Changes to ETS leave farming sector fuming

The legislation makes dairy and meat processors, rather than individual farmers, responsible for emissions from 2015. Photo / Dean Purcell

New Zealand's largest exporter, Fonterra, says it will receive no protection under planned changes to the emissions trading scheme intended to protect exporters.

Under the existing scheme, enacted just before the 2008 election but in limbo since then, large trade-exposed emitters would receive an allocation of free emission permits equivalent to 90 per cent of their emissions in 2005.

But the amended scheme, being rushed through a parliamentary select committee, adopts Australian tests for eligibility for that protection, measured in terms of revenue-intensity - how many tonnes of emissions per million dollars of revenue.

Fonterra told the select committee yesterday that those thresholds would preclude it from receiving an allocation of free permits for emissions from its manufacturing plants.

The resulting cost increases would be passed back to farmers, it said, undermining the intention to protect agricultural emitters.

"At 2015 we had thought 90 per cent [coverage of carbon costs] would be provided to the sector," Fonterra general manager John Hutchings told the committee yesterday.

"In fact it will be more like 75 per cent."

The new eligibility thresholds were those designed for the Australian economy, many of whose heavy emitters are in the mining and minerals sector, Fonterra said.

"By contrast the New Zealand economy is driven by agricultural industries with integrated supply chains ... [and] the issue is not just about the level of emissions intensity at a particular stage in the supply chain but acknowledging the flow-on impacts of a significant cost imposed on one of its parts.

It proposes a fix in the form of a provision which would extend the 90 per cent free allocation to processors of the output of sectors eligible for that level of support.

Climate Change Minister Nick Smith said, "It is not our intention to take the approach of picking off particular industries as winners and losers."

The principle of an intensity-based threshold was the right one, in his view.

"We will be considering Fonterra's submission alongside others as to whether we have got those thresholds in the right place."

Fonterra objects as well that, as the bill is drafted, it gets no benefit from about a quarter of the process heat it uses in what would otherwise be the waste heat from electricity generation.

Co-generation facilities such as these are a highly efficient use of natural gas.

It also opposes the legislation making dairy and meat processors, rather than farmers, the point of obligation when emissions from pastoral farming are included in the scheme in 2015.

While administratively more convenient, this approach blunts the incentive for individual farmers to reduce their emissions.

"We have got until 2015 to find a way of making this work,' Hutchings said.

State-owned farming group Landcorp also argues that setting the point of obligation at the farm level would encourage the changes of behaviour the scheme seeks and farmers should be given that option.

A joint submission from Meat and Wool NZ and the Meat Industry Association criticises using revenue rather than value-added as the basis of intensity-based allocation of free units, and making processors rather than farms the point of obligation.

They are concerned that the legislation's rules for the allocation of free units would mean sheep and beef farmers gained no benefit from having already reduced their absolute emissions by 14 per cent since 1990 (reducing the national bill under Kyoto) through "unprecedented efficiency gains".

HAVING THEIR SAY
Fonterra, Landcorp and meat industry representatives were among 27 submitters due to be heard by the finance and expenditure select committee yesterday.

The committee chairman, Craig Foss, said that, in all, 184 of the 372 submitters had indicated they wanted to make oral submissions. The committee is scheduled to spend 20 hours over three days this week hearing submissions.

It has to report the bill back to the House by the middle of next month because the Government wants the emissions trading scheme to be "settled" before the big international climate change conference in Copenhagen early in December.