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4.7 Non-energy emissions from agriculture

RELEASED UNDER THE OFFICIAL INFORMATION ACT

4.7 Non-energy emissions from agriculture

Summary

This section:

  • assesses emission trends and the effectiveness of the current policy package
  • considers alternative or additional policies to increase abatement and reduce future liabilities, using price or regulatory measures, research and extension, and special treatment of agricultural emissions in future international agreements
  • highlights the importance of the national greenhouse gas inventory to capture farm-level mitigation actions, and of the links between agriculture mitigation and other climate change policies.

It concludes that:

  • current research and development and technology take-up, land-use planning and on-farm decisions do not explicitly factor in the cost of agricultural greenhouse gas emissions
  • sole reliance on voluntary research and development initiatives is therefore unlikely to deliver emissions reductions that would come at a net cost to farmers, even if and where this cost might be less than the international carbon price
  • a key barrier to implementing an effective price-based measure is the accurate measurement, monitoring and reporting of emissions at the farm level, and the limited ability to reflect mitigation actions in the national emissions inventory. The use of proxies would preferentially stimulate changes in sector output and land use rather than a more efficient production system
  • taxation of nitrogen fertilisers presents a feasible but very limited price-based mitigation option for CP1
  • analysis to date has not assessed the full potential for mitigation in response to a price signal. Bottom-up assessment of technology and farm-management options and their aggregation to sector-wide impacts would be useful
  • key decisions are required by the Government to guide further policy development:
    • does the Government want to move towards including agricultural emissions in a price- or regulatory-based system?
    • as New Zealand is unique in the developed world with its high proportion of agricultural emissions, does the Government want to seek to negotiate special treatment for agriculture in future climate change agreements?
    • how does the Government wish to approach further research and development investment in this area?
  • there are synergies and trade-offs between the above policy directions and their implementation, and no-regrets measures and voluntary arrangements that need to be considered before concrete decisions are made. Decisions about agriculture policies will also influence alternative land uses such as forestry.

4.7.1 Current policy settings, trends and projected liabilities

Current policy settings

Livestock agriculture and associated processing industries earn about $13 billion in total export values and contribute about 10% of GDP. Most of New Zealand’s agricultural produce is destined for export and therefore subject to competition with producers in other countries on the global market.

Agricultural emissions reductions are difficult due to the international competitiveness of the sector, the apparent absence of significant mitigation options without reducing output, and the limited ability to monitor and report abatement at the farm level. As indicated in Section 3.2.5, the policy package of 2002 therefore exempted the agricultural sector from an emissions tax, with the liability for emissions borne by the Crown. Instead, the policy focused on increasing research efforts into cost-effective mitigation options through the joint government-industry consortium PGGRC.

The PGGRC set a voluntary goal of reducing agricultural emissions by 20% below business-as-usual by 2012. However, the current research prospects and limited efforts to prepare for implementation and reporting of mitigation options at the farm level appear unlikely to meet this goal. With the exception of nitrification inhibitors, which have the potential for much wider uptake over coming years, it is not clear whether any additional mitigation tool would be commercially cost-effective or come at a net cost to farmers. The absence of a price signal at the farm level means that farmers have no incentive to implement mitigation measures that come at a net cost to their operation even if the cost is small, unless there are other benefits from undertaking such actions.

This section considers additional policy options to enhance mitigation outcomes during CP1, and the sustainability and effectiveness of such options beyond 2012.

Emission trends

Total agricultural emissions were calculated to represent almost 50% of New Zealand’s total greenhouse gas emissions in 2003, with more than 98% of these emissions from livestock through enteric fermentation and agricultural soils. Emissions are estimated to be above 1990 levels by about 25% (8.2Mt) in 2010 and over 35% (11.6Mt) in 2020.

Emissions growth is being driven by increasing intensification of agriculture production, increasing performance per animal and increased nitrogen fertiliser use. Changes in environmental regulations, fiscal interest and exchange rates, domestic value of land and alternative land uses, and international trade conditions influence activity in agricultural industries and can therefore alter projected agricultural emissions.

Since methane and nitrous oxide emissions are correlated with total production (both the number of animals, and metabolised energy and nitrogen throughput per animal), absolute emissions from the sector in 2010 would be expected to be higher than in 1990, even if the emission-reduction objective of the PGGRC could be fully achieved. This brings into sharp focus the challenge that a growing agricultural sector represents against fixed emission targets.

