Final allocative baselines for industrial allocation
2024
Key messages
1. This paper seeks your approval to issue drafting instructions to the Parliamentary
Counsel Office to draft amendments to the Climate Change (Eligible Industrial Activities)
Regulations 2010 to:
i
update allocative baselines,
ii
revoke eligibility for two industrial activities, and
iii
update two activity descriptions.
2. Cabinet approved the delegation for issuing drafting instructions to you on 30 September
2024 (CAB-24-MIN-0381 refers).
3. This briefing also seeks your approval to proactively release the associated Cabinet
paper
Progressing updates to industrial allocation in the emissions trading scheme, which you presented at Cabinet Economic Policy Committee on 25 September 2024, as
well as the resulting minute of decision. No redactions are proposed.
4. The allocative baselines are listed in Appendix 1. These have been calculated from data
provided over 2023 and 2024 from all firms receiving industrial allocation. The process of
obtaining and reviewing submitted data was assisted by PWC. They include the latest
information on the NZU price impact on electricity costs, as modelled by the Electricity
Authority. Our data team have provided additional assurance reviews of calculations.
5. The allocative baselines for producing clay bricks and field tiles are unresolved. Historic
data is being collected and reviewed from two manufacturers. We seek your approval to
include the consequent allocative baselines in our drafting instructions. We will seek
your approval of the allocative baselines and any minor policy changes needed for the
drafting instructions before lodgement of the amendment regulations and Cabinet paper
in November.
6. No data for production over 2016-2021 was received from firms in three activities.
i
For the production of gelatine and the production of newsprint, because no data was
also received in a call for projected data process, we recommend you set the
respective allocative baselines to zero and revoke eligibility for the two activities. No
firm is producing those products in New Zealand currently nor is expecting to in the
future. The Climate Change Response Act 2002 requires a two-year delay before
eligibility is revoked.
ii
For the production of carbon steel products, while no historic data was received, we
recommend not amending the current baselines until a call for projected data is
completed. We will provide further advice shortly.
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7. We recommend you agree to amending the activity descriptions of producing carbamide
(urea) and protein meal, as set out in Appendices 2 and 3. Data collected for the
allocative baselines in Appendix 1 reflect the proposed new activity descriptions.
Next steps
8. The amendment regulations need to be presented to Cabinet Legislation Committee
before the end of November. This allows them to come into force from 1 January 2025
and be implemented through the annual process of adjustments to provisional
allocations.
9. The allocative baselines in Appendix 1 do not reflect recent policy decisions for NZ
Steel’s use of cogenerated electricity or upcoming decisions on NZAS’s electricity
contracts. Those decisions will take effect through setting unique allocative baselines in
March 2025, which are developed once electricity consumption data for 2024 is received
from both firms. Those unique allocative baselines will result in adjustments to 2024
provisional allocations, in the same process as the rest of the new baselines.
10. The Cabinet paper notes you will contact the CEO of NZ Steel following Cabinet
decisions. We will hold back the proactive release of the Cabinet paper and minute until
this has occurred.
Recommendations
We recommend that you
a.
Agree to instruct Parliamentary Counsel Office to draft amendments to
Yes | No
the Climate Change (Eligible Industrial Activities) Regulations 2010 to
prescribe the allocative baselines for 2024 as set out in Appendix 1
b.
Agree to instruct Parliamentary Counsel Office to draft amendments to
the Climate Change (Eligible Industrial Activities) Regulations 2010 to
revoke the eligibility for industrial allocation from 1 January 2027 for the
production of
i. gelatine
Yes | No
ii. newsprint
Yes | No
d.
Agree to instruct Parliamentary Counsel Office to draft amendments to
Yes | No
the Climate Change (Eligible Industrial Activities) Regulations 2010 to
amend the activity description of producing carbamide (urea) as per
Appendix 2
e.
Agree to instruct Parliamentary Counsel Office to draft amendments to
Yes | No
the Climate Change (Eligible Industrial Activities) Regulations 2010 to
amend the activity description of producing protein meal as per
Appendix 3
f.
Agree the instructions to
Parliamentary Counsel Office in
Yes | No
recommendation (a) can include the final allocative baselines for
producing clay bricks and field tiles once calculated by officials following
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the formula set out in section 161C(2) of the Climate Change Response
Act 2002
g
Agree minor policy changes can be reflected in the drafting instructions
Yes | No
h.
Note your agreement to the allocative baselines for producing clay
bricks and field tiles and any minor policy changes will be sought before
the amendment regulations are presented to Cabinet
i.
