Counter-UAS Regulation

The malicious or negligent use of drones gives rise to significant risks. While the risky behaviours are subject to existing legal sanctions, the apprehension of perpetrators can be difficult.

Licensing is sometimes proposed as a means of controlling drone operations. However, licensing, even when coupled with surveillance and enforcement, does not prevent unlicensed individuals from engaging in the activity, or licensed individuals from undertaking the activity in an unsafe manner. Notwithstanding the prohibition on using a hand-held cellphone while driving, in the 2017 calendar year the New Zealand Police recorded 23,412 offences of using a hand held device for calling or texting while driving (New Zealand Police, 2018).

Electricity Authority decisions demonstrate High Court reasoning was incorrect

The Electricity Authority (EA) has been consulting on changes to electricity transmission pricing, removing the pricing principles under which distributed generation connects to the distribution network, and removing the avoided cost of transmission payments received by many distributed generators. No owners of distributed generation accepted the EA’s proposals regarding distributed generation, and the transmission pricing proposals received widespread condemnation from across the industry (accept from certain major industrial customers, who were set to benefit significantly because the Authority chose measures of “use” that would significantly favour those entities).

To everyone participating in the consultation process on the EA’s proposals it was evident that the EA had a pre-determined position. Consultation papers used terms like “subsidy” and “cross-subsidy” in a perjorative and political manner, using measures of “fairness” based on the EA’s heavily flawed analysis. Unfavourable responses to consultation were met by the Authority trying again, from a different angle, or by trying to slice off a smaller sliver of an issue that it might be able to win in isolation. The consultation process has been long, complicated, expensive for industry participants, and seemingly designed to wear everyone down.

Trustpower took exception to the EA’s pre-determined position, and filed an application for a Judicial Review in the High Court. On Friday 2 December 2016 the Court declined Trustpower’s application^[1], with the decision being made public on Monday 5 December.

In reaching his decision, Cull J stated:

The stage that has been reached in the process is that the [EA] has not made a final decision on the submissions it has received, but is still in the process of considering them.^[2]

Judge Cull went on to state:

It is also inappropriate for this Court to undertake a merits-based review of the [EA]'s consultation process, when the [EA] is currently undertaking an analysis of all the submissions... both as to substance and as to process, and has yet to reach a decision.^[3]

The EA gave the lie to the Judge Cull’s reasoning the very next day, announcing two decisions^[4] that had quite clearly already been made:

• First, the EA has decided not to progress the removal of the distributed generation pricing principles, a decision that was forced upon it given widespread condemnation of its proposals.^[5]
• Second, the EA has decided to progress the removal of ACOT payments.

The decision to remove ACOT is hardly a surprise, being a decision that the EA made clear when it first consulted on ACOT back in 2013.^[6] The decision was pre-determined and the EA was not going to let any amount of analysis stand in its way.

Endnotes
[1] Trustpower v Electricity Authority [2016] NZHC 2914. Available on the Electricity Authority website at http://www.ea.govt.nz/dmsdocument/21511.
[2] At 116(b).
[3] At 122.
[4] Electricity Authority, "Authority Decision on the review of DGPPs and ACOT", 6 December 2016. Available from this link.
[5] See the summary of submissions published by the EA.
[6] For more on the original consultation, see ASEC Report finds Benefits from Distributed Generation and ACOT Payments, 9 February 2014.

Application of New Zealand Privacy Law to Drones

An Australian woman discovered that real estate advertisements,
including a large billboard, carried an image of her sunbathing in her
backyard. Would New Zealand privacy law provide adequate
protection?
Source: “Mt Martha woman snapped sunbaking in g-string by real
estate drone”, Herald Sun, 17 November 2014.

New Zealand privacy law encompasses the torts of wrongful publication of private facts and intrusion on seclusion, the Privacy Act 1993, and various provisions in the Crimes Act 1961 and the Summary Offences Act 1981. The privacy torts set a high threshold, requiring a privacy violation to be “highly offensive”, a test that is highly dependent on the circumstances of the individual case. There is considerable uncertainty over whether the privacy torts provide any effective cause of action against privacy violations by drone.

