Sweetheart Climate Payouts For Farmers

Newsroom

Agricultural emissions are behind two thirds of the warming New Zealand is responsible for, but the sector is slated to get special benefits under the Government’s farm pricing proposal, Marc Daalder reports

Analysis: The farm emissions pricing plan released for consultation on Tuesday is a sweetheart deal for the primary sector, offering discounted levies on greenhouse pollution and generous payments for any efforts they take to cut emissions.

The Government’s preferred options would see farmers pay between $2.86 and $5 for every 36 kilograms of methane emitted (equivalent to about a tonne of carbon dioxide), but receive $50 for every 36 kilos they don’t emit.

The tough question for the Government, on this and other aspects of the proposed scheme, is whether it actually accomplishes the goal of reducing farm emissions. According to modelling by the Ministry for Primary Industries, a $5 payout instead of $50 wouldn’t lead to significantly more farm conversions or increase emissions by all that much.

Listen: Newsroom’s Net Zero: The Road to 2050 podcast episode on agriculture, (below)

Government modelling also shows that for every tonne of carbon dioxide equivalent reduced under the pricing scheme, about 650 kilograms of greenhouse gas will go up elsewhere in the world. That’s because some reduced production in New Zealand will be replaced by higher-emissions production overseas – though the effect is not one-for-one.

This emissions leakage effect is subject to considerable uncertainty. The Climate Change Commission said earlier this year that the risk “is highly uncertain but appears to be low for agriculture in Aotearoa New Zealand in the near term”.

Speaking to Newsroom on Tuesday, Climate Change Minister James Shaw said he wasn’t sure how seriously to take the warning that two thirds of agricultural emissions cuts will be replaced overseas.

“We’ve got no particularly good data about emissions leakage, especially when it comes to agricultural emissions,” he said.

National and ACT both attacked the Government over this statistic on Tuesday, though it would also be an issue with National’s preferred option of the original He Waka Eke Noa plan.

The plan

The new plan contains just a handful of alterations from the one submitted by farming groups to the Government in June.

Chief among them are the decision to pay farmers for on-farm carbon sequestration via the Emissions Trading Scheme rather than a bespoke agricultural system, though this will take a few years to set up. In the interim, He Waka Eke Noa’s proposed sequestration payments would be adopted.

The Government will also take full responsibility for setting the price of the emissions levy, in consultation with the sector and after advice from the Climate Change Commission. Farmers originally wanted to have a role themselves in price-setting, in combination with the Government.

Shaw said the Zero Carbon Act would be amended to require the commission to advise the Government on the levy price, ensuring the public could see what the experts said the price should be. While this isn’t as tamper-proof as his preferred option of a hard cap on emissions, it could go some way to tempering future political meddling with the price.

One issue which remains unresolved is how to price synthetic nitrogen fertiliser. This makes up about a fifth of on-farm nitrous oxide emissions. He Waka Eke Noa said it should be included as part of the nitrous oxide levy, while the Climate Change Commission said it should be included in the Emissions Trading Scheme. The Government is consulting on both options.

There are far more similarities than differences. Like the He Waka Eke Noa proposal, the Government’s option would require farmers to pay a certain price for methane and nitrous oxide emissions, reflecting the differing impacts each gas has on the atmosphere.

The price of the levy for both gases will be discounted from the price for carbon dioxide equivalent in the Emissions Trading Scheme. This is a benefit enjoyed by some exporters in the ETS who would be disadvantaged on international markets if they faced a steep carbon price.

Since no other country has yet priced agricultural emissions, a similar idea is applied to the methane and nitrous oxide levies.

Higher payouts won’t cut emissions much

The scheme would also offer generous payouts to farmers who reduce their emissions by implementing particular technologies like low emissions sheep, feed additives or methane and nitrogen inhibitors.

Unlike discounting the levy, this special benefit isn’t available to the rest of the economy. The emissions price applied to energy, industry, transport, waste and forestry means that if they reduce emissions, the reward is not having to pay the price.

By default, under the incentive payment system, a tonne of emissions avoided would not only waive the $2.86 to $5 levy but return an equivalent payout. The Government, following the lead of He Waka Eke Noa, has gone further in its proposal by applying a 10 times multiplier to that payout.

This vast increase in payouts, which would see more than $60 million go to farmers instead of a few hundred thousand dollars, has relatively little impact on emissions and does relatively little to spare farmers from negative economic impacts.

The modelling from the Ministry for Primary Industries shows the levy plus a basic incentive payment of $5 would lead to a 15 percent reduction in methane emissions and a 12.6 percent reduction in nitrous oxide emissions in 2030, compared with a world in which there was no pricing scheme.

