The Carbon Challenge

The Carbon Challenge: New Zealand's Emissions Trading Scheme

Empty rhetoric.  That’s the verdict on the Emissions Trading Scheme (ETS ) from Geoff Bertram of the Institute of Policy Studies and Simon Terry, Executive Director of the Sustainability Council, in their searching book The Carbon Challenge: New Zealand’s Emissions Trading Scheme.

They present a picture of governmental processes captured by powerful groups pursuing their own interests at the expense of the rest of the community. Large industry and agriculture have won for themselves exemptions and delays of such an order as to make significant emissions reduction impossible in the first commitment period (CP1) of the Kyoto Protocol. At the same time the costs have been loaded disproportionately on to households and small industry. Those responsible for 30% of emissions will carry 90% of the cost. Agriculture with 49% of emissions will pay 3% of the costs.

The authors don’t accept the claim of the agricultural sector that there are few options open to them to reduce emissions. In fact they claim agriculture offers by far the biggest set of low-cost abatement opportunities. There are a number of options that are not only commercially available but profitable to undertake. They instance means for reducing nitrous oxide emissions – nitrification inhibitors, stand-off pads, new grasses, supplementary maize feed, improved soil drainage.  Selective breeding offers the possibility in due course of some reduction of methane as does the supplementary feeding of various plant matter. The processing of casual effluent from milking sheds through bio-digesters cuts both carbon dioxide and methane. Improved carbon storage in soils through pasture management appears possible as does sequestration through biochar burial. Meanwhile agriculture’s exemption from the ETS bolsters higher land prices. Nice for landowners, but subsidised by the community at large.

In the longer run the ETS exemption is against farmers’ own best interests. It is shielding them from likely winds of change in world markets. The authors instance large companies in other countries seeking low-emissions milk, as Cadbury is doing in the UK,  and point to the likelihood that New Zealand will surrender first-mover advantage to such countries if we continue with our present dogged denial.

There is self-defeat for large industry, also, in the favoured position they have gained for themselves. The ETS opens the possibility of production subsidies for high-emission industries by focusing on the intensity rather than the overall quantity of emissions. It is likely, for example, that Solid Energy would be entitled to subsidies for the manufacture of urea from South Island lignite, even though it would be the country’s biggest single industrial emitter of greenhouse gases after the Huntly power station. By this provision New Zealand could provide a welcoming environment for industries relocating from other Annex I countries, via ‘carbon leakage’ from those economies. Such production subsidies will invite tariff retaliation from other countries and could shut New Zealand exports out of key markets.

New Zealand will emerge from CP1 with a level of emissions considerably higher than the 1990 benchmark to which we are expected to have returned. The role of forestry as a carbon sink to offset the country’s emissions is the subject of close investigation in the book, which warns of the reckoning which must be faced when the trees are cut down. Potentially enormous costs could be faced by the next generation when the final accounting is made. Indeed, the costs may be so high as to raise questions about the country’s ability to meet them. This prospect may see other nations disallowing the plantation forest offsetting practice in successor arrangements after CP1. Permanent forests are a different matter, and the authors see these as a real key to balancing the country’s future carbon budgets. They lament the uncertainties and potential retrospective taxation the forestry sector faces by comparison with the government response to demands from large industrial operations.

The book’s discussion of forestry, as of many other aspects of the ETS, is complex and demanding for the general reader. But the ETS itself is highly complex and often difficult to follow. I can well understand the authors’ claim that it’s a reasonable guess that no more than a handful of MPs understood the detail of what they were voting on in 2008 and 2009. I often found myself struggling to get a proper hold on the ramifications of the various processes the book explores, even though the authors have been exemplary in the patience and thoroughness of their explanations.

It is the exhaustive care they bring to their task which makes the reader respectful of the summary statements which emerge from time to time in the course of their discussion, such as this one:

“The ETS has not been designed to promote economically efficient abatement.  It has been designed firstly to protect and promote the position of vested interests that are unwilling to shoulder asset write-downs required to recognise a price on carbon, and secondly to transfer the costs of this to future generations.”

