The Government should crack down harder on carbon dioxide than methane and other biological emissions from farms, New Zealand's environment watchdog says.

Parliamentary Commissioner for the Environment Simon Upton has proposed separate trading systems for fossil and biological emissions to help tackle climate change.

This so-called "landscape approach" would deal with agricultural greenhouse gases and forest sinks together – and separately from CO2.

His report, out today, marks a departure from widespread calls to drag agriculture into an expanded "all gases, all sectors" version of the current Emissions Trading Scheme (ETS).

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But Upton denies that his alternative approach would be letting farmers off the hook.

Biological emissions from farms – nitrous oxide, and methane belched from livestock – make up about half of New Zealand's total greenhouse gas emissions.

Environment groups have long called for agriculture to be folded into the ETS, and the Productivity Commission and the Tax Working Group have also suggested a phase-in.

The sector itself has opposed such a move - arguing that our trading partners didn't force the same rules on their farmers, and that there wasn't an accurate way to measure and report farm emissions – and National also favoured alternatives.

The Government has tasked the Interim Climate Change Commission to look at the issue and hasn't confirmed how methane and nitrous oxide will be policed under its proposed Zero Carbon Act.

'There are always alternatives'

Upton argued the current approach, which relied on heavily on the ETS and off-setting emissions with forestry, was a short-term fix for a long-term problem.

Depending on sequestration by trees to offset fossil carbon dioxide emissions was risky, he said, because trees could burn down or be devastated by disease or pests.

Using forests to offset the warming effects of biological gases, on the other hand, led to a better alignment of risks.

While New Zealand might be able to push emissions down to net zero, he said, delaying action on gross fossil emissions could mean they could still be running at around half today's level.

The country would need more time – and land – to offset the balance well into the second half of the century, he said.

"We could store carbon in forests over large areas of New Zealand and score a net zero accounting triumph around mid-century; or adopt a more ambitious approach to reducing fossil emissions and make a clear statement about how far biological emissions should be reduced."

Under an alternative approach the report explored, fossil emissions would be managed down to zero by the second half of the century, separately from biological emissions and forest sinks.

While biological emissions would need to be reduced, that would not be to zero because of their shorter lifetime in the atmosphere.

While lifetimes of methane and nitrous oxide were around 12 and 120 years respectively, some carbon dioxide remained in the atmosphere for thousands of years.

Upton said his proposed alternative approach more closely aligned the duration of the warming impact of these emissions and the duration of forest sinks that offset these emissions.

It adopted a timeframe through to 2075, rather than a 2050 target, which it said provided time for further technology development.

"Policymakers need to be prepared to test different approaches rather than accept without argument that 'there is no alternative'," Upton said.

"There are always alternatives – and reducing gross fossil carbon dioxide emissions must be the priority."

Upton said the scale of the climate challenge was such that, to meet it, the shape and structure of our economy and our rural environment would look very different.

"Equally, if we fail to rise to the challenge, our economy and rural environment will also be transformed but in a much more damaging way."

Upton said his alternative strategy wasn't about giving farmers a free pass, although it was true that a biological emissions price faced under an alternative approach would be much lower than those faced by fossil emitters.

Climate Change Minister James Shaw welcomed the report, but ruled out the suggestion of forestry offsets being taken away from CO2 emitters.

The Government was committed to retaining the offset option for all gases "for the sake of providing policy stability and predictability for emitters and the forestry sector".

"As the Intergovernmental Panel on Climate Change report says, there is a narrowing window of opportunity to stay within 1.5C of global warming," he said.

"It is because that window is so narrow that planting trees to offset emissions is a necessity; at least in the coming decades."

However, he said Upton was right to say that trees only retain sequestered carbon for the life of the tree.

"I agree that the priority must be actual gross reductions in emissions," he said.

"The NZ ETS reforms we consulted on last year, and which we will introduce this year, will provide necessary incentives to bring down domestic emissions."

Climate Change Minister James Shaw says the Government is looking to take away forestry as an offset option for emitters of carbon dioxide. Photo / File
Climate Change Minister James Shaw says the Government is looking to take away forestry as an offset option for emitters of carbon dioxide. Photo / File

Those included putting a cap on the ETS, which would limit the number of units that can be traded, and bringing permanent forest into the scheme.

"The Government believes those sets of reforms are the best range of policies available at this time."

What experts say

Professor Dave Frame, the director of the Victoria University-based Climate Change Research Institute, said Upton's report was "thoughtful and constructive" and acknowledged the cumulative differences between gases.

"This is a good idea, and a necessary step if we are to develop a coherent, warming-focused set of climate policies across all sectors."

AgResearch farm systems scientist Robyn Dynes said Upton's report challenged policymakers and landowners to learn from previous land use transformations.

"This alternate approach for New Zealand provides the opportunity for landowners, their catchment and community to be in the driving seat to shape how their catchment will transform in land use over time," Dynes said.

"It also offers the opportunity for all we know about land and environmental process to come together, which can be shaped by the grassroots knowledge of the farming sector and communities.

"The incentive could be there for those who live in these communities to bring their collective innovation to find ways to more than balance sources and sinks, and to address other values in their solutions."

Another expert, Catherine Leining of Wellington's Motu Economic and Public Policy Research, said a two-system approach could be a valid choice if New Zealand was starting from a blank slate.

But she argued the same concerns that Upton raised could still be addressed within an all-gases, all-sectors ETS using existing gas metrics, forestry rules, free allocation, and new standards, regulations and policies.

"Whether using a one-system or two-system approach, it is possible to achieve different marginal emission prices and emission outcomes for different sectors," Leining said.

"Under a single system, if progress with reducing fossil CO2 emissions seems too slow, the cap can be tightened and fossil fuel standards, regulations and policies strengthened to accelerate progress.

"There are always alternatives - and reducing gross fossil carbon dioxide emissions must be the priority," environment watchdog Simon Upton says. Photo / File

"If forest sequestration or biological emissions seem too high, forestry rules, greenhouse gas metrics or agricultural free allocation could be adjusted."

She echoed Shaw's point that the Government, businesses and foresters were already heavily invested in a single ETS.

"Experience suggests policy volatility can be harder to manage – and more important for long-term investment – than price volatility."

Dr Ivan Diaz-Rainey, co-director of the Otago Energy Research Centre, said agriculture's biological emissions had long represented the elephant in the room of New Zealand's climate policy.

He said separating carbon and biological emissions was sensible, "both from a science, but also from a political expediency perspective".

If the Government opted for a two-system approach, he expected the current ETS would become more of a domestic carbon trading scheme, and the cheap afforestation option would be gone.

"Does this mean a free ride for agriculture once more? Probably not, but the devil will be in the detail."

Diaz-Rainey added that the degree to which afforestation could be used to offset agricultural emissions also needed to be considered.

"Might unlimited offsets lead to landscapes that are either forests or relatively intensive dairy farming, with little else in between?

"Clearly, there needs to be strong incentives to reduce biological emissions beyond the offset option that push towards more sustainable forms of farming."