Agree to proactively release the Cabinet paper
Progressing updates to
Yes | No
industrial allocation in the emissions trading scheme (Appendix 4) and
minute of decision (Appendix 5) following your conversation with NZ
Steel.
Signatures
Mark Vink
Hon Simon WATTS
General Manager, Markets
Minister of Climate Change
Date
Date
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Final allocative baselines for industrial allocation
2024
Purpose
1. This paper seeks your approval to
i
Issue drafting instructions to PCO to draft amendments to the Climate Change
(Eligible Industrial Activities) Regulations 2010 to update allocative baselines,
revoke eligibility for two industrial activities, and update two activity descriptions.
ii
Proactively release the Cabinet paper
Progressing updates to industrial allocation in
the emissions trading scheme and minute of decision
.
2. Broadly, the drafting instructions we seek your approval for follow directly from the
Cabinet approval of the policy and there is limited judgement involved. However, there
are four areas where we are seeking judgements from you:
i
Gelatine and newsprint: we recommend that the eligibility of these activities is
revoked in addition to setting their baselines at zero.
ii
Carbon steel from cold ferrous feed: we recommend that you do not update the
existing baseline for this activity due to a separate process calling for projected data
being underway.
iii
Clay bricks and field tiles: we recommend that you authorise us to continue to collect
data about these activities and build that additional data into the drafting instructions
we give to Parliamentary Counsel Office.
iv
Carbamide (urea) and protein meal: we recommend updates to the descriptions of
these activities in regulations.
Updates to allocative baselines
3. The allocative baselines in Appendix 1 represent the emissions per unit of production
over 2026/17 to 2020/21 for each product in eligible industrial activities. They are
weighted averages if there is more than one firm.
4. Data was collected and reviewed from late 2023 to early 2024. PWC was contracted to
provide support to firms and to ensure data quality. Provisional allocative baselines were
emailed to firms on 27 July 2024. The 2024 electricity allocation factor was then applied,
resulting in slightly higher final allocative baselines. Our data team has provided
additional tests of the calculations for assurance purposes.
5. A special process will be followed to adjust baselines early in 2025 for producing
aluminium and for producing iron and steel from ironsand. Those adjustments are
necessary to ensure the 2024 allocations to firms represent actual emission costs from
consuming electricity under particular contracts. The baselines are updated from
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obtaining electricity consumption data in January then amending regulations in late
March.
Data was not collected for three activities
Gelatine and newsprint
6. No firms were found to be producing gelatine or newsprint over 2016/17 to 2020/21. The
appropriate baselines for the products in those activities are therefore zero, as there was
no emissions or production.
7. We are mindful that a new entrant could restart the production of such products in the
future and seek industrial allocation. The Act allows for new entrants to receive industrial
allocation if tests are met, such as the prospective baseline must be lower than the
current prescribed one. The setting of baselines at zero will make it very unlikely that the
tests can be met by a new entrant.1 This means industrial allocation will be unlikely.
8. The requirements on any new entrants in the production of gelatine or newsprint to gain
an industrial allocation would be much lower if the activity classes were removed from
the regulations. The new entrant would then apply for eligibility as a new activity and not
be bound by the constraint on increasing an existing baseline.
9. Decisions on eligibility were not possible from the 2026/17 to 2020/21 data collection
process.2 Therefore, in order to provide you with the opportunity to revoke eligibility, we
initiated a projected data collection process. Notices were issued seeking data from
anyone considering starting either of the two activities in the next few years. No data
was received. This allows you to decide if eligibility should be revoked.
10. To revoke eligibility, you must be satisfied the activity is either no longer moderately or
highly emissions intensive, or trade exposed.3 Due to the absence of data on the
emissions intensity of the activities, we consider this test is met.
11. Revoking eligibility takes effect at least two years following the publication of the
regulation.4 We recommend that eligibility is revoked through amendment regulations
that take effect from 1 January 2027.
Carbon steel from cold ferrous feed
12. Data was also not collected from any person producing carbon steel from cold ferrous
feed. This is the eligible activity that NZ Steel will use for electric arc furnace production.
13. We recommend not amending the existing baseline for that activity at this stage. A call
for projected data is planned, enabling allocative baselines to be developed for the
regulations. We are consulting on changes to the activity description and changing the
1 Section 161A(3A)(c)
2 Schedule 1AA Part 41
3 Section 161A(3)
4 Section 161A(5)(a)
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data collection forms to enable this call for projected data. NZ Steel has been engaged
in that consultation process.
