Dr Eric Crampton: NZ Initiative Chief Economist on Government's $60m cement plant bailout

The Government’s carbon credit trading scheme could have shut New Zealand’s only cement manufacturing plant, but Fletcher Building announced today it got a $60 million bailout to keep it running - the $60m is not a loan.

NZ Initiative Chief Economist Dr Eric Crampton told Heather du Plessis-Allan that the bailout doesn't address the root cause of the issue. 

"It's a mess that's trying to solve what's actually a real problem in how the government's industrial allocations in the emissions trading scheme work - the design of those is not good, and they are particularly not good when it comes to cement manufacturing," he said.

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Episode Transcript

Speaker 1 (00:00):
Now now the government is pumping sixty million dollars into

(00:02):
golden based cements so it doesn't shut its Northland operation down.
That operation is the only cement manufacturing facility in the country.
It supplies sixty percent of New Zealand's cement and by
the way, it's owned by Fletcher. Doctor Eric Crampton is
an economist at the New Zealand Initiative and with us.

Speaker 2 (00:16):
Hi, Eric, good afternoon.

Speaker 1 (00:20):
I can imagine that you probably don't enjoy the spend,
do you.

Speaker 2 (00:24):
Well, it's a mess that's trying to solve. It's actually
a real problem in how the government's industrial allocations in
the emissions Trading Scheme work. The design of those is
not good, and they are particularly not good when it
comes to cement manufacturing. I would have preferred that the
government updateds settings for those so that they were more

(00:46):
functional and so we wouldn't see this kind of problem
emerge in other sectors later. We've seen it previously in steel. Instead,
they've done it as a one off, paying out Fletchers
to maintain the plant through to twenty forty. But the
underlying problem with the emissions Trading scheme in how it
calculates industrial allocations is still there to be fixed.

Speaker 1 (01:07):
Okay, So is this ultimately in a nutshell a problem
that the cost of manufacturing cement to New Zealand is
impossible because of the cost that the ETS imposes on
it is that basically.

Speaker 2 (01:18):
It it's impossible because we don't charge a carbon equivalent
border charge for cement coming in from overseas. So remember
that we have industrial allocations for sectors where we worry
that if we didn't provide ETS credits for a New
Zealand company, the emissions would just happen overseas instead, because

(01:40):
we'd be importing from there, or other countries would be
buying foreign made products rather than New Zealand products, and
that's a problem for global warming. If the emissions shift
to a place where the emissions are even worse than
they are here now, it looks like New Zealand cement
is actually more carbon efficient than the cement being made
in Japan, which is where we'd be importing from the alternative,

(02:02):
or at least on average, that's where it largely comes from.
If the plant here shut down, there'd be more global
reliance on the Japanese cement and we'd be relying on
that global emissions would go up. If we were doing
industrial allocations properly, then this wouldn't be an issue. They
would be allocated credits sufficient to for it not to

(02:25):
be competing with unpriced alternatives, or we'd be adjusting a
border charge for importing carbon intensive cement.

Speaker 1 (02:34):
These these allocations, are you just talking about basically an
exemption from the ETS.

Speaker 2 (02:39):
Well, what happens is that existing industries that face this
kind of trade issue caated free credits by the government.
So every year the government puts up some credits for auction,
and they've not been able to sell any recently. They
also provide free allocations to industries where the government has
good reason to worry that emits would happen overseas instead

(03:01):
of here instead, so the company gets free credits. They
can use those to satisfy their surrender obligations. So whenever
they create a ton of carbon dioxide emissions, they must
surrender one ends at you. They can choose to do that,
or they can choose to do things that reduce their
own emissions and then sell those credits for other people
to use. Unfortunately, there are a couple of problems and

(03:24):
how the system is set up so one unfortunate consequence
of it is that when Wholesome shut down a higher
emitting plant so that they've got lower carbon intensity in
their own current production, they wound up getting fewer emissions
credits out of it because of how we baseline these things.
They're baselined against what happens here rather than emissions intensity abroad.

(03:50):
Really they should be tracking how carbon intensive is production
overseas and if that reduces, well, we would provide fewer
credits here, because it's not such a bad thing if
production shifts overseas, if the overseas is more efficient on
carbon grounds, and that the ETS's only job is around
carbon stuff, there can be other reasons to want to

(04:11):
have domestic manufacturing, but keep the ETS pure. It doesn't
scale that way. It scales instead to domestic emissions and
then on this weird timetable where it reduces the amount
that's allocated to these companies a little bit each year.
Trying to is basically a fudge factor that the government

(04:31):
expects that emissions intensity overseas will reduce as technology improves,
and so will emissions here, so it will just scale
down over time, rather than scaling with what's actually going
on overseas, which is what should matter in a clean
version of boll okay, and so we're stuck with a subsidy.

Speaker 1 (04:51):
But the is just a joke, right, I mean, the
thing is it's becoming, as you explain, incredibly complex, not
actually working. It's making our power builds, our domestic pas
powables unaffordable to us. Why don't we just instead of
giving these guys sixty million dollars out of textpayer money,
why don't we just scrap the ETS?

Speaker 2 (05:09):
Well, it depends whether you want to scrap the net
zero Act right right now? Okay, So you could have
a consistent version where you get rid of the net
zero legislation. We would still face some obligations under international agreements,
and to the extent that we view those as binding,
it could be far more expensive to try and buy
international credits to satisfy those obligations than to maintain the ETS.

(05:33):
There are versions of ETS reform that I kind of like,
where we would anchor in sort of in international prices,
So if New Zealand prices ever got too high, we'd
buy international units and use those within the ETS here
as well. There are ways of doing that that would
be consistent with the net zero legislation. If we ditch

(05:54):
the net zero legislation, and well, I guess how to
put this. If it becomes so obvious that China and
the US and large major emitters overseas are going to
abandon efforts at achieving net zero, then we would have
to wonder whether it makes sense for New Zealand to
be continuing down that path. I'm not sure that we've
got that with certainty yet, and I think that updates

(06:16):
to how the ETS works so that we could rely
more on foreign credits also keeps US in line with
foreign with foreign efforts. At the same time, our prices
aren't that high compared to international norms. We're much below
the price in Europe for the sectors that are covered.

Speaker 1 (06:31):
Eric, thank you, I appreciate it. That's Eric Crampton, New
Zealander Nossi of Economists. For more from Hither Duplessy Allen Drive,
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