The European Union is pondering the possible introduction of a pricing scheme for agricultural emissions as a way to accelerate the reduction in agricultural emissions on the way to net zero emissions by 2050. In the wake of criticism from the European Court of Auditors in its 2021 report on the climate performance of the CAP, and in light of the Court’s recommendation that the Commission should “assess the potential to apply the polluter-pays principle to emissions from agricultural activities, and reward farmers for long-term carbon removals”, the Commission has commissioned an exploratory study on pricing agricultural emissions and rewarding climate action in the land sector. A public consultation on several options designed by the consultancy team has just concluded, and the final report should be published before the end of this year.
Furthermore, the European Climate Law requires the Commission to propose a 2040 climate target in 2024. A first public consultation to gather views on what this target should be ended in June 2023. The consultation specifically sought views on the role of carbon pricing and non-carbon pricing instruments for agricultural emissions and land-based removals.
At Member State level, the current Danish government which took office in December 2022 included in its programme for government a commitment to propose a pricing system for agricultural emissions when an Expert Group on Green Tax Reform specifically charged with examining different pricing models publishes its recommendations later this year. Isermeyer, Heidecke, and Osterburg (2021) examine the feasibility of including the agricultural sector into a carbon pricing mechanism in Germany but this is a research paper rather than an official policy proposal.
In light of this increased interest in using pricing to accelerate agricultural emissions reduction in Europe, this post examines the experience of New Zealand, the only country so far to have proposed the inclusion of agricultural emissions in an emissions trading scheme or otherwise to set a price on agricultural emissions. Other countries, such as the Australian Carbon Farming Initiative, California’s Compliance Offset Program and Low Carbon Fuel Standard, and Alberta’s offset protocols, allow offsets generated by the abatement of agricultural emissions to count against emissions in their emissions reduction compliance markets but these are effectively subsidy programmes rather than proper pricing schemes.
New Zealand developed its approach to pricing agricultural emissions in close partnership with primary sector organisations and has largely adopted the pricing design proposed by the agrifood sector. It first proposed to include agricultural emissions in the NZ Emissions Trading Scheme (NZETS) in 2008 but it is now looking as if it will be at least 2030 before a pricing system is introduced and some commentators assess that it will have little impact in any case. The New Zealand experience highlights the difficulties of getting agreement on the unilateral introduction of emissions pricing in a largely export-dependent sector.
Origins of the New Zealand policy to price agricultural emissions
New Zealand’s emissions mitigation effort traces back to the late 1990s when it signed the Kyoto Protocol. Under the Kyoto Protocol, the New Zealand government committed to maintaining its GHG emissions at 1990 levels. The Climate Change Response Act 2002 is the primary legislation for climate policies with multiple amendments. It created the NZ Emissions Trading Scheme (NZETS) as a primary policy instrument to meet New Zealand’s international commitment under the Kyoto Protocol. NZETS was officially launched in 2008 and is among the world’s earliest market-based emission trading systems operated at a national level.
The NZETS is unique because it also includes forestry as well as, in principle, the agricultural sector (Climate Change (Emissions Trading) Amendment Act 2008). Agricultural emissions were covered because they make up the largest share of total emissions (48% in 2007 and 49% in 2021). The agricultural ETS had as its point of obligation the processor level not the individual farm level (although farmers could enter the ETS for forestry, and the Act allowed for the point of obligation for both livestock and fertiliser emissions to move to the farmer level in future by regulation). Voluntary reporting of biological emissions was planned to start in 2011, with mandatory reporting the following year and the obligation to purchase ETS allowances (New Zealand Units or NZUs) beginning in 2013.
To mitigate issues around the loss of competitiveness and carbon leakage, the government planned to allocate 90% of free NZUs to processors, based on yearly average output within the industry, phasing out these free allowances from 2016 at the annual rate of 1.3% (these parameters were later amended to 95% initial free allocation and a phasing out rate of 1.0% per cent per annum). The date of obligation was subsequently deferred to 2015 in 2009 and in 2012 was deferred indefinitely. Kerr and Sweet (2008) describe how the New Zealand government initially planned to integrate agricultural emissions into the NZETS, what some of the critical issues have been, and some of the outstanding challenges. The issues they discuss are all very relevant to any proposal to create an agriculture ETS in the EU.
Greater ambition under the Labour/Green government
Interest in pushing forward on the commitment to put a price on agricultural emissions revived following the election of the Labour/Green Government at the 2017 election with a commitment to more ambitious climate policies. In November 2019, the Climate Change Response (Zero Carbon) Amendment Act 2019 (ZCA) was passed, setting a new GHG target for 2050, providing for five-year emissions budgets and emissions reduction plans and establishing an independent advisory Climate Change Commission (CCC). Under the 2050 target, biogenic methane emissions must be reduced at least 10% below 2017 levels by 2030 and 24–47% below 2017 levels by and beyond 2050, and all other GHGs must reach net zero by and beyond 2050.
