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Scoping Report for an Environmental Assessment of the New Zealand Emissions Trading Scheme and Closely Related Measures

Executive Summary

1 Introduction

2 Methodology and Policy Scenarios

3 Changes and Environmental Effects by Sector

4 Effects by Environmental Resource

5 Possible Response Mechanisms

6 Further Investigation of Environmental Effects

7 Summary of Proposed Response Measures

8 References

Appendix 1: Excerpt from Project Brief: Scoping Report for an Environmental Assessment of the NZ ETS

Appendix 2: Policy Scenarios

Appendix 3: Acknowledgements

Appendix 4: Significance of Environmental Effects by Environmental Resource

3 Changes and Environmental Effects by Sector continued

3.3 Transport

3.3.1 Behavioural changes

Introduction

Transport is often segmented into land (road and rail), sea and air modes but for the purpose of this exercise it is better categorised by functional activity (eg, urban access and mobility, logistics and location, long-distance passenger travel). The responsiveness of different functional activities to fuel price changes varies widely, depending on the nature of demand and the availability of alternatives.

Some examples may help illustrate this point. Demand for road freight from profitable and expanding economic activities located in an area where no alternative freight services exist is likely to show little response to small price changes. Commuter journeys are more likely to be influenced by price movements where commuters have access to a high quality public transport system. Demand for domestic air travel may be much more price sensitive for personal travel than for business travel.⁴⁵

The factors affecting transport demand, in particular the effects of price on urban travel demand, have received much attention internationally, but relatively little specific attention in New Zealand. It is commonly thought that because of our patterns of work and daily life, road transport use is relatively unaffected by price (ie, the demand for fuel is “inelastic”).⁴⁶

A recent review of global literature in relation to the demand response to fuel price changes (and a range of other factors) concluded as follows:

Although every situation is different, on average the long run effects of a 10% change in fuel price (for example) will be a change in traffic volume of about 3%, and of fuel consumption of about 7%.⁴⁷

Recent New Zealand research commissioned by Land Transport New Zealand on petrol price elasticities, although not directly comparable, suggests a somewhat similar value for traffic volume and a somewhat lower value for fuel consumption should be used for domestic land transport planning purposes.⁴⁸ This study also suggests that the price effects on fuel use and traffic volume, while modest in absolute terms, are quite rapid.

Price effects of the ETS

International factors are expected to be the dominant influence on both domestic prices and supply security for petrol and diesel in the short to medium term. The possibility of a global peak in conventional oil supply (sometimes known as “peak oil”) in the near future is regularly discussed in the sectoral media.⁴⁹ This study does not take a view on the imminence or otherwise of “peak oil”.⁵⁰ Clearly, were a peak to occur in the study period, there would be significant upward pressure on the price of mineral oil and diesel. This would be expected to dominate any influences due to the ETS.

The main initial impact of the ETS-plus on transport will be through the cost of carbon being reflected in increased petrol and diesel prices from the start of 2009, when liquid fossil fuels enter the scheme. Overall, it is likely that as fuel prices rise in response to the ETS price, there will be a small relative decrease in total GHG (mainly CO₂) emissions from the transport sector, linked to a small decrease in total road and air kilometres travelled.

International aviation and marine fuels are not covered by the Kyoto framework or the ETS-plus. Any future introduction of international aviation and marine fuels into international or domestic emissions reductions programmes would have significant implications for New Zealand, because of our economic dependence on long-distance international trade (predominantly sea freight) and international tourism (predominantly air travel).⁵¹

There are many uncertainties in the size of fuel price increases driven by the ETS and the Biofuel Sales Obligation, as well as in individuals’ and organisations’ response to this price increase and other measures in the ETS-plus. The ETS will affect the relative price of petrol and diesel differently: diesel is not subject to Petrol Excise, and the ETS is initially likely to reduce the price per litre differential between petrol and diesel and hence the incentive to switch to diesel.

Diesel vehicles are however subject to Road User Charges and when these are taken into account the overall percentage change in price per kilometre for diesel and petrol vehicles is likely to be similar. The relative fuel efficiency of diesel and petrol vehicles will also influence consumers’ vehicle choices as the relative prices of petrol and diesel change in response to the ETS. Some stakeholders believe that fuel switching from petrol to diesel is likely in the short term, in response to relative price signals, while others expect little change. None of the factors affecting these decisions can be expected to stay constant throughout the period 2009–2020.