However there are countervailing forces at work against the formidable clout wielded by agricultural and other major emitter lobbies. The authors nominate three domestic factors which could upset the current political equilibrium. One is the possibility that the lack of trust in the forestry regulatory regime may deter new planting in general and permanent afforestation in particular; this would increase pressure for reform of the ETS.  The second is that sections of the population and the economy will become more concerned about climate change and the lack of any effective action at home to reduce emissions. The third is that the recognition of the size of the carbon debt we are passing to future generations by using forest credits to cover excess emissions may become a moral issue.

They also point to international factors which will put our ETS under pressure. One is the pressure we will come under if international emissions targets move towards being set more on a per capita basis. It would be very risky for us to go forward with gross emissions far above any we could hope to defend in a global commons debate.  Another is the possibility mentioned above of changes to the rules relating to forestry in a CP2 period. A third is the risk of border taxes and other adjustments we could well face from other governments and from private-sector firms if our climate change policy is shown to be incapable of matching the climate change objectives it espouses.

In the ETS we have shied away from the present costs involved in serious action to reduce emissions. But in doing so we have laid up for ourselves the far greater costs which will be the result of doing nothing now. That is the basic warning of the book. New Zealand is part of the developed world and will not be able to escape its fair share of responsibilities as we appear set on trying to do.

67 thoughts on “The Carbon Challenge”

  1. Good review Bryan. When it’s release was announced, I went along to Unity Books in Willis Street (Weliington) a few weeks ago to get a copy. I wondered whether I would have ask for it. No, there was a large display near the door! I very much enjoyed reading ‘TCC’. Though it is a hard but rewarding read. Had to put on my better reading glasses for that small body text font, let alone the footnote font. Now I am on my second read, just to make sure, I have taken in all the points.
    Bertram and Terry make it very clear how ineffectively designed the NZETS is and that is not in any way a “Cap-and-Trade” ETS as it has no Cap! I thoroughly recommend The Carbon Challenge to anyone who wants to get to grips with the NZETS.

  2. I concur with everything said here. And it’s not as if the “administration” haven’t been told already. They just don’t want to know. A good book, but a frustrating read – because it need not be like this.

  3. OK, but the assertion that households are carrying more than their share of the costs while businesses are exempt does not stack up economically. All costs are ultimately borne by households, which are the final consumers of all goods and services. If the ETS was applied to farmers etc it would just flow through to consumers in the form of higher prices. What the current design of the ETS means is that households are paying a disproportionate share of the ETS through their taxes, and not enough through the prices they pay for goods.

    So the whole point of the ETS, which is or should be to encourage people to prefer to buy products and services that use less carbon, is being subverted, because the necessary price signals are not happening. BUT because the price signals are not there, New Zealand’s exports are a little cheaper than they would be with a more fairly applied ETS, so the economy is healthier. There are no easy choices.

  4. Possum, the ETS applied to farmers will hopefully mean not just a flow through of higher prices to consumers but also more serious efforts to reduce emissions, the costs of which may be considerably less than the interested parties claim. If major industries feel under little pressure to reduce emissions doesn’t that make the whole scheme rather pointless?

  5. This (Possum)

    So the whole point of the ETS, which is or should be to encourage people to prefer to buy products and services that use less carbon, is being subverted, because the necessary price signals are not happening.

    is essentially the same as (Bryan)

    the ETS applied to farmers will hopefully mean not just a flow through of higher prices to consumers but also more serious efforts to reduce emissions,

  6. There is so many things wrong with this article I am not quite sure where to start. I’ll begin with the comments above.

    Placing an emissions charge on New Zealand milk or meat production will not change the world price for either, so will therefore not change the price consumers pay, as Bryan and Possum suggest.

    So adding a cost for emissions will create an incentive to reduce emissions, sure, but it will not create an incentive for New Zealanders to consume less. The cost will not be passed through so if farmers can not reduce emissions they will see a direct reduction in profit from the emissions charge.

  7. Your claim that allocations to firms such as Solid Energy’s proposed urea plant will lead to carbon leakage from Annex 1 countries is also false.

    If Annex 1 firms relocate here their emissions will still be captured by Kyoto so it is not leakage. The Kyoto cap is unchanged.