While the 2019 ZCA set legal split-gas reduction targets for agricultural emissions, it was silent on the means to achieve these targets. Prior to the adoption of the ZCA the government established an Interim Climate Change Commission (ICCC) in 2018 with a specific mandate to recommend policies to reduce agricultural emissions. The Commission published its report in April 2019 and recommended a farm level levy/rebate scheme for livestock emissions rather than including farms within the NZETS, while pricing emissions at the processor level for fertilisers. It noted that a levy/rebate scheme was sufficiently flexible that if the government proposed separate targets for different gases, this could be reflected in different relative prices. It proposed returning the revenue from the levy to the sector for further mitigation programmes using a dedicated Agricultural Emissions Fund.
A significant initiative occurred in July 2019 when representatives of the NZ primary sector climate partnership He Waka Eke Noa published its climate change commitment. The sector committed to working with the government to design a practical and cost-effective pricing system for reducing emissions at farm level by 2025. The document was more a statement of intent rather than a detailed policy design but the sector offered to work with the government to develop an agreed methodology and systems for calculating net on-farm emissions.
The government responded with a consultation document in July 2019 that built on the ideas outlined in the ICCC report. It sought views on introducing a levy/rebate system for livestock emissions at farm level while pricing fertilizer emissions at processor level from 2025. It proposed that the government should report by 2022 on the further details of farm-level pricing and regulatory changes needed to implement it. If that report showed that farm-level pricing by 2025 is infeasible, the consultation document proposed as a fall-back position that all emissions would be priced at processor level as part of the NZETS from 2025.
The New Zealand Government proposal to price agricultural emissions
In June 2020, the Climate Change Response (Emissions Trading Reform) Amendment Act 2020 (ETRA) was passed. The ETRA provided for biogenic emissions from agriculture to face an emissions price no later than 1 January 2025 under either the NZETS or an alternative system for farm-level emissions. While inclusion in the NZETS remained the default option, the government was required to prepare a report by December 2022 outlining what this alternative pricing system should look like.
The ETRA incorporated primary sector climate change commitments to prepare farmers for emissions pricing. Specific time-bound targets for the proportion of farms reporting on emissions and having farm plans to manage emissions by particular dates according to methods and definitions accepted by the He Waka Eke Noa primary sector climate action partnership were included in the Act (Schedule 5). The CCC was tasked with conducting a review of progress towards meeting these targets by 30 June 2022 and to assess the sector’s readiness to assume NZETS obligations for animal emissions. If sufficient progress had not been achieved, unit obligations could begin for emissions from both fertilisers and animals at the processor level by 2025.
In line with the Act, the CCC published its advice on the readiness of the agricultural sector to implement a pricing system in 2025 in June 2022. The He Waka Eke Noa Primary Sector Climate Action Partnership made its recommendations for pricing agricultural emissions at the same time. The government published a consultation document in October 2022 which stated its intention to design its system on a slightly modified version of the approach proposed by the Partnership and seeking the views of the public. The document recognized there could be advantages in pricing methane emissions through a tradable quota system but ruled out proceeding with this option at this time. Following the consultation (which took place over 6 weeks and received almost 23,000 submissions), the government published its report setting out its preferred system to put a price on emissions from agricultural activities as an alternative to participating in the NZETS in December 2022.
The government’s December 2022 proposal agreed with both the CCC and the primary sector partnership that a farm-level emissions pricing system is the best approach to incentivise farmers and growers to reduce agricultural emissions. It proposed to set separate levy prices for nitrous oxide and biogenic methane (ruling out a processor-based point of obligation for fertilizer emissions). The October 2022 consultation document had proposed that nitrous oxide prices would be set annually and linked to the NZU price, with a proportional discount, and that biogenic methane levy prices would be reviewed periodically (annually or three yearly) based on progress against emissions targets and advice from the Commission. The final government proposal explicitly committed to set relatively low, unique prices initially for both biogenic methane and nitrous oxide for five years based on set criteria, with the proviso that the price of nitrous oxide would be capped for the first five years at a level that the sector would be no worse off than if the sector had entered the NZ ETS. Fixing prices in advance has the advantage of giving farmers more certainty.
To compensate for the lower flat-rate levy, the government proposed to introduce incentive payments to make technology uptake more effective. A sequestration strategy would be developed to determine the details of how sequestration is accounted for and rewarded within the pricing system, with the intention that recognition of sequestration should be included in the NZETS as soon as possible. The legislation would specify that funding sequestration is a purpose of the levy. Any surplus funding raised by the levy would be recycled to fund emissions reductions in the sector. Only farms above a certain size threshold (equivalent to ~200 tonnes CO2e per year) would be covered by the levy scheme. This would cover approximately 23,000 farmers and around 96% of agricultural sector emissions. The government proposed to develop an interim processor-level levy system as a transitional step, in the event a farm-level pricing system would not be possible in 2025.