Diesel also has significant off-road uses and the increased price of diesel will have some impact on a range of non-transport activities (eg, on farm-use (see section 3.5), electricity from diesel generators will become more expensive, affecting isolated households, recreation activities, etc).

If the world price of emissions rises significantly over the study period, ETS-driven-demand reductions would become more significant additions to demand reductions driven by world market fuel price increases or other factors.

The biofuel sales obligation

Additional response issues arise with the Biofuel Sales Obligation. At present, industry sources advise that bioethanol is domestically produced by Fonterra for Gull petroleum⁵² and biodiesel is sourced from tallow and post-consumer oil wastes. Tallow and ethanol from whey have a range of uses besides fuel. The domestic supply of post-consumer oil waste for transport is currently limited as most of the half to two-thirds of the waste stream recovered is supplied to one major industrial processor (Ministry for the Environment 2007).⁵³

Industry sources indicate that the biofuel obligation is not likely to be met from existing domestic production processes in the short term. They also note that the international price of biodiesel relative to bioethanol has risen recently. This is affecting earlier expectations that the biofuel obligation would be met largely through domestic biodiesel supply.

Present expectations are that a relatively even balance of imported biodiesel and imported bioethanol will meet the obligation, and this will moderate any domestic environmental effects of biofuel production (see section 3.5). In general, stakeholders suggest that the price effects of the Biofuel Sales Obligation are not expected to be significant in the short term. As with mineral diesel and petrol, the factors affecting the cost and supply of domestic and international biofuels are expected to vary significantly over the study period.⁵⁴

The potential use of imported biofuels raises questions in relation to their role in reducing greenhouse gas emissions, because imported biofuels might have been produced using emissions-intensive processes⁵⁵ and their production may have created significant adverse effects.⁵⁶ The global sustainability of biofuel production has received significant publicity in the last few months.

In response to these issues, the proposed legislation for the biofuels obligation would give the Government the ability to impose a sustainability requirement in relation to fuels used to meet the obligation. Industry sources have suggested that any such requirement needs a high-degree of specificity – for example similar to that provided by the UK’s Renewable Fuels Agency⁵⁷ – if it is to encourage sustainable domestic production of biofuels.

The precise nature of any sustainability requirements in the biofuel obligation is likely to influence whether there is increased demand for arable land for biofuel production within New Zealand.⁵⁸ Based on recent research,⁵⁹ in the medium to long term it is likely that so-called second-generation biofuels, notably bioethanol from wood waste/residues, will add a further element to the demand for wood residues. The range of factors to be considered in assessing the sustainability of biofuel production is wide, as illustrated by the Appendix in SKM (2008).

Other measures

Behavioural change leading to emissions reductions may also be driven by other ETS-plus measures, particularly the Energywise Transport measures in the NZEECS, eg, fuel economy labelling and standards, education for fuel-efficient driving styles. In the near future (based on relatively low prices on greenhouse emissions), these initiatives are likely to be at least as significant as price signals from the ETS. For example, commercial fleet driver training alone is expected to deliver reductions in excess of the carbon price signal initially.⁶⁰

The effects of fuel economy standards and prices rises are likely to be mutually reinforcing. This contrasts with experiences over the last two decades: some commentators (eg, Schipper, 2007) have suggested that, in this period, significant gains in fuel economy have been more than absorbed through increases in travel and vehicle size, leading to an overall increase in fuel use. In effect, fuel efficiency improvements only reduced the price per kilometre travelled, not the total amount of fuel consumed. It is now recognised that technical and behavioural measures need to be introduced in tandem to minimise this form of take-back. In an environment of rising fuel prices, and climate change awareness, it is much more likely that fuel economy standards will reduce overall fuel use, as well as fuel use per vehicle-kilometre.

Behaviour change in the medium term

The range of possible medium-term behavioural changes in response to the ETS-plus is substantial but similar to those that can be expected as a result of rising fuel prices and changes in public awareness. These include:

• generally greater efficiency of transport use

• more cycling and walking and public transport use

• demand for improved public transport facilities

• less work-related commuting and an increase in people working from home

• increased video-conferencing to replace business travel

• fewer single occupant car trips

• changes in the logistics industry including moves from road to rail and shipping for long-haul freight distribution, and increased pressure for larger heavy road freight vehicles to be permitted

• more fuel-efficient vehicles

• increased demand for electric and hybrid vehicles

• reduction in car usage

• less discretionary travel for holidays and business.