    Secondly this will result in a reduction in global emissions for the following reasons. A firm will only be more profitable in New Zealand as opposed to a non-annex 1 country if its emissions per unit of output are lower than the 90% of benchmark set for that activity, ceteris paribus.

    If the firm is the only operator of that activity in Australasia then by definition it will face 10% of the emissions charge. So we will only attract operators who can operate more efficiently than existing operators.

    So we will only attract efficient producers. Non-efficient producers will not have an incentive to relocate here unless every other nation has an ETS (or is undesirable for other reasons).

    An operator that relocates to New Zealand will have a marginal cost of emissions that they would not have had if they operated in another nation, creating more reductions. So by creating an incentive to relocate to NZ, the ETS reduces Kyoto leakage, creates an incentive for firms to be efficient, and ensures a marginal cost of emissions.

    I consider this an emissions efficient outcome that should reduce global emissions and increase production captured by Kyoto. However the equity concerns and the cost to NZ of creating this outcome would require a different investigation. Every aspect of the ETS has both efficiency and equity outcomes and it is not often that an aspect is positive on both measures.

  8. R2D2, my reference to higher prices for consumers was loosely expressed and not my point – what I intended was to draw attention to the function of pressure through an ETS to reduce emissions. Bertram and Terry maintain that in fact the agricultural section can reduce emissions, even profitably.

  9. R2D2, I’m a step behind with my responses. You talk about “your claim” in relation to carbon leakage from Annex 1 countries. It isn’t my claim. This post is a book review. By all means disagree with Bertram and Terry, but I’m only reporting what the book has to say, not setting up as an expert.

  10. AndrewH –
    this is one example.

    I expect there will be others as the effect of the ETS flows through the supply chain

    Auckland-based, Arandee Industries, one of only three players in the global aerospace aerosol business, has blamed the emissions trading scheme for its decision to relocate its headquarters to Singapore. The company believes it could not survive the ETS.

  11. I think you mean that is the only example, Fred. And I would want a lot more detail on the background to the company’s decision before taking that claim at face value. Link please.

  12. Sounds like Arandee has other more beleivable reasons for moving its HQ over to Singapore.

    “We will be headquartered in Singapore because we already have manufacturing in Malaysia, the United States and Thailand as well as in New Zealand,”

  13. I can’t see any reason to argue that an ETS would make NZ industry less competitive than its overseas counterparts without an ETS.

    An ETS effectively put up the price of everything, unless you are in the forestry sector.

    Surely this is obvious.

  14. Leakage does not have to be whole companies and factories shutting down and moving offshore. It is much more complicated than that and therefore difficult to give examples of.

    If the cost of producing a good rises for a producer it is the equivalent of a fall in the price received for that good. If their elasticity of supply is not perfectly inelastic they will respond with a drop in production while prices remain the same. If the good is traded non-NZ competitors will not feel the increase in costs and increase production to fill the supply gap. If the good is not traded the local price will rise and the price signal is felt.

    So the ETS will create marginal leakage in all cases where a good is traded and it has caused the cost of production to increase relative to competitors costs (whether we are importers or exporters of that good) (and where elasticity of supply is not perfectly inelastic). To pretend lack of obvious examples of leakage is proof leakage is a false concept is economically ignorant.

  15. it is important not to put too much confidence in the apparent precision of supply and demand graphs. Supply and demand analysis is a useful, precisely formulated conceptual tool that clever people have devised to help us gain an abstract understanding of a complex world. It does not – nor should it be expected to – give us in addition an accurate and complete description of any particular real world market.

    Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T: Microeconomics in Context 2d ed. Sharpe 2009

  16. Has it ever occurred to some commentators here that maybe the fixation by NZ farmers on meat and dairy is perhaps not the most efficient way of producing protein for world consumption (nor the most helpful). If humanity as a collective grouping of some 7.8 Billion (at the very least) to 11.5 Billion (if fertility rates in Africa and Asia do not reduce) by 2050 is to survive, and we are to avoid runaway Global Warming, then we cannot continue with Business as Usual. The price for Dairy and Meat needs to reflect the total cost of production, and that includes all those currently externalised costs including GGE, deletion of water resources, degradation of Biodiversity, and pollution of waterways. Maybe when all of these previously unaccounted costs are taken into account, people will see that that, which previously was seen as a sustainable agriculture, is now unsustainable, and the luxury that it really is. 5/6ths of the world population cannot afford the food that NZ produces and that proportion is growing smaller every year.
    Disclaimer: I farm north of Auckland.

