Stationery Energy and Industrial Processes (SEIP) Technical Advisory Group (TAG) Notes of 3rd meeting held on 12 February 2008 9:30 – 12.30 at Treasury

Present: Chris Baker (Co-Chair), Mark Storey (Co-Chair), Carmen Blackler, Hans Buwalda, John Carnegie, Ray Deacon, Roger Fairclough, David Fletcher, James Flexman (conference call), Stuart Frazer, Ewan Gebbie, Phillip Millichamp, Craig Palmer, George Riddell, Michael Rynne, Doug Watson.

Officials: John Scott, Sara Arhaim, Robin Brasell, Kent Hammond, Tim Penne, Megan Taylor, Jan Catley (meeting secretary).

Introduction of officials took place followed by a welcome to James Flexman present by way of conference call and to Dr Suzi Kerr, convenor of cluster B of the Climate Change Forum.  The meeting approved the presence of officials.

Notes of the previous meeting on 24 January 2008 were accepted as a fair and correct record.  Agreed unanimously.

A comment was made about the late circulation of papers prior to this meeting and it was agreed that in future officials and TAG members preparing papers would aim to have papers distributed no later than the Thursday prior to the meeting.  In principle it was agreed that late papers would be held over until the next meeting.

Background paper on methods of allocation

John Scott (ETG) spoke to the paper on methods of allocation (SEIP/5) that had been circulated and briefly outlined the main points, noting that the choice of method depends in the primary objective of providing the assistance, for example, whether the objective is to prevent firm closure and carbon leakage or whether it is more broadly to compensate firms.

Initial discussion focussed on the government’s primary objective with the ETS. Clarification was sought as to whether the objective of the ETS is about meeting New Zealand’s international commitments at least cost. Officials replied that it was. A comment was made that this objective is inconsistent with the Government’s stated objectives of economic transformation. Further comment was made that industry is in general seeking an allocation plan that provides reasonable protection for industry and the ETS as designed does not appear to see this as an objective. 

Discussion moved to the problem of carbon leakage and defining it. It was explained that leakage is an environmental issue, whereby there is no global environment gain if reduced production in one country is simply offset by increased production elsewhere. Suzi Kerr explained further that the problem of leakage occurs only when the increase in production occurs outside of the Kyoto cap.

Discussion moved to the proposal to phase out assistance after 2013 (although officials noted that the phase out issue is outside the remit of the TAG) and a question was put to officials as to whether the Crown would not benefit fiscally post 2012 if free allocation was phased out and if this was a motivation for the Government? Officials replied that fiscal factors were not the reason behind the recommendation to phase out assistance. Rather the issue was the costs faced by the country as part of any future commitments and how to distribute these costs within the economy to ensure that the ETS objective is achieved as well as possible.

Suzi Kerr noted that the question of phase out of assistance was linked to the underlying rationale for providing assistance to industry in the first place.  Stranded assets is often the reason given for free allocation but how long is it appropriate to compensate for this?

There was some discussion around the concept of economic regrets. Officials acknowledged that economic regrets and economic adjustments are genuine issues. 

Strawman paper

A strawman paper on an allocation model had been circulated by a member of the TAG who spoke to the paper.  The presenter suggested that the formula for determining the size of the pool proposed by the government seemed un-necessarily arbitrary.  The strawman paper had retained certain aspects of the government’s in-principle decisions, i.e. that the pool should be defined in absolute terms and that there should be a level of stringency around the free allocation to ensure an emitter is facing the marginal cost of emissions.  The major variation from the Govt’s proposal is the methodology for defining the size of the pool. The strawman paper proposed a method based on defining normal production capacity and some pool for new entrants, (whereas as noted in the discussion) the government’s proposal is to limit the size of the pool to 90% of 2005 emissions. 

It was noted by the presenter that this proposal drew on the NGA process.  While this approach would be more complicated than the government historical based proposal it was suggested that the NGA process illustrates that it can be done and need not be overly complicated.  Other industry members commented that while the early phase of the NGA process was overly complicated, the revised process was robust and thorough and any criticism of the process was generally uninformed!

There was some discussion of the strawman proposal, in particular the alternative method for determining the size of the pool.  Suzi Kerr queried why it would be preferred to measure productive capacity and not an output basis, when she assumed their interest would be on protecting output and jobs.  Officials queried whether together with the proposal to have a new entrant reserve the proposal did not in fact imply an intensity based or growing cap rather than an absolute cap.  It was noted that this feature of the strawman would be a significant departure from the draft legislation.

