Landmark climate change breakthrough: Farmers agree to emissions pricing

A 20-year standoff with farmers over charging for emissions is about to end, with sector leaders today signalling support for a new system as soon as 2025.

But the industry is still against a more immediate proposal for processors to be hauled into the Emissions Trading Scheme (ETS), and wants Kiwis' feedback on its own one.

Agriculture now contributes around half of New Zealand's greenhouse gas emissions, largely through methane breathed and burped from livestock.

How to account or charge for that has long been a policy headache and a point of contention among farmers.

One of the newly formed Interim Climate Change Committee's first tasks was to look at how this heavyweight emitter might be brought into the ETS – something the sector, with its 20,000 to 30,000 small farm businesses, has long resisted.

But instead of dropping the industry directly into the ETS, the committee has recommended a special levy and rebate scheme, avoiding the need for farmers to trade units.

However, that scheme would still be broadly part of the ETS, and agricultural emissions covered would be part of the same decision-making process and rules for setting ETS caps.

It is estimated the average dairy farm, with a 95 per cent discount on emissions in line with other industries, at the current NZ ETS price of $25 per tonne, would incur $0.01c per kg of milk solids.

The average cost on beef production was estimated at $0.01c per kg of beef, $0.03c per kg of sheep meat, and $0.04c per kg of venison.

A phase-in would start in 2022, with farmers being required to begin reporting emissions by 2024, and then being charged for them in 2025.

In the interim, the committee suggested that agricultural emissions should be priced through the ETS at a processor level, and that all fertiliser manufacturers and importers should also be fully included in the ETS to cover emissions from nitrogen.

What was collected from processors would be recycled back to farmers and growers over the next five years through a farmer-led $47 million a year fund, allowing them to set up measurement tools before 2025.

While industry leaders agreed emissions should be accounted for and priced by that deadline, they were against processors being pulled into the ETS, describing that as a broad-based tax on farmers.

"A new and blanket levy at the processor level wouldn't incentivise any on-farm changes and would be seen by farmers as a new tax, which would undermine farmers' efforts to make positive changes, especially as individual farmers wouldn't reap the benefits of any improvements they may make," Beef + Lamb New Zealand chairman Andrew Morrison said.

Farming leaders were instead offering an alternative sector-led proposal, which it would manage, to get the agricultural sector into an emissions pricing system by 2025, funded through the sector's levy organisations.

In any case, today's announcements have been lauded by all sides as a breakthrough.

"The co-operation and consensus between the farming sector and the Government is an incredibly important shift from farmers and growers on the need to tackle climate change compared to nearly 30 years ago," Agriculture Minister Damien O'Connor said.

"We are now agreed on the outcome; Government and farmers want emissions to be calculated at the farm level where farmers have the most control over how they can manage their own emissions on their property."

Climate Change Minister James Shaw said the significance of that could not be under-stated, "when you consider how things stood a few years ago".

"Of course, there is a significant amount of infrastructure that needs to get laid down across tens of thousands of farms to make that work."

Shaw said both the ICCC's and industry's options were being put out for public consultation over the next four weeks.

While he noted the ICCC had expressed doubt over the ability to implement a proposal like the industry's, by consulting on it, the Government was allowing it to be examined further.

DairyNZ chief executive Tim Mackle said the stakes were high.

"New Zealand's primary sector contributes one fifth of our GDP, generates one in 10 jobs and produces 75 per cent of our merchandise exports - we want to avoid shocks like the 80s and make any changes in a stable and considered way," he said.

DairyNZ chief executive Tim Mackle said the stakes of pricing agricultural emissions are high. Photo / File

"While appropriate pricing mechanisms for incentivising emissions reductions at farm level can have an important role to play in incentivising change, creating an environment that enables and supports farmers and growers to make changes on the ground is equally important to prepare for farm-based pricing from 2025."

Greenpeace's Russel Norman said bringing agriculture into the ETS was a step in the right direction.

"But it's truly astounding that the strongest option put forward by the Government to deal with our biggest emitter is to delay action for another two years, after which agri-business will pay a paltry 5 per cent of their emissions that they will then receive back as incentives."

DairyNZ was among a range of major sector groups behind the counter-proposal; others included Federated Farmers, Beef + Lamb New Zealand, Horticulture New Zealand, Deer Industry New Zealand and Apiculture New Zealand.