Land used for sheep and beef farming would be 17.8 percent below expected levels in 2030 and dairy land use would be down 2.7 percent. Forestry would be up 3.9 percent and scrub and native bush would rise by 15.8 percent. Net revenue across the agriculture sector would be 5.1 percent lower in 2030 than in the baseline scenario.

Commodities production would be between 5.3 percent (milk solids) and 36.7 percent (beef) lower than in business as usual.

The scheme would bring in $289.9 million in 2030 and pay out less than $300,000 in incentive payments.

Compare that to a scenario in which incentive payments totalled $50 per tonne, in which methane emissions would be 16.3 percent below expected levels in 2030 but nitrous oxide would fall by only 10.9 percent.

Sheep and beef land use would fall by a bit less (16.7 percent) but dairy land use would fall by a bit more (3.1 percent). Net revenue would be down an almost identical 5.1 percent.

Commodities production would fall by similar amounts with the exception of beef, which wouldn’t fall at all in a “tailwinds” scenario where technology is available earlier and cheaper than expected. In a “headwinds” scenario, beef production would still be down 36.7 percent.

The scheme would bring in a similar $289.9 million but pay out $61 million in incentives.

Fairness

This is in fact one of the most important findings of the modelling. Estimates provided by He Waka Eke Noa suggested the levy price would be responsible for incentivising just a quarter of the emissions reductions by 2030, with generous incentives needed to fill the gap.

But this research by the ministry says even a very low incentive payment without any multiplier applied could still not only reach but even exceed the necessary reductions. In combination with other existing policies, the pricing system only needs to drive an 8.5 percent reduction in emissions. The 15 percent methane cuts with a $5 incentive payment overachieves that by 75 percent – an astounding and unexpected result.

It turns out a low price of just $5 per tonne of carbon dioxide equivalent with an extra $5 payout for certain mitigations is more than enough to meet the 2030 agriculture target.

Money raised via the levies will go to a range of climate-related initiatives either way, but there are big questions for the Government to answer as to whether a $61 million payout to farmers is worth a 1.3 percent reduction in methane. Could that money be better spent elsewhere, for even greater reductions?

Another crucial question ministers will face is what to do if the levy does, as modelling suggests is likely, put the sector on a path to overachieve the 2030 target. The consultation document states ministers “would periodically need to assess whether methane emissions were on or off-track regarding the emissions targets. If emissions are over- or under-achieving, the ministers could update the biogenic methane price.”

This sets another different standard to that expected from the rest of the economy. If New Zealand overachieves its general emissions budgets or if particular sectors overachieve their sub-sector targets, there is no expectation or allowance for emissions cutting measures to be eased.

Applying such an approach to agriculture turns the 10 percent target into a ceiling for ambition, rather than a floor.

Shaw insisted to Newsroom that it isn’t meant to be read that way.

“We all know that we need to cut all of our greenhouse gases in all categories as dramatically and as fast as we can. But ultimately I want to make sure that Cabinet follows the advice of the Climate Change Commission on this matter as I do with the ETS,” he said.

“There are times when I think their advice is conservative. It doesn’t go as far as I would. But actually ensuring that governments follow the advice of the commission is really important, because that can go the other way as well where the commission says actually you need to crank it up.”

The line is mostly meant to flag that the levy price could rise and fall, like the ETS price does, Shaw said. It isn’t meant to align with a dominant view among primary sector groups that 10 percent by 2030 is the maximum the country should aspire to.

Again, the key questions for Government on this scheme come back to the efficacy of the proposal in cutting emissions and the degree to which agriculture is treated like everyone else, or like it’s above everyone else.

There are valid reasons to give the sector special treatment. It has never faced an emissions price before and many smaller farmers (particularly sheep and beef farmers) aren’t in a financial position to pay the price of their pollution.

On the other hand, successive governments have tried to implement an agricultural emissions price for two decades. While the sector has successfully fobbed them off until now, no one can complain that they didn’t see this coming.

Moreover, every other sector is doing its part to reduce emissions. And that’s despite the fact that agriculture is behind more than two thirds of the global warming New Zealand is currently responsible for, according to a recent report from the Parliamentary Commissioner for the Environment.

Even in the most ambitious methane cutting scenarios, that proportion is likely to persist through the rest of the century.

Given the fiery response from the primary sector, it’s certainly possible the pricing proposal will be further watered down. A future National government might even gut the scheme, like the last National government did efforts to put the sector into the ETS.

But this ongoing imbalance between responsibility for warming and obligation to cut emissions means farm pricing will always be lurking around the corner, even if it is put off a little longer.