Projected costs and liabilities for CP1

The excess emissions from agriculture above 1990 projected for CP1 are estimated to cost the Crown approximately $350 million to offset through credit purchases. The value of total agricultural emissions over this period is estimated over $1.7 billion.

Under current policy settings, the only direct costs to the sector result from its investment into research under the PGGRC, currently at about $1.6 million per year (PGGRC, 2005). Mitigation research is supported indirectly through other research programmes on farm efficiency, resource use, animal genomics and field trials carried out under the Pastoral Genomics research, BoviQuest and RED efficiency-improvement programmes.

The Crown is currently contributing an equal amount of funding to the mitigation research by the PGGRC. If investment remains at current levels to 2012, the total direct investment by New Zealand into agricultural mitigation research until the end of CP1 would be about $33 million, shared equally between the Crown and industry. Government also funded improvements to the national emissions inventory.

Post-2012 scenarios and possible targets, commitments, liabilities and costs

As indicated in Section 2.3, there is considerable uncertainty around the international framework for climate change post-2012. The costs and liabilities for non-CO2 emissions beyond 2012 will depend on any future emission or policy targets that New Zealand may accept under a future international framework. Domestic policy decisions regarding the point of obligation or sharing of burdens (eg, Crown, industry, or individual farmers) will also be important in determining these costs and liabilities.

Proposals and options for commitments and targets for agricultural non-CO2 emissions under future international agreements could include:

  • economy-wide emissions targets for both CO2 and non-CO2 gases
  • intensity-based emissions targets per unit of agricultural output
  • quantitative or qualitative commitments to investment in development, deployment, and international transfer of mitigation technologies and practices
  • an argument to exempt agricultural non-CO2 emissions from future emission targets, or to reflect the export component of emissions from agricultural production
  • absence of international agreement on climate change targets immediately after 2012, and hence no direct obligations to mitigate agricultural emissions.

Most of these options are not necessarily exclusive but could co-exist or be considered as complementary ways for countries to meet their obligations under future agreements. The first three options would likely imply additional, more stringent requirements and obligations on New Zealand with regard to emissions reductions from agriculture and/or enhanced research efforts.

4.7.2 Assessment of current policy package

Key gaps and limitations of current policy package

The current policy settings contain some obvious gaps and limitations that could become more pronounced under climate change obligations beyond 2012. These include:

  • agricultural land-use decisions are being made without regard to the cost associated with emissions
  • there is limited knowledge about the possible response of farmers to an emission tax through changes in farm management and intensity. For example, little attention has been given to management changes to reduce greenhouse gas emissions through changes in timings for calving, milking and slaughter
  • sole reliance on research means that any low-cost mitigation options will not be taken up even if they are less than the international price of carbon (unless there are other drivers or benefits of doing so). This leads to increased net abatement costs across the entire economy
  • there are limited incentives to develop practical tools for monitoring and reporting farm-level greenhouse gas emissions and providing extension services to farmers that help them access and routinely use such tools
  • there has been little work on how to reflect the abatement effect of possible farm management choices or on the use of nitrification inhibitors in the national greenhouse gas inventory system
  • there is no agreed consequence for industry if it fails to meet the PGGRC’s target to reduce emissions by 20% below business-as-usual levels by 2012.

The first four of these issues, as far as any mitigation options exist, are largely due to the current absence of any taxes on agricultural non-CO2 emissions, and the result that farmers lack incentives for early mitigation actions unless they are commercially viable through productivity gains. Although the Government is considered to be responsible for developing inventory methods at a national level, there is some overlap with industry in the responsibility for monitoring and reporting the effect of mitigation actions at the farm level, and the integration of this information into the national inventory.

Effectiveness of policy package to date

Research efforts and mitigation options

The Government-private research consortium, PGGRC, set up to develop cost-effective mitigation options, has resulted in effective collaboration between major industry bodies and has also led to a productive and collaborative working relationship between industry, government departments and science providers (MAF, AgResearch and National Institute of Water & Atmospheric Research (NIWA).

Section 4.1.4 outlined the current prospects for mitigation. Based on evidence to date and the long lead time it generally takes for new technologies to be tested and taken up by the market, it appears unlikely that the current research and extension efforts will lead to reductions in actual on-farm emissions by 20% below business-as-usual by 2012, as set out in the PGGRC research strategy.

