The New Zealand government has rejected advice to take a closer look at hundreds of millions of dollars in climate subsidies to some of the country’s biggest polluters.

The Scheme: A Transient Measure

The subsidies were meant to be a transitional measure to shield firms from unfair competition from countries without carbon prices and climate targets. The scheme mainly benefits five firms deemed to be exposed to trade competition: Methanex, Fletcher Building, the Tiwai Point smelter, Ballance, and NZ Steel.

• Methanex: Producers of methanol
• Fletcher Building: Manufacturers of concrete, aluminium, fertiliser, and steel
• Tiwai Point smelter: Smelter of aluminium
• Ballance: Producers of fertiliser
• NZ Steel: Producers of steel

These firms receive hundreds of millions of dollars a year in the form of free carbon credits, which the government could otherwise sell. The subsidies were meant to be a transitional measure, running from 2010-2030, but they have been extended.

The Concerns

The scheme has been criticized for propping up pollution. Climate campaigners have long accused the scheme of giving heavy emitters a free pass to continue polluting, which would increase global emissions and result in job losses here. The latest advice released under the Official Information Act shows Inland Revenue and Treasury wanted the scheme properly analyzed. They said there was no analysis showing whether the subsidies were a “proportionate response” to the real risk and impact of shifting production.

• Climate campaigners have long accused the scheme of propping up pollution
• The latest advice recommended getting staff of other ministries to assess each of the individual sectors benefitting most from the scheme, to see if the subsidies were justified

Alternative Solutions

Thinktank Motu has published a report, suggesting several alternatives to the system. One major concern is that giving out freebies blunts the incentive for firms to switch to cleaner, lower-emissions technology.

• Several alternatives to the system have been suggested
• Examples include a carbon tax, a cap-and-trade system, or a green fund

Key Supporters

Despite the concerns, some supporters argue that the scheme is necessary to keep heavy-emitting exporters cost competitive.

• The scheme has been supported by the National-led coalition
• The coalition argued that the carbon market should encourage companies to lower emissions, not taxpayer subsidies

The Commission’s Findings

The Climate Change Commission said the risk of emissions moving overseas is real, but the current system threatens New Zealand’s ability to meet its climate targets.

• The commission said the freebies reduced incentives for companies to switch to cleaner technology
• The commission also said the subsidies reduced incentives for customers to choose cleaner products

A Call for Change

Climate campaigners are calling for the government to reassess the subsidies and consider alternative solutions.

• The campaign has petitioned against the scheme
• The campaign argues that the money spent supporting green jobs could be better used

Expert Opinion

Economist Eric Crampton said the incentives would work better if payouts were pegged to what competing countries are doing.

• Crampton argued that if Chinese steel was competing with New Zealand steel, and started out dirtier per tonne than New Zealand’s, New Zealand manufacturers would qualify for a subsidy
• Crampton also argued that if Chinese competitors lowered their emissions until they were cleaner per tonne, the support would be phased out

A Response from the Government

Revenue and Climate Change Minister Simon Watts said the scheme was important to keep heavy-emitting exporters cost competitive.

• Watts argued that the government wanted to make sure it had the “right incentives” to keep jobs and economic benefits here
• Watts said the government expected to make announcements “this year”

A Perverse Incentive

The subsidies have created a perverse incentive for firms to switch to lower-emissions technology, but only if it’s cheaper to do so.

• The commission said that firms like NZ Steel lost some of their subsidy when it switched from melting raw ironsand to steel recycling
• The commission also said that firms that lose some or all of their subsidies stand to lose millions

A Need for Transparency

Climate campaigners argue that the government needs to be more transparent about the subsidies and their impact on the environment.

• The campaign argues that the government should be more open about the subsidies and their benefits
• The campaign also argues that the government should be more open about the risks and impacts of the subsidies

A Path Forward

The government is expected to make announcements “this year”. However, the exact nature of the changes is not clear.