Earlier this month the He Waka Eke Noa partnership released its recommendations on how agricultural greenhouse gas emissions should be priced.
Having been engaged by the programme office for the last 18 months to support its development I know first-hand how much blood sweat and tears has gone into these recommendations. Farmers should be proud of the leadership role their sectors have played.
While the concept of a pricing mechanism is universally not favoured, the alternative position, the Emissions Trading Scheme (ETS), would have been a dangerous place for agriculture to end-up. Agriculture would have been competing for NZU (emissions units) in a market where other sectors have a greater ability to pay the price, and there would have been no differential pricing mechanism for short-lived gases (methane).
The report recommends a farm-level levy where the cost faced is driven by the level of investment required to fast track research and development of new mitigation options; provide financial incentives to encourage more rapid uptake of mitigations, e.g., sheep genetics, coated urea, or feed additives. Sequestration (woody vegetation) not eligible for the Forestry ETS would also be incentivised (at a reduced price) recognising the co-benefits for freshwater (riparian plantings) and indigenous biodiversity (protection of native bush). Increasing the range of sequestration options also provides an opportunity for farms to offset. This is particularly important for some sheep and beef farms where the cost faced will have a significant impact.
Under the farm-level levy, farms over a defined number of livestock or tonnes of synthetic N-fertiliser use would need to calculate and pay for their emissions using an agreed methodology, this ensures everyone is treated fairly. The methane and nitrous oxide price settings would be unique, and ring-fenced based on need. This ensures the levy is as low as possible, minimising impacts on production and profitability while still achieving emissions reductions. The cost faced could then be reduced through the uptake of mitigation incentives, designed to encourage emissions reductions, or through maintaining or increasing sequestration. Either directly through He Waka, or indirectly through the Forestry ETS or voluntary carbon markets.
The Climate Change Commission has also released advice to government around the most effective way to assist farmers in meeting emissions reductions targets. They concluded that a farm-level price with an output-based rebate should be used for this. This provides an incentive based on production efficiency. The partnership did consider this approach, but the issue is how would this work on a breeding or trading farm where there is no easy way of recognising its output. Proxies could be used but as it’s an average the incentive for change is reduced and a national sheep tracing system would likely be challenging to implement.
What happens now? Government will consider the recommendations in both reports alongside receiving advice from the ministries, it will then gather its thoughts on the most practical way forward. As the timelines are tight for implementing a farm-level system by 2025, this will likely be released for consultation late in the third quarter of this year, before a final decision is made in late 2022.
So, what does this mean for farmers? While all farmers need to know their emissions numbers, it’s more important to understand what’s driving these. Many farms have an opportunity to make efficiency improvements, and others an opportunity to offset (plant trees in less productive areas). Now’s a good time to start thinking about the options as it’s highly likely there will be a pricing system in place in 2025.