  17. Elasticity of demand, leakage, economically naive, blah blah.

    Sorry guys, this is BS.

    If my product is more expensive because of an artificial structure like the ETS, then I am at a disadvantage as an exporter against countries that don’t have those structures.

    What more is there to say?

  18. Macro-
    If you add in all those extra costs to your product and make it uneconomic for overseas markets, won’t they just shift their source somewhere else?

    (e.g South America)

  19. Le Chat Noir: Interesting that markets are just too complicated for economic models yet you no doubt have full confidence in the ability of climate models to predict future temperatures….. need I point out the double think? People do not trust what they do not understand. Perhaps they also choose willfully to not understand what they do not like.

    In this case it is not a complicated relationship and your disregard for the entire economic discipline is alarming. All I am saying is that producers generally react when the price they receive for a good changes. When expectations for future dairy payouts were high we had increased conversion of land to dairy, ergo increased production of dairy in NZ. This policy will reduce payouts in NZ relative to the rest of the world, hence reduce NZ production relative to the rest of the world, and result in leakage. This logic can be applied to any good with normal elasticity of supply produced in NZ that uses energy.

    (perfectly inelastic supply curve simply means regardless of the price, supply remains the same, ie the supply of land in NZ will stay the same regardless of the ETS and cannot be changed, but the supply of outputs from this land is not perfectly inelastic and will change http://en.wikipedia.org/wiki/Supply_and_demand#Vertical_supply_curve_.28perfectly_inelastic_supply.29 )

  20. Macro: You may be correct, you may be incorrect. But for the global market to decide this you need a global price on ag emissions. Putting a price on NZs emissions is about equity of the Kyoto bill and seeking NZs lowest cost abatement, and this is all that Terry-Bertram discuss. Efficient global food production cannot be achieved through Kyoto or the NZ ETS but needs global cooperative action on agricultural mitigation (Grosers research alliance perhaps?).

  21. Economic models – based on assumptions about human behaviour that have no or very limited demonstrated predictive ability.

    Climate models – based on laws of physics that have demonstrated predictive ability in a wide range of situations (except at relativistic speeds or in very high gavitational fields).

    Hmm I wonder what the difference is?

  22. Climate models – based on laws of physics that have demonstrated predictive ability

    The climate models have not demonstrated predictive ability.
    The laws of physics have demonstrated predictive ability

    I presume that is what you meant?

  23. Doug: I am not saying either is stronger than the other. I just laugh when people wont trust economic models due to them being complicated (when in fact they are simple) but will trust climate models they have no hope of understanding. That is not to say both are not strong. It is just that I laugh at the lack of consistant logic that is displayed.

  24. Fred yes we do know in 10 years time the global climate will on average be warmer (not taking into account comet strike or nuclear war).

    Climate models have demonstrated skill at a global level since the 1980s. They show a warming world, and yes it warms.

    R2D2 I have worked with the owner of the only operating GE model of the NZ economy. I did not find it simple. Perhaps we have different definitions of simple?

  25. Doug: “I have worked with the owner of the only operating GE model of the NZ economy. I did not find it simple.”

    So all economic thought is to be disregarded? All I said is that for a normal good a fall in price will result in a fall in domestic production.

    (PS: Are climate models any more simple? It would never be suggested that inorder to keep the argument simple the IPCC shouldn’t use General Circulation Models.

    “There is no easy way out of confronting the cost to society of reducing radiative forcing. Certainly it would never be suggested that, because of the necessity of “keeping the argument simple,” basic features of atmospheric chemistry should be passed over. It is similarly untenable to argue that the essence of economic policy be neglected. ” Eckaus 1992

  26. My point is that I place more weight on GCMs to be robust than I do economic models because they have at their base simple rules that have been demonstrated to have predictive ability.

    Yes GCMs are complex and they have data specification issues. To address these limitations assumptions are made. However, research has and will continue to address these limitations and the models will perform better.

