New Zealand Steel has recently faced a significant setback, losing a greenhouse gas emissions subsidy valued at approximately $13 million. This loss was communicated to the government, with the company cautioning that this funding was integral to its decision to transition to an electric arc furnace.
Under New Zealand’s Emissions Trading Scheme (ETS), the government allocates New Zealand Units (NZUs) to companies in emissions-intensive industries. The government designs this allocation to reduce the risk of these companies shifting their operations to countries with less stringent carbon regulations. In 2023, the total industrial allocation was worth around $400 million.
The method for calculating allocations has remained unchanged since 2010, when the previous government initiated a comprehensive review. This update encompasses not only the general formulas but also the specific calculations of actual emissions for individual companies.
The revisions will impact a wide range of businesses, from small-scale tomato and rose growers to some of New Zealand’s largest corporations, such as Methanex. According to a Cabinet document, most companies are expected to see a decrease in their allocations. The report indicated that there would be an overall net reduction in industry allocations of about 112,000 units, equating to an annual value of $6.7 million based on a carbon price of $60. Nonetheless, certain changes may have significant implications for specific companies.
In addition to this, officials have been reviewing NZ Steel’s allocation based on the “electricity allocation factor (EAF),” which determines the additional costs qualifying companies incur for electricity due to carbon pricing. NZ Steel produces some of its electricity through cogeneration, utilising energy consumed on-site to generate power. However, a recent independent assessment revealed that this cogenerated electricity is not subject to emissions pricing, indicating that NZ Steel has been receiving compensation for costs it does not actually incur.
According to the Cabinet paper, only emissions from the minimal natural gas used in the cogeneration plant should factor into NZ Steel’s EAF calculations.
The estimated cost to the Crown is around 225,000 NZUs annually, equating to approximately $13.5 million. While NZ Steel has not disputed this finding, it has requested a “phased transition” regarding changes to its industrial allocation due to a funding agreement with the previous government aimed at supporting the installation of an electric arc furnace to significantly reduce coal usage in steel recycling.
“NZ Steel remains focused on its transition to lower GHG [ greenhouse gas] emissions steel making. The first stage of this transition is well under way with civil works progressing for the installation of the electric arc furnace at Glenbrook with the aim of starting commissioning late next year,” NZ Steel said.