Given the typical time lags between research and practical results, even a substantial increase in research investment would not be expected to significantly increase the chances of reaching the emissions-reductions goal by 2012, but it would improve the chances of emissions reductions over the longer term.

As discussed in Section 4.1.4, the main success of research has been the development of nitrification inhibitors, which have the potential to reduce nitrous oxide emissions by a few percent from business-as-usual by the end of CP1. However, the long-term effectiveness, sustainability and cost implications of are yet to be confirmed by further modelling and field trials. To date there has been little information as to the uptake of these despite having been on the market for two years. Another question is the energy balance between the production of nitrification inhibitors and that of nitrogen fertilisers. The total life-cycle greenhouse gas emissions of nitrification inhibitors need to be taken into account before policy decisions are made to encourage their use for climate change mitigation.

Some limited research has been done on farm-management practices specifically aimed at reducing emissions. Preliminary studies indicate that, for some dairy farms, the use of wintering stand-off pads could reduce seasonal nitrous oxide emissions, but that gains in this area could be offset by increased methane and carbon dioxide emissions resulting from more intensive and supplementary feed regimes.

Engagement at farm level on mitigation

There has been limited engagement at farm level on the subject of greenhouse gas emissions management and the roles that management decisions and technology choices by individual farmers could play. While the nutrient budgeting tool OVERSEER contains a module that allows reporting of greenhouse gas emissions at farm level, it can reflect only some possible mitigation actions. There has been very limited effort to integrate the use of greenhouse gas monitoring or reporting into standard farm practice.

The sector does not currently face any direct costs associated with greenhouse gas emissions resulting from land-use decisions. As a consequence, long-term strategic agri-business planning for growth and future profitability does not generally factor in the cost of greenhouse gas emissions.

4.7.3 Overview of additional policy options

Additional policy options can be grouped into three broad categories:

  • providing incentives to farmers to use low-cost mitigation options through introduction of a tax and/or regulatory measures for agricultural non-CO2 emissions
  • continued focus on research, and extension to farmers, to develop and deploy commercially cost-effective mitigation tools, and develop and disseminate monitoring and reporting tools for on-farm greenhouse gas emissions
  • [withheld under OIA s6(a), s9(2)(g)(i), s9(2)(j)]

These approaches are not mutually exclusive. Synergies and trade-offs between them will be discussed in Section 4.7.8. Particular questions, challenges and practical limitations of these broad options are discussed in more detail in Sections 4.7.4 to 4.7.6.

4.7.4 Assessment of emissions tax and/or regulatory measures

The main options for emissions taxes and/or regulatory measures that provide abatement incentives while limiting overall economic impacts on the sector include:

  • sector-wide price signals through an emissions tax that either applies to all methane and nitrous oxide emissions or is set relative to some intensity target
  • partial price measures on a subset of total emissions where the effect of mitigation actions can be easily measured – mainly for nitrous oxide emissions resulting from the use of nitrogen fertilisers
  • a regulatory approach for nitrogen inputs that focuses on environmental co-benefits as well as greenhouse gas (nitrous oxide) emissions
  • positive incentives and support for uptake of low-cost mitigation actions.

Options for sector-wide price measures

A sector-wide emissions tax faces three main challenges:

  • uncertainty about abatement opportunities and the effects of a tax
  • the economic cost to the sector, which will face international competition from competitors not subject to a similar tax
  • difficulties in monitoring and reporting on-farm greenhouse gas emissions and the effect of mitigation actions.

If the Government wishes to explore possibilities of moving towards a sector-wide tax on non-CO2 emissions, the following actions are a priority:

  • understand the economic impact and likely mitigation responses, and/or structural adjustment of the sector and regions, to different options for taxes, points of obligation and the possible use of proxies for farm-level emissions
  • develop and deploy monitoring and reporting tools that provide accurate, practical and cost-effective estimates of on-farm greenhouse gas emissions that can account for the effect of technological or farm management mitigation actions
  • develop methods and data systems to reflect mitigation actions at farm level, in the national greenhouse gas inventory, consistent with good-practice requirements under the UNFCCC.

A further issue regarding potential methane-mitigation technologies, such as vaccines and feed additives, is their long-term environmental sustainability and their acceptability by domestic and international consumers.

Full emissions tax

Estimates of the economic impact and abatement resulting from a tax on agricultural non-CO2 gases are based on either economy-wide computable general equilibrium model studies, or models that estimate the expected change in land-use resulting from an emissions tax.

