Cementitious products

Analysis of options for a cement definition

Background

There are three stages to the manufacture of cement:

  1. Preparation of the raw mixture for input into clinker
  2. Production of the clinker
  3. Milling of clinker into cement.

Approximately 90% of the emissions from the manufacture of cement are associated with the production of clinker.  5% can be attributed to the milling of clinker into cement, with the remaining 5% associated with the upstream preparation of raw materials.  The milling of clinker into cement is not emissions-intensive in its own right.

Following your decision to adopt a cement activity definition, rather than clinker, a draft definition was developed and consulted on with the cement industry (Holcim (NZ) Ltd and Fletcher Buildings Ltd, FBL).  This definition consisted of a single allocative baseline for the production of Portland cement, with allocation based on the tonnes of Portland cement produced.

Summary of submissions

Each industry participant submitted different feedback, reflecting their differing interests that they wanted reflected in the activity definition.

The following sets out the points raised by the two firms:

  1.  Removal of Portland

    2. Both firms have requested the removal of the term Portland which sets certain quality standards for cement.  There are other types of cement, regularly produced and sold in New Zealand, with various levels of additives.  Removal of this term would allow all cement to receive an allocation. 

    Officials consider this a reasonable request, provided there are references to performance standards for cement within the activity definition.  However, it entails a potential risk of allocating on the basis of the historical clinker content of cement, which is subsequently reduced by the use of increased additives, and could result in an allocation of over 100% of historical emissions. 

    The impact of removing the term Portland from cement is that increased levels of filler, such as fly ash or iron blast-furnace slag, can be included in cement.  The standards for cement technically allow up to 75 percent additives to be included (depending upon the additive), displacing clinker content.  Although Holcim notes that, currently, there are considerable supply limits to filler availability and that it is more expensive than clinker, (the implication being that any clinker displacement would be limited), officials are unable to confirm this. 

    Therefore if a firm were to produce cement with significantly less clinker content than they historically have, thus reducing the emissions intensity for the product, they would still receive the same level of allocation as if they had not reduced the clinker content per tonne of cement. 

    FBL argue that this is an incentive to make a less emissions intensive product.  This would occur by reducing the clinker content in cement and receiving an allocation for the emissions they would have created if they were to make that same amount of cement but with a higher clinker content, while being rewarded by a reduced requirement to surrender NZUs. 

    Further they argue that this reduction in clinker content is no different from the allocation they receive from switching from coal to alternative fuels that have lower emission levels. Continuing to receive an allocation means that the price incentive of the ETS is not removed. 

    However, it is possible that this scenario may also be perceived as a windfall gain, as a firm could be seen to be receiving an allocation for an activity that was less emissions intensive than originally identified and against costs which they did not incur.

  2. Stockpiling

    3. Holcim has noted that they would like the activity definition to provide the ability to stockpile clinker in preparation for a planned outage, if it meant that the clinker was produced in one calendar year, but not milled into cement until the next calendar year.  As the activity of turning limestone and clay into cement did not occur within the calendar year, the stockpiled clinker would be ineligible for an allocation.

    Officials have clarified with industry that this is a situation that arises with all activities, where part of the activity may commence in one calendar year, yet the product is not completed until the next year.  In this situation, allocation is given in the year when the production has been completed. 

  3. Tradability

    4. Holcim also noted that they wanted to ensure that the activity definition allowed emissions from clinker which they sold rather than milled into cement, to be eligible for an allocation.  Again, this relates to their ability to minimise disruption from planned outages, and more importantly, from unplanned outages where they have not had the ability to stockpile clinker.   It also relates to their ability to sell any excess clinker production.

  4.  Other comments

    5. Industry suggested that the use of the term cementitious material as the end product, rather than cement, would allow both the production of clinker and the production of cement and reduce the risk of these appearing to be two activities.

    Advice from MfE’s technical consultants suggests that a tightly worded activity definition that requires that limestone and clay are transformed by a set process, into either clinker or cement, would prevent other cementitious products from being eligible under this definition. 

    On this basis, officials propose to accept the industry suggestion to use the term “cementitious product”.

Industry requirements

In summary, both firms want to include the manufacture of all types of cement in the definition, not just Portland Cement. 

Holcim is looking to have flexibility in the definition to allow trading and stockpiling of clinker in the event of plant outages and to retain the option to export clinker in the future if they build a new plant that had excess capacity for the NZ market. 
FBL is concerned with ensuring they are still incentivised to reduce the clinker content in their product and not to result in a reduced allocation.  They favour a definition based on tonnes of cement that would result in an allocation for the production of cement regardless of its associated clinker content.  Therefore if they were to produce cement with significantly less clinker content than they historically have, they would still receive the same level of allocation as if they had not reduced the clinker content per tonne of cement.