Prospects for implementing the government proposal
Although final decisions were to be made in early 2023, no further information has so far been released, including the rates of levy and the dates for implementation. Legislation will also be required to support the system. Much of the debate around emissions policy in New Zealand in 2023 has been dominated by the publication of a government consultation paper on the role of forestry offsets in the NZETS, driven by concerns that the recent rise in the price of NZETS allowances was driving investments into forestry rather than encouraging abatement at source.
Furthermore, New Zealand will hold a general election on 14 October this year. Current polling projections show that the opposition National Party with the support of the liberal-conservative party ACT is likely to defeat the ruling Labour/Green coalition. Both the National and ACT parties have stated they will further delay (National) or significantly amend (ACT) the proposed legislation to price agricultural emissions.
National is committed to the target of achieving net zero emissions economy-wide by 2050 which requires reducing agricultural emissions. It supports the long-term objective of pricing agricultural emissions at farm level but insists that pricing should not be introduced before farmers have the tools to make these reductions. It therefore proposes that pricing emissions should be delayed to 2030 to give further time for the development of abatement technologies. It insists that prices should be set at the lowest level needed to achieve emissions reduction targets while avoiding any leakage. National would also limit conversions to carbon farming of high-quality agricultural land.
ACT, which has had a tradition of climate scepticism, would go further than National and proposes to scrap the Zero Climate Act. Its position is that emissions in New Zealand should be capped in line with the efforts made by its trading partners and that greater emphasis should be put on climate adaptation. Specifically on agricultural emissions, it claims to have opposed He Waka Eke Noa from day one. It does not reject the notion of pricing agricultural emissions but would tie any emissions price to that of New Zealand’s five main trading partners to ensure there is a level playing field for growers and producers competing overseas.
In the background, rural protests continue with a farming protest group Groundswell New Zealand, initially formed to oppose water regulations, calling for the abandonment of agricultural emissions pricing. It seems that uncertainty over the future of New Zealand’s proposal to price agricultural emissions will continue until a government is formed after the October 2023 election.
Several lessons can be learned from this review of New Zealand’s experience in trying to introduce a system of pricing agricultural emissions. New Zealand has taken the lead on this simply because a net zero commitment is meaningless until agricultural emissions are tackled in a country where they make up almost half of total emissions. It was the first country to commit in law to introduce a pricing system for agricultural emissions.
The initial New Zealand approach was to integrate agricultural emissions into its trading scheme with processors as the point of obligation. However, driven mainly by farmers’ own wishes, the government eventually proposed a levy scheme which would be implemented with the individual farm as the point of obligation. This was subject to the proviso that farm-level carbon accounting could be implemented but there is increasing acceptance that this is feasible.
The preference for a levy rather a trading scheme approach can be seen as a preference for stability. A trading scheme sets a cap on emissions, but the price of allowances is volatile. Farmers dislike this uncertainty, and their ability to manage a trading system is also questionable. Instead, the government has opted for a levy system. The drawback of a levy system is that it does not guarantee that a particular emissions target will be achieved. Over time, it is possible to adjust the levy amount to target a specific emissions reduction. The criticism of the New Zealand government’s approach is that the levy amounts it has proposed are too low to achieve the amount of abatement needed to meet the country’s climate targets.
A further feature of the New Zealand approach has been its acceptance of the argument that biogenic methane’s impact on the global temperature is not correctly reflected in (and is lower than) the weightings implied by the standard metric of the Global Warming Potential over 100 years. It has therefore opted for a split-gas approach in which biogenic methane will be penalised less than nitrous oxide relative to GWP100 weightings.
New Zealand has developed its approach to pricing agricultural emissions in close partnership with primary sector organisations and has largely adopted the pricing design proposed by the agrifood sector. While this is recommended and supported by reflections on managing a just transition, the trade-off is a relatively low level of ambition which looks like it will be further reduced following the general election later this year.
New Zealand first proposed to include agricultural emissions in the NZETS in 2008 but it now looks as if it will be at least 2030 before a pricing system is introduced, highlighting the difficulties of getting agreement on the unilateral introduction of emissions pricing in a largely export-dependent sector. The major factor in the debate has not been any apparent difficulties around measuring or reporting emissions even at farm level. Instead, it has been the argument that pricing emissions in New Zealand will result in production moving to other countries with potentially less emissions-efficient production, which could lead to higher rather than lower global emissions. This is also the argument heard most frequently in the climate debate around agricultural emissions in Europe.
This post was written by Alan Matthews.
Photo credit: Image from raxpixel and used under a CC0 1.0 Universal (CC0 1.0) Public Domain Dedication.