The Government should avoid pouring millions of dollars of taxpayer subsidies into "dirty" lignite coal, Parliamentary Commissioner for the Environment Dr Jan Wright says.
"Production of diesel and urea from lignite are both new activities that may well qualify for much of their greenhouse gas liabilities to be met by the Government in the form of free carbon credits," she said in a report on the greenhouse gas implications of Southland's proposed billion-dollar lignite industry, released today.
"But it makes no sense that the emissions trading system (ETS) rules would lead to taxpayers subsidising, even at a modest level, new investment in outdated dirty technology."
State-owned coalminer Solid Energy is planning extensive development of its Southland lignite deposits - turning them into diesel fuel, nitrogen-based urea fertiliser and briquettes, while privately-owned L&M Group is also eyeing a coal-to-diesel operation.
But Dr Wright - who has been following the lignite-to-fuel issue for more than 20 years - said that using lignite would cause large amounts of greenhouse gas emissions, particularly making diesel from lignite.
Yet, "companies that develop products from lignite on a large scale are likely to receive subsidies of millions of dollars per year from the taxpayer," she warned.
Eligibility for handouts was based on an order-in-council based on recommendations by the Environment Minister, but the decisions should instead be made transparently.
"Making products from lignite on a large scale should not receive government assistance in any form," she said.
New Zealand's "good choice" of the ETS to put a price on carbon and reduce greenhouse gas emissions was being significantly undermined by "deeply-flawed" rules for allocating free carbon credits, she said.
Particular problems included the never-ending promise of free carbon credits and a lack of transparency surrounding this form of industry assistance, and these should be redressed in the scheduled 2011 review of the ETS .
Dr Wright recommended Climate Change Issues Minister Nick Smith change the ETS so that new industries which use lignite on a large scale are specifically excluded from receiving free carbon credits.
Dr Smith should also change the ETS to provide criteria for deciding which new activities are eligible to receive free carbon credits, including a requirement for the new activity to reduce the nation's net greenhouse gas emissions, she said.
She backed Dr Smith's proposal for a private-public taskforce to help develop clean green technology, and said such a group could provide a forum for a national discussion of whether large scale exploitation of lignite would undermine New Zealand's "clean and green" image.
Cabinet should establish a clean green taskforce to explore growing the green economy, "including considering the implications for New Zealand of the large-scale exploitation of lignite", Dr Wright said.
The release of Dr Wright's report was delayed because of events at the Pike River Coal mine.