Ministry for the Environment analysis

The outstanding issues raised by industry relate to the basis for allocation.  Options to increase filler content in cement and trade clinker means that a change to the basis of allocation, from a single allocation based on tonnes of cement produced, needs to be considered. 

Four options have been discussed with industry.   


Option 1:  Allocative baseline clinker and cement milling

Option 1: Allocative baseline clinker and cement milling

This option is relatively simple from an administrative point of view. It is a workable option that does not require complex calculations around a minimum level of clinker content in cement.  It minimises the risk of over and under allocation and the perception of windfall gains. 

The activity definition would require that a firm would have to be milling clinker produced in its own plant to receive the second part of the allocation.  This would avoid a firm that only milled cement (which is not emissions intensive in its own right) from receiving an allocation.

There are no issues with the legality of this option. The use of multiple allocative baselines in this manner, is consistent with how other activities have treated intermediate products, such as carbon steel, therefore being consistent with Section 161E(1)(c)(i).

This option would allow for both trading and stockpiling of clinker.  There would be a very small risk of an over allocation as a result of decreased clinker content (allocation would be 92% if there was a 75% additive content) compared to what may occur under option 3.  However, this option does provide some incentive to improve efficiencies in the cement milling stage, whereby there is an allocation based on the amount of cement produced in this stage of the process.

[Withheld] option 1 was Holcim’s preferred option, as it allows trading. Fletchers do not support this option as they consider it to remove their ability to receive an allocation (i.e. to be incentivised) for reducing clinker content in their cement, regardless of the clinker content.

Recommendation – on balance, this is officials preferred option as it is most consistent with the matters to which you must have regard in Section 161E(1).

Option 2:  Allocative baseline cement

Option 2: Allocative baseline cement

Along with option 4, this option is simplest from a data collection and administrative perspective.

[Withheld]

This maximises the incentive that the ETS introduces for displacing clinker with filler in cement production. However, a firm could receive an allocation of well over 100% if the clinker content of cement was to fall below 78%.  Industry standards technically allow clinker content of only 25% (depending upon the additive), which would result in 143% allocation.  The desirability of displacing clinker depends on whether it results in a reduction in clinker input (with no change in cement production levels) or an increase in cement production with no change in clinker production levels.  It would create perverse incentives which would distort the market if firms are incentivised to increase their cement production using filler, simply to obtain additional emission units.  This scenario would be inconsistent with section 161E(1)(c)(ii) of the Act.

Industry has commented that this is a theoretical possibility but they argue that it is not realistic in the current environment because:

  • there is a lack of access to alternative additives in New Zealand
  • the cost of procuring additives from overseas would be prohibitive in large quantities at this time
  • it would take time to create acceptance and demand by the market for a product that was different from what is currently used, despite it meeting the same technical standards
  • production quantities are driven by customer demand (although there is a level of clinker production that is the most efficient for the plant).

This is the preferred option of Fletcher Building Ltd. 

FBL argue that incentivising emission reductions is a core part of the purpose of industrial allocation.  To provide allocation on the basis of anything other than cement production, removes the incentive that the NZ ETS creates to reduce emissions through the use of less energy intensive inputs and is therefore counter to the purpose of the Act.

There is some logic to this argument, if the manufacture of cement was to remain constant, whereby any addition of filler would displace an equal quantity of clinker, thus reducing total clinker production.  This would be considered a good environmental outcome as total emissions would reduce and it is economically efficient.  However, it cannot be ensured that the demand for cement, and therefore clinker production, would not increase in the future. 

Further, if an allocation provides an incentive to produce more cement simply in order to obtain emissions units, thus maintaining or increasing clinker production, this is a market distortion and would result in an inefficient level of cement production without necessarily achieving an overall reduction in emissions.  They would be compensated for costs that they would not be bearing otherwise.  This would be inconsistent with section 161E(1)(c)( ii). 

Likewise it could be considered inconsistent with the purpose of industrial allocation, which is to provide protection for those activities facing significant cost increases as a result of the introduction of the NZ ETS, because they are emissions-intensive and trade-exposed.  Whilst industrial allocation is important in supporting the overall purpose of the Act, there is a risk of a perception of windfall profits as a result of reducing the clinker content of the product, rather than an efficiency in the production process.

FBL concede that this option could pose a significant risk to the Crown and have suggested the use of a minimum level of clinker content as a way of reducing the risk, yet still providing an incentive to reduce clinker input.  This would need to be set at a level that was realistic in the current economic environment, is in line with that is technically possible, yet still provide enough of an incentive to see the emissions intensity of the product reduced.

A requirement around clinker content is possible, but depending on how it was incorporated, could be complex to include in regulations and may be open to interpretative differences over time.   

This option presents a policy risk in relation to the inequitable treatment of a firm that produces cement and one that trades clinker.  Because the trading of clinker would not be allowed, a firm that traded clinker would not receive any allocation, whereas a firm that made cement would.  Again this could distort business decisions and would be inconsistent with Section 161E(1)(c)(ii).

