But Climate Change Minister Nick Smith said agricultural emissions would be included only if "practical technologies are available to enable farmers to reduce their emissions and more progress is made by our trading partners to reduce their emissions".
Both those conditions are such that people can argue about whether they are met until the cows come home.
Federated Farmers is putting a narrow construction on the condition about progress on emissions reduction in the rest of the world.
"Farmers are extremely pleased that minister Smith has reaffirmed a pledge the Government has given to Federated Farmers, that biological emissions will not be included in the ETS if our trading partners do not follow suit," its vice-president and climate change spokesman, William Rolleston, said.
"It is also to be congratulated for recognising that farmers, despite the research investment, lack the practical means to reduce emissions."
The review panel, however, concluded that agriculture does have enough opportunities to reduce emissions to warrant its inclusion in the scheme from 2015.
It noted that emissions per unit of product from agriculture had fallen by about 1.3 per cent a year over the past 20 years as a result of improved management practices, animal genetics, pasture and crop genetics and technological changes.
Opportunities for further reductions included the use of forestry on marginal or erosion-prone land, nitrification inhibitors, and "good practice" management techniques that increase productivity, it said.
"There is a known gap between the high and low performers and there is an opportunity to lift industry performance further."
Emission-reducing technologies would be more readily adopted as they became available, if agriculture was in the ETS and there was a price on emissions, the panel said.
But Rolleston said, "Any tools available are too variable or immature to meet the needs of farmers. Long-term solutions such as vaccines and genetics are several decades away from commercial deployment."
Green Party co-leader Russel Norman pointed to Reserve Bank forecasts, released the same day as the review report, which expect export commodity prices to remain high.
"It means that greenhouse-intensive industries like dairy are in a strong position to pay their way. But this Government will continue to give them a handout," he said.
"The agricultural sector will take the lesson from this that it pays off to lobby Government to maintain subsidies, rather than actually investing to reduce emissions."
But Smith said the Government's primary objective with the ETS was to drive investment into more efficient production.
"We are not interested in simply including agriculture in the ETS to impose a cost when there are not practical technologies through which they can reduce emissions, in contrast to a sector like electricity where there are really good opportunities."
An advisory committee is due to report on where the "point of obligation" should be by the end of next year.
RECOMMENDATIONS
* Farmers would get free carbon credits covering 95 per cent of their emissions for the first two years.
* This would fall to 90 per cent over the following three years and by 1.3 per cent a year thereafter.
