Posted 3 June 2010
ETS or bust?
With emission schemes stalled from Washington to Canberra, David Broome asks if Federated Farmers could be set to ‘fight all ridiculous taxes’ in F.A.R.T 2.0.
It may be that New Zealand has just embarked on the most audacious branding exercise ever conceived. Global in scope, the brand takes market forces, supercharges them with the power of righteousness and uses them to drive what to-all-intents-and-purposes, is a moral crusade. All going to plan, other nations will be powerless to resist the brand’s underlying logic with our goods sailing (but not flying) out the door to grateful buyers willing to pay a huge price premium.
Or, just maybe, New Zealand has embarked on a lonely, delusional, badly-timed odyssey that will cost the country dearly – leaving the rest of the world shaking its collective head in amused bewilderment. New Zealand, the land which swallowed its own propaganda. It’s no wonder, some say, the Government receives congratulatory emails from overseas about its acronym rich Emissions Trading Scheme (ETS).
After years of protests, wrangling and horse-trading, the ETS becomes reality on July 1. On that day, electricity generation, transport fuels and industrial sectors will be required to buy emissions units to cover their greenhouse gas emissions, known as GHG’s. It’s estimated retail electricity prices will rise by five percent and it will add four cents a litre to the cost of petrol and diesel. In its first year, being 2010 and not 2015, it will directly cost pastoral agriculture $87 million and that doesn’t count horticulture, plantation forestry or fishing. Yet the scary unknown remains the impact the ETS will have on the $12.5 billion worth of farm inputs. The real impact on agriculture from 1 July 2010, could be north of $200 million, killing the lie that agriculture is ‘immune’ until 2015.
Yet due to vigorous lobbying by Federated Farmers, the agriculture sector will be the last sector to fully enter the scheme. At the Federation’s 2009 National Council, the Prime Minister went as far to announce that the ‘predicted’ annual cost per farm from 2015, had reduced 90 percent – from $30,000 under Labour to $3,000 under National. Yet that ‘$3,000’ is only for farm based methane (CH4) and nitrous oxide (N2O) emissions. It takes absolutely no account of the ETS’ impact from 1 July 2010 on the $866 million worth of fuel and electricity consumed by New Zealand’s sheep, beef, dairy and arable farmers. It also takes no account of increased processing costs or what the impact will be on other key farm inputs.
Cynics rightly ask that if scientists can’t accurately model the ash cloud from Iceland’s volcano, how can our Government be so definite about future costs? After all, MAF’s economic forecasts about agriculture is based on a US dollar of $0.49; a wide margin of error seems to be order of the day. Yet, given significant backsliding overseas, the Government has signalled it won’t do unto agriculture unless our trading partners do undo their farmers. Talk is cheap unless current legislation is amended to put that delay option into law.
Since the ETS was a glint in a policy analysts eye, Federated Farmers has opposed the ‘all sectors, all gases’ approach. While the ETS may win kudos on the climate change cocktail circuit, our scheme won’t make one jot of difference to global emissions. Federated Farmers President Don Nicolson is scathing, “in addition to the $87 million more we’ll pay, the ETS will cost Fonterra an additional $38 million next year, rising to $107 million in 2015. I understand it will cost the meat processors about $10 million from 1 July but after 2013, when synthetic gases and waste enter the ETS, this will likely double to some $20 million. Since these costs will be passed through to farmers the ETS is a massive erosion of our profits inside our farm gates,” he says.
While Kiwi families will be forced to pay more, will overseas consumers voluntarily do likewise? It seems a huge gamble with a sector making up 64 percent of everything New Zealand sells to the rest of the world. New Zealand farmers will be the only farmers in the world to be penalised under an ETS for the natural emissions of ruminant animals, “it’s a natural gas after all,” Nicolson quips.