• increased or more intensive use of particular transport corridors

• a reduction in peri-urban lifestyle subdivision requiring long commuting distances.

The likelihood and magnitude of all these changes in transport patterns are very hard to assess because of the complexity of factors influencing people’s transport decisions and the dominant role of factors beyond ETS-plus.

The actual rate and extent of change in transportation patterns associated with the ETS and Energywise Transport measures in the NZEECS (as individual or business responses to either rising prices, or generally greater awareness of transport energy demand issues) will depend on the extent to which general transport policy settings and initiatives support the direction of behaviour change signalled by the ETS.

In particular, there is a need for consistent and mutually supporting price signals, regulation, availability of more fuel-efficient and alternative vehicles, public funding (including infrastructure investment decisions), education and social marketing, and land use planning. At present there is considerable scope to increase the alignment of these factors, deliver a range of benefits and benefits and help to future-proof and manage risks associated with the transport system.

Environmental effects

This section discusses how the behavioural changes above are likely to influence environmental effects from the demand for and supply of transport. Most effects have similar drivers.

3.3.2 Greenhouse gas emissions

The initial ETS-driven changes in activity and consequent changes in transport GHG emissions from transport are expected to be very small. Officials estimate that, as a result of the ETS, transport sector emissions will reduce by less than 1% relative to business as usual over the medium to long term, with an emissions price in the range of $15–25/t CO₂-e; (ETS Framework description, September 2007, Table 7.1). As discussed above, other measures in the ETS-plus – notably fuel economy standards and driver training – are expected to result in further reductions in emissions relative to the base case.

Overall, the most likely effect on emissions in the short term is a slight decrease in the rate of emissions growth. It is possible that any emission reduction driven by the ETS-related price signal could be completely offset by efficiency gains or overtaken by population and economic growth. However, this situation would still represent a reduction compared to the base case, under which growth would have been even higher.

If the cost of emissions rises significantly towards the end of the period 2009–2020, the additional reductions from the ETS price signal are expected to become more significant. Trends in emission levels over the medium to long term will also depend on the development of biofuels, other technological developments and emergence of alternatives to current patterns of urban mobility and freight movement.

3.3.3 Local water quality

Reduced road vehicle usage results in reduced local water pollution from road runoff. Significantly reduced road vehicle usage, to the point that the total number of vehicles declines or projected road construction is not required, generally results in locally improved water quality, because of reduced sedimentation and pollution from road construction and end-of-life disposal of cars, tyres or oil. A further potential positive effect is that biodiesel blends will lessen the aquatic pollution caused by fuel spills. Biodiesel is biodegradable and even small proportions in a fuel mix will speed the breakdown of fuel spills (EECA, 2005).

These positive effects may be experienced locally even if road vehicle usage does not decrease nationally but its pattern changes (eg, growth is concentrated in fewer transport corridors). Conversely, pollution effects in these corridor zones are likely to be greater. Also there is a likely to be a lag in pollution reduction from a reduced total number of vehicles. This is because New Zealand’s car fleet is relatively old, and its average age has increased in recent years (Ministry for the Environment, 2008). If vehicle prices increase as a result of higher fuel efficiency and pollution standards, there could be a tendency for owners to retain their cars longer than would be the case currently.

3.3.4 Local air quality

In urban areas, transport is a major source of PM10 particulates and the main source of oxides of nitrogen and carbon monoxide (MfE, 2007). Particulates from diesel motor vehicles⁶¹ are of particular concern in Auckland.

Increased diesel prices could be expected to reduce diesel use and hence particulate emissions. However the direct price effects on diesel use are expected to be small initially and there is debate about the overall effect of the ETS on the relative attractiveness of diesel versus petrol.

Any increased use of biodiesel, which leads to noticeably lower particulate and sulphate emissions than mineral diesel alone even when blended in small quantities (Biofuels Taskforce, 2007), is expected to reduce particulate emissions from diesel engines. Biodiesel substitution would further enhance the air quality effects of any overall diesel reduction due to price changes.

