using that as a revenue stream can suddenly have that taken away with no predictability at all. So, in setting up a schedule where we say “no sooner than five years, no later than 10 years”, what that means is that businesses understand that there is a set series of reviews.

Now, a review does not mean a change in the allocative baseline. What it means is that you take a look at it and say, you know, does it still stand that the basis on which companies are receiving their allocation remains the same? If they have done that and made those investments in good faith, then there’s no particular reason why that would lead to a change.

But the whole point of having a regular schedule here is actually to provide the industries that are receiving these free units—that there is some predictability to that process and that there are some considerations or some constraints on the Minister, despite the godly powers that that member bestowed earlier on in the evening.

Minister, in this current arrangement, where we’ve separated church and State, it’s not up to me to anoint a Minister with powers beyond that provided for. It may well have been said in jest, Minister; in fact, it was said in jest.

But it is true that there are many people in New Zealand who do believe that the powers that the zero carbon Act gives the Minister are, essentially, God-like powers, where the Minister can pick and choose which industries succeed or fail, which businesses survive or not. Even under the zero carbon Act, if some of the plans suggested or proposals suggested by the Climate Change Commission—if the Minister was to act on them, some of us who rely on gas heating might find that we no longer have hot showers. But, Minister, I’m sure you wouldn’t do that—not even to punish a member of the ACT Party at 10.45 p.m. on a Wednesday night.

Minister, I’m really interested because the allocation to industries has a cost. And so if the carbon price is 50 bucks or 100 bucks a ton, whatever it is, and the current arrangement allows for the Government to allocate so many hundreds or thousands or hundreds of thousands of tons of carbon to an industry or a sector, that comes at a cost to the Government. I understand, Minister, that cost is projected potentially to balloon out to the billions. It’s a massive liability, potentially. But whether it balloons out or whether it’s just a massive cost, how does the Government propose to fund this now and in the future?

So when the Government creates a New Zealand Unit (NZU) inside the emissions trading scheme, it carries that as a liability on its books. So it’s not something that we purchase; it is something that is created, but, in an accounting sense, it does appear as a liability on the books. In 2021, which is the last year that we’ve got fully verified data for—because there is a time lag—we gave away about 6.6 million units under the industrial allocation programme. Now, a fairly conservative estimate is that getting a more accurate picture, as we are through this bill, could reduce the amount that we hand out by about 800,000 units, which if you assumed a carbon price of $60, which is what it is today, is about a $50 million paper loss on the Government’s accounts.

The way to think about it is actually less in terms of the cash component of that and more about an NZU as a licence to pollute—to put a ton of pollution into the atmosphere—then we’re literally handing out something in the vicinity of 800,000 tons of pollution, or rights to pollute tons of pollution, that aren’t grounded in reality, right? That means that there’s a slackness in the emissions trading scheme. I know that member and that member’s party are great believers in the emissions trading scheme and that it needs to be built on really solid foundations. So I’m sure it would distress the member to know that we are, essentially, we estimate, overallocating 800,000 tons worth of pollution permits that are unnecessary and that make it more difficult for all of our industries to decarbonise as a result.

Oh, thank you for your insights, Minister. So if I’m to take it from your reply, this is an accounting charge and that no taxpayer currently—I just need you to confirm this for me if you could—no taxpayer in the future will have to pay for these allocations. Is that correct?

The more that we allocate for free, the less we can auction. So it carries a loss in that sense, right? Rather than a taxpayer buying a unit, it’s revenue that’s forgone through the auctioning system.

There is a scenario in the future which is that, if we succeed and the country decarbonises, then demand for New Zealand Units will obviously decline alongside that. But if we’ve guaranteed that we’re going to be handing out pollution permits as we have in perpetuity—albeit at a declining rate—then there will be a point at which those lines intersect, where demand actually drops lower than the amount that we’re dishing out for industrial allocation.

At that point, the Government would actually have to purchase units in order to supply them into the market in industrial allocation. That would be quite an absurd situation, if it got to that point—which is that the Government would literally by buying, probably, forestry offsets to back freely allocated units. We’re a very, very long way away from that scenario at the moment, but to answer the question accurately, there is a scenario in which that could occur in the future, but we are a long way from that point right now.

Thank you, Madam Chair. Thank you, Minister. It’s very helpful, particularly for people who are listening at home who might be interested in what this is all about. Because the emissions trading scheme (ETS) is not something that typically gets discussed at a barbecue—unless I’m there, or James is there—

💬 Hon Member: Minister.

—the Minister’s there. So Minister, I just want to come to the forgone revenue part of it. The last two auctions that the Government has run have been passed in without selling any of the carbon credits. Minister, if you can just give us an indication of how much revenue you think is being forgone and what the implications of that are? Because the revenue from those auctions then goes into the decarbonising industry fund, which is one of the levers that ACT’s very concerned about—actually we don’t think it should be going into that fund; we think the ETS revenue should be going back to consumers in the form of a carbon tax credit so that consumers can make their own decision about how they decarbonise.

But Minister, could you just give us an indication of how much revenue might have been forgone through those auctions failing to trigger and sell?