    In contrast the underlying assumptions in economic models continue to be used despite their obvious limitations and poor record of performance.

    A couple of caveats on that last comment there have been developments econometrics which have been significant. Also the field of behavioural economics is at least trying to come to grips with the complexity of human decision making behaviour.

    Economic models/analysis do have some use, but it is often more of the “this is how it works in theory what in the real world can go wrong.”


  27. Fred yes we do know in 10 years time the global climate will on average be warmer (not taking into account comet strike or nuclear war).

    We do not KNOW that. We are predicting that, based on our assumptions, which may be wrong.

  28. If they are wrong the only thing we lose in the long term is our reliance on unsustainable fossil fuels and unsustainable land use practices.

    Oh, and our prosperity, wealth, and a few hundred thousand lives or more.

    But then, when did an environmentalist care about human suffering?

  29. Bryan,
    In the UK, it is estimated that the average power bill in 2020 will be 5000 pounds a year (around $11,000) – source Ofgem, the UK energy watchdog.

    We also know that the UK has a looming energy crisis that will almost guarantee a major energy shortfall in the next 10 years. Possibly even within 5, that will result in frequent brown-outs in the energy supply.

    So what are the Brits doing about it?

    Chris Huhne, energy secretary, has committed to a massive expansion of wind energy, without any backup generation planned in the form of gas or nuclear.

    It is a known fact that wind cannot provide a primary source of energy without backup from conventional sources.

    Pensioners will freeze to death in energy-less houses in the UK in the next decade. This is almost guaranteed.

    And most of this is down to a myopic obsession with global warming, coupled with a complete detachment from reality, and a deeply hypocritical leadership (Huhne owns 7 houses).

    This, in my view, will be a major humanitarian crisis that we will witness, stood back and endorsed.

  30. Fred, there’ll be no further response from me. I’m not going to argue with you about whether I care about humanity. You’re once again hijacking a thread for your own purposes.

  31. OK Bryan,

    I’ll leave you to remain in denial, as you did with the Amazongate issue

    It’s your conscience that you will have to live with over the next few years.

    Regards

  32. Fred says

    “Oh, and our prosperity, wealth, and a few hundred thousand lives or more.

    But then, when did an environmentalist care about human suffering?”

    In my view the only reason someone is an environmentalist is because you care about human suffering. to parpharase the words of a dead climate denier ‘the earth (life) can look after itself it is humanity’s future that is at risk’.

    Also to use your own words Fred. You only BELIEVE that our future prosperity is at risk by doing something about climate change. The evidence supporting that conjecture is questionable. What makes you right and others like Stern wrong?

  33. Fred sounds like all the earlier trolls. He should leave this forum and join the ranters on Weatherzone, as splendid a collection of cranks as one can find anywhere.

  34. That Andy Scrase (Fred?) sure is persistent alright, I was just waiting for him to mention that his mother was raised in Nazi Germany, but I suspect having already made that mistake he wouldn’t do so again. But you never know.

  35. The information I have provided you regarding Britain’s dire energy crisis and the UK governments response to it is easily verified.

    If you wish to use strawman arguments and ad hominems to argue against these, then you are correct, there is no point in me engaging in further.

    Best Regards

  36. Can we take the discussion back the equity and efficiency of the New Zealand Emissions Trading Scheme?

    Discussions about the merits of emissions policy in general are not needed.

    Comments about the usefulness of economic thought altogether are also nonconstructive.

  37. "Years ago, I noticed one thing about economics, and that is that economists didn’t get anything right. I wanted to find out the reason. They would say their models are not perfect. But data show that you do much worse using their models than you would without them. It’s a bullshit science."

    Nassim Nicholas Taleb

  38. To come back to the externalised costs of NZ’s Mono-Agriculture. NZ farmers are proud to produce a product that competes price wise very well. What that price does not include, are all the externalised costs listed before, and they are real costs – met not by the producer, but by the general public, the environment, biodiversity, and future generations. The ETS is (or was) (or will be?) an attempt to capture some of those costs. As Bryan, and the authors point out, is that by internalising that cost to some extent, farmers will look at ways to reduce the cost. They do this already with those costs that they must already take into account. A cost of GGE will give them the incentive to look to ways to reduce them as much as possible.