Land-use based models (Hendy and Kerr, 2005; Sin et al, 2005) suggest that a price of $25 per tonne of CO2e would result in an average land-based tax burden of $109 and $42 per hectare per year for dairy and sheep/beef land, respectively. Depending on annual profitability, this equates to a reduction in average net trading profits of about 17% to 30% for dairy farms, and about 15% to 32% for sheep or beef farms. [Sin et al (2005) calculated relative impacts on net trading profits for the years 2002/03 and 2003/04. Higher or lower net trading profits would imply a proportionally lesser or greater impact of an emissions tax in any given year.] Assuming that farms can change only land-use but do not change management practices or land-use intensity, the model suggests that a tax at this level would reduce total non-CO2 emissions by 3%. This relatively small change in emissions is due to the fact that despite reduced net trading profits, alternative land-uses are estimated by the model to be even less profitable in many instances.

Computable general equilibrium model studies do not specifically consider alternative land-use options, but assume that economic activities can adjust between all sectors. Recent modelling for New Zealand by Australian Bureau of Agricultural and Resource Economics (ABARE, 2005) suggests that for a tax of $13 per tonne of CO2e, total output from dairy and beef sectors would reduce by between 2% and 3%, and wool outputs would reduce by over 11%. These changes in outputs (except for wool) are broadly similar to the modelled effects of the same tax on CO2 emissions from the iron and steel and primary aluminium sectors.

The general equilibrium model estimates that a tax of $13 per tonne of CO2e would reduce total non-CO2 emissions by 3.8Mt CO2e or over 9% of total non-CO2 emissions, significantly higher than the abatement suggested by the land-use based model. The reasons for this discrepancy have not been explored, but will be influenced by the equilibrium model’s assumption that other sector activities can replace agriculture outputs without being constrained by possible land-uses in different regions.

A lower tax level, as discussed in Section 4.3.3, could generally be expected to result in lesser economic impacts on the sector. The main drawback of a reduced tax level would be that it proportionally reduces abatement incentives.

If agricultural non-CO2 gases are excluded from an emissions tax, the equilibrium model suggests that outputs and exports from agriculture sectors would reduce by significantly less, with any remaining impacts due to the cost of energy and flow-on effects from the adjustment of other sectors. A discussion of effects across the entire economy when agriculture is included or excluded from an emissions tax can be found in Section 4.1.2.

A general drawback of all model studies to date is that they do not explicitly consider possible changes in management practices or intensity of land-use, the possible use of new mitigation technologies, and do not fully account for land-use transition costs and time requirements. They also assume that all emissions reductions can be fully accounted for at the farm level at no cost. Additional desk-top studies and real-world testing through demonstration farms would assist with a better understanding of the actual response options, net economic impacts, and abatement at the farm level in response to a tax.

Two alternative options for reducing the economic impact of a sector-wide price measure, while providing a full abatement incentive, are:

  • a tax on excess emissions relative to some reference year
  • a tax/rebate arrangement relative to intensity-based targets.

Tax on excess emissions relative to a reference year

Using a reference year (or fixed-reference emissions level) would limit the total economic impact on the sector but provide the full price abatement incentive. The overall economic impact of a tax on excess emissions relative to a reference year would be proportional to the amount of excess emissions, and can be estimated based on the impact of a tax on full emissions.

A major disadvantage of a tax on excess emissions is that it could create economic distortions between sub-sectors that have contracted or expanded since the reference year, and could also create problems for new industry entrants after the reference year if the point of obligation is at the farm level. An example in agriculture is dairying, which has grown substantially in response to favourable economic conditions since 1990, while sheep farming has contracted, and some farmers have switched their operations from sheep to dairying. Setting the reference year as 2005 would eliminate historical distortions, but would remain inflexible with regard to future changes in economic performance and output from specific sub-sectors, and new entrants after 2005.

Tax based on intensity targets

Intensity targets are usually defined as allowable greenhouse gas emissions per unit of output. This means that the reference level for taxable emissions is determined by the actual overall future output of the sector. The possible function of intensity-based targets in agricultural emissions is explained in detail in Box 3 specifically for the dairy sector.

The advantage of an emissions-intensity approach would be that, similar to taxes on excess emissions, the sector faces only small overall costs or even positive returns from such a price measure, while the full marginal abatement incentive is maintained. In contrast to a tax on excess emissions relative to a fixed reference year, intensity-based targets would avoid the economic distortions that can result for sub-sectors that have contracted or expanded in output since the reference year.