The Privacy Act creates an offence of an “interference with privacy”. One of the most likely causes of an interference with privacy involving drones is that personal information has been “collected by means that, in the circumstances of the case … intrude to an unreasonable extent upon the personal affairs of the individual concerned”.

The Privacy Act appears to provide an avenue for redress for a person who believes that they have suffered a privacy violation, but there are significant hurdles to overcome. Two particular problems are:

• The victim may not be able to see the pilot, and there are unlikely to be any identifying characteristics on the drone, meaning that it will be very difficult to hold a specific individual accountable.
• In a test case in 2015, the Privacy Commissioner held that if a drone is not recording then there is no information collected, so no information privacy principle can be violated and there is no interference with privacy.

There are sufficient uncertainties in the application of the current body of tort and statute that a person upset by unwelcome surveillance cannot be sure of an acceptable resolution, even when that surveillance takes place in a location where they have a reasonable expectation of privacy.

New Zealand’s current privacy framework requires clarification to better accommodate the challenges posed by drones. Some of the modifications could potentially be achieved by way of a code of practice issued under the Privacy Act, which may provide a relatively low-cost means of setting the standard of acceptable behaviour. Challenges will still remain because the characteristics of drone technology make it difficult to identify the operator, which in turn makes it difficult to obtain any legal remedy. Such challenges may mean that in some instances an alternative, more direct means of intervening to protect one’s right to privacy would be efficient.

Source:
This article summarises key aspects of the recent paper:

Shelley, Andrew (2016) “Application of New Zealand Privacy Law to Drones”, Policy Quarterly, 12(2):73-79, May.

A copy of the full paper can be downloaded from the Policy Quarterly website or Andrew’s author page on SSRN.

TPM Options Review

On 16 June 2015 the Electricity Authority (EA) released that latest in its series of working papers: the Transmission Pricing Methodology Review: TPM options working paper (the “TPM Options Paper”). It is understood that the EA intends the TPM Options paper to be the last of the working papers, with the results of the current consultation enabling it to move to selecting a specific TPM option to assess against the current TPM. In a somewhat unusual situation, ASEC prepared three responses to the TPM Options Paper:

• A report for the Independent Electricity Generators Association (IEGA);
• A report for Electra (a distributor) and King Country Energy (a small generator and retailer and member of the IEGA); and
• A letter from ASEC on the treatment of the Loss and Constraints Excess (LCE).

The EA’s proposals created sufficient alignment of interest between the parties that the three responses could be prepared without risk of arguing at cross purposes.

Traditional analyses of embedded generation are typically focussed on short-run effects, concerned to ensure that pricing does not provide incentives to avoid or reduce use of the current transmission system. A long-term view, on the other hand, suggests that this approach may not be correct and may result in being locked in to existing technologies and existing network structures.

The report for the IEGA develops a theoretical framework for embedded generation within the construct of a planner seeking to optimise the mix of local generation, local transmission, and remote generation for a distribution network. The same framework readily allows energy efficiency and other demand management initiatives.

Both the IEGA and Electra/KCE reports address a wide range of issues that arise with the various proposed TPM Options. Perhaps the greatest concern is that the allocation of the proposed Residual charge results in an under-allocation of approximately $52m to the directly-connected industrial customers, which will instead be paid by the consumers connected to distribution networks. The same allocations provide an incentive for larger industrial consumers to disconnect from distribution networks and connect to the transmission network.

The letter on the treatment of the Loss and Constraints Excess reinforces the submission made in March 2014. The EA proposes to credit the LCE that arises on Connection and Deeper Connection assets to the parties that pay for those assets, but credit the remainder of the LCE in bulk against Transpower’s revenue requirement. The treatment of LCE on Connection and Deeper Connection assets is appropriate, but the treatment of the remainder is not. The proposed TPM Options also include an “Area of Benefit” charge to recover the cost of specific transmission investments. The parties that pay for those new assets should also receive the LCE generated on those assets.