The evidence in relation to bioethanol/petrol blends is less clear. Some studies suggest that increased use of bioethanol in fuel mixes can increase emissions of oxides of nitrogen⁶² and emissions of particulates.⁶³ According to this study, particulate emissions from a petrol engine running on a 10% ethanol blend may be up to 40% higher than one running on mineral petrol alone. These studies suggest that a significant trend of fuel switching to diesel, and/or increased use of a bioethanol/petrol blend, could possibly lead to decreased air quality in some areas of higher traffic intensity.

The use of biodiesel (as opposed to bioethanol) to meet the biofuel obligation is now likely to be less than initially expected. The effect of the ETS-plus on air quality is therefore difficult to assess with certainty in the short-term, because of the different possible sources of biofuels and the complexity of the factors affecting the relative demand for transport fuels as a whole, diesel and biofuels.

Many factors discussed above are subject to change in the future, and the research information around biofuels is growing rapidly. These facts only reinforce the difficulty of reaching definitive conclusions in a scoping study.

Along with the questions about global sustainability of biofuels, the uncertainties associated with the domestic production and use of biofuels have led the authors to propose further study of biofuels (see Chapter 6).

In the longer term, if there is significantly less diesel used overall, the positive air quality effects of the ETS-plus would be less ambiguous. Reduced road vehicle usage and vehicle numbers could also be expected to decrease local air pollution due to vehicle emissions.⁶⁴ An ancillary benefit of this would be reduced air pollution from end-of-life disposal of cars, tyres or oil. The extent of these benefits will depend on the way in which transport patterns respond to the ETS-plus.

3.3.5 Human health

Reduced local air pollution resulting from lower emissions would have public health benefits, especially in urban areas. As noted under air quality, the net effect of the ETS-plus on this in the short-term are unclear. The longer-term benefits are relatively unambiguous.

In addition, any increased use of active modes (walking and cycling) will bring clear health benefits through increased exercise. Some concern has been expressed about increased exposure of pedestrians and cyclists to risk of vehicle injury. It will be important to ensure that general policy and funding settings (eg, through the New Zealand Transport Strategy and Financial Assistance Rates⁶⁵ used by Land Transport New Zealand) support an expansion of safe routes for walking and cycling. A number of international studies (eg, LEED, 2006; BMA, 1997) suggest that overall an increase in walking and cycling delivers clear public health benefits, even considering possible crash risk and exposure to air pollution.

Possible safety concerns have been raised in relation to proposals to increase the size and dimensions of heavy trucks on New Zealand roads (in order to maximise the energy efficiency of freight movement). To the extent that the ETS-plus increases pressure for this, it can be considered a potential environmental effect of the scheme.

3.3.6 Land use and landscape

It is possible that significant land use-related environmental effects resulting from changes in transport patterns will occur, as discussed in the section above. Changes may be either positive or negative. For example, better urban form could result from less or changed urban road transport required, eg, less space required for roads and car parks. Similarly changes in land use in response to transport price increases could result in less pressure for peri-urban subdivision, but more pressure from other peri-urban uses such as local food production.

Stakeholders suggested a range of changed or greater pressures on land, including new transport corridors, changed retail patterns, new infrastructure requirements for alternative fuels, transport methods or routes, or a requirement for more local warehousing. There are likely to be landscape or visual effects from such changes, but predicting the scope or scale of such changes is not possible at this stage.

3.4 Land use – agriculture⁶⁶

3.4.1 Behaviour changes

The extent of land use change and on-farm management change as a result of the ETS-plus will depend on a number of factors which are likely to come to bear during the time before agriculture enters the ETS in 2013. For example, change will depend on:

• product prices and profitability within each agriculture sector

• what other countries are doing about the carbon price

• the degree to which the ETS-plus affects forestry land use

• where the point of obligation is for agriculture and how strong the price signal is for land managers/owners

• the availability and uptake of farm management practices and technologies that will reduce emissions, and

• the degree of consumer and public pressure on the sector to reduce its effects on the environment.

Before 2013

The 2007 deforestation intentions survey (Manley, 2008) has highlighted two significant issues for agriculture in the period before it enters the ETS:

• deforestation was higher in 2007 than forecast in 2006 (19,000 ha cf 13,000 ha)

• deforestation over the period 2008–2011 is lower under all scenarios than forecast in 2006.

