The Government plans to spend up to $140 million subsidising one of the country’s biggest greenhouse gas emitters in transitioning away from burning coal in a move equivalent to taking 300,000 cars off the road.

It will be New Zealand’s largest decarbonisation project and has been described as a global “template” for governments and industry to work together to reduce emissions.

“There are not a lot of good news days in climate change - this is one of the best,” said Climate Change Minister James Shaw.

Not everybody is happy, however, with the National Party calling it “corporate welfare”.

The money will go to NZ Steel, based in Glenbrook just outside Auckland and owned by multinational company Bluescope, which alone makes up about 2 per cent of the country’s entire greenhouse gas emissions.

It will be used to help the private company transition away from using coal to make new steel products out of iron-rich sands and instead from melting scrap metal, using electricity from the grid.

Prime Minister Chris Hipkins said the move alone would cut the country’s total emissions by one per cent and contribute to New Zealand’s net zero 2050 emissions target, helping keep global warming below 1.5C.

“This size of this project demonstrates how serious the Government is about reducing New Zealand’s emissions as fast as possible,” Hipkins said.

 “This project dwarfs anything we have done to date.

“The plan means New Zealand businesses will have access to locally produced, cleaner steel, and high value jobs are protected that otherwise might have gone offshore.”

From left: Energy and Resources Minister, Dr Megan Woods, Prime Minister Chris Hipkins, and Climate Change Minister James Shaw at Glenbrook Steel. Photo / Alex Burton

The money will co-fund a $300m electric arc furnace to replace the existing steelmaking furnace and two of the four coal-fueled kilns.

The new furnace at Glenbrook means NZ Steel will cut its emissions by more than 45 per cent and will produce 100 per cent of its annual steel production as lower carbon steel.

This will reduce 800,000 tonnes of climate pollution from its Glenbrook mill each year, or the equivalent of taking 300,000 cars, or all the cars in Christchurch, off the road.

The Government portion includes $110m as base funding, $10m conditional on it being operational by January 2027 and the remaining $20m in performance funding if it can double those emissions reductions by the end of 2030.

Hipkins made the announcement today at the site alongside Shaw and Energy Minister Megan Woods.

The money comes out of a Government fund established to support decarbonising industries, set up in 2020 but which received a $650 million boost in last year’s Budget.

Shaw said this was the largest decarbonisation project in New Zealand.

“There are not a lot good news days in climate change, but this is one of the best.”

He said it would also help kickstart a wider steel recycling industry. There were about 4.2 million internal combustion engine vehicles that would be taken off the road in the future as they are replaced by electric vehicles, and developing a recycling industry here meant they would not need to be shipped offshore.

Shaw said it would also save the Government money in the long term by reducing the amount of money it would have to spend offsetting emissions.

“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 move is expected to help plug a major gap in New Zealand’s emissions budgets after Hipkins scrapped two climate-focused policies this year.

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 which it is still committed to.

Most of that comes from the binning of the “sustainable biofuels obligation,” which came in Hipkins’ first round of reprioritisations in February and was estimated to contribute about 1 megatonne of emissions reductions to the first budget.

The Clean Car Upgrade and the Social leasing scheme were also meant to contribute 2500 and 2700 tonnes of emissions reduction over the first budget.

At the time Hipkins said there were more effective - and cheaper - ways of reducing emissions.

Shaw said 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.

The NZ Steel deal was however 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).

Contact Energy has also negotiated an agreement with NZ Steel, through which it will provide 30MW of renewable generated electricity in a flexible off-peak arrangement that will enable the company to scale down production in times of peak demand or supply shortages.

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 contributes over $900m to the economy per year and adds $398m to the Auckland region. It employs 1400 people.

Coal is conventionally used for heating and 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.

National Party leader Chris Luxon criticised the announcement and called it “corporate welfare at its worst”.

Luxon said National supported the country’s climate change commitments but did not think foreign-owned Bluescope, which made billions of dollars in profit last year, should be getting subsidised.

National would focus more on increasing renewable energy supply, Luxon said.

Energy Minister Megan Woods said while there were similar arc furnaces around the world operating to recycle steel without public subsidies, those were done only where it was commercially viable - unlike here. This project was the first to be done specifically for the task of reducing emissions.

Other factors included retaining jobs and developing a broader steel recycling industry.

Chief Executive Robin Davies said the project would not have happened without Government funding, indicating the future of the industry here was at risk.

In terms of supply, Davies said New Zealand currently exported about 500,000 tonnes of scrap steel. They needed about 300,000 tonnes to maintain current production levels, which he was confident they could source.

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.

Mark Vassella, Managing Director and CEO of NZ Steel owner BlueScope, said this deal was a “template for Governments around the world” in terms of decarbonisation.

“It is a fantastic example of both governments and companies working together.”

His company also had a net zero emissions target for 2050.

Contact Energy CEO Mike Fuge said the deal meant NZ Steel would reduce production at peak power times, meaning they would not have to burn coal to keep up with demand.

He said a climate-friendly future was not about shutting heavy industry down but “inviting them in”.

NZ Steel receives a free allocation under the Emissions Trading Scheme (ETS) as an “emissions-intensive, trade-exposed” business – recognising that ETS costs might impact the international competitiveness of these businesses. This allocation would reduce in line with reductions in its carbon emissions.

After today’s announcement Hipkins will travel to Papua New Guinea for a US-Pacific summit taking place on Monday, alongside bilateral meetings with Pacific leaders.

Hipkins will also meet with Indian Prime Narendra Modi while there.

Hipkins had planned to meet with US President Joe Biden but last week he cancelled what would have been a historic trip - first visit by a sitting US President to a Pacific island country - due to stalled talks with Republicans over raising the debt ceiling.