The announcement comes as DairyNZ has released its own submission to the Government's Zero Carbon Bill, calling for its proposed methane reduction range for 2050 to be reduced from 24 to 47 per cent to up to 24 per cent, and arguing that farm profits could otherwise fall by 42 per cent.

Renewables goal questioned

Meanwhile, the ICCC has also recommended the Government pick accelerating electrification of transport and process heat over its goal of making 100 per cent of electricity renewable by 2035.

The Government should set up a "clearly defined timetable" to phase out fossil fuel process heat – with coal as a priority – while reducing regulatory barriers to electrification, and forcing regulators to take emissions reductions into account, the ICCC found.

The ICCC looked at how New Zealand's level of renewable electricity might be pushed from 82 per cent today to 100 per cent by 2035, but found that this would require an over-build of infrastructure for a relatively meagre drop in emissions, and a much higher price for household electricity.

Any decisions around freshwater should also consider the value of existing hydro generation, the Interim Climate Change Committee says. Photo / File

The committee pointed out that, while electricity represented just 5 per cent of the country's greenhouse gas emissions, fossil fuels used in transport and process heat accounted for about 30 per cent.

And under the current system, the percentage of electricity was tracked to rise up to 97 per cent anyhow.

Specifically, the ICCC recommended the Government investigate the potential for pumped hydro storage to eliminate the use of fossil fuels in the electricity system.

Any decisions around freshwater should also consider the value of existing hydro generation, it found.

In transport, the Government should set a target to slash emissions by at least six metric tons of carbon dioxide equivalent (MtCO2e) in 2035 relative to today, and ensure that New Zealand didn't become a dumping ground for fossil-fuelled vehicles.

"Accelerated electrification will be a crucial step towards eliminating fossil fuel emissions in New Zealand," committee chair Dr David Prentice said.

"But to make it happen, the Government must act urgently. Every petrol or diesel vehicle imported into the country will be around for the next 10 to 20 years and a new fossil fuel boiler can last for over 40 years."

Energy and Resources Minister Megan Woods accepted the recommendations, and stated that further work, such as further storage solutions, exploring a transport emissions reduction target and revising the National Policy Statement for Renewable Electricity Generation would be investigated.

But the Government was still focused on the 2035 100 per cent goal – and Woods said it would be carrying out five-yearly assessments to ensure the energy "trilemma" of affordability, sustainability and security was well managed.

"A simplistic trade-off won't be needed," she said.

"We will move our country towards a zero-carbon future while keeping power prices in check for households.

"An investigation into customer electricity pricing is under way with decisions on that to be released imminently."

National's energy spokesperson, Jonathan Young, said the Government should completely back off the 2035 target.

"Energy and Resources Minister Megan Woods has continually stated her commitment to achieve 100 per cent renewable generation by 2035 in nearly every speech she has made," Young said.

"Her comment today that she won't die in the ditch about the last couple of per cent, is an admission that her Government's policy regarding electricity security and affordability has failed."

Q&A

Why is this a big deal?

We talk much about what we can do to help tackle the climate crisis, like cycling more and flying less. But when we look at New Zealand's total greenhouse gas emissions, agriculture is the elephant in the room – or the methane-burping cow in the paddock. The sector accounts for nearly half of our country's contribution to climate change, yet has long been excluded from our biggest mechanism to tackle it – the Emissions Trading Scheme (ETS). That works by polluters paying for their emissions through units, and people who plant trees earning them, thus creating a trading system and an incentive to lower emissions. The agriculture sector has long resisted being part of such a scheme – until now. As commentators have pointed out, this is a huge shift from where things were at just a few years ago.

So what's actually proposed?

Both the industry and the Government have signalled putting a price on farm emissions by 2025. The Interim Climate Change Commission (ICCC) has recommended farmers shouldn't be directly in the ETS, meaning they won't have to trade credits, but will still be generally part of it, and will be covered by the same rules for setting caps. At the current NZ ETS price of $25 per tonne, and with a 95 per cent discount, the average dairy farm would incur a price of one cent per kg of milk solids. Critics have argued this is a measly figure that only amounts to a symbolic gesture. The Government points out this in line with discounts that have been offered to other industries.

What happens now?

The ICCC has suggested that processors in the sector be rolled into the ETS as soon as possible, with all that's collected from them be put toward a fund to help farmers prepare for 2025. By 2024, farmers would be required to be reporting their emissions. But the sector has proposed its own self-funded, self-led phase-in plan. Both options are being put out for people to comment on over the next four weeks.