Well, the honest answer to that question is: you can’t tell until you’ve had the second two auctions—the remaining auctions this year—because units are allocated on an annual basis and any units that weren’t auctioned at the first two become available at the third and fourth, which are yet to happen. But having said that, that’s irrelevant to the scope of this bill.

I call on Simon Court. Try to keep it relevant to this particular bill.

Quite. So, I mean, I disagree that it’s irrelevant because the problem that this bill tries to solve is an excess of allocations of units. Minister, you’ve described that allocations from the Government’s cache that are allocated to industry mean the Government has less to auction. So Minister—and Madam Chair—I do believe this is quite material. We need to understand what the implications are of excessive free allocations or potentially lower allocations, meaning the Government’s got more credits to auction.

It doesn’t change the fact, though, Minister, does it, that the Government—or the Minister, in fact—are using powers akin to a deity and has the ability to set a cap on carbon emissions? So if that’s the case and we’ve got this giving an allocation for free versus revenues that the Government could potentially raise, there is an inherent tension there.

Minister, I’d just like you to explain: is there any thinking going on which is influencing decision making about how many credits are made available for free, and the downside risk to the Crown’s revenues through the emissions trading scheme; and would the risk of giving away free credits—and potentially the Crown missing out on the revenue for, say, pet Government Investment in Decarbonising Industry projects—have any bearing on decision making or the development of formulas or measures in this bill?

No. That would be outside the scope of this bill.

Minister, you’ve said quite clearly that giving away carbon credits for free is a downside—it’s a foregone revenue from the emissions trading scheme that the Government could have generated from the auction mechanism. So there’s clearly a balancing going on somewhere, either in the Minister’s office or a Government department or maybe in Treasury or Grant Robertson’s office—I don’t know. But the more we give away, the less we get to auction, the less revenue comes into the Government, the less money that the Minister might have to allocate—or the Minister for Energy through the Government Investment in Decarbonising Industry Fund might have to allocate to projects that this Government wants to progress. So, Minister, this is entirely material: what thinking has gone on around this calculus, and is there anything in this bill that would allow us to potentially get a bit more transparency around what that calculus is?

No, that’s the annual emissions budget, the emissions trading scheme unit supply process, which takes place within the emissions budgets, that’s based on the advice of the commission under the zero carbon Act. This bill is designed to work out whether companies that are currently entitled to industrial allocation, whether their industrial allocation is accurately based on their actual emissions.

Before I call the member again, can I just warn the member that he is beginning to be quite repetitive about the same issue which is somewhat relevant. He may want to talk about a different clause.

Thank you, Madam Chair. I do appreciate your guidance. I guess, from the perspective of somebody who’s new to climate economics—even though I’m an engineer—I can only imagine the people listening at home are trying to determine what the implications of this are; they might find it rather impenetrable. So it has been helpful to get the Minister’s explanations.

Minister, there’s a test that I asked officials whether this bill met—in the Environment Committee—and I wasn’t satisfied they were able to give the ACT Party confidence. It is: if a business is manufacturing something in New Zealand—whether they’re manufacturing concrete products, which results in carbon emissions, or whether they’re manufacturing wood pulp, or turning all of that recycled glass that’s collected around New Zealand back into new glass to be made into glass bottles, hopefully filling them up with some tasty beverage, some refreshing beverage, or whether they’re making methanol or urea fertiliser—how do we know whether a New Zealand business is paying the same for their carbon emissions in New Zealand under this bill as a competitor in, say, one of New Zealand’s top-five trading partners?

I move, That the question be now put.

Thank you, Madam Chair. That is fundamental to this bill. Minister, this bill covers emissions-intensive trade-exposed industries. The question I asked officials is: do the mechanisms under this bill allow us to fairly compare the carbon price a New Zealand manufacturer would pay to that of their competitor in another country, so that an evaluation can be made? Are New Zealand businesses paying a fair carbon price or not?

I move, That the question be now put.

The question is that the Minister’s amendments set out on Supplementary Order Paper 409 be agreed to. All those in favour will say Aye, to the contrary, No. The Noes have it. A party vote has been called for—

💬 Chris Penk: I don’t think you did the closure motion. You didn’t put the—

CHAIRPERSON (Hon Jenny Salesa): Ah, that’s true.

💬 Chris Penk: Sorry to be—

CHAIRPERSON (Hon Jenny Salesa): That is true. So it does give someone else an opportunity for one last call.

Thank you, Madam Chair. Minister, would you care to explain whether the Supplementary Order Paper making changes to clause 2, 3, 14, the Schedule—I mean, there’s cross-referencing errors in all of this. That’s what it’s designed to correct. And this is errors to a formula of process which was only tabled a few days before the select committee wrapped up.

Minister, even in the regulatory impact assessment—I’ve got it here somewhere. It says—oh, here we go, Minister, here we go. Problem identified: “Under current legislative policy, eligibility to receive industrial allocations is contingent upon two tests, emissions intensity and trade exposure.” How on earth are New Zealand businesses supposed to be confident that allocations under this proposal—that a carbon price, in totality, that a business which benefits from free allocations might pay—will be equivalent to that of a competitor overseas? Minister, we don’t know, and you still haven’t responded to that question.