  39. Le Chat Noir: Do you know how similar to a climate sceptic describing the predictions of climate modellers you sound like?

    Macro: If the whole world priced greenhouse gases there would be a fall in production of beef and dairy, yes. But the relative change in New Zealand’s production of beef and dairy would depend on the relative emissions profile of New Zealand production to the rest of the world. If our emissions profile is low it is possible that internalising the cost of GHGs would increase profitability and production (if all nations internalised).

    If only NZ internalises the cost then NZ production would fall. But as the above shows this may not be an economically or emissions efficient outcome.

    See section 14.5.4 of the Garnaut Review for a detailed explanation.
    http://www.garnautreview.org.au/pdf/Garnaut_Chapter14.pdf

  40. Perhaps by imposing a cost of carbon now of farming it will have two effects:

    1 Incentivise farmers to reduce emissions through innovation (increase productive efficiency) Increased effiicency in non ETS costs may result in now significant increase in overall production costs.

    2 Reduce incentives to over-invest in a sector that will sooner or later (assuming no effect from 1 above) need to retrench. Thus avoiding wasted investment.

  41. P.S. For a sector that keeps banging on about how innovative they are they appear to have very little faith in their own claims.

    It seems to me if I was Fonterra I would be jumping up and down to has a charge on ruminant methane. It is probably the only way to make sure that dairy farmers as a whole move in the right direction (in may expeerience they are not a monothetic group). See it as a form of risk management.

  42. Corrections
    Sorry I sent the last two comments off without proofing.
    Comment 1
    1st sentence “of” is “on”

    In point 1 “now” is “no”

    Second comment
    “has” is “have” and “expeerience”, well you can guess.

    I am not sure whether I am slightly dyslexic or just careless.

    cheers

    “may” is “my”

  43. The economic analysis done during the development of the ETS showed that without allocations the cost of a charge on methane and nitrous oxide would cost the average dairy farmer $30,000 per year. Imposing this charge would result in an 8% reduction in production.

    Under the National proposal, with allocations, the cost falls to $3,000 per farm. This is smaller than the cost to dairy farmers of already being in the scheme for half thier CO2 emissions.

    Such a charge could still create an incentive to innovate if emissions were measured on-farm and allocations were decoupled so that the marginal price on emissions remained $25, rather than $2.50.

    However neither Government (or the Greens?) have supported on-farm measurment of emissions. Both major parties claim it is too hard to verify the factors that drive emissions on-farm so a processor levy is the only option for including agricultural methane and nitrous oxide in the scheme.

    So including emissions in the scheme under this system would simply be a levy on industry and not create an incentive to reduce emissions.

    Saying that, I think industry are already taking efforts to invest in research to reduce emissions (PGgRc).

  44. "Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you but it never does to anyone else."

    Lyndon Baines Johnson

  45. So my comment plainly stating the history of ag emissions policy in the ETS gets voted to be hidden. Why was that? Can any of the people who down thumbed it please explain?

    Le Chat Noir: Are you saying you think the study of economics has no value? All you do is post silly quotes about how economics is so stupid etc but you never explain what you mean by these.

  46. R2
    Firstly I didn’t vote it down – it was voted down before I read it. But read it again – slowly.

    “Such a charge could still create an incentive to innovate if emissions were measured on-farm and allocations were decoupled so that the marginal price on emissions remained $25, rather than $2.50.”
    Is this a paragraph? Who is going to pay for the on farm measurements?

    “The economic analysis done during the development of the ETS showed that without allocations the cost of a charge on methane and nitrous oxide would cost the average dairy farmer $30,000 per year. Imposing this charge would result in an 8% reduction in production.”
    Accepting these facts – that would also imply an initial one off reduction in emissions of around 8% in methane and nitrous oxide, but other reductions would eventuate as farmers were encouraged to reduce industry wide emissions.

    “Under the National proposal, with allocations, the cost falls to $3,000 per farm. This is smaller than the cost to dairy farmers of already being in the scheme for half thier CO2 emissions.”
    What are you saying here?