Manley reports that under the ETS policy scenario,⁶⁷ deforestation intentions total 10,700 ha: 24% (2,700 ha) intend to convert to dairy, 45% (4,900 ha) to sheep and beef and 28% (3,100 ha) to lifestyle farms. Manley also considered an “amended scenario” allowing forest owners greater flexibility than the ETS policy including the continuation of conversion projects at some cost to the land owner. This scenario generated intentions totalling 47,000 ha deforestation, with 63% converting to dairy (29,600 ha), 29% (13,600 ha) to sheep and beef, and 7% (3,300 ha) to lifestyle. This amended scenario is presented because the ETS-plus policy is not yet designed in detail and the full implications for the environment will need to be considered if amendments to the ETS-plus considered for this scoping report are made.

The ETS policy intervention leads to substantially lower levels of deforestation than were planned without the intervention (11,000 ha). Of deforestation planned by large-scale owners during 2008 to 2020, 46% (5,000 ha) is forecast to take place in the Central North Island, with Northland, Otago/Southland and Canterbury/West Coast being the next highest areas.⁶⁸

With this as context, a number of factors will start driving change before 2013 and build the platform for the behaviour changes expected to affect nitrous oxide and methane emissions after 2013, when farm management mitigation practices and technologies are expected to be better developed and able to be taken up. Significant drivers of change will include:

• the Government’s sustainable land management and climate change initiatives⁶⁹ (these initiatives are part of the base case for this report)

• the slowing of conversion of exotic forestry land to dairying from 2008, due to deforestation liabilities

• the carbon price signal on liquid fossil fuels from 2009 and electricity from 2010

• the requirement for the agricultural sector to report its emissions at entity level by 2011⁷⁰

• the expectation of non-CO₂ emissions pricing from 2013

• the quantum of free allocation of emission units to the sector and how and to whom the units are distributed

• the early signalling (by late 2008) of the point of obligation for the agriculture sector entry to the ETS.

According to sector participants in the workshop and the arable and horticulture sector contacts, energy price increases are already being factored into decisions on the farm. For example, the area of land cultivated on an arable farm in any one year has reduced and more cost-effective and energy-efficient cultivation and planting systems are being adopted, including some no-tillage systems where appropriate. This is expected to continue as the price increases from the ETS are passed through to the farmer and are likely to improve the efficiency of water, fertiliser and energy use.

In the greenhouse horticulture sector, there are likely to be growers whose businesses become uneconomic due to increased energy costs, where fuel cannot be switched nor efficiency gains made and where growers compete with Australia for market share. The effect of Australia ratifying the Kyoto Protocol on the relative economics is uncertain at this point. These impacts are economic and social. Some growers, however, are likely to look for new renewable energy sources such as small scale wind and solar where they can be managed within the growing system.

Direct climate change liabilities will be drawn to the attention of the sector with the measurement of industry liabilities in 2011. This increased awareness is likely to lead farmers to increase their carbon-use efficiency.

In addition to rising energy costs, public and market pressure on climate change, water management and about “clean green New Zealand”, are currently significant influences on the behaviour and rising awareness of the industry. The responses to date include greater environmental research investment through the PGGRC,⁷¹ energy efficiency improvements⁷² and environmental agreements on growers for better waterway and riparian management (eg, Clean Streams Accord, see MFE, 2008).

Despite these initiatives there is not expected to be much change in behaviour at the farm level up to 2013, especially in the dairy sector, until the price on all emissions is felt at the farm and the technologies for the reduction of non-CO₂ GHGs have been either disseminated (farm management practices that are known now to reduce emissions) or new practices/technologies successfully developed and made available. The stronger influences on industry behaviour before 2013 however, will be other factors, such as the exchange rate, relative prices for different agriculture products, changes in overseas markets and the effects of extreme weather-droughts and storms.

The response by the extensive sheep and beef farmers is likely to be slow up to 2013 for methane, since the mitigation technologies and their delivery mechanisms are still 10–15 years away eg, ruminant methane reduction technologies, breeding and forage additives. While nitrification inhibitors are available and cost effective now in some areas, they are not yet being taken up in a widespread way, in part due to the need for successful demonstration across the full range of soils and climate conditions and better understanding of their full environmental effects (Suter et al, 2006). The base case initiatives in the SLM and Climate Change Plan of Action are designed to support such demonstration over the period up to 2013. The effectiveness of these measures, however, will be less for sheep and beef farming than for dairying, due to the practical difficulties of implementing new technologies on extensive farming systems.

