The primary sector's plan to price and reduce emissions from livestock and fertiliser is rooted in wishful thinking about technology that is not yet proven at scale, Marc Daalder reports
Analysis: Another month, another climate plan that places all of its hopes on a miraculous development to reduce livestock emissions without reducing livestock numbers.
In May, the Emissions Reduction Plan banked much of its pathway to achieving emissions budgets on methane-inhibiting technology cutting agricultural emissions by 30 percent between 2026 and 2035.
Now, the He Waka Eke Noa partnership between primary sector groups and the Government has offered up a scheme to price agricultural emissions that will miss legislated targets without that methane technology.
The problem is that no tech to cut methane emissions by more than a few percentage points is currently proven at scale.
He Waka Eke Noa made headlines on Wednesday with promises to cut methane emissions by 4 to 5.5 percent from 2017 levels by 2030. Alongside contributions from the waste sector and from existing Government policies, like the freshwater regulations, this would achieve the target of a 10 percent reduction in biogenic methane by the end of the decade. That target is set out in the Zero Carbon Act.
The scheme would accomplish this by making farmers pay a levy on their emissions, the amount of which would be reduced if they engage in particular low-emissions behaviours or sequester carbon dioxide through native and riparian planting.
Each farm will calculate its own levy through a centralised online system, which prices short-lived methane and long-lived gases like carbon dioxide and nitrous oxide against two different rates. Both rates would be set by an oversight board whose members would be jointly-appointed by primary sector groups and the Government. He Waka Eke Noa proposed that the price for methane would be capped at $110 per tonne initially and that long-lived gas rates would be set at 5 percent of the market price for carbon credits in the Emissions Trading Scheme (ETS).
Both figures come out to about $3.90 per tonne of carbon dioxide equivalent, against a current market spot price of $76 per tonne.
A deeper dive into the figures underlying the He Waka Eke Noa plan show that reductions consistent with meeting the 2030 methane target are contingent on that unproven technology and on extremely generous subsidies for farmers.
Resource Economics modelled a range of different pricing options for the partnership, including a farm-level levy like that proposed in the final draft but without extra payments for adopting low-emissions technology.
That levy, under the same assumptions used to arrive at the 4 percent cut promised by He Waka Eke Noa, would only have achieved a 0.8 percent reduction in methane emissions by 2030. That's essentially unchanged from the 1 percent reduction in the draft He Waka Eke Noa report, which was widely panned. It also means the 2030 target would be missed, because a reduction of at least 3.9 percent is needed in addition to existing policies and the waste sector in order to add up to a 10 percent cut.
"Within that 4 percent, my reading of it is roughly a quarter of that is due to the price incentive and three fourths of that is essentially the carrot," Climate Change Minister James Shaw told Newsroom.
The difference between the two comes from optimistic assumptions about the arrival of methane-busting feed additives to cut livestock emissions by an annual average of 12 to 24 percent starting in 2025. While trials of such technology have been successful, they have yet to be proven at scale and New Zealand's pasture-based feeding model presents an extra set of challenges.
In the modelling, farmers who adopt those additives, as well as other tech like methane vaccines or low-emissions fertiliser, would get a discount off their levy equal to seven times the emissions price for each tonne avoided.
In other words, the modelling behind the He Waka Eke Noa scenario assumes that farmers might pay $350 per tonne of methane and $13.80 per tonne of long-lived gas they emit in 2030, but would get a discount of $2450 and $96.60 for every tonne avoided, respectively.
It's unclear whether this seven times multiplier is proposed for the final scheme.
"The discount received will be related to the cost of implementing the action, but it will also consider the emissions reductions being achieved," the final document says.
This imbalance between cost and incentive isn't unique to He Waka Eke Noa's final choice. All of the schemes examined by the partnership allow farmers to earn rebates on their levies for on-farm carbon sequestration through planting vegetation that isn't covered by the Emissions Trading Scheme. While farmers would pay a 95 percent discounted price on their carbon dioxide emissions (falling to 90 percent by 2030), they want to earn the full value of their sequestration – or at most a 25 percent discounted credit.
That means farmers would receive between 15 and 20 times the long-lived gas levy rate as a rebate for each tonne they sequestered in 2025.
"The issue of fairness and also a kind of related matter which is economic distortion is one of the things that we've got to look at," Shaw said.
He Waka Eke Noa's incentives would also specifically exclude emissions reductions resulting from a decline in production and would likely not cover on-farm efficiency improvements.
The rebates system proposed by He Waka Eke Noa clashes with advice from the Climate Change Commission which was also released on Wednesday. This advice dealt with what financial assistance farmers should receive once their emissions start to be priced.
The commission wrote that it couldn't be too specific because He Waka Eke Noa had not decided on a final approach to pricing emissions when it completed its work. But it did recommend the Government look into output-based rebates – something He Waka Eke Noa explicitly examined and rejected.
In its advice, the commission also said there was no certainty that assistance was needed to avoid emissions leakage, in which carbon efficient operations in New Zealand are shuttered and less efficient ones launch overseas.
"After assessing the available literature specific to agriculture the risk of emissions leakage is highly uncertain but appears to be low for agriculture in Aotearoa in the near term," the commission reported. It also commissioned modelling on the subject which found that a reduction in agricultural emissions in New Zealand would lead to a smaller increase elsewhere, so there would still be a net decrease.
If farmers face widespread hardship, the commission wrote, then financial assistance could be warranted.
"Our view is that the Government should give assistance to all farmers if it expects material financial hardship to be widespread as the sector transitions to low emissions practices, and could also choose to give targeted assistance based on certain criteria to manage more specific impacts."
Whether that hardship might arise remains unclear. The consensus seems to be that beef and sheep farms will be hit harder by the pricing scheme.
The levy will cost dairy farmers an additional $0.12 to $0.15 per kilo of milk solids in 2030. For reference, the average farmgate milk price for Fonterra rose by more than $1.50 over the past year.
In the interview with Newsroom, Shaw also acknowledged that money raised by the agricultural pricing scheme could fund the Government's new Centre for Climate Action on Agricultural Emissions.
Announced as part of the Emissions Reduction Plan, the centre's current $340 million in funding comes from the Climate Emergency Response Fund, which in turn is sourced from Emissions Trading Scheme revenues. The agricultural sector doesn't pay into the ETS, raising questions of fairness about petrol purchasers subsidising research to help farmers reduce emissions.
He Waka Eke Noa already wants levy revenue to go towards new research, after accounting for administrative costs. Shaw said realigning the two so that the climate fund supports decarbonisation in ETS sectors and the He Waka Eke Noa revenue supports agricultural emissions reductions was on the table.