    A levy on the industry (owned by the producers as is Fontera) would be an incentive for them – the producers – to reduce their emissions. Any levy on the industry is a direct reduction of their (the farmers) income. The old Dairy Board, for whom I first started work 40+ years ago in the research branch, had herd testers across the country, and every cow’s production and bull in NZ on tape. The farmers shouldered the cost of this research and development and made the NZ dairy herd what it is today. It’s not beyond their capacity to shoulder this cost either. It’s not something that should be farmed out to the general public.

  47. OK, thanks for the reply. I guess I was trying to capture muliple points in a short post. A little further detail below.

    point 1:

    Farmers already operate the programme OVERSEER, so there is no additional cost from measuring. There will be an additional cost of verification of the data inputed by farmers. This cost of verification (audit cost) would need to be picked up by the Crown in the same way tax audits are not paid for by the person being audited (but tax returns are paid for by the business sending them). Audits would be expensive at first but reduce overtime as compliance issues subside.

    point 2:

    Yes this would result in an 8% reduction in NZs dairy emissions. This is the kill the cows approach. Taxing an industry to decline is not in my opinion a good way to reduce emissions (its a tax rather than an emissions charge when it is applied at the processor level). Also there are the same leakage concerns that result in other trade-exposed sectors.

    point 3:

    Dairy farmers, like everyone, are already in the ETS for half of their CO2 emissions. The cost of being in the ETS for 10% of ag emissions in 2015 (the current proposal) will be less than the cost of 50% of CO2 emissions. So I am saying the cost is not prohibitive to farmers but an incentive can be created.

    If allocations are given to farmers based on Kg MS the marginal cost of emissions will still be $25 per tonne, ie for every tonne of emissions mitigated the farmer saves $25, even though he/she only faces a cost of emissions above a 90% benchmark.

    point 4:

    Levying the industry. First, Fonterra is not the entire dairy industry. This would allow about 10% of dairy farmers who do not supply Fonterra to free ride on Fonterra’s research spending.

    Secondly, the incentive to research is already there and occuring. Government global research alliance and industry government partnership in PGgRc.

    Thirdly: So if the research shows doing x reduces emissions how do you create the incentive for individual farmers to change management practices without an ETS with on-farm emissions measurement?

  48. Hmmm. Thanks Fred.

    I’m a bit worried thats so simplistic that it only serves to mislead farmers!

    I entered my dairy cows but I was not asked for live weight, production per cow, genetic merit, fertiliser use, time spent off pasture, feed mix etc etc etc. All of which will swing emissions per cow by plus or minus ~35 per cent lol (test it in OVERSEER).

    Also, the claim that liabilities will be 50 per cent by 2050 is off the mark. Allocations per unit of production will decrease at 1.3% per year. But the emissions per unit of production will also decrease, so liabilities should not change a great deal from current levels (John Key has claimed that the cost per farm will still be $3,000 in 2030). However the need for allocations will be reviewed every five years. If farmers are still recieving an allocation in 2050 it effectivly means our trade competitors must not have introduced agriculture to a price on carbon yet. That in itself would be cause for concern (so hopefully allocations will be 0% in 2050).

  49. R2D2 –

    Is there information on carbonfarming.org.nz that you specifically disagree with?
    If so, it is probably best to discuss with them directly. After all, it is in all our interests to get as much information about the ETS in front of the public as possible. This is especially true for farmers who face additional compliance costs, and as with any regulatory mechanism, it is up to the party being regulated to keep up to date with the regulations, or face fines. (as in any area of taxation)

    I think it is worth pointing out the following:

    Carbon Farming is a not-for-profit charitable trust.

    From http://carbonfarming.org.nz/do-more.html

    There are no off the shelf methods, additives etc to reduce methane from ruminant animals. It has been said that the only silver bullet for methane emission reductions is the silver bullet!

    Pasture and soil improvement
    Outside the current rules of the ETS, scientists are investigating farm management techniques which will permanently increase the carbon content in the soil. If these are adopted it will enable grassland farmers in NZ to build up the level and depth of carbon in the soil and become “carbon positive”.

    Pasture is completely outside the ETS (and Kyoto as far as I know)

    This is a major point of contention for many farmers, who are working hard to produce efficient pasture but receive no credit via the ETS.

Leave a Reply