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Solid Energy's plan to turn lignite - low quality coal - into diesel fuel could costs taxpayers billions and harm New Zealand's clean and green image, the Parliamentary Commissioner for the Environment (PCE) warns.
"Whatever you do with lignite - whether you burn it directly or turn it into something else - you end up with lots of unwanted carbon dioxide - greenhouse gas," PCE Dr Jan Wright told members of Parliament today.
Although state-owned Solid Energy had stated that it would take "full responsibility" for emissions, she said, she was puzzled as to what this would actually mean.
"Under the current rules in the Emissions Trading Scheme, the taxpayer could end up subsiding a lignite-to-diesel plant to the tune of a quarter of a billion dollars per year," Dr Wright said.
Taking full responsibility could also mean that the company would be refusing to accept any subsidy in the form of free carbon credits or it could be storing all the carbon dioxide emissions associated with these projects - below the ground or in trees.
The two latter options Dr Wright thought were rather unlikely, as they would make the company less competitive.
"While we can do the calculations for the processes that produce the carbon dioxide, we have no information in any detail how they would deal with that," she said.
"Assuming that they would spend that money, that their competitors will not, the one way is to compress the liquid carbon dioxide and store it underground, the other way is to plant lots of trees."
There were only five plants in the world using the compression process which was still in the experimental stage and if the company planted trees the country could end up covered with pines.
New Zealand was already trailing behind commitments it made in Copenhagen, to reduce emissions by up to 20 percent below 1990 levels by 2020.
At the moment government projections were 30 percent above.
The lignite-to-diesel plant planned by Solid Engery would increase the size of the gap by 20 percent.
A second lignite-to-diesel plant another company, L & M Mining, is signalling to built would add another 20 percent.
"That's a 50 percent increase in the gap from two lignite-to-diesel plants," Dr Wright said.
New Zealand could buy carbon-credits offshore to make the difference, but being so dependent on carbon reductions in other countries was a poor look for a country that branded itself internationally as clean and green.
"An alternative is to buy and import oil as we do now, we may have some of our own and there are some options for bio fuel."
The biggest gains though would be made in efficiency of use.
"I think what will happen as the price of oil goes up, we'll see a genuine response from people, they will buy smaller cars and I think we haven't begun to see that yet," she said.