He Waka Eke Noa recommendation and Climate Change Commission advice to Government
He Waka Eke Noa has recommended an alternative agricultural emissions pricing system that would sit outside the Emissions Trading Scheme.
Under the Climate Change Response (Zero Carbon) Amendment Act 2019 the Government legislated emissions reduction targets of reducing methane to 10% below 2017 levels by 2030 and by 24-47% by 2050. Nitrous Oxide and Carbon Dioxide targets are to reduce to net zero by 2050.
He Waka Eke Noa (the Partnership) released their recommendation on pricing agricultural emissions on 8 June 2022. The report recommended that Government adopt a farm-level split-gas pricing system outside the ETS that will incentivise emissions reductions. Farmers are to be tasked with calculating their own individual short and long-lived farm emissions using a greenhouse gas calculator. These calculated farm emissions will then determine the levy payable by that farmer, instead of paying a national average. The ETS does not distinguish between methane and Carbon Dioxide, nor does it allow for split gas pricing. Hence the recommendation to have a system outside the ETS.
The Partnership also recommended that incentives should be provided for the uptake of practices and technologies that reduce emissions. Additionally, farmers will receive offsets to the cost of the levy through the recognition of on-farm sequestration.
The levy revenue is recommended to be invested entirely back into the agricultural sector for research and development purposes. A separate fund is being set aside for Māori landowners and an independent Māori Board will be established to work alongside the System Oversight Board. This is intended to provide a system that gives effect to the Treaty of Waitangi.
The proposed framework is estimated to reduce methane emissions between 4 and 5.5%. In combination with existing polices and the waste sector, this is believed to achieve the 10% methane reduction target set by Government.
The Partnership modelled the impact that the prices would have on the financial performance of farmers. The modelling found that on average farm profit will be impacted on a scale of 0% to 7.2%. It is expected that the system will have a greater impact on deer, sheep and beef profits in comparison to dairy. As explained in a farm case study report, the economic farm surplus (EFS) (measure of productivity) of a dairy farm is much larger than that of a red meat farm. Therefore, the impacts of the levy on the EFS of a dairy farm is smaller than that of a red meat farm (not taking into consideration debt levels).
The price of the levy is recommended to initially be as low as possible with an indicative maximum price for methane of $0.11/kg until at least 2028, before rising to levels of $0.17 to $0.35/kg by 2030. The Partnership advised that the levy must be carefully set so as not to result in falling production, which in turn could lead to emissions leakage – a scenario where the lost production is picked up elsewhere globally, consequently resulting in increased net emissions.
In relation to the price of long-lived gases such as nitrous oxide and carbon dioxide, the Partnership assessed two options. Firstly, linking the price to that of carbon under the ETS, and secondly, setting a unique price. The first option was least preferred due to the fact that the carbon price trajectory would be linked to other sectors and forces in the economy such as speculative investors, which would result in a price unnecessarily high to achieve the emissions reductions targets. An excessive price could also result in emissions leakage and production shifting offshore. The second option of setting a unique price, was to be set at a price level that would be sufficient to generate enough revenue in order to pay farmers for He Waka Eke Noa sequestration payments. The Partnership felt this option was closely aligned with pricing emissions to the extent that it is required to drive the practice change needed, not charging a price above and beyond this. The Partnership noted that over time all sequestration should ideally occur under the ETS once the ETS has been improved to be more applicable to individual farmers. The indicative cost proposed was $4.25/t in 2025 rising to $13.80/t in 2030.
The Partnership recommended that sequestration on farm be recognised to offset the price of the levy and incentivize sustainable farming practices. There are several costs involved in the planting, fencing, pest/ weed management and maintenance of registering sequestration areas. Providing financial assistance to support and incentivize these practices was also recommended.
Two methods for pricing sequestration were considered:
- linking the price of carbon sequestration to the NZ ETS carbon price per NZU; and
- setting a unique price.
Both prices would be balanced against the need to recognize genuine sequestration but also the need to maintain the financial viability of the system.
Linking the price to that of the ETS has the benefit of having a clear explainable starting point. However, not all vegetation proposed to be recognised by the Partnership is recognised under the ETS. Whereas by setting a unique price, although it creates more administration, would allow for wider recognition of vegetation to be entered in the system. The key difficulty in setting the unique price will be weighing the considerations to what is fair and achieves the right outcomes due to the differing rates of sequestration between vegetation.
The recommendation from the Partnership is that the initial price for sequestration be linked to the ETS price but discounted to reflect that only some He Waka Eke Noa sequestration would normally be counted under ETS. The vegetation recognised under He Waka Eke Noa that is not recognised under the ETS, is comprised of two categories:
- permanent vegetation such as:
- indigenous vegetation established before 1 January 2008 (baseline year) – at least 0.25ha of predominantly indigenous woody vegetation;
- indigenous vegetation established after 1 January 2008 – at least 0.25ha of predominantly indigenous woody vegetation; and
- riparian vegetation – plantings suited to margins and banks of waterways, including wetlands. The planting must be predominantly woody vegetation including indigenous and non-indigenous. Non-woody vegetation such as flaxes and toetoe (toitoi) are included but must not be predominant species.
- cyclical vegetation such as:
- perennial cropland – an orchard or vineyard greater than 0.25ha in size;
- scattered forest – minimum area of 25ha with minimum stocking rate of 15 stems per ha;
- shelterbelts – a linear vegetation feature consisting of one or more rows of trees and/or shrubs planted after 1 January 2008; and
- woodlots/tree-lots – minimum of 0.25ha.
Where there are multiple scattered areas of vegetation they may be aggregated to meet the 0.25ha threshold. Vegetation that qualifies for the ETS cannot be registered under He Waka Eke Noa (generally where vegetation area greater than 1 ha).
The Partnership considered the inclusion of other sources of sequestration such as wool, tussock grasslands, wetlands and soil carbon but reasoned that scientific knowledge is not at a level capable to include these categories.
An indicative price range for He Waka Eke Noa sequestration would be 70-90% of the ETS carbon price. In 2028 there will be a review the sequestration pricing method and of the ETS in general.
Climate Change Commission Advice
The Government asked the Climate Change Commission (Commission) under section 5K of the Climate Change Response Act 2002 to provide advice on the following points:
- what financial assistance (if any) should be provided to farmers participating in an emissions pricing scheme; and
- an assessment of farmers readiness for a farm-level system for pricing agricultural emissions.
The first point of advice on financial assistance was completed in May 2022. The Commission advised that the Government should give financial assistance to farmers only if Government expects material financial hardship to be widespread in the sector, and that the Government could also choose to give targeted financial assistance based on specific criteria where certain agricultural players are disproportionately affected.
The Commission recommended that financial assistance could be given in these situations in order to manage disruptive changes and avoid emissions leakage. It seems that the threshold for material financial hardship is high, as the Commission modelling showed that if financial assistance is given too freely, then the incentive to reduce emissions will not be apparent and the emissions reductions targets will not be met. The modelling portrayed by the Commission showed that net emissions reductions are greatest when no financial assistance is given.
The Commission has, at the time of publishing, released their second piece of advice and we will shall seek to comment on this shortly.
Want to know more?
If you have any questions about He Waka Eke Noa’s recommendation to Government, please contact our specialists David Goodman, Peter Sangster, or a member of our Agri-Business and Climate Change Teams.
PDF version: here.