Government kills pollution loophole that was great for cucumber growers but terrible for the climate

The Government has cracked down on the number of carbon credits provided free to large polluters – including killing off a change that could have made the problem worse.

A new law was passed on Wednesday night that will reduce free passes for certain exporters to heat the planet without paying.

Some companies were being given more free credits than their actual emissions, giving them a windfall at the Government’s expense – resulting in cucumber growers, for example, getting triple what they should have.

However, when the Government attempted to fix it, the first draft of the law contained a controversial proposal to take the current price of carbon into account when deciding how many free units a company was eligible for.

Environmental campaigners and the Climate Change Commission pushed back.

Activists were concerned the proposal could mean companies such as Fonterra would become eligible for a larger number of free units.

The controversial provision was removed from the law before it passed in the House on Wednesday, as part of a package estimated to save 800,000 tonnes of carbon dioxide from heating the planet each year.

Emily Mabin Sutton, who helps write the Climate Club newsletter and launched a petition on the issue, was “thrilled” by the update – though she thought the overall bill could have been tougher on polluters.

Climate Minister James Shaw said, at the bill’s first reading, he asked the select committee to consider the controversial provision – because he “wasn’t wholly comfortable that we’d got it right”.

But the bill as passed on Wednesday was a major win for the climate, he said.

The Ministry for the Environment estimated the changes will reduce the number of free units given to businesses by 800,000 each year – each representing one tonne of emissions that would have been released to the atmosphere, said Climate Minister James Shaw. The law will have “a very significant” impact, he added.

“That is the equivalent of the NZ Steel deal,” Shaw said, referring to the $120m grant to the Glenbrook mill to switch to a greener metal-making process – which will also cut an estimated 800,000 tonnes every year, or 1% of the country’s annual emissions, from 2027.

In 2021, more than 6 million free carbon units were offered to companies making products such as steel, aluminium, chemicals, cement, fertiliser, glass and paper, as part of the Emissions Trading Scheme (ETS).

The goal is to stop Kiwi-based companies in these industries moving overseas to escape the charges, because they’re believed to compete with overseas rivals that don’t face a comparable penalty.

Businesses considered to be moderate emitters were intended toreceive roughly 57% of their carbon footprint for free. Those classified as high emitters should get 87% – with the share falling by 1% each year.

Large electricity users also receive free units, designed to cover the extra cost of fossil-fuelled power generation.

However, investigations found that many companies are receiving far more free units than the politicians writing the law intended.

When the Government announced its intention to crack down on overzealous hand-outs, industry representatives lobbied for the now-dead amendment.

Carbon prices were significantly higher than when the system of free units were designed, so companies asked for a formula that would take this into account.

When Sutton first saw the proposal in the draft law, she thought a mistake had been made.

“All of the other changes were moving in the right direction, but this felt like an absolute policy U-turn. It would drastically increase the number of companies [eligible] and the numbers of credits.”

Giving feedback on the first draft of the law, the Climate Change Commission said the package risked doing “more harm than good”.

Motu and University of Auckland researcher Troy Baisden said the “massive expansion” in free units “would have undermined the system”.

Sutton said it can be tough to engage the public on something as technically complex as the ETS – so she was pleasantly surprised to see thousands of people sign the petition. She was relieved the provision was removed from the final legislation.

Sutton said she felt “sober happiness” because she’d prefer to see all free units phased out by 2030, compared to the current path where some companies will still get freebies after 2050 – plus agricultural emissions in the ETS.

Baisden was also concerned that people “that haven’t been working on climate change and emissions for 20 years” would have struggled to understand the law change. For the sake of democracy and Te Tiriti, reforms needed to “make sense to people”.

The carbon price in the ETS has been erratic this year, but Baisden hoped the new legislation would help to stabilise it. But with momentum lost, good climate policy was needed to bridge the gap, he added.

The issues, as demonstrated by cucumbers

When they surrender carbon units to meet their ETS obligations, companies use their exact carbon footprint for the year.

But the Government doesn’t apply a 57% or 87% discount to this “bill” for moderate and high-emitting companies.

Instead, it calculates and grants a number of free units in a separate exercise. The calculation is not based on the company’s actual footprint, but on an industry baseline for the specific greenhouse gas-producing activity – such as making cement, paper or fertiliser.

So if a company had a cement-producing process that was more efficient than the industry baseline, it could receive more than the intended share of free units. Ministry for the Environment analysis found this was occuring. The taxpayer provided roughly 100% of a cement company’s annual obligation in free units.

Carbon units can be sold to other polluters, allowing companies to profit from overallocation.

The analysis also found cucumber growers get 300 per cent of their relative carbon costs under the system.

Electricity calculations used out-of-date data more relevant to Australia than New Zealand.

Both these issues will be addressed by more regular baseline and electricity reviews required by the new law.

Asked when the baseline reviews would begin, Shaw said a “set schedule” had not been decided.

He was confident the reforms would survive a change in Government, if that occurred following the election.

“The National Party voted for the bill last night,” he said. “The prevailing view across the house was that this is a very sensible measure… If you’re going to subsidise pollution, you shouldn’t over-subsidise pollution.”

Our weekly email newsletter, by the Forever Project’s Olivia Wannan, rounds up the latest climate events. Sign up here.