Overall, the extensive pastoral sector is likely to be influenced more by the price signal in the ETS-plus than the dairy sector, due to its low current profitability. This is likely to result in more dairy conversions from sheep and beef and some of the remaining farms becoming more intensive, the less intensive farms reverting to regenerating indigenous vegetation and some areas established as exotic forest. The likely mix of land uses is uncertain.

It is expected that between 2008 and 2013 the dairy sector will continue to intensify and move into areas not previously in dairy, while at the same time becoming more efficient, so long as the world prices for dairy products stay relatively high. It is expected that conversions will occur where the benefits are sufficient to meet all the costs involved, including the relevant deforestation liability.⁷³ This is because the conversions are influenced more by other market drivers and because energy prices are a relatively small proportion of the cost structure of dairy farming. They range from about 5% for electricity as a proportion of total on-farm costs up to about 20% for the large-scale irrigated dairy farms. Liquid fuels are a smaller proportion. Electricity costs are rising less quickly compared to other on-farm costs like stainless steel dairy equipment and irrigators.⁷⁴

The extensive pastoral sector will be directly influenced by what is going on in the dairy sector as a result of the high current prices affecting behaviour and because they are competing for the same land in some areas of New Zealand. The intensive arable and horticulture sector will make decisions on irrigation equipment, for example, based on price, market information and availability of the most efficient equipment. The degree to which regional councils require efficiency ratings for irrigators will also drive behaviour change up to a 10% efficiency gain.⁷⁵

OVERSEER is a critical tool that is expected to drive behaviour change on livestock farms. It is a computerised decision-making tool that can assist dairy, sheep and beef farmers to manage nutrient inputs and explore changes to farm management systems. The rate and extent of uptake will depend on industry leadership, the base case initiatives to fine tune it, success of technology demonstrations and whether the price signal to energy use is large enough to leverage some behaviour change that flows over to non-CO₂ GHGs.

In the absence of a price signal to reduce emissions before 2013, strong leadership from the sector will be needed to drive the widespread adoption of OVERSEER for active emissions measurement and monitoring, according to some industry contacts.

For sheep and beef farming it is also expected that there will be spill-over effects from changes in farming structures. These could include a greater proportion of production coming from a smaller number of farm businesses which could influence behavioural responses to the ETS-plus. Note that recent changes in dairy farm ownership have seen owners with different drivers from those of the traditional New Zealand dairy farmer, with respect to scale and management. How changes in ownership patterns will play out is uncertain.

There is likely to be increased arable cropping to supply the expanded dairy sector up to 2013, although this is likely to be muted by increases in energy costs from 2009.

After 2013

After 2013 it is expected that the ETS, along with the outcomes of the SLM and Climate Plan of Action, could either reduce dairy production from business as usual forecasts in key dairy regions (industry predictions) or increase dairy production built off a lower carbon (offsets⁷⁶ and mitigation) high profit scenario. The likely outcome is uncertain at this stage.

The ETS-plus however, is expected to increase the rate of uptake of mitigation technologies and slow intensification and expansion into new areas. Mitigation technologies are likely to include greater use of nitrification inhibitors, feed additives, biochar, herd homes, feedpads, riparian management, less use of nitrogenous fertiliser and greater use of farm wastes for biogas as the price of energy increases.

The likely responses from regional and district councils to the land-use changes expected under the ETS-plus are uncertain. Some may respond by restricting forestry or dairying, by protecting indigenous biodiversity and through water management tools. Others may actively encourage land use change. Such actions could enhance or detract from the purpose of the ETS-plus. Alignment of national and local government policies are likely to be necessary if the full benefits of the ETS-plus are to be realised.

By 2013 the base case initiatives are likely to start reducing nutrient leakage, reduce GHGs and encourage more efficient use of water and the ETS-plus are expected to reinforce these behaviour changes.

Extensive farming is likely to become less competitive compared with both forestry and dairy farming, unless there is a significant change in recent product price trends that have favoured dairy farming. As a result it is expected that some sheep and beef farms could: (i) become more intensive; or (ii) become less intensive and revert to indigenous vegetation or (iii) convert to dairying, some to forestry and biofuel cropping. The efficiency initiatives, however, are not expected to be available immediately, as they are based on animal genetics, nutrition or forage plant breeding and transfer. These will all take many years to become robust technologies for use on the farm.

