Smelter sought assurances about $46m carbon subsidy before signing power deals

Government officials provided the Tiwai Point aluminium smelter with an indication of the increased carbon subsidy it could expect under new power contracts before multinational minerals company Rio Tinto finalised the deals.
In a November briefing from the smelter’s chief executive Chris Blenkiron to Energy Minister Simeon Brown and Resources Minister Shane Jones, obtained under the Official Information Act, the smelter asked for free allocation of carbon units for its electricity usage to be restored. That allocation was set to zero by the previous government, when officials determined the price the smelter paid for power was so low that it did not pass on any carbon costs.
At current carbon prices, the restoration of the subsidy to the level it received prior to that decision by the Labour government could be worth $46 million a year. Climate campaign group Don’t Subsidise Pollution worked out the total value of the new subsidy could be $2 billion between now and 2050.
Climate Change Minister Simon Watts declined to release the indicative figure provided by officials to the smelter when asked by Newsroom, saying it was commercially sensitive. He also wouldn’t promise that Cabinet would follow official advice in setting new carbon allocation rates.
Under the Emissions Trading Scheme, large emitters that trade overseas receive some carbon units for free, as part of the industrial allocation regime. This is to ensure they remain competitive with overseas producers who don’t face an emissions price. It also prevents low-emissions manufacturers in New Zealand closing up shop and being replaced by higher-emissions producers overseas, a phenomenon known as emissions leakage.
“Tiwai obviously fits the definition of what this model is designed for. If our low-emissions smelting operation (approx 2 tonnes of carbon for each one tonne of aluminium produced, compared to the global average of approximately 12T of carbon for each 1T of aluminium produced) were to close, then a higher carbon producing business overseas would be expected to pick up the orders previously met by Tiwai,” the smelter’s external affairs director Simon King told Newsroom.
Many of the credits that are allocated correspond to a firm’s direct greenhouse gas emissions. However, large power users can also receive an allocation based on their electricity usage, because the carbon price is passed from generators on to consumers. Tiwai Point has its own, bespoke, electricity allocation factor (EAF) set by Cabinet, because it consumes 13 percent of New Zealand’s power, making it the country’s single largest electricity user.
That number was set to zero by the Labour government in 2022, after it emerged that Tiwai paid a power price so far below market price that the carbon price could not be passed on through it. The new contracts are for higher amounts and have been approved by the Electricity Authority. This offers up a new opportunity for that allocation factor to be reset.
“As we work to conclude negotiations with energy generators, a return to an appropriate EAF for the smelter will be crucial in order to ensure a commercial agreement can be reached that works for all parties,” the smelter wrote in the briefing to ministers.
An April 9 briefing to Jones from energy officials, also obtained under the Official Information Act, revealed more information about the Government’s communications with Tiwai Point.
“NZAS [the smelter] has raised it wants greater certainty about the level of industrial allocation associated with the electricity supply it will receive once the new contract has been finalised,” officials wrote.
“The Minister for Energy and the Minister of Climate Change have directed officials at the Ministry for the Environment to review those contracts and provide an indication of future allocations of emission units under them. The indication will assist NZAS with decisions on entering the contracts into force.”
In the end, the smelter signed the contracts, meaning it will continue to operate for another 20 years.
Climate policy analyst Christina Hood, who runs the Compass Climate consultancy and previously headed up the International Energy Agency’s climate unit, said it wasn’t a surprise Tiwai had sought assurances before signing new deals.
“It’s a lot of money. It’s worth $40 to $50 million a year based on current ETS prices and they said in their letter to ministers that that tips the balance in terms of their thinking around staying or going,” she said.
While the subsidy is not a direct cash transfer, it does have an effect on taxpayers.
“In the ETS, there’s a fixed number of units that the Government supplies each year. It can either auction them or give them out for free. The more it gives out for free, the less it can auction and the less money it has to spend on other things,” Hood said.
“It’s $40 to $50 million a year that the Government could otherwise spend on other priorities.”
King said the smelter wrote to ministers just to seek confirmation that the intent behind the ETS was still the same.
“Given the series of contracts now publicly disclosed, which contained significant differences from the previous contract, including the large demand response provisions, we wanted to update the energy minister on the progress of negotiations. We also wanted to confirm that the intent of the ETS has not changed, including that the applicable [emission-intensive and trade-exposed] and associated EAF allocation regime would be applied to any new contracts that might be gazetted, as has been the case since 2010. This certainty was important given the multiple party, market-based contracts with long duration, we were working on,” he said.
“These were market-led, commercial deals. Over the last few years both government administrations have made clear that they were supportive of Tiwai remaining open, with appropriate commercial arrangements. This is what we have achieved.”
He added that ministers were always clear that a final decision still needed to be made by Cabinet and that this could only occur after contracts were finalised. Watts said that decision was yet to be made, but he hoped to have it done before the end of the year.
Labour’s climate spokesperson Megan Woods said the Government needed to tell the public if it had promised or indicated a greater subsidy for the smelter.
“What that amounts to is a giant subsidy – or, in this Government’s language, corporate welfare – to pollute, rather than actually partnering with our industrial users for them to decarbonise,” she said.
“Simon Watts and the entire Government has to be crystal clear with New Zealanders that they are more intent on giving subsidies to international players to produce emissions in New Zealand than they are to securing New Zealand jobs and security into the future.”
While Woods said she wasn’t inherently opposed to a suitable electricity allocation factor if the smelter really is paying a higher carbon price, it needed to be phased out rapidly, along with the rest of the industrial allocation system.
Similarly, Hood said industrial allocation needed to be significantly reformed.
“One of the biggest problems I have with the whole system of free allocation is that we never stop and ask whether this is actually in New Zealand’s interest to spend this money in this way,” she said.
“Should we be spending $50 million a year subsidising a power bill or should we be spending it on something else?”