So is the ETS a policy solution borne out of a ‘disproportionate sense of environmental noblesse oblige?’ Nicolson says yes, not because other countries have decided to likewise, or because there are commercially viable mitigation technologies, or even because it makes economic sense, but because 117 out of 122 MPs have fallen for their own ‘clean-green’ slogans. “Parliament’s like a village and together with their advisers, they’ve convinced themselves this is an overriding priority for Government. “But look at Australia,” Nicolson says. “The Rudd Government won power in 1997, with high sounding claims climate change was the ‘great moral and economic challenge of our time’. Yet as the costs, claims and science underpinning it have come under scrutiny, the electorate have shifted the politicians.”
With Australia’s version of our ETS, the CPRS [Carbon Pollution Reduction Scheme] now put back to 2013, it has ended all hopes of harmonisation. “What’s happened to the harmonisation with Australia National promised us?” Nicolson asks. “An increasing number of farmers are asking if National will face up to reality, that this isn’t the global policy priority they believe it to be,” Nicolson states.
Don Nicolson has a point. Europe’s ETS targets just 43 percent of industrial emissions and is based solely on carbon dioxide. It doesn’t apply to methane, nitrous oxide and even fluorocarbons – 48 percent of the European Union’s GHG profile. Sectorally, it excludes emissions from transport (21 percent), households and small business (17 percent), agriculture (10 percent), construction and waste (9 percent). So the EU’s much trumpeted ETS (from where we’re told by MP’s and the media a ‘consumer backlash’ against New Zealand goods would come) omits 57 percent of its emissions. The EU seems to realise that people have to eat, have shelter and be able to get from point A to point B.
But what about our other major trading partners? Over ANZAC weekend, the United States’ Waxman-Markey Bill, a ‘cap and trade’ system has, like Australia’s, fallen under an electoral bus. Even then U.S. farmers weren’t just exempted from liabilities but were to be rewarded with emissions units. In February, it was announced that Japan’s troubled trading mechanism has been delayed until 2012, with its farmers similarly exempted. France’s carbon-tax plan died in March while plans for a trading scheme in Canada remain just that. Meanwhile China and India have no intention of going anywhere near an emissions cap. None of our trading partners are currently proposing the inclusion of primary food production. None.
But the ‘clean-green’ belief propelling the ETS, about how New Zealand is thought to be viewed abroad, has never been verified by research. Federated Farmers wants New Zealand’s trade policy and ‘brands’ built on sounder foundations. “So how important is sustainability relative to price signals in our established markets?” Nicolson asks. “Are consumers in China and Asia really prepared to pay much more for our carbon neutral food?” The stakes for New Zealand are incredibly high too, Nicolson says, “the ETS is playing with economic fire.” The stark reality is that even if our ETS achieved significant reductions in New Zealand’s GHG profile, it would have almost no effect on global GHG emissions. New Zealand’s impact on global emissions, a mere 0.2 percent, dwindles as the global population and economy grows.
Clean-green is also the international Reduced Emissions from Deforestation and Degradation (REDD) scheme. It proposes, for example, that polluting countries pay other countries with rainforest to maintain that stock as carbon. Those countries could then buy their food from New Zealand instead of growing it on deforested land. Aside from being ‘chequebook carbon’, those developing nations hardly represent the price-paying premium end of the market who desire branded, niche and high value goods, commentators from Rod Oram to KPMG argue, should be the focus of New Zealand agriculture. Aside from price sensitivity, REDD slams headlong into issues of verification as well as the food security concerns that drive agriculture in developing nations.
The truly scary thing for farmers is that the clock is ticking and no one seems to have the detail to hand. A call to MAF’s Sustainable Land Management and Climate Change helpline, 0800 CLIMATE (0800 254 628), reveals very little for pastoral farmers. A request for information on the Voluntary Reporting of Emissions draws a complete blank. “Given this starts on 1 January 2011, in just seven months time, that’s not good enough,” Nicolson says. “It rams home my belief this is still big picture stuff struggling to be turned into a real policy.” More so as mandatory reporting of emissions for all farmers commences on 1 January 2012. “While we think the ETS is nuts and are fighting hard we also have to ensure our members make the most of a bad situation.”
