Government Agricultural Emissions Proposal

The Government has released their agricultural emissions proposal document for consultation to the public.

The Government has for the most part accepted the proposal put forward by He Waka Eke Noa (Partnership) except on a few key points. This has seemingly struck a midway ground between environmental and farming groups with neither party particularly satisfied.

The journey so far

The Partnership released their agricultural emissions proposal on 31 May 2022 recommending a split-gas price system so that the levy paid for biogenic methane and carbon dioxide was independent of each other. The levy was proposed to be paid at the farm-level and the price of the levy was to be determined by the minsters for agriculture and climate change (Ministers) based on advice from a system oversight body, consisting of representatives of the affected parties. At the farm-level farmers could calculate their on-farm emissions and receive credit for emissions mitigation practices undertaken. A further key proposal from the Partnership was for sequestration to be credited for on-farm vegetation that was outside of the eligibility criteria of the NZ Emissions Trading Scheme (ETS).

Simultaneously, the Climate Change Commission (Commission) released advice to Government assessing whether any assistance should be provided to participants of an agricultural emissions pricing system. Further advice on the readiness of farmers to engage with agricultural emissions pricing was provided to the Government on 30 June 2022. The Commission advised that a streamlined version of the Partnership’s proposal was possible by 2025, key changes they suggested were to leave all sequestration to what is currently occurring under the ETS and place synthetic fertilisers that create long-lived gases into the ETS immediately.

The Government proposal

The Government has agreed with the Partnership and the Commission that a farm-level levy pricing system is the best approach to incentivize farmers and growers to reduce agricultural emissions, with some modifications. This utilizes a split-gas approach (pricing short-lived and long-lived gases differently), but offers limited sequestration to on-farm vegetation, and allows for the Ministers to set the levy price for biogenic methane with advice received from the Commission, but with no input from a system oversight body. Incentive payments would be given to farmers for a range of mitigation technologies and practices that reduce emissions. In accordance with the Climate Change Response (Zero Carbon) Amendment Act 2019, the pricing of emissions would occur from 1 January 2025.

Further consultation

The Government is seeking further consultation on the following options:

• an interim processer-level levy as a transitional step if the farm-level levy is not ready in 2025 (as opposed to placing farmers in the ETS);
• a proposed pathway for how sequestration from on-farm vegetation could be recognized in 2025 and in the medium to long term under the ETS; and
• options for how synthetic nitrogen fertilizer could be priced, either within the farm-level levy or under the ETS at the processor-level.

The levy

The long-lived gases levy price would be set annually and linked to the price of NZUs under the ETS, but with a 95% free allocation in 2025, decreasing by 1% each subsequent year (although the allocation is subject to review). The price of biogenic methane emissions is to be set by Ministers periodically (either annually or every 3 years), based on the progress against the emissions targets under the Zero Carbon Act and on advice received from the Commission. The total methane levy paid will be the amount of emissions calculated on-farm (using a centralised emissions calculator) multiplied by the levy rate.

The centralised calculator works by receiving the inputs in the table below which may be required to be proven with the corresponding evidence:

An important aspect to note in the above table, is that meat production data is not inserted into the calculator due to the fact that final carcass weights at the processor do not represent the time the animal was on farm actually creating emissions, nor the fact that only a percentage of stock is sent to the meat processor (e.g. breeding stock remains on farm). Therefore, industry averages at either a national or regional level based on animal type and class will be used when calculating livestock emissions. The Government intends to move beyond the simple reporting system above by 2027, to use more detailed data that recognises mitigation action and provides more accurate emissions estimates. This would ideally incorporate more detailed data such as:

• animal liveweight gain per stock class;
• weaning percentages;
• replacement stock retained;
• lambing and calving percentages;
• death of stock;
• feed types; and
• farm slope.

Farmers will be obliged to pay the levy if they have greater than 550 stock units, or 50 dairy cattle, or apply over 40 tonnes of nitrogen fertiliser.

Sequestration

Although a core proposal of the Partnership was to allow for a wide range of sequestration on farm, the Government has appeared to have accepted the advice from the Commission, and proposed that only two narrow categories of sequestration will be granted outside of the ETS sequestration categories. As a short-term solution, the Government proposes contractual payments funded from levy money, will be paid to farmers who go through an application process for the management of indigenous vegetation and riparian plantings. The government emphasised the need for sequestration to meet the ‘additionality’ threshold, so the areas would need to be fenced off and pest free, and riparian plantings would need to have been established post the 2008 baseline. In the long term, the Government considers that all sequestration payments will occur under the ETS, however the eligibility rules are still a challenge to be solved (requiring further consultation).

Incentive payments and transitional assistance

The Government proposes incentive payments of $50 per tonne of emissions reduced (in carbon dioxide equivalent). Examples of mitigation technologies that could be incentivised include:

• low emissions genetics;
• effluent pond treatments;
• low-protein/methane forage;
• feed additives; and
• nitrogen inhibitors.

There would be a degree of administration to prove that these practices were occurring. Transitional assistance is being considered by the Government, but the proposal lacks detail in this area and asks for further consultation on what this might look like.

The estimated impacts

Government modelling of the farm-level levy was undertaken and used the Partnership’s recommended price of 11 cents per kg of biogenic methane, as well as 8 cents and 14 cents as low and high prices respectively. At the medium pricing, modelling predicts a 13% reduction in biogenic methane and a 5% reduction in nitrous oxide by 2030. Unfortunately for farmers this will come at a cost, with modelling showing the following decreases in net revenue by 2030 for the corresponding sectors:

In addition, the changes in the supply of agricultural production by 2030 for the following sectors are modelled as follows:

Ultimately the sheep, beef and venison sector will bear the brunt of the pricing policy due to emitting a higher amount of biogenic methane relative to net revenue. Evidently, the pricing proposal will cause great land use change, most likely from sheep farms into forestry, although modelling predicts some sheep farms to convert solely to beef because of mitigation technology (hence the increase in land use for the beef sector). It is a tough pill for farmers to swallow, especially given that Government modelling indicates that emissions leakage will occur in the sheep production sector (i.e. the decrease in production in New Zealand, will be produced internationally less efficiently, resulting in increased net emissions). The percentage of New Zealand sheep emissions reductions that will leak is 133%. As greater than 100% of the sheep sector emissions reductions will leak internationally, net global emissions will increase for this sector. However, global net emissions are modelled to decrease overall when the emissions reductions to the dairy and beef sectors are factored in.

Tradeable methane quota

The Government consultation document also discusses the possibility of an alternative pricing option that was not opted for. This was a tradeable methane quota system similar to that of the ETS. This system would manage the volume of methane emissions in New Zealand and then allow the market (via supply and demand) to determine the price of Methane Units. Farmers would need to acquire these units to offset/pay for their methane emissions on farm. This system would provide more certainty that New Zealand would meet emissions targets, however Government as a whole decided that the system would be too complex to implement by 2025.

Conclusion

The system is expected to cost $87 million to establish, with an ongoing cost of $32 million annually, in order to generate a surplus of between $100-140 million to be recycled back into creating further emissions reductions in the sector. Consultation closes on 18 November 2022 and final proposals will go to the Ministers for approval in early 2023.

Want to know more?

If you have any questions about the Government agricultural emissions proposal, please contact our specialists David Goodman, Peter Sangster or a member of our agribusiness and climate change teams.

PDF version: here.

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