Analysis
The Government today announced a partnership with NZ Steel to spend up to $140 million on helping it transition away from burning coal in a move equivalent to taking 300,000 cars off the road. It will be used to help the private company move from using coal to make new steel products out of iron-rich sands to melting scrap metal using electricity from the grid instead, and in doing so knock at least 1 per cent off the country’s total emissions.
How significant is this announcement?
“There are not a lot of good climate change news stories - today is a good day,” quipped a visibly stoked Climate Change Minister James Shaw.
Prime Minister Chris Hipkins called it the country’s “largest-ever emissions reduction project”.
So, how does it stack up?
In terms of bang for a quick buck, this initiative is remarkable.
NZ Steel accounts for 2 per cent of the country’s greenhouse gas emissions, and halving the use of coal in its production will slash that by 45 per cent.
Sunday’s announcement, reducing carbon pollution by 800,000 tonnes, will knock off 1 per cent of New Zealand’s total annual emissions (provided it goes to plan and is up and running by 2027).
Energy Minister Megan Woods said it was the equivalent of taking 300,000 cars off the road - or the entire Christchurch fleet.
By contrast, the scrapped clear car upgrade “cash for clunkers” was to cost $569m and deliver just 2500 tonnes of emissions reductions over the first budget period (2022 to 2025).
It reduces more emissions on its own than all the other 66 projects the Government has approved to date.
It also involved a careful negotiation with Contact Energy which means renewable energy will be supplied in a way that does not impact peak electricity demand (and could have in turn seen coal burned to make up the difference).
Climate Change expert Dr James Renwick told the Herald the steel deal was a “very significant” move given steel was one of the country’s single largest emitters, as well as in the context of meeting overall emissions reduction targets.
New Zealand has committed to reducing carbon emissions to net zero by 2050, as part of global efforts to keep global warming under 1.5C.
The country has also committed internationally under the Paris Agreement to reduce net greenhouse gas emissions in 2030 by 50 per cent below gross emission levels in 2005, part of global efforts to limit warming to below 1.5C.
To meet that target, New Zealand’s emissions between 2021 and 2030 must not exceed 571 megatonnes of carbon dioxide equivalent gases (MtC02e).
Today’s announcement was estimated to contribute 5.3 per cent of the emissions reductions needed under New Zealand’s second emissions budget (2026-2030), and 3.4 per cent within the third emissions budget (2031-2035).
“The steel industry is described as a sector where it is hard to come up with renewable alternatives,” Renwick said.
“So this is a great initiative and a real win in terms of emissions reduction and recycling; a move towards a circular economy.”
Why is steel production such a big emitter?
Coal is conventionally used given the high temperatures needed in chemical reactions to create iron, the main ingredient needed to make steel. About 70 per cent of the world’s steel is made using coal.
There is currently limited - and very expensive - technology available for alternatives, aside from melting and re-using scrap steel (which can be done with conventional electricity).
NZ Steel produces about 670,000 tonnes of steel each year for mainly domestic consumption. Key products include roofing, structural beams, steel framing and reinforcing steel.
NZ Steel CEO Robin Davies said in New Zealand, they intended to eventually cut the other 55 per cent of their emissions by progressively increasing the ratio of scrap metal used along with developing energy sources in hydrogen and natural gas to replace coal.
Does this account for the climate change-focused policies the PM canned earlier this year?
In short, no.
Those climate policy U-turns and fossil fuel subsidies blew up roughly 16 per cent of the emissions reductions the Government had wanted to achieve by 2025 - and to which it is still committed.
Most of that comes from the binning of the “sustainable biofuels obligation”, which came in Hipkins’ first round of reprioritisations in February, and the Clean Car Upgrade and the Social Leasing Scheme.
At the time, Hipkins said there were more effective - and cheaper - ways of reducing emissions.
Shaw told the Herald as the new furnace was not expected to be up and running until 2026/27, it would not help with the hole in the first budget to 2025.
“We’re still in quite a tight spot,” he said. The Government was working through some options currently to plug that gap, he said.
Is this just corporate welfare?
National and Act were quick to oppose the initiative, with respective leaders Christopher Luxon and David Seymour calling it “corporate welfare” - a term they have both used to criticise many of the Government’s partnerships with industry to reduce emissions.
Seymour and others have also argued such industry decisions should be influenced by a properly functioning Emissions Trading Scheme (ETS). Essentially, as the price of pollution increased, companies would be encouraged to cut emissions.
The money comes out of the Government Investment in Decarbonising Industry (GIDI) fund, which was set up in 2020 and received a $650m boost in last year’s Budget.
The funding has been allocated from the Government’s Climate Emergency Response Fund, which itself is funded by proceeds from the ETS - essentially, the money has come from polluters themselves.
However, ultimately, the Government does decide what to do with that money.
Governments do invest and subsidise in various industries all the time - generally speaking, they are seeking a broader return, whether it be for the economy, retaining jobs and/or improving social and environmental outcomes.
The recent Budget, for example, included $160m over four years to subsidise the gaming industry - something National said it supported.
NZ Steel itself said without Government support, the project would not have happened.
Shaw told the Herald Government support was also necessary to make it happen as quickly as possible, as it would be responsible for paying for any emissions targets the country didn’t meet in the long run (with some high-level estimates reaching $24 billion by 2030).
“The lifetime abatement cost is forecast at $16.20 per tonne. Current carbon prices are around $55 per tonne. In the long term, this saves the Government and the country money.”
The deal would also ensure over 1500 people kept their jobs, and help establish a wider scrap metal recycling industry - something that would be needed as 4.2m internal combustion engine vehicles eventually made way for electric alternatives.
NZ Steel also currently receives a free allocation under the ETS as an “emissions-intensive, trade-exposed” business – recognising that ETS costs might impact the international competitiveness of these businesses. This means it would not be influenced in the same way as other industries.
Shaw said this allocation would reduce in line with its reductions in carbon emissions.
Renwick told the Herald what governments chose to invest in was a political decision.
“You could see this as a case of the Government helping to move them in the right direction. It might have happened anyway, but maybe not as quickly.
“More of this will have to happen. The Government is changing the way the economy operates. It will cost money, so it does need to think about that.”
MPs literally counted down the final seconds of Parliament.