Report from Suzi Kerr, Convenor of Cluster B (Allocation issues) of the Climate Change Leadership Forum

Suzi Kerr explained the work that Cluster B (allocation issues) of CCLF has been doing to date.  She mentioned that as part of this work there has been considerable discussion on what is meant by leakage.  She noted that the CCLF is seeking stories from industry about leakage.  Cluster B is also looking at examples of stranded assets in sectors that are not at risk of carbon leakage, e.g.  the land sectors and fisheries.

Some TAG members queried the process that the CCLF has set in place for obtaining stories from industry noting that they had not heard of this request.

Actions: 

  • A note outlining the nature of the information being sought will be provided to the SEIP TAG after the next meeting of Cluster B.
  • Officials will also follow up CCLF about the companies they are approaching for collecting data
  • TAG members who want to submit stories to the CCLF should do this via the co-chairs

Suzi Kerr also noted that the CCLF has requested Adolf Stromberg to do some further modelling work on sectoral impacts and to help determine the scale of structural adjustment that is facing the NZ economy.

There was general discussion of the respective roles of the CCLF and the TAG.  It was noted that one of the strengths of CCLF is that it is cross-sectoral.  The TAG on the other hand has specialist industry knowledge and greater resources.  It was suggested that the CCLF could give consideration as to how they could utilise the TAG.

There was brief discussion of the issue of border tax adjustments.  Officials explained that some briefing material on this subject was being prepared for the next meeting of the CCLF.

Action:

Mark Storey to request whether briefing information on the subject of border adjustments can be made available to the TAG for its next meeting

Information work programme

Speaking to the paper that had been circulated (SEIP/6), officials explained that Statistics New Zealand had surveyed 1500 geographic units out of 5500 that belonged to the manufacturing industry with rolling mean employment greater than 10.  Stats now have record data and there are two main options for officials and the TAG to pursue should they wish to access this data.

  1. Datalab access on a nameless basis could be available to researchers.  Approval process will be required and there will be a Datalab cost in the vicinity of $5,000 - 25,000.  Access is confined to the data being used on site at Statistics NZ.  Reports will be subject to a confidentiality clause so that reports do not give identification of respondents.
    Advantage: can be done relatively quickly
    Disadvantage: all disaggregated data must stay on site, data must remain nameless
  2. Respondent data release, a process whereby information within the survey is deemed by the government statistician to be of significant importance that respondents are asked to release their own results to another party, e.g. MED
    Advantages: raw data available with names of companies
    Disadvantages: Companies not required to release information, will take longer.  Unlikely to cover more than (say) 100 companies.

In considering whether to pursue either or both of these options or whether to try to gather data from other sources MED officials suggested two key issues arise; what are the questions that TAG have, and at face value is the data within the MEUS survey worth pursuing?

Actions:

  • Option 2 – formal request to Statistics New Zealand to release the data will be started (Roger Fairclough). 
  • Option 1 will also be progressed in the initial stages (Roger Fairclough)

Determining who should be eligible for assistance of allocation.

Discussion moved to the work programme going forward and the first task outlined in the strawman paper  - determining who is eligible for assistance/allocation and how do we define ‘trade exposed’ (TE).

There was some discussion on this returning to the questions of the motives for providing assistance, the use of a threshold etc.  The point was also made that criteria used and methods for determining Competitive at Risk (CAR) in the NGA process should be looked at again for their relevance to this process.  It was agreed that a sub group should be set up to advance this work and to report back to the next meeting.

Action

  • Sub-group comprising Mark Storey, Doug Watson, Hans Buwalda, Stuart Frazer, and Tim Denne (ETG), established to prepare a paper on objectives, criteria, options and data requirements for determining eligible firms

Progressive obligation work stream

Action

A small sub-group (George Riddell, Craig Palmer, John Scott (ETG) will prepare an assessment of progressive obligation and table a paper for the next meeting.

Further actions before next meeting

List of all papers submitted to CCLF will be provided by officials prior to the next meeting.  Approval has already been sought for full release of these papers. 

Notes on supply and demand of NZUs

Paper distributed was taken as read.  Any issues will be raised at the next meeting.

Next meeting dates:

Tuesday 4 March 2008 at Ministry for the Environment. Conference call facilities will be provided for those unable to be present.

Agreed that the April meeting will change to Thursday 10 April. 

Meeting closed at 12.40pm

Last updated: 15 September 2008