Other activities such as the production of aluminium and urea are not able to receive an over allocation if they were to dilute their end product.  Allowing cement to do so would lead to inequities across activities and would be inconsistent with section 161E(1)(c)(i).

Recommendation - on balance officials do not recommend option 2 as it represents significant risk due to inconsistencies with a number of the matters in section 161E(1).

Option 3:  Allocative baseline cement or clinker

Option 3: Allocative baseline cement or clinker

This option would require two allocative baselines.  The first would be for turning the limestone and clay into cement and the second turning the limestone and clay into clinker, where the clinker is traded rather than being processed into cement.

[Withheld]

It should also be noted that the fiscal risks identified under option 2 above, would also apply to the cement allocative baseline under this option.  Therefore this option may incentivise an increase in cement because of decreased clinker content, in order to receive an increased allocation.

Industry initially proposed this as a means of providing for both FBL’s and Holcim’s interests.  [Withheld]

Recommendation - [Withheld], strongly recommend against this option.

Option 4: Allocative baseline clinker (including cement milling)

Option 4: Allocative baseline clinker (including cement milling)

This option is the simplest from a data collection and administrative perspective.

[Withheld]

If a firm was to sell clinker, rather than have the clinker continue to the next stage of the process where it would be milled into cement, an allocation for emissions that did not occur would result.  This “over allocation” would be very small, and a firm that traded 100% of its clinker instead of milling it into cement, would still only receive an allocation equal to 94% of emissions.

Industry does not favour this option. 

Recommendation – this is a possible option and is officials’ second preference, however it presents some risk and is not preferred by industry.

Appendix 2 – Section 161E(1) Matters to which you must have regard

The following table sets out the matters to which you must have regard in Section 161E of the Climate Change Response Act.

Matter Analysis – Option 1 Analysis – Option 2 Analysis – Option 3 Analysis – Option 4
The requirement to define each activity by reference to a physical, chemical or biological transformation of inputs into outputs. An activity definition under any of the options would be consistent with this matter. 
The activity description is expressed as a physical and chemical transformation of inputs into outputs.
The undesirability of activities being defined by reference to the technology employed, the fuel used, the age of the plant, or the quality of the types of feedstock used when the activity is carried out. An activity definition under any of the three options would not reference technology, fuel used, age of plant, or the quality of the feedstock.
The desirability of defining activities:
  • consistently and equitably across industries.
  • in a way that takes into account the impact that definitions may have on business investment, geographical location, and the structure of activities.
  • in a way that takes into account the potential for intermediate inputs produced when the activity is carried out to be substituted for bought-in inputs.
 Approach take in this option is consistent with activities such as carbon steel, where there are multiple allocative baselines for the different stages of the process.
Least impact on business decisions.
Allows trading of clinker, however imported / traded clinker that is milled would not be included in the allocation.
Reduces incentive to use filler as a replacement for clinker		 Approach taken in this option is consistent with other integrated activities, such as Urea as it has a single allocative baseline.
Potential for over allocation, which could impact on business decisions.
Disincentivises domestic sales of clinker
Retains ETS incentive to use filler as a replacement for clinker		 Approach in this option has not been taken in any other activities, where one of the allocative baselines is also an input in the second.
Allows for trading of cement, but there is the potential for inequitable treatment of allocation for clinker production where one firm traded clinker and another milled their clinker into cement.
Potential for over allocation, which could impact on business decisions.
Retains ETS incentive to use filler as a replacement for clinker		 Approach taken in this option is consistent with other integrated activities such as aluminium, as it has a single allocative baseline. 
Small potential for over allocation, is unlikely to have a major impact on business decisions.
Allows trading of clinker, however imported / traded clinker that is milled would not be included in the allocation.
Reduces incentive to use filler as a replacement for clinker
The desirability of there being no overlap between activity definitions. There is no overlap between activity definitions or within the activity definition itself.  There is no overlap between activity definitions or within the activity definition itself.  This option has an overlap of allocative baselines within the single definition. There is no overlap between activity definitions or within the activity definition itself. 
Any other matters the Minister considers relevant, including:
  • The desirability of activity definitions reflecting activity definitions used in Australia.
 Australia has proposed a clinker definition. 
Proposing a cementitious product definition.
A cement with the maximum allowable additive content would only result in an allocation of 92%		 Totally different allocation regime compared to Australian proposed definition, which could see an over allocation if clinker content is reduced.
Potential for an allocation of over 100% of historical emissions.		 Australia has proposed a clinker definition. 
Risk that this is seen as two separate activities within a single activity definition. 		Australia has proposed a clinker definition. 
Proposing a cementitious product definition.
Even if all clinker was traded, would only result in an allocation of 94%

Last updated: 11 November 2010