Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: What to do about agriculture - it's a gas

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Pastoral farming generates nearly half the country's emissions but also provides a similar proportion of its export income. Photo / Christine Cornege
Pastoral farming generates nearly half the country's emissions but also provides a similar proportion of its export income. Photo / Christine Cornege

Compared with the ferocity of the political debate raging across the Tasman over attaching a price to carbon emissions, climate policy in New Zealand is a picture of stability, cross-party consensus, sweetness and light.

But only comparatively.

Serious differences are emerging between National and Labour, particularly on the issue of whether agricultural emissions should be brought under the emissions trading scheme, and if so when and on what terms.

Methane and nitrous oxide emissions arising from the bodily functions of livestock amount to nearly half New Zealand's greenhouse gas emissions.

The original ETS, enacted by the previous Labour Government in the last few days of its ninth year in power, would have brought them into the scheme in 2013. That is still Labour's policy.

The National Government's amendments included pushing that date back to 2015 and whether to go ahead with that is a key issue for the ETS review, chaired by David Caygill.

Climate Change Minister Nick Smith, addressing an Australia New Zealand climate and business conference in Wellington this week, said it was "a marginal call" to include agriculture, given that no other country was doing so and the limited technological options to reduce emissions currently available.

That was merely the most recent of a series of comments from the Government indicating it is wide open to the idea of pushing the pricing of agricultural emissions further into manana territory.

A decision is expected by the end of next month.

The case for excluding agriculture goes like this:

Pastoral farming may generate nearly half the country's emissions but it also provides a similar proportion of its export income.

New Zealand farmers have to compete in a wicked protectionist world with producers who are subsidised and in no danger at all of facing a price on carbon.

A growing global population and rising incomes are expected by mid-century to double demand for the foods of affluence of which this country is an efficient producer.

Fonterra chief executive Andrew Ferrier told the same conference that New Zealand had one of the lowest-carbon dairy industries in the world and the United Nations' Food and Agriculture Organisation had stressed the need for higher production to come from emissions-efficient countries.

A study undertaken in 2009 of the New Zealand dairy industry's carbon footprint found that 85 per cent of it occurred on-farm, 10 per cent in processing and only 5 per cent in getting the product to markets overseas. "So much for food miles," Ferrier said.

Fonterra had since 2003 applied an internal carbon price to its own operations and had been able to reduce emissions significantly, often by finding more energy-efficient ways of doing things.

Meanwhile, some of the lines of research under way into reducing on-farm emissions were sufficiently promising for it to be reasonable to aim for a reduction of 30 per cent in emission per litre of milk by 2030.

The key phrase there is "per litre". It is an intensity target, reducing embodied emissions per unit of output, rather than an absolute reduction.

"The absolute approach would hobble the industry and do nothing for global climate change or meeting the global demand for food," Ferrier said.

It is what in the jargon of climate policy is called a leakage argument. Because the atmosphere and the planetary climate system are global commons, reducing emissions in one country will do no good if the only effect is to drive production to equally dirty or even dirtier operations in another country.

Labour doesn't buy the leakage argument in the case of agriculture.

David Parker, who was the Climate Change Minister who got the ETS on to the statute book, says the leakage argument is stronger for industries like steel, cement and aluminium where the means of production can move to other countries.

"But you can't take away our land or our grass," he said.

"If we have a cost as an economy for increasing agricultural emissions that cost is not avoided if you leave it off farmers. It just moves to the taxpayer."

If a transaction, a dairy conversion say, only happens because of that subsidy then it represents a misallocation of the country's scarce capital and leaves it poorer, not richer.

"At the moment farmers are being cross-subsidised for their increasing emissions by other sectors of the economy. At the time when we introduced the legislation the big emitters made the point that they did not think that was fair. And it's still not fair."

To the extent the subsidy is capitalised into land values it represents an intergenerational inequity among farmers as well.

Under Labour's policy farmers, as trade exposed emitters, would get a free allocation of units to cover 90 per cent of their emissions with 2005 as the baseline year. But anything above that would incur the market cost of carbon.

That degree of protection would be progressively withdrawn, though it was likely to be more slowly, Parker indicated, than the 8.3 per cent a year rate his original legislation prescribed. Even so, this is a tougher regime than other trade-exposed industries face under the present scheme.

They receive a free allocation covering either 90 per cent or 60 per cent of their emissions, depending on how emissions-intensive they are, and there is a transitional "buy one, get one free" deal for the other 10 or 30 per cent.

If they increase production, their free allocation increases and the allocation is whittled down at the gentle pace of 1.3 per cent a year.

Labour is non-committal on whether it would retain those provisions.

"We recognise that it is desirable there is some certainty for emitters. What we have said is that we will not comment further on the industrial allocation model until we hear what the ETS review panel says," Parker said.

"We haven't endorsed the present system, but we haven't said we will revert to our system."

The degree of protection emissions-intensive trade-exposed emitters receive is similar to what is proposed for their Australian counterparts when (or if) their pending carbon tax morphs into an ETS in 2015.

The Australian ETS would exclude any liability for agricultural emissions, though farmers will be able to earn credits for approved climate-friendly measures they might undertake.

Smith said it was "inexplicable" to treat agricultural emissions significantly tougher in New Zealand than emissions from industries such as steel, aluminium and methanol.

He has sent back the report from the ETS review panel for updating in light of the Australian policy.

"A key factor in assessing the review panel's report and in determining the future of agriculture will be the availability of practical technologies that will enable farmers to reduce emissions without reducing their contribution to the New Zealand economy," he said.

That comment ignores the fact that the entire point of carbon trading is that it only requires emitters to take financial responsibility for their emissions.

If someone else can reduce emissions more cheaply than they can, the market exists to allow emitters to pay them to do that.

Figures released by the Government this week covering the first six months the scheme operated in earnest showed that only 2 per cent of the units emitters surrendered to the government to meet their obligations had been bought on the international market.

The remainder were all units which the Government had allocated gratis under various schemes, mainly to foresters.

The flow of money, less than $200 million over the six months, was largely from consumers of electricity and transport fuels to forest owners.

Labour, however, intends to introduce the auctioning of units by the Crown.

It has counted a cumulative $4.8 billion of revenue for that source between 2013 and 2025 to help fund its income tax and GST cuts.

Auctioning, as well as free allocation, occurs in the European ETS and will under the Australian one.

Estimating how much revenue a New Zealand government might raise in this way is guesswork at this point, however.

It would depend on how much of the Kyoto Protocol system and the international carbon markets it has created survive beyond the end of next year.

It would depend on what linking agreements are concluded between the emissions trading schemes, in varying stages of development, in Europe, Australasia, China and parts of the United States.

The local supply of units will also depend on how many forest owners may yet join the scheme.

So far the owners of only a third of the post-1989 or "Kyoto" forests have opted into the scheme. Are the other two-thirds wary of the commercial risks (there are some) or have they just not got around to it yet?

And the owners of only half of the pre-1990 commercial forests have applied for their free allocation of units; the others have until the end of November to do so.

Parker argues that there is bound to be at least a hiatus between the expiry of Kyoto's first commitment period at the end of next year and subsequent multilateral or bilateral international agreements which would make imported carbon available to the New Zealand market.

That, plus the addition of agriculture on the demand side, would not only enable, but require, the Government to auction units.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

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