Ministers Snub Call to Reassess Climate Grants: What It Means for Our Future

Ministers recently dismissed advice to reevaluate the hundreds of millions spent on climate grants for major carbon polluters like NZ Steel and Methanex. Inland Revenue and Treasury pointed out there’s no solid evidence proving these yearly subsidies are necessary. Instead of considering a thorough review, Minister Simon Watts turned down their suggestion. Alex Johnston from the Don’t Subsidise Pollution campaign expressed disappointment, highlighting concerns about the effectiveness of the subsidy system in meeting climate goals.

The grants, designed to support industries vulnerable to international competition, primarily benefit five key players: Methanex, Fletcher Building, Tiwai Point smelter, Ballance, and NZ Steel. These firms collectively receive substantial sums in free carbon credits, which the government could otherwise utilize for other priorities.

Initially intended as a temporary measure from 2010 to 2030, the subsidies have been extended. With a slow phase-out rate, heavy emitters could still be receiving support well into 2060, despite the government’s 2050 carbon neutrality goal.

Supporters argue that the scheme prevents local industries from moving production overseas, thus safeguarding jobs. However, many climate advocates contend it perpetuates pollution. Recent advice obtained under the Official Information Act reveals that Inland Revenue and Treasury wanted a detailed analysis to determine if the subsidies were justified.

Over the last few years, calls for a closer look at these subsidies have increased. The Climate Change Commission acknowledged the risk of emissions relocating but warned that the current scheme endangers New Zealand’s climate targets. A report from the think tank Motu suggests alternatives that might better align with environmental goals.

One major flaw in the current system is that free credits reduce the incentive for companies to adopt cleaner technologies. Companies can lower their emissions slightly and still keep subsidies, which undermines the motivation to innovate. For instance, if NZ Steel switches from melting raw ores to recycling, they could potentially lose some subsidies, creating a disincentive for pursuing cleaner operations.

In a recent environment committee meeting, Climate Commission chief executive Jo Hendy explained that while companies can make minor improvements, switching to significantly cleaner methods could lead to losing subsidies altogether. This could be akin to giving free petrol to businesses that still rely on fossil fuels; they may just optimize usage instead of transitioning to electric alternatives.

Eric Crampton, an economist from the NZ Initiative, proposed a more adaptive subsidy model. For example, if China’s steel production became greener, then New Zealand’s subsidies should decrease accordingly, rewarding local firms for reducing emissions rather than rewarding them for maintaining the status quo.

As the debate unfolds, Minister Simon Watts insists the scheme is vital for maintaining the competitiveness of heavy-emitting exporters. He acknowledges the need for proper incentives to encourage investments in lower emissions technology, stating that announcements regarding potential changes to the subsidy system are expected later this year.

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