Yet about two thirds of New Zealand’s GHG emissions is said to be methane – a GHG 21 times the potency of CO2 but there are no quick fixes. The biggest single influence on emissions per animal is the quantity and type of feed eaten. Age also affects emissions per animal so farmers’ ability to influence things is limited to animal husbandry and the economics of farm management. Or, as one Australian wit suggested, we could replace all of our cows and sheep with kangaroos as they don’t produce methane during digestion. Genetic engineering may offer solutions but that opens up a fresh can of worms.
What about the other GHGs? About one-sixth of New Zealand’s CO2-equivalent agricultural emissions is said to be nitrous oxide. As a greenhouse gas, it’s more potent than methane. Options to reduce it include removing animals from pasture during wet periods, stand-off pads and using feeds, high in energy but low in nitrogen. Nitrification inhibitors may help but only where these are feasible. Farmers ‘could’ reduce their CO2 emissions by ‘investing’ in fuel efficient farm machinery, adopting no-tillage technologies, maximising irrigation efficiency, improving fertiliser application accuracy and ensuring the timing and rate of nitrogen application is optimised for pasture response. But given agriculture’s year-on-year productivity growth since 1990 has been 1.8 percent, efficient resource use defines New Zealand’s farmers.
In the hope of a eureka moment, the Government has committed $45 million over four years to the 29-member Global Research Alliance on Agricultural Greenhouse Gas Research and $50 million more to the Agricultural Greenhouse Gas Research Centre based in Palmerston North. Yet despite a climate change fear of tomorrow, Parliament’s mouth doesn’t match the cheques cut. New Zealand’s funding for this international collaborative research works out at $9 million annually, the United States is chipping in around $26 million a year, while Canada is putting in just under $10 million annually. New Zealand’s international research contribution into supposedly the ‘biggest crisis facing Planet Earth,’ is equivalent to one Citizens Initiated Referendum, or one-quarter of what’s spent by Parliamentary Services each year to support MP’s. The Pastoral Greenhouse Gas Research Consortium (PGgRc), meanwhile, is working to develop technologies to reduce methane emissions. However, this technology is at least 10 to 20 years away from practical and profitable application at farm level. You don’t turn around ruminant evolution with the Governor-General’s signature on an Act.
But what about offsetting agricultural emissions by bringing soil carbon into the equation? According to Professor Jacqueline Rowarth, Director of Massey University Agriculture, this could result in farmers being worse off. Kyoto is designed to reward a change in behaviour that results in either more carbon sequestered, or less released. Carbon in soil and pasture is assumed to remain basically unchanged. Major factors driving soil carbon changes are difficult to manage – drought and increased temperature for instance, cause a loss of carbon. Putting soil carbon into the ETS could result in liabilities rather than credits, argues Rowarth. “Furthermore, it’s difficult to measure accurately and validate changes in soil carbon,” she adds. Rowarth believes countries should be rewarded for maintaining and not just increasing the carbon stocks in their forests and soils. A point not lost on Federated Farmers.
However, New Zealand farming is already highly efficient, so the law of diminishing returns may kick in sooner rather than later. Lincoln University’s life cycle assessment, taking into account energy use and CO2 emissions associated with the production and transport of food products, shows New Zealand producers are far more efficient than their UK competitors. UK farmers use twice the energy per tonne of milk solids and four times more energy per lamb, even after transporting goods to Europe. New Zealand’s efficiency gains since 1990 has 7 percent more lamb produced from 55 percent fewer sheep. Beef volumes are up 23 percent from 11 percent fewer cattle. Dairy production growth per cow has averaged 26 percent since 1990 – it’s the success story you never hear about.