After 2013 the key tool that is expected to bring a change in farmer management practice is the shift in use of OVERSEER from nutrient budgeting, to measurement and monitoring of greenhouse gas emissions. Refinements to OVERSEER will have been completed and trialled and demonstrated actively on farms. Use of OVERSEER is expected to become best practice.

The degree to which expanded feedstock cropping and biofuel planting will be affected by the ETS-plus is currently uncertain (See section on Energy Supply on renewables). Ensuring that any biofuel that is domestically produced is from sustainable sources would be consistent with New Zealand’s sustainability objectives.

3.4.2 Environmental effects

Before 2013

Prior to 2013, the most significant determinant of agricultural emissions is the extent of deforestation and conversion to dairy farming. The effects of deforestation on agricultural emissions are twofold – an immediate increase prior to the ETS announcement over 2007, followed by immediate slowing in the intended rate of conversion of forest land to pasture resulting from the forestry sector entry to the ETS from 2008. This has a double benefit from the avoided emissions from deforestation and avoided increase in non-CO₂ emissions in the order of 21 million tonnes of CO₂e over the period 2008–2012⁷⁷ (see Forestry section ).

However, these slower rates of conversion to intensive pastoral farming are reductions off the large increase in 2007. The result will be that dairy is expected to continue to grow up to 2013 under business as usual, resulting in some increase in adverse environmental effects. There are likely to be reduced effects as a result of some reduction in sheep and beef farming, some uptake of energy efficiency measures on the farm, and some limited use of nitrification inhibitors up to 2013.

Not introducing agriculture sector non-CO₂ emissions into the ETS until 2013 may embed some growth in dairying and the associated adverse environmental effects. This is likely to put some of the benefits of the ETS-plus at risk because of the sunk costs of the investments involved and the lack of mitigation options available for methane in particular. In other words, once land has been converted to dairy farming, it is not likely to revert to less intensive uses. This will constrain the ability of the ETS to reduce New Zealand’s net emissions from BAU and to lower New Zealand’s emission trajectory.

The report Environment New Zealand 2007 (MFE, 2007a, pp.232–233) sets out the effects of intensive land use (higher stocking rates and stocking densities) in New Zealand over the last two decades. It also identifies the increased inputs of fertiliser and irrigation, both of which have increased the environmental pressures on waterways and groundwater. The energy inputs to the average dairy farm over the past 20 years have doubled, mostly as a result of the increase in use of nitrogenous fertiliser (PCE, 2004). In addition, an increase in arable cropping land to supply the expanding dairy sector and the increased irrigation associated for crops and dairy pasture is expected to increase energy demand and thus increase GHG emissions further.

The change to more intensive farming has in some areas resulted in:

“further reduction of freshwater quality in lowland rivers and waterways” and “changes in soil health and increases in some GHG emissions for example methane” (MFE, 2007a).

The adverse environmental effects of the growth in dairying and some irrigated sheep and beef farming up to 2013 are expected to include increased GHG emissions, nutrient leakage, loss of in-stream values, soil compaction with associated soil carbon reduction and structural changes, and landscape changes in some areas where intensive farming has never been undertaken, eg, North Otago and Benmore irrigation schemes and potential for Hunter Downs and McKenzie Irrigation schemes.⁷⁸ If all schemes have management plans, water is efficiently used and all farmers have management plans that are audited annually (as proposed in the schemes), then the effects are likely to be reduced, but by how much is uncertain.

At the same time, productivity gains across the industry are expected to continue,⁷⁹ with some further energy efficiency gains. The degree of uptake of energy efficiency will be largely influenced by the price of energy- a higher price is likely to result in uptake of energy efficiency measures. Initiatives to lower the price of energy on the farm, eg, night rates, are likely to dampen the uptake of energy efficiency up to around 20c per kilowatt hour.⁸⁰

After 2013

After 2013, if technologies to reduce agriculture GHG emissions have been developed and demonstrated sufficiently on-farm, the ETS-plus is expected to reduce emissions from business as usual, especially for nitrous oxide and for nutrient leakage to waterways and ground water. The degree to which this will produce positive effects on the quality of the environment will depend on how soon changes in behaviour take place. This would suggest that measures to effect change early would have a high priority given the significance of the impacts of intensive agriculture on the environment.