For more detail on these issues and more, see the relevant submissions:

• report for the Independent Electricity Generators Association;
• report for Electra and King Country Energy; and
• ASEC submission on the Loss and Constraints Excess.

Review of Secondary Networks

TENCO EBS (http://tenco-ebs.co.nz) commissioned Andrew Shelley Economic Consulting Ltd (ASEC) to prepare a report in response to the Retail Advisory Group’s Issues and Options Paper on Secondary Networks.

Networks for conveying electricity to consumers are categorised by their level of connection to the transmission network. Those that are directly connected to the transmission network are local distribution networks (“Local Networks”). Secondary networks are indirectly connected to the transmission network by way of another electricity network.

Secondary networks typically service consumers in a specific multi-tenant location such as multi-tenanted office blocks, residential apartment buildings, retirement villages, shopping centres, airports, industrial/commercial parks, residential subdivisions, and permanent camping sites. Secondary networks may be:

• Customer Networks, which is typically represented by a single Installation Control Point (ICP) in the registry, and individual consumers on that network do not have an ICP but are billed for their electricity consumption by the network owner;
• Embedded Networks, where each consumer has an ICP and can obtain retail services from retailers that operate on that Embedded Network (which in theory requires a use-of-system agreement (UoSA) to be negotiated); and
• Network Extensions, where the network operates as an extension of the Local Network, and each consumer has an ICP and obtains retail services from retailers that operate on the Local Network.

The Retail Advisory Group has identified that certain competition, reliability, and efficiency issues may arise with secondary networks. The issues identified include:

• Consumers on Customer Networks do not have a choice of retailer;
• Retailers claim that it is difficult to negotiate UoSAs with Embedded Networks;
• Retailers claim that it is difficult to maintain relationships with Embedded Networks;
• Interactions between retailers, distributors, and secondary networks could be improved, for example during the conversion of a secondary network from one type to another; and
• Interactions between retailers, distributors, secondary networks and consumers could be improved to reduce costs of performing market functions and providing retail and network services.

Of particular note, ASEC analysis of registry data on ICPs shows that Embedded Networks have a Herfindahl-Hirschman Index (HHI) of 1,562, significantly lower than the estimate of >3,000 calculated by the Electricity Authority for the national residential retail market. Embedded Networks also have significantly lower Concentration Ratios. This data strongly suggests that there is not a problem with competition on Embedded Networks, but rather that Embedded Networks are the network environment with the highest level of competition.

A range of measures are proposed to reduce transaction costs and enhance the efficiency and competitiveness of retail competition on Secondary Networks. More Information:

• The Retail Advisory Group’s Issues and Options Paper; and
• The ASEC Report.

Study Quantifies Benefits from Beyond-Line-of-Sight use of UAVs

AeroVironment Puma being hand-launched Photo: Sgt. Bobby Yarbrough - http://www.marines.mil/Photos.aspx?igphoto=2000010661 Crop of 130304-M-DE426-001.JPG. Licensed under Public Domain via Wikimedia Commons.

Andrew Shelley Economic Consulting Ltd teamed with Aviation Safety Management Systems Ltd to quantify the potential economic benefits to New Zealand from allowing beyond-line-of-sight use of Unmanned Aerial Vehicles (UAVs) for pasture management, forestry, and monitoring electricity infrastructure. The report, commissioned by Callaghan Innovation, estimates that benefits to New Zealand could be in the order of $151m - $189m per year.

The Civil Aviation regulatory framework in New Zealand currently requires the pilot of a UAV to maintain visual contact with the aircraft at all times, or otherwise to have an observer who maintains visual contact, to ensure that appropriate action can be taken to avoid collision with any manned aircraft. Beyond-line-of-sight use provides opportunities for additional economic benefits to be realised, but that will require additional measures to be in place to ensure that collisions do not occur. Research and practical experience suggest that line of sight is restricted to a distance of from 500m to approximately 1.4km.