New Zealand may be nudging the technical limits of production, so that any increase in efficiency will only come after scientific breakthroughs; one example being drought-tolerant forage. Exactly by how much agriculture can reduce its emissions is a matter of conjecture. The only major way for farmers to radically reduce future costs under the ETS, is mitigation through carbon-sink forestry. Landowners can generate carbon credits (NZU’s) from forests planted after 1989 on land not previously planted in trees. As Don Nicolson puts it, “the simple fact is that methane and nitrous oxide, our big issues, fall outside the CO2 stored in trees. For the carbon foresters to win financially, I, as a sheep farmer, have to lose financially in the farm inputs I need to farm.”
Yet growing trees to sequester carbon – carbon farming – is radical, “you can’t eat trees,” Nicolson wryly observes. Yet finding people receiving regular cheques for their forest carbon is difficult. Anders Crofoot, President of the New Zealand Grassland Association and Federated Farmers Wairarapa provincial president adds that carbon farming may have several unintended consequences, not the least being, New Zealand’s pastoral landscape. “New Zealanders don’t appreciate their open pasture land,” Crofoot says, “but the tourists do. They don’t come half way around the world to look at pine forests.” The penalties that lie in the ETS legislation for non-compliance, particularly with forests, is eye-opening – $8,000 for not notifying MAF that pre-1990 trees have been cleared, another $8,000 for not filing an emissions return and then being forced to surrender emissions units equal to what was lost in the forest plus an additional $30 per NZU surrendered. That adds up to a fair amount of punishment for something as simple as accounting for changes in the carbon stored in a forest. Yet the cost of compliance has many farmers with forests deciding if compliance is worth the return. That and rules, which discount many plantings and types of plantings doesn’t warm many farmers towards the ETS.
Carbon farming is not without risk either. The uncertainty created by constant legislative change, coalesced with environmental, biological and biosecurity risks, let alone technology. Nicolson warns that, “the big risk of pinning hopes on carbon farming as the latest 'white knight' for farm forestry, is that you are one innovation away from seeing your investment implode in value.”
Unlike Europe, New Zealand doesn’t have the luxury of paying farmers to preserve landscapes as ‘stewards.’ Anders Crofoot fears that in the future, the public will have an unreasonable expectation of defining what is and isn’t permissible land use, even if they aren’t actually footing the bill. “Mitigation planting will be easy enough in the immediate future as the low hanging fruit – non productive land – is planted out, but what will happen down the track?” he asks. But if more land is put into trees it begs a wider question – in the face of a growing world population and increasing demand for food, does it make sense for New Zealand, a large efficient exporter of food, to grow trees?
Despite the rolling barrage of criticism the Government has copped over the ETS, especially following the United States and Australia putting their schemes on ice, this Government is not for turning. At least not yet. But an increasingly sceptical public and international backsliding may provide the Government with an escape route.
But if agriculture becomes fully enrolled in 2015, the ‘Point of Obligation’ – where the obligation to balance emissions/credits lies – will be at the processor level. This means meat and dairy processors and fertiliser companies will be responsible for the emissions that occur on farms. In bureaucratic terms, it’s easier to deal with a handful of companies rather than some 60,000 individual farmers. That doesn’t get farmers off the hook as those costs will be passed through. Yet it also means those farmers who invest in emission reduction technologies and techniques may not have this recognised in their carbon balance. Making the farm the point of obligation would take account of the efficiency of production, of the changes in land-use undertaken to reduce exposure to a price on carbon and of the use of land-based technologies. Efficiency remains the key word.
While the Government is intent on introducing the ETS, it’s clear the details of the scheme are not carved in granite. Domestic pressure will build after 1 July 2010, when middle New Zealand and retirees especially, find the intellectual attraction of carbon neutrality in conflict with their bank balance. For Federated Farmers the issue becomes how to push the Government towards electoral pragmatism it’s shown on other issues. Given noises that agriculture’s full inclusion may be put back if our trading partners don’t follow suit, the stage may again be set to fight all ridiculous taxes.
David Broome is Federated Farmers staff*
GENERAL MANAGER STRATEGIC COMMUNICATIONS
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