14. Even though no data was collected from 2016/17 to 2020/21 for the activity, that does
not compel you to set the baseline at zero at this stage.
15. We expect to seek your approval to the update to the activity description of this activity
and to issue the Gazette notice calling for projected data by the end of October.
Data from clay bricks and field tile producers is not yet final
16. PWC contacted producers of clay bricks and field tiles but did not receive any response.
We made our own enquiries in preparing for a call for projected data exercise and found
two small producers. Data is being sought and assessed from those producers, but this
process has not been completed yet. The table in appendix one contains ‘to be
determined’ as entries against allocative baselines.
17. We seek your approval to a flexible approach to the updating of the clay brick and field
tile allocative baselines. Cabinet agreed the changes would enter into force from 1
January 2025 and be applied to final 2024 allocations. Holding back the full set of
drafting instructions so that clay brick and field tile calculations could be made and
added would make that timetable unachievable.
18. We will include the allocative baselines in our drafting instructions once they are
calculated. Your formal approval of the respective allocative baselines and any broader,
but still minor, policy changes will be sought when we provide the draft Cabinet
Legislation Committee paper to you for feedback in November 2024. We will follow the
required formula in section 161C(2) of the Act to determine the allocative baseline,
exactly the same as the other allocative baselines.
Updates to two activity descriptions
19. Consultation on changes to the activity descriptions for producing carbamide (urea) and
protein meal was performed prior to the collection of 2016/17 to 2020/21 data.
Engagement feedback from affected firms as wel as Iwi/Māori was supportive.
20. Regulations did not need to be amended to collect that data. The allocative baselines in
Appendix 1 were developed from data collected under the proposed new activity
descriptions. The proposed new activity descriptions are in Appendix 2 and 3.
Production of protein meal
21. The existing activity description for protein meal does not include tallow as a co-product
as this was left out as an oversight when the regulations were drafted. The existing
activity description needs to be updated to improve the future accuracy of allocations.
22. Without this change, there is a risk of under-allocating to firms producing protein meal as
emissions from tallow production would not be included if there was another data
collection process. This update is minor and consists of adding a line to the existing
description.
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Production of carbamide (urea)
23. Ballance Agri-Nutrients Ltd (Ballance) is currently the only firm producing urea in New
Zealand. They manufacture three liquid urea products that they do not receive an
allocation for at present.
24. The liquid urea products do not contain a high enough concentration of urea to meet the
concentration test in the existing activity description in regulations. The existing activity
description needs to be amended to allow the urea solution products to be listed as
eligible.
25. The impact that adding these products will have on current allocation levels is minor and
will be outweighed by the reduction in allocation levels resulting from the new allocative
baseline for urea production.
Proactive release of Cabinet paper and minute
26. We seek your agreement to proactively release the Cabinet paper in Appendix 4 and the
minute of decision in Appendix 5. No redactions are proposed.
27. The Cabinet paper notes you will contact the CEO of NZ Steel following Cabinet
decisions. We will not publish the Cabinet paper or minute until you have done so.
28. The Cabinet paper and minute will be published alongside the final allocative baselines
for 2024 as well as the provisional baselines that were emailed to firms in July. Those
provisional baselines were requested under the Official Information Act 1982 and our
response noted an intention to publish them on our website following Cabinet decisions.
We have performed a commercial sensitivity test with all firms. Visy Glass asked their
provisional allocative baseline be withheld, which we will do.
Te Tiriti analysis
29. No Tiriti issues are associated with the proposals in this briefing
Other considerations
Legal issues
30. Cabinet approved the delegation for issuing drafting instructions to you on 30 September
2024 (CAB-24-MIN-0381 refers).
31. Your decisions in this briefing will support our development of drafting instructions to the
Parliamentary Counsel Office. We have engaged with the PCO to ensure they can draft
the amendment regulations in order for presentation to Cabinet Legislation Committee in
November.
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Next steps
32. We will issue drafting instructions as soon as we receive your direction through this
briefing. We will add the final clay brick and field tile allocative baselines to those
instructions once determined.
33. We will publish the allocative baselines, Cabinet paper and minute after your
communication with NZ Steel.
34. A draft Cabinet Legislation Committee paper is being prepared and is timed for
consideration on 21 November 2024. We will provide your office with a draft by mid-
October to ensure sufficient time for your and Ministerial consultation.