The main drawback of an intensity-based tax is that absolute emissions from agriculture would be uncertain, and may entail a substantial liability for the Crown if future international agreements entail fixed emission targets that include agriculture emissions.

Box 3: Example of Intensity-based Emission Targets for the Dairy Sector

Intensity-based emission targets offer the opportunity for an effective abatement incentive without penalising economic growth. They generally operate by setting an emissions-intensity target (eg, non-CO2 emissions per kg milk solids) for a specific sector. The actual emissions target for any given year would then be defined by the actual output from the sector (eg, total milk solids produced) and the intensity target. A tax/rebate system could then be applied to emissions from the sector that exceed or undercut the emission target calculated for each year.

Example (hypothetical numbers)

Assume that an emissions-intensity target of 8.5kg CO2e per kg of milk solids is set for 2010. This intensity target would be based on assumed improvements in emissions intensity under business-as-usual as well as possible mitigation options.

The actual target emissions for 2010, in CO2e, would be calculated at the end of the year, based on the actual milk solids produced during 2010:

Target emissions = (actual milk solids produced in 2010, in kg) × 8.5kg CO2

The sector would have to pay the full price of carbon on emissions that exceed these target emissions, but would receive a rebate if it undercut the target emissions. A similar calculation and fee/rebate would apply every year where the intensity-based price measure applies.

The actual emissions target for any given year would therefore vary with the actual output of the sector during each year. If the total output of milk solids increases from one year to the next, its emissions target would adjust accordingly, and there would be no financial penalty as long as the emissions intensity of production meets the specified target. Likewise, if the output from the sector contracts because of unfavourable economic conditions, the emissions target would also reduce and there would be no windfall gain to the sector as would occur with fixed-emission targets.

Intensity targets could, in principle, be set relative to milk solids, slaughter weights and wool production, and could thus cover virtually all main agricultural sub-sectors. The total economic impact of an intensity-based target would depend on the intensity target. If the intensity targets were set at zero, the economic impact would be the same as for a full emissions tax. At the other extreme, if the target intensity is set close to the expected business-as-usual intensity, the total economic impact of the tax would be zero but would still provide the same marginal abatement incentive to the sector. However, the definition of future “business-as-usual intensity” may involve considerable negotiation and discussion with industry, if intensity target levels are to be set as part of a negotiated agreement with industry rather than a unilateral decision by the Government. NGAs with major energy users may provide useful lessons for this.

The need to measure both greenhouse gas emissions and outputs to determine the actual intensity increases monitoring and reporting difficulties. In most cases, outputs of key quantities at the farm gate are well known, since they are the key source of income (eg, total amount of milk, wool, and meat sold), but intensities would have to be averaged over the course of a year to provide meaningful figures. Year-to-year variations in productivity at farm level could also create hardships that need to be explored further.

Other considerations for a sector-wide emissions tax

It appears, therefore, that a sector-wide tax at a lower level, or one based on intensity targets, could avoid the large negative economic impacts across the sector that a full tax would entail. Three additional points need to be considered to assess the feasibility of a sector-wide price signal:

  • mitigation options and structural responses to a price signal
  • information, monitoring and reporting requirements needed to administer the tax
  • choice of an appropriate point of obligation for the tax incidence.
Mitigation options and structural responses to a price signal

The main purpose of a price signal is to provide incentives to decision-makers to undertake abatement measures.

Relevant responses to a price measure on agricultural emissions would be the use of available mitigation technologies or management practices, and/or a structural adjustment of the sector through changing land use or reducing outputs.

As discussed in Section 4.1.4, there are some, albeit limited and uncertain, mitigation technologies and management options that could be taken in response to a price signal. There appear to be opportunities to reduce nitrous oxide emissions through nitrification inhibitors, wintering stand-off and feed pads, and optimisation of the application of nitrogen fertilisers. Opportunities for optimising total on-farm greenhouse gas emissions through changes in stock management and seasonal timing of calving, milking and slaughtering may also exist but have not yet been explored in any detail. There are currently no feasible technological options such as vaccines or feed additives to achieve major methane emissions reductions from individual animals. The effect on net emissions of all or any of these options is therefore uncertain.

