Climate Change Commission advice on pricing agricultural emissions seeks more stick and less carrot.
The Climate Change Commission has released their second piece of advice to Government on assessing how ready farmers and the agricultural sector is for an emissions pricing system.
Advice on ‘readiness’ of sector
The advice is tailored to address ‘readiness’ in the sense of asking whether the Climate Change Commission (Commission) believes farmers have the information and support in place, and also relates to whether Government can effectively implement, monitor and enforce a farm-level levy system.
The Commission agrees with the He Waka Eke Noa recommendation that methane emissions can be priced outside of the Emissions Trading Scheme (ETS) on a ‘stream-lined’ individual farm levy system by 1 January 2025. The Commission is of the view that a full, detailed farm-level levy will not be attainable by 2025 but could be developed in the years following.
The ‘stream-lined’ version is a basic system that the Commission advices the Government to adopt, but has some critical differences from the He Waka Eke Noa proposal as the following will discuss.
The Commission highlighted that in order for farmers to be ready for this system by 2025, particular focus will need to be given to designing and building the necessary IT systems, establishing administrative compliance and enforcing functions, and putting regulations in place. This is in addition to registering some 20,000 farms, passing legislation and drafting regulations.
The advice indicates that farmers would receive a discount off their emissions liability if they implement certain approved mitigation actions, to make adoption of those actions more cost effective. These approved actions suggested are currently (some are technology and research dependent):
- coated urea;
- supplementing protein or low methane forages;
- effluent methane capture;
- low emissions animal genetics;
- feed additives; and
The Commission also assessed the sectors readiness to implement a processor-level levy as an alternative to the farm-level levy and reasoned with high confidence that this could be achieved. This would operate by pricing emissions at the processor level, where the costs would then be passed on to farmers vie reduced prices for milk and meat. But this does not adhere to the split gas approach, and is a less desirable system for farmers as voiced by He Waka Eke Noa.
This system would not allow for farmers to mitigate their on-farm emissions and have their liability mitigated. Somewhat unhelpfully, the Commission takes the view that farmers would be able to reduce their liability through reducing production and changing land use. Despite that assessment, the Commission maintained the recommendation that the ‘stream-lined’ farm level levy system be the starting point in 2025 before setting the goal to transition to a detailed farm-level system in the long-term.
Additional advice
The advice from the Commission extends beyond what was asked by Government into ‘recommended further steps for agricultural emissions pricing’ – essentially devoting a section of the advice as a response to the He Waka Eke Noa report. This extra piece of advice (that was not requested by Ministers) suggested four critical changes to the ‘design elements’ of the He Waka Eke Noa proposal.
Firstly, the Commission touched on the approach to incentivizing emissions reductions. The Commission recommended that in order to drive emissions reductions in line with targets in the Climate Change Response (Zero Carbon) Amendment Act 2019 (Act), the direct emissions price incentive must be high enough to drive actual change in the form of improving emissions intensity of production, reduced production, and land-use change. This is in contrast to the He Waka Eke Noa proposal that hoped to reduce emissions through incentive payments for adopting approved actions that mitigate emissions as discussed above. However, it is clear the Commission is opting for a ‘more stick, less carrot’ approach.
Secondly, the Commission recommends that synthetic nitrogen fertilizers emissions are priced at the manufacture and importer level under the NZ ETS “as soon as practicable”. The Commission recommends that if this advice is adopted, that the Government reconsider the backstop in the Act to allow a free allocation to start at 95% because this was decided on the basis of all agriculture being priced under the ETS (which is not the case). Therefore, in essence the Commission is advising the Government to place importers and manufacturers of nitrogen fertilizers into the ETS as soon as possible and participate in the ETS with no free allocations to the price of NZUs.
Thirdly, the Commission has advised that on-farm sequestration (that would not be eligible under the ETS), should not be adopted. Therefore, farmers would not receive any mitigation payments for vegetation on-farm. The Commission was of the view that rewarding on-farm sequestration was not practical, effective nor equitable. Practically, this was due to the complexity of monitoring and administering the system, compounded by the lack of robust science for certain sequestration estimates – although this was something to be developed. In terms of effectiveness, the proposed system would be inconsistent by attempting to offset methane emissions with carbon sequestered, which is not in line with the split-gas approach. The Commission was of the view that the policy would not incentivize additional carbon sequestration in the future, beyond what was already planted. In relation to equity, the Commission deemed it inequitable to allow farmers rewards for sequestration when Councils, businesses, Iwi and other landowners with vegetation could not.
Finally, the Commission suggests that additional supplementary policies could be created to support agricultural emissions pricing to be more effective, efficient, and timely at achieving emissions reductions. The Commission ironically stated that “recommending further specific supplementary policies is beyond the scope of this report”, but noted that their first piece of advice touched on the direction of such suggested supplementary policy. Such ‘direction’ included supporting farmers response to price signals, overcoming barriers, avoiding unintended consequences, and minimizing inequities.
Conclusion
All eyes will now turn towards Government in December to learn whether the He Waka Eke Noa proposal will be adopted, or if the basic ‘stream-lined’ Commission recommendation will be preferred. The fact that the Commission supports the split gas approach outside the ETS is helpful for farmers, but the streamlined approach is a tougher regime without the ability to claim mitigation payments for on farm vegetation.
Want to know more?
If you have any questions about agricultural emissions pricing systems, please contact our specialist agribusiness / climate change team or David Goodman and Peter Sangster.
PDF version: here.
This article was included in Edition 6 of our rural newsletter – Rural. which you can read here.