There is expected to be a decline in dairy, sheep and beef farming profitability after 2013, due to the ETS price signal, which is likely to affect land use, its intensity and location. However, by how much and at what rate is uncertain, and depends in particular on the point of obligation and how the price signal is transmitted to farmers.

The base case initiatives⁸¹ will have the effect of slowing the increase in nutrient leakage, degradation of water quality in-stream and groundwater, GHGs, landscape changes and encouraging more efficient use of water. However, these relative improvements in environmental outcomes are likely to be modified by some loss of indigenous biodiversity in some areas due to expansion of either dairying or forestry. Of particular concern would be some areas of indigenous ecosystem types with high biodiversity values, such as post-1990 regenerating forest, scrubland and tussock grassland, that is eligible to be cleared and afforested to gain forestry sink credits.

NIWA⁸² and work undertaken for the PGGRC (Suter et al, 2006) have identified that there could be secondary environmental effects on waterways from the mitigation technologies, eg, nitrification inhibitors, which warrant further investigation. Many of the experiments conducted to date in New Zealand on N-inhibitors have been conducted under relatively ideal conditions and using manual measurements techniques, rather than continuous measurement, and thus miss peak N2O events that can be orders of magnitude larger than baseline emissions and thus contribute significantly to annual emissions.

Suter et al note that little is understood about the impact of nitrification inhibitors on nitrogen cycling, on loss pathways and on soil microbial populations and animals. Similarly, little is known about what happens to nitrogen in the runoff after application of N inhibitors, especially in hill country catchments that support stream networks and wetlands. It is possible that wetlands affected by inputs of nitrification inhibitor may cease to return nitrogen to the atmosphere via denitrification, and could act as conduits for nitrogen from land to waterways, with eutrophication as a consequence.

Nitrification inhibitors are the most significant GHG emissions mitigation technology currently available to the agriculture sector. These uncertainties should therefore be addressed as a matter of some urgency. It is understood that some work has just started on these issues for completion in 2008 and 2009, but that the analysis will then need to look at the potential impacts of nitrification inhibitor use over large catchments on downstream ecosystems, especially lakes and wetlands (refer Chapter 6).

The overall effect on net GHG emissions and nutrient leakage is uncertain. The effects on biodiversity in some areas are not entirely clear since they have not been adequately identified. (See also the Forestry section.)

There is likely to be competition for different environmental objectives. For example, feedpads and herd homes minimise soil waste and compaction during winter, but enable an increase in stocking rates that, during other times of the year, could increase emissions overall. The high energy feed model that is emerging for dairying in New Zealand is likely to increase the economic viability of biogas production, thus potentially reducing GHG emissions, although by how much and which gases is still uncertain.

In the longer term, emissions could be mitigated through the use of methane-reducing food additives, if this technology becomes available and is taken up. There is some use of imported palm kernel for feed already. Such imports allow greater intensification, which is likely to increase the total pollution load in New Zealand, due to increased animal waste to be dealt with.⁸³

Landscape changes that occur before 2013, including further expansion of dairying in the North Otago and Benmore areas and onto previously forested land in the central North Island, are expected to slow post 2013 at rates related to the price of carbon.

Any short rotation arable biofuel cropping that does occur, could result in greater soil disturbance, compared to biodiversity and landscape benefits from longer rotation species, although the environmental effects are less than from dairying or hill country pasture. Recent changes to crop management by the arable sector in response to energy price rises are likely to have benefits for managing these effects. Growing, management and harvest of non-arable crops for biofuel are likely to have less overall effect on the environment (Zah et al, 2007).

Some stakeholders have suggested that the ETS-plus is likely to encourage farmers to remove some kinds of indigenous vegetation from their properties. For example, regenerating indigenous shrublands and scrub (including kanuka and manuka and other woody plant species), which have regenerated since 1990, as well as non-forest ecosystem types (eg, tussock grassland areas).

In both these situations, affected areas may have medium to high biodiversity and landscape values, but are not “forest” by definition under Kyoto rules, and are therefore eligible for clearance and afforestation. Unless their values are clearly identified and decisions taken to protect them, their biodiversity and associated carbon stocks are at risk (see Forestry section for further discussion).

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