The largest gains from beyond line-of-sight use of UAVs arise in the forestry sector, where the use of UAVs for pest and disease monitoring and control has the potential for gains of at least $72m-$95m per year. The nature of forest plantations is such that line-of-sight use of UAVs is highly restricted and little benefit can be gained. When beyond-line-of-sight use is adopted, benefits from enhanced control of Dothistroma in radiata pine plantations could be as much as $69m per year, and improved control of the eucalyptus tortoise beetle could generate a further net benefit of $26m. Control of other pests and diseases would generate further benefits.

The gains from UAV use in pasture management are potentially very large, but the majority of those benefits can be obtained from line-of-sight use. Given assumed high take-up rates in dairy, but relatively small farm sizes that can be covered relatively efficiently with line-of-sight operation, the gains from beyond-line-of-sight use in dairy are estimated to be approximately $29m per year. Sheep and beef farming is assumed to have limited take-up rates (approximately 20% of farms), but the much larger size of these farms means that the gains are larger at an estimated $38m per year.

The use of UAVs in electricity infrastructure inspection allows for more frequent inspections, better targeted maintenance and reduced outage times. Reduced outage times on the electricity distribution system could provide economic benefits to consumers of from $4m to $19m per year. Reductions in the cost of maintenance would yield approximately another $7m per year. Additional safety benefits occur from avoiding having inspections conducted by low-flying helicopters and reducing the amount of time that linesmen may have to work at height, but these have not been quantified.

For more information:

• Read the Callaghan Innovation press release;
• The New Zealand Herald article;
• The same article on the National Business Review;
• Visit the Aviation Safety Management Systems website;
• Download the report here or from the Callaghan Innovation website.

Selecting the Regulated WACC in the Presence of Market and Catastrophic Risks

A new report by Andrew Shelley Economic Consulting Ltd (ASEC) analyses issues relevant to the choice of the Weighted Average Cost of Capital (WACC) for regulated Electricity Distribution Businesses (EDBs) in the context of risks faced by those entities.^[1] The report demonstrates that given key technological and catastrophic risks faced by EDBs, the economic costs of setting the WACC too high are likely to be less than the costs of setting it too low.

Key risks facing electricity distribution are technological change, which could render existing networks obsolete, and catastrophic events such as earthquakes, volcanic eruptions, and an increase in storm damage due to climate change. The regulatory regime currently in place means that In the best case scenario, EDB making investments now can expect that from regulatory period to regulatory period it will earn its WACC, such that in approximately 45 years’ time it will break even on the investment. These risks mean that it is not appropriate to set the regulated WACC at its mid-point value unless the risks are explicitly addressed through another mechanism. Absent such a mechanism, it is likely to be necessary to set the WACC at above its mid-point (above the 50^th percentile).

ASEC estimates that setting the WACC at the 75^th percentile of the WACC distribution results in average delivered electricity prices around 1.4% to 1.8% higher than if the WACC is set at the 50^th percentile. Given a price elasticity of demand of -0.4, the difference in average delivered electricity prices will result in a deadweight loss of between $174,000 and $214,000 per year.

The same economic cost would arise with a loss of supply of just 14.36MWh per year, equivalent to an increase in SAIDI^[2] of 15 just seconds over the weighted average SAIDI of 111 minutes and 35.5 seconds. This is a trivial increase compared to the higher long term SAIDI rate that could occur if EDBs did not undertake discretionary non-essential capital expenditure such as undergrounding or network reinforcement to build resilience.

Facing a lower WACC, EDBs could also increase the level of capital contributions required, shifting capital expenditure to customers who have a higher WACC. In aggregate, EDBs would only need to increase capital contributions by $18m to achieve the same economic cost as the deadweight loss from higher prices.

Refinement of the above estimates into a loss function requires considerable additional analysis, including the development of engineering studies on network performance under various catastrophic events given different levels of discretionary investment. Other complex issues will also require resolution and agreement, such as the relationship between the regulatory WACC and discretionary capital expenditure by EDBs, and how reductions in discretionary capital expenditure would translate into economic costs.

