A discussion document to address agricultural emissions has been released. With 48 percent of New Zealand emissions being a result of agriculture in 20171, this is welcomed progress.
The discussion document proposes that the agricultural industry pay for emissions through New Zealand's Emissions Trading Scheme (ETS) in the hope that this encourages environmentally sustainable behaviour in the industry. This article discusses some of the factors shaping the decision of how to introduce agricultural emissions into the ETS.
The ETS shifts the cost of emissions to businesses that create the emissions. Under the ETS, a business will calculate its footprint and then buy sufficient New Zealand Units (NZU), which equates to one tonne of Carbon Dioxide equivalent, to offset its footprint. Businesses can be allocated NZU’s for activities that absorb emissions (i.e., planting trees).
The discussion document proposes that livestock emissions are priced at farm-level from 2025, rather than at processor level (i.e., Fonterra). The reason being as this enables scope to incentivise farmers to reduce emissions. If emission obligations were dealt with at a processor level, then the compliance cost for an individual farmer would be equal across all farmers in New Zealand regardless of the steps taken by individual farmers to reduce their farm’s footprint. Whereas under a farm-gate scheme the individual farmer could report and pay for their emissions, and they could earn credits for improvements made. This encourages farms to reduce emissions and plant forests to absorb carbon dioxide.
So far the ETS has proven an effective method of incentivising businesses to consider its footprint and how to reduce its footprint, and we expect the same outcome from the inclusion of agriculture, at farm-gate, in the ETS.
In the past, the government has said it “would only bring biological emissions from agriculture fully into the NZ ETS if there were economically viable and practical technologies to reduce these emissions. We [the government] are putting considerable investment in research and development to find new options to reduce agricultural emissions, and we [the government] will continue to work with the agricultural sector to enable and incentivise the sector to adopt new mitigation options as they become available.”2 This clearly was not enough incentive for the industry because years later and there are still limited options for reducing emissions. With limited emission reduction practices and technologies available we hope bringing agriculture into the ETS will incentivise investment into research and development to create solutions to reduce emissions. It will be important that these solutions enable farmers to reduce gross emissions, as planting trees only reduces net emissions. Further, hopefully this research and development creates methods for environmentally sustainable behaviour which will be not only environmentally beneficial to the agricultural industry, and New Zealand, but also economically beneficial to the agricultural industry, and the New Zealand economy. Looking at the other end of the supply chain, if farmers have environmentally sustainable practices and market products as such, this creates an easy option for consumers who are also seeking to reduce their footprint.
Wellington, along with several other regions, has recently declared a climate emergency. The pricing of livestock emissions at farm-level is set to apply from 2025, which doesn’t feel like a reasonable timeframe for responding to an emergency. However, processes need to be developed, systems need to be put in place, and farmers need to learn the ropes of the ETS before the changes to the ETS can be effectively implemented. The government have suggested that, in the interim, livestock emissions be paid at the processor level from 2021. This appears to be a good solution, it responds to the urgency of climate change but it’s not hastily jumping into developing the systems for enabling the pricing of emissions at the farm-level. A complex system such as the ETS will not be effective if it is not implemented with much consideration.
The government has proposed that initially farmers will only pay five percent of the cost of their emissions. This has been described as a ‘sweetheart deal.’ But it’s actually an industrial allocation; industrial allocation has been around since the beginning of the ETS. “An industrial allocation is an allocation of units which is given to a business carrying out an activity which is recognised as being impacted by the New Zealand Emissions Trading Scheme. The purpose of industrial allocations is to mitigate this impact and ensure that no part of the economy is unfairly affected. Businesses in this category are termed Emissions Intensive and Trade Exposed. This means that they need a lot of power to support their production, which may cost more because of the ETS. However, they are not able to pass on this increased cost to their customers. This is due to the level of competition in the market from other businesses who may not face the same costs (including overseas suppliers).”3 Another aspect that plays a role here is emissions leakage. “Where economic activity migrates and mitigation of emissions in New Zealand is offset by an increase elsewhere. If this happens, global emissions may not fall at all and may even increase.”4 Further, “for leakage to occur, production in New Zealand would have to be displaced by production that is more emissions intensive.”5 These factors highlight the reasons for an industrial allocation at inception.
All in all the introduction of agriculture to ETS is a welcomed development and a step in the right direction. Hopefully there is a suite of changes at government level to encourage environmentally sustainable behaviour in all industries to ensure that choosing environmentally friendly products is the easy option for consumers.