Bringing agriculture into the ETS: What’s at stake?

The New Zealand Emissions Trading Scheme (NZ ETS), established in 2008, is one of the earliest national-level ETSs worldwide. The NZ ETS covers energy, industry, and forestry. But agriculture, which makes up half of our total emissions, still sits outside the scheme. Not including agriculture is becoming increasingly difficult to justify as the country pursues its net-zero targets.

In June 2024, the Government repealed the legislative “backstop” that would have brought agricultural producers into the ETS by 2025, and individual farms by 2027. Instead, it disbanded the He Waka Eke Noa partnership and created a new Pastoral Sector Working Group. At the same time, it committed more than $400 million to the research and development of emissions-reducing technologies, including methane inhibitors, vaccines, and low-emissions genetics. 

The shift means biological emissions will not be priced until at least 2030. For now, the emphasis is on innovation rather than levies. Supporters argue that this avoids undermining farm viability, while critics counter that excluding half of our national emissions risks New Zealand falling short of our climate target.

If agriculture does enter the ETS, or a parallel pricing scheme, the effects will be felt on farms, in supermarkets, and across rural communities. 

• On-farm costs and technological barriers – Farmers would face charges for methane from livestock and nitrous oxide from fertiliser. These are difficult gases to reduce, and cost-effective technologies are only just beginning to emerge. Large farms may adapt by investing in feed changes, inhibitors, or precision tools, but smaller family farms could face tighter margins and reduced resilience. To ease the shock, policymakers have considered starting with very low levy rates for methane.
• Land-use shifts – Pricing would change the economics of production. Some high-emissions pastoral land could be converted to lower-emission crops or forestry. While this may reduce emissions, it also risks accelerating rural depopulation if conversions reduce local employment. 
• Food prices – Costs are likely to flow through supply chains. Meat and dairy prices could rise, adding to inflationary pressures. To be specific, international estimates. suggest that with a carbon price of around US$100 per tonne of CO₂-equivalent, lamb prices could increase by about US$2 per kilogram, beef by US$1.50 per kilogram, and milk by around US$0.10 per litre. However, in the long run, proving New Zealand food is genuinely low carbon may protect export markets and even command a premium. 
• Competitiveness – Introducing costs for New Zealand farmers in the absence of equivalent measures overseas risks “carbon leakage”, where production relocates offshore with no net climate benefit. Effective policy design must carefully consider trade exposure.
   

Even without domestic pricing, pressure from abroad is rising. From 2026, the EU’s Carbon Border Adjustment Mechanism will charge tariffs on carbon-intensive imports such as fertilisers. Food is not yet included, but the signal is clear: academic analysis highlights that if the EU does include agricultural emissions in future domestic pricing schemes, it could pave the way for extending CBAM to agri-food products . At the same time, global food buyers are demanding low-emissions supply chains. For New Zealand exporters, showing credible reductions may soon be essential; otherwise, costs could be imposed at the border.

The design of any agricultural emissions pricing scheme will be critical, as it will shape whether the policy is perceived as fair and effective. Options debated to date  include:

• Split -gas pricing – Price methane separately from nitrous oxide and CO₂
• Output-based rebates – Farmers pay a levy but get credits for efficient, low-emissions production
• Point of obligation – Start pricing at processors, then shift to farms as tools improve
• On-farm credits – Farmers earn credits for using approved practices that cut emissions
• Revenue recycling – Levy revenue is returned through research, grants, or support.  
   

A credible staged pathway in the next 10 years might look like this:

• Get ready – All farms start measuring and reporting emissions. Keep building and testing new tools such as methane inhibitors
• Start small – Bring in a low levy at the processor level, with rebates, so prices stay modest but give a clear signal
• Reward action – Give credits to farmers who cut emissions or increase long-term sequestration. Gradually lift efficiency expectations
• Shift to farm level – Move pricing from processors to individual farms, with split-gas rules and recycling of revenue back into the sector. By then, new technologies and support will help farmers cut emissions without harming the rural economy.

It is about how to cut emissions credibly while preserving rural livelihoods and export competitiveness. Delaying action buys time for technology to be developed, but it does not erase the challenge. The real question is not if agriculture is priced, but when and how.

The pathway forward must balance three dimensions: cost, to keep the system affordable for farmers and households; technology, to ensure proven tools are available to cut emissions; and time, to phase the transition at a pace that allows adaptation. By managing these trade-offs carefully, New Zealand can design a fair, staged system that meets its climate commitments while protecting one of its most important industries.