A copy of ASEC’s report can be downloaded here.

Endnotes
1. ASEC was retained by Unison Networks Ltd to prepare this report for submission to the New Zealand Commerce Commission's current process considering the appropriate WACC. The Commerce Commission's project page is here.
2. The System Average Interruption Duration Index or SAIDI is a commonly used measure of reliability for electricity networks. SAIDI measures the average outage duration for each customer served.

ASEC Calculates Value of Pulse Energy to Buller Consumers

Buller Electricity Ltd (BEL) is the small trust-owned electricity distribution network serving the Buller region. Andrew Shelley Economic Consulting Ltd (ASEC) was retained by BEL to estimate the value to BEL's consumer-owners of the company's ownership stake in Pulse Energy.

Frequent congestion or constraints on the transmission lines providing power to the region means that retailers operating in the area face high levels of wholesale electricity price risk. ASEC's analysis considers the risk management options that are available to a retailer, and how this leads to a regional retail electricity market. Limited risk management options for those retailers without generation increases risk and is likely to reduce competition,

Pulse Energy entered the retail electricity market in Buller region after Buller Electricity entered a recapitalisation agreement with Pulse Energy in 2010. BEL currently owns 59.47% of Pulse Energy. In the space of two years, Pulse Energy gained a market share of over 25% of Installation Control Points (ICPs), and currently maintains a market share of 23%-24% of ICPs. The process of competition would be expected to result in lower retail prices, providing BEL's consumer-owners with a benefit that is unlikely to have occurred absent the entry of Pulse Energy.

The actual market share of retailers is known, as are their actual prices. Estimates are developed of the market share and weighted average retail price that might have prevailed but for the entry of Pulse Energy. Comparing this "counterfactual" weighted retail price with the actual retail price provides an estimate of the benefit per kWh. Average annual loads for consumers on the BEL network then allow the calculation of an annual benefit. This is converted to a net present value over the period 5-15 years, using a social discount rate. The period 5-15 years is the timefame over which independent generation might be expected to enter the regional electricity market, providing opportunities for retailers to hedge their exposure to transmission constraints.

A copy of the ASEC report can be downloaded from the Buller Electricity website here.
View the Buller Electricity press release here.

ASEC Disagrees with Electricity Authority Proposals

Andrew Shelley Economic Consulting Ltd (ASEC) has submitted on its own behalf to the Electricity Authority's ("the Authority's") consultation on the use of the "loss and constraints excess" (LCE) to offset transmission charges.*

The Authority issued its working paper, Transmission pricing methodology: Use of LCE to offset transmission charges, on 21 January 2014. ASEC made this submission because the Authority's working paper lacked the intellectual rigour that should reasonably be expected from professional economists. In a letter to the Authority, Andrew Shelley states that "it is important to distinguish between conjectures that seem logical and robust demonstrations of fact."

Mr Shelley's letter demonstrates that the LCE should be returned to the party paying for transmission. If this is not done then locational marginal pricing creates a distortion in favour of market participants owning transmission assets (and thereby keeping them out of the wholesale electricity market). Mr Shelley also argues that the resulting “muting” of the marginal price signal is not a concern from an economic perspective, with a price equal to marginal cost only being optimal in a narrow set of circumstances such as perfect competition.

It has been claimed that payment of LCE to parties that pay for transmission could introduce a risk that generators would "game" the LCE. Mr Shelley examines this claim and concludes that it is unlikely that generators will have such an incentive, with an increase in LCE normally being associated with a decrease in generation and decrease in profitability.

ASEC's letter to the Authority can be downloaded here.

Note: The LCE arises from the pricing system used in the wholesale electricity market. Locational marginal prices are set based on the marginal cost of electrical losses and constraints, whereas the average cost of losses is the cost actually incurred. A fundamental characteristic of the physics of electricity is that electrical losses are proportional to the square of current, which means that marginal losses are greater than average losses. In the wholesale electricity market this means that more money is collected from customers than is paid to generators, and the difference is termed the "loss and constraints excess". This does not represent a super-profit, but is instead currently returned to consumers by way of a reduction in lines charges.