Now, in the regulatory impact assessment it’s quite clear, although amusing: “We are confident in the analysis in this regulatory impact statement; however, we’re unable to predict the impact at firm level for the subset of activities carried out by a relatively large number of participants. This limits our ability to consider regional impacts at a granular level. We won’t know the eligibility thresholds” and so on and so forth.

Minister, each major industry is unique. I mean, I think I’ve heard you say that it’s almost like New Zealand has five or six factories that this really applies to. And yet there’s no clarity here this evening whether a New Zealand business, competing with imported products—whether it’s precast concrete products made from New Zealand - made cement that are going to be supplied to New Zealand construction projects, made by New Zealanders, supplied to New Zealand jobs—will pay the same carbon price as concrete products manufactured in another jurisdiction not subject to the same regime.

Minister, I have no clarity; people listening at home will have no clarity. That’s the fundamental test: will this bill result in emissions leakage? In other words, businesses leave and make the same stuff overseas but with more carbon emissions than if they’d stayed here. Will this bill—

💬 Hon Peeni Henare: All hypothetical.

Absolutely hypothetical, the Hon Peeni Henare. This is what this bill is designed to address, Mr Henare, and the Minister’s failed to address it.

So will New Zealand businesses remain competitive? Will they receive an allocation that means they pay the same carbon price as their competitors? Because, if they don’t, what’s the point in all of this? We’re going to have to go back to the drawing board—aren’t we, Mr Cameron?—should ACT form part of a future Government, because we can’t rely on officials, who say that they’re confident in their analysis but then they’re not confident in the information.

💬 Rachel Boyack: Point of order. I just want to refer to Speaker’s rulings which, I understand, mean that you can’t criticise officials who are in the Chamber.

Madam Chair?

CHAIRPERSON (Hon Jenny Salesa): I’m taking the point of order. That is actually correct. Can the member withdraw and apologise.

I’m afraid I’m not aware of any criticism I’ve levelled at officials. So, while the member has made that statement, I’d have to look at the Hansard, but I certainly haven’t intended to criticise any officials, and I don’t believe I have.

CHAIRPERSON (Hon Jenny Salesa): I believe you did in terms of their calculations.

No, I’m simply reading from the regulatory impact statement—I’m reading it. I’m not criticising them; I’m reading what they’ve said. That’s OK. I just will proceed. I don’t think that’s a matter that needs to be litigated.

💬 Hon Peeni Henare: Then just withdraw and apologise and carry on.

Why? It’s here.

CHAIRPERSON (Hon Jenny Salesa): Does the member want to continue his call? If he does, he will withdraw and apologise; then he can continue.

Sorry; it’s contingent on me withdrawing and apologising, is it?

CHAIRPERSON (Hon Jenny Salesa): Yes.

Well, I withdraw and apologise. And I certainly didn’t mean any offence to officials in the Chamber, but it is clear from page 5 of the regulatory impact statement that there is a conflict of confidence, and that officials wrote that.

Minister, can you give us confidence here in the House tonight—people listening at home, the businesses that came to select committee and were really concerned that their business activities, their investments might be undermined by these changes—that they will pay a carbon price equivalent to their competitors overseas?

This is an amendment to an existing regime, which is that, since 2008, businesses that are moderately emissions-intensive will receive an allocation equivalent to 60 percent of their emissions—they get that for free from the Government in order to be able to compete with imports from countries which face different or no carbon prices—and that businesses that are highly emissions-intensive will receive 90 percent of their emissions obligations free from the Government in order to remain competitive.

Now, carbon prices vary wildly around the world, including among our major trading partners, and they change over time. So, for example, the European Union—with whom we have just signed a free-trade deal, which includes a chapter on climate change and sustainability requiring both parties to uphold their agreements—has a carbon price that’s close to NZ$200 a tonne, which, given that ours is $60, means that they are paying considerably more than we are producing here. At the same time, there are other countries with whom we trade where the carbon price is closer to NZ$20 a tonne, which is about a third of what we pay. And in some countries that we trade with, there is no carbon price at all. So what that means is if there is no global carbon price. The only way to be able to do that on a product-by-product basis would be to apply an average—and we do sit at about the average in terms of our carbon prices at the moment. That is the entire point of the industrial allocation system.

Now, I will admit it is ugly policy. I mean, remember that industrial allocation is subsidising pollution—right?—which seems to run in direct contrast to the entire point of the emissions trading scheme, and it does. The reason that we have industrial allocation is because there is no global carbon price, and because we don’t have carbon border adjustments—or at least we don’t yet. It is conceivable that there will be a point in the future where we are able to have a system of carbon border adjustments which is able to moderate for the variabilities in price between imports from countries that have got different carbon prices to our own, but we are not at that point yet. So, in the meantime, we use industrial allocation to moderate that effect.

I move, That the question be now put.

The question is that the Minister’s amendments set out on Supplementary Order Paper 409 be agreed to.

Amendments agreed to.

Mr Speaker, the committee has considered the Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill and reports it with amendment. I move, That the report be adopted.

Motion agreed to.

Report adopted.

The bill is set down for third reading immediately.