35. We will seek your approval to proactively release the following Cabinet papers, with
appropriate redactions, in late October as a package:
i
New Zealand Aluminium Smelter electricity allocation factor update5
ii
Amendments to the New Zealand Emissions Trading Scheme regulations6
36. Other upcoming industrial briefings are:
i
9(2)(f)(iv)
ii
Issuing calls for electricity consumption data from the production of iron and steel
from iron-sand and from the production of aluminium – mid December
5 Expected to be considered by Cabinet in mid-October
6 Considered by Cabinet Legislation Committee on 19 September 2024
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Appendix 1: Final allocative baseline values for 2024
Baseline
Baseline for
currently in
regulation
Activity
Product regulations
amendments
Aluminium smelting
A
10.1304
10.2511
Manufacture of carbon steel from cold ferrous feed
A
0.3693
No change
Manufacture of carbon steel from cold ferrous feed
B
0.1470
No change
Manufacture of carbon steel from cold ferrous feed
C
0.0940
No change
Manufacture of iron and steel from iron sand
A
3.2613
3.1783
Manufacture of iron and steel from iron sand
B
0.1190
0.1422
Manufacture of iron and steel from iron sand
C
0.2800
0.2077
Manufacture of iron and steel from iron sand
D
0.1630
0.1839
Manufacture of iron and steel from iron sand
E
0.1493
0.1592
Manufacture of iron and steel from iron sand
F
0.1470
0.1654
Production of burnt lime
A
1.4115
1.3012
Production of carbamide (urea)
A
1.6245
1.6151
Production of carbamide (urea)
B
1.5580
Production of cartonboard
A
1.1783
0.7434
Production of cartonboard
B
0.4784
0.6461
Production of cartonboard
C
0.3377
0.0754
Production of caustic soda
A
1.5926
1.4953
Production of cementitious products
A
0.9615
0.8300
Production of cementitious products
B
0.0234
0.0235
Production of clay bricks and field tiles
A
0.2264
TBD
Production of clay bricks and field tiles
B
0.8813
TBD
Production of clay bricks and field tiles
C
0.2227
TBD
Production of cut roses
A
0.000991
0.0004
Production of ethanol
A
1.5076
1.8715
Production of fresh capsicums
A
3.6064
3.0098
Production of fresh cucumbers
A
3.4461
0.7713
Production of fresh tomatoes
A
2.6006
1.4963
Production of gelatine
A
6.4607
0
Production of glass containers
A
0.5946
0.6125
Production of hydrogen peroxide
A
1.395
1.2859
Production of lactose
A
1.4323
1.3081
Production of market pulp
A
0.6215
0.7320
Production of market pulp
B
1.3812
0
Production of market pulp
C
1.0463
0.8293
Production of methanol
A
0.7854
0.8191
Production of newsprint
A
0.5035
0
Production of newsprint
B
1.3662
0
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Production of packaging and industrial paper
A
0.4657
0.5419
Production of packaging and industrial paper
B
0.5171
0.5267
Production of packaging and industrial paper
C
0.0961
0.1109
Production of protein meal
A
0.9360
1.1288
Production of reconstituted wood panels
A
0.2134
0.2089
Production of tissue paper
A
1.2176
0.8651
Production of tissue paper
B
0.7896
0
Production of whey powder
A
0.8526
0.6377
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Appendix 2: Changes to the activity description of producing
of carbamide (urea)
1. Change the existing product into two products A and B:
A. total tonnes of dry-weight carbamide (CO(NH2)2 urea) in high concentration products;
B. total tonnes of dry-weight carbamide (CO(NH2)2 urea) in low concentration products
2. And define these as
High concentration products means products where the concentration of carbamide
(CO(NH2)2, urea) is greater than or equal to 80% with respect to mass.
Low concentration products means products where the concentration of carbamide
(CO(NH2)2, urea) is between 31% and 41% with respect to mass.
3. Change the activity description to accommodate those products:
Activity means the production of carbamide (urea) by the chemical transformation of
hydrocarbons (or other hydrogen and carbon feedstocks) and nitrogen to produce
carbamide solutions (CO(NH2)2(aq), urea), where the concentration of carbamide
(CO(NH2)2, urea) is is greater than or equal to 80% with respect to mass, where the outputs
include:
(a) carbamide solutions (CO(NH2)2(aq), urea); and/or
(b)
saleable granulated, prilled or other solid forms of carbamide (CO(NH2)2(s), urea).
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Appendix 3: Changes to the production of protein meal
1. Amend the activity description by adding B as below:
Activity means the physical and chemical transformation of raw livestock-derived animal
material into:
A. protein meals (such as meat and bone meal, dried blood and feather meal) which
must have a moisture content of 10% or less; and
B. tallow co-products.
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