ASEC Report finds Benefits from Distributed Generation and ACOT Payments

A new report by Andrew Shelley Economic Consulting Ltd (ASEC) finds that distributed generation (DG) provides significant benefits, and that Avoided Cost of Transmission (ACOT) payments made to distributed generation embedded within distribution networks also provide benefits. ACOT payments are made to generators embedded within a distribution network and which generate at peak periods, thereby avoiding transmission charges based on peak.

In November 2013 the Electricity Authority issued a "working paper" which, in essence, claims that there are little or no benefits obtained from distributed generation that is embedded within distribution networks, and indicating that such payments should be eliminated. Andrew Shelley Economic Consulting Ltd (ASEC) was retained by the Independent Electricity Generators Association (IEGA) to examine the Authority's analysis and, where relevant, to provide estimates of benefits derived from distributed and embedded generation and from ACOT payments themselves.

The Social Discount Rate

When calculating the value of an investment, or determining whether to undertake a certain project or action, future costs and benefits are reduced (or "discounted") into an equivalent value today. The reason for discounting is that a dollar received in a year's time is worth less than a dollar received today: over the course of the year inflation will degrade the purchasing power of that dollar, delayed consumption intrinsically has less value to us than consumption now, and a dollar received today could also be invested and earn a return over that year.

Discounting and the Importance of the Right Discount Rate

The discount rate is the percentage rate that is used to convert future values to present values. A discount rate of 4% (0.04) means that one dollar received in one year is worth $1/1.04 = 96 cents today. A discount rate of 10% (0.10) means that one dollar received in one year is worth $1/1.10 = 91 cents per day. Due to the geometric nature of discounting, the difference in present values becomes increasingly significant the further into the future that the dollar is received. For example, one dollar received in 15 years' time is worth $1/1.04¹⁵ = 56 cents with a discount rate of 4%, but only $1/1.10¹⁵ = 24 cents with a discount rate of 10%. The choice of discount rate clearly makes a very significant difference to the present value of future costs and benefits.

The Perils of Price Fixing

Business is subject to cut-throat competition and margins are tight. Except, that is, when competitors are tempted to agree on prices or the division of customers so that profits are maintained or expanded. Either way, this is a price fixing arrangement or cartel and is illegal under the Commerce Act 1986.

This Paper sets out:

• the prohibition against price fixing in the Commerce Act;
• the enforcement actions available to the Commerce Commission, with examples of both high-level and low-level enforcement actions;
• some practical advice on how to avoid price-fixing.

Of Consumer Ownership and Regulatory Intervention

Introduction

This Paper considers the potential rationale for regulatory intervention in an industry and the alternatives that are available. The concept of pareto-efficiency is introduced, and then some of the real world conditions which prevent this optimal state from being achieved are discussed. Alternatives for overcoming problems of consumer bargaining power are discussed, focussing on consumer ownership options and regulatory intervention.

Pareto-Efficiency

The gold standard of welfare economics is the pareto-efficient allocation of resources. Pareto efficiency occurs when it is impossible to make any one individual better off without making at least one other individual worse off. This may require that anyone who is made worse off is compensated by those who are made better off: if the loss is less than the gain then an improvement in pareto efficiency will occur.

Ronald Coase

On 2 September 2013, one of the great economists of the 20th Century, Ronald Coase, passed away. Coase is particularly remembered for two seminal contributions to economics:

The transaction cost theory of the firm, which states that firms exist because a hierarchical system of organisation has lower costs than relying on the market to co-ordinate production.

