Is there anything special about pastoral farming that would warrant continuing to treat it differently from other emissions-intensive, trade-exposed (EITE) industries?

That is one question facing the Productivity Commission in its inquiry into how New Zealand can transition to a low-emissions future, while continuing to grow incomes and wellbeing.

And it will be a key issue for the yet to be established Climate Commission.

The Labour-NZ First coalition agreement says "If the Climate Commission determines that agriculture is to be included in the [emissions trading scheme] then, upon entry, the free allocation to agriculture will be 95 per cent, but with all revenues from this source recycled back into agriculture in order to encourage agricultural innovation, mitigation and additional planting of forestry."


At present, the agricultural gases — mainly methane but also nitrous oxide — produced by cattle and sheep, which account for nearly half of national greenhouse gas emissions, are entirely excluded from the ETS.

The EITE sector, which includes the NZ Steel plant at Glenbrook, the NZ Aluminium Smelters plant at Tiwai Point and the Methanex plant in Taranaki, are in the ETS, but the companies get an allocation of free New Zealand units from the Government to cover 90 per cent of their emissions. For most of the ETS' history, it was 95 per cent.

The 128 submissions the Productivity Commission has received to its issues paper include all the special pleading you would expect from the agricultural lobby groups.

The arguments they put up for continuing to escape a price on emissions are broadly similar to those their smokestack counterparts advance for not having their exposure to a carbon price increased.

The line of argument goes like this: the world needs milk, or meat, or steel, or aluminium, or whatever.

Producing those things inevitably generates emissions, whether they arise from ruminants' digestion or in the process of prising metals from their oxides.

If New Zealand's contribution to meeting that demand is reduced as the result of zealous emissions pricing, it will only be met instead by producers elsewhere. The planet will be no better off.

And it is likely to be worse off. The embedded emissions in an aluminium ingot from Tiwai, which derives its electricity from the Manapouri hydro scheme, are a fraction of the competing product from, say, Chinese smelters which get their power from coal-fired generation.


Similarly, Fonterra says New Zealand dairy farmers are among the most emission-efficient in the world. "There is no global benefit to shifting milk production from New Zealand to [less efficient] milk producers elsewhere. New Zealand's most significant opportunity to contribute to global emissions is to help other countries become more efficient."

Beef + Lamb makes a similar argument in opposing additional costs which are not faced internationally, given that 90 per cent of New Zealand's meat production is exported.

There is no global benefit to shifting milk production from New Zealand to [less efficient] milk producers elsewhere.

"Improvements in productivity in sheep, beef and deer production have resulted in continuous improvements in emissions intensity [the level of emissions per kilogram of product] making the sector one of the most emission-efficient in the world," it says.

The smokestack sector makes similar points about efficiency gains already made and the need for a level playing field.

New Zealand Steel warns that a substantial increase in its carbon costs would mean the end of steelmaking in New Zealand. Not less production, but none. "If we stop doing what we do the emission will continue — just not here."

It argues that the Paris Agreement's bottom-up approach to national targets makes international cost comparisons over individual sectors difficult, if not impossible.

And other submitters contend that anything that could be called the "world price" of carbon is a long way off.

But all of this amounts to a case for some level, even a high one, of free allocation. It is not an argument for treating pastoral farming differently from other EITE sectors, that is, to have an exposure at the margin to a carbon price that will incentivise further gains in emissions efficiency without putting them out of business.

Oji, which has the pulp mills at Kinleith and Kawerau and says it gets 80 per cent of its process energy from renewables, says it faces competition from subsidised production in many countries keen to foster biofuels and renewable energy.

"In effect the present EITE companies are at risk of being forced to subsidise agriculture if agriculture remains outside the ETS and the Crown wants the liability to be devolved to selected emitters."

Federated Farmers calls for the exclusion of agricultural biological emissions from the ETS "until cost-effective mitigation technologies are available and international trading partners include equivalent emissions in their domestic climate change policies."

However, a price on agricultural emissions is not just about influencing how existing farms are managed, but also decisions about land use.

New Zealand might be better off with fewer cattle and more pigs, for example. They are not ruminants and they taste good too.

Federated Farmers is sceptical about governments' ability to pick winners "and this includes land use". But forest owners would snort derisively at that and point out that including forestry in the ETS while excluding pastoral farming does exactly that.

In the end, New Zealand is internationally accountable for all of its emissions. If those who profit from half of those emissions entirely escape that cost, the rest of us bear it.

That is a subsidy and one that gets capitalised into land prices.

The beneficiaries are those who sell farmland and who get a larger tax-free capital gain.

The buyer just gets a correspondingly larger mortgage.