The Coase Theorem, which effectively states that absent transaction costs when there are well defined property rights, the distribution of those property rights has no effect on production. By direct implication the only effect of regulatory intervention is the redistribution of wealth; it does not affect production. In later years Coase described this result as “an obvious point”: “all [the theorem] says is that people will use resources in the way that produces most value”.¹

Physics, Financial Models, and Predicting the Unpredictable

This essay is principally a review of the book The Physics of Wall Street: A Brief History of Predicting the Unpredictable, 2012, James Owen Weatherall. The first part of the review summarises the key individuals from physics that have made a contribution to financial economics. I then touch briefly on a negative review of Weatherall’s book, noting the complete omission of the important contributions made by non-physicists. The review then turns to a controversial topic – whether models can or should be used when there are extreme and seemingly unpredictable events (“Black Swans”). The thesis of the book is that the assumptions underlying models need to be understood, the models need to be regularly tested, and that better models can be built. Rupture models have been empirically shown to predict when crises will occur, turning the unpredictable Black Swans into predictable “Dragon Kings”). I conclude with some personal comments.

Selected Contributions by Physicists to Financial Economics

In The Physics of Wall Street: A Brief History of Predicting the Unpredictable, 2012, James Owen Weatherall provides a very interesting, if selective, history of the contribution of physicists to quantitative finance. Key contributors covered in the book are:

ASEC ETS Study Quoted in Fletcher Building Submission

Andrew Shelley Economic Consulting Ltd (ASEC) recently conducted a study for Fletcher Building, the Impact on NZ Steel Manufacturing of the Australian and New Zealand Emissions Trading Schemes. This study was cited in Fletcher Building's Submissions on the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill, submitted to the Finance and Expenditure Select Committee. The executive summary from the ASEC report is included as an annex to Fletcher Building's submission.

This study compared the impacts of the NZ ETS and the scheme proposed for steel manufacturing under Australia's Clean Energy Futures Plan. The relatively favourable treatment received by Australian steel manufacturers would make steel production in New Zealand less attractive, possibly resulting in the long-term run-down of the Pacific Steel plant. The potential shift in production to either Australia or Asia would result in consequential increases in greenhouse emissions. Given the difference in emissions intensity, the increase in global emissions from production in Australia rather than New Zealand would be in the order of 125,000 tCO2 given projected production volumes in 2015.

The Fletcher Building submission also cites two early studies conducted by Mr Shelley while working for CRA International. Those studies, conducted for the Ministry for the Environment, analysed the impact of the (then proposed) NZ ETS on Golden Bay Cement and on Pacific Steel.

Studies by Andrew Shelley cited in Fletcher Building ETS Submission

In 2008 Andrew Shelley conducted two studies for the Ministry for the Environment concerning the effect of the (then proposed) emissions trading scheme (ETS) on the competitiveness of two of New Zealand's large trade-exposed emissions-intensive industries: Pacific Steel, a large steel recycling plant; and Golden Bay Cement.

Mr Shelley's studies were cited by Fletcher Building in their Submissions on the Review of the New Zealand Emissions Trading Scheme, submitted to the Emissions Trading Scheme Review Panel.

The first study was the Impact of the NZ ETS on Cement Manufacturing, prepared by CRA International for the Ministry for the Environment, 2008. This study analysed the potential impact of the ETS on Golden Bay Bay Cement. The analysis indicated that the ETS would create significant incentives to switch to the import of lower-cost clinker¹, particularly with high exchange rates. Importing clinker could result in emissions leakage, i.e. an increase in global emissions.

The second study was the Impact of the NZ ETS on Pacific Steel, prepared by CRA International for the Ministry for the Environment, 2008. This analysis indicated that under some plausible scenarios the NZ ETS could provide the incentive for Pacific Steel to cease production. If that occurred, then Pacific Steel's production of rebar and steel wire would switch to more emissions-intensive plants, and further emissions would be generated as scrap steel (e.g. old car bodies) were shipped offshore rather than recycled locally.

Summaries of both reports are provided in the annex to Fletcher Building's submission.

Note:
1. Clinker is a key intermediate product in the manufacture of Portland cement. It is produced in a high temperature kiln from the raw materials (limestone plus additives). Clinker is easily stored and transported, and is traded internationally.