Beyond such mitigation options, a price measure would mean a change in farm profits and/or a resulting structural adjustment of the sector through reduced outputs and possible land-use changes. If cost effective mitigation options are not available, then structural adjustment will be the only effective response. This structural adjustment may impose higher transition costs and occur over longer timeframes.

If New Zealand accepts binding emissions targets, including for its agricultural emissions, under future international agreements, a structural adjustment of the sector may be inevitable. However, the uncertainty about future commitments implies that it may be desirable to limit these structural adjustments until New Zealand’s future obligations are clearer.

Information, monitoring and reporting requirements

For a tax to be effective in stimulating mitigation responses, reliable mechanisms have to be in place to allow any actual reductions in greenhouse gas emissions at farm level to be reflected in the tax burden. The mechanism for accounting for greenhouse gas emissions under a tax system would need to be clearly defined before such a tax is announced and applied.

At present, there are few practical, cost-effective and accurate tools for monitoring and reporting greenhouse gas emissions at farm level, including the effect of nitrification inhibitors and management changes, for the variety of farming conditions in New Zealand. The nutrient budgeting tool OVERSEER has a module to estimate greenhouse gas emissions at farm level, but it currently reflects only some of the potential mitigation options. The level of use of OVERSEER is limited; even in dairying, which has the most intense nutrient cycling. Only 17% of Fonterra suppliers were reported to be using OVERSEER or other nutrient budgeting tools in 2004. The level of use in other farming systems is likely to be lower still.

Use of proxies

In the absence of monitoring and reporting tools for greenhouse gas emissions at the farm level, any sector-wide price measure would have to operate through proxies for average greenhouse gas emissions, such as:

  • total fertiliser use
  • animal numbers
  • farm area
  • production outputs such as milk solids, slaughter weights, or wool.

While the use of proxies – animal numbers, land area or production outputs – would be efficient from a transaction point of view, it would not provide a fully effective abatement incentive, since the use of neither nitrification inhibitors nor stand-off pads, nor most other potential mitigation technologies or practices, would affect the emissions tax burden at farm level.

The main response to an emissions tax based on these proxies would therefore be a structural adjustment through changes in stock numbers or land use.

The only area where a proxy could bear a relatively close relationship to actual emissions is a tax on nitrogen fertilisers. The national inventory methodology calculates that each tonne of nitrogen fertiliser results in 6.8 tonnes of CO2e emissions, although actual nitrous oxide emissions may still vary depending on soil conditions and level of application. However, emissions from nitrogen fertilisers are responsible for only 7% of total agricultural emissions. This may, however, be a useful first step towards including agriculture in the climate change framework. The use of fertiliser as a proxy for nitrous oxide emissions would also have the advantage that any changes in fertiliser use would directly translate into the national greenhouse gas emissions calculations. The likely economic impact and abatement from a tax on nitrogen fertilisers is discussed in more detail below.

Points of obligation

An important consideration for the practical implementation of any tax is where to place the point of obligation, and what transaction costs and information requirements would result.

Where the point of obligation is close to the decision-maker, the incentives to mitigate are strongest, but the costs of reporting, monitoring and administration are high. Where the point of obligation is far from the decision maker (say, at the level of an industry body) the mitigation incentive is weak, but the costs are low.

Placing the point of obligation at farm level would allow farmers to use their creativity and knowledge to optimise practices with regard to greenhouse gas emissions and individual economic and other environmental objectives. It also signals that the agricultural sector, over time, will need to engage in mitigation activity. The major disadvantage of this point of obligation is the very limited availability and use of cost-effective, practical and accurate tools to estimate actual non-CO2 emissions at the farm scale, including the effect of these mitigation actions. The use of such tools to determine emissions tax levels may also result in resistance to the use of nutrient budgeting tools at farm level.

The alternative is to place the point of obligation as high up as possible; ie, on large companies such as Fonterra, meat-processing plants and national industry bodies. This approach would reduce transaction and administration costs due to the limited points of contact, the ability to use more generic tools to account for non-CO2 emissions consistent with the national greenhouse gas inventory, and flexibility for industry sector organisations on how to distribute costs across their suppliers.

However, they would have to be based on output proxies such as milk solids, slaughter weights and wool. This would provide no direct incentive for individual farmers to take mitigation actions, as the only efficient response would be to reduce their outputs. If industry bodies simply passed the costs on to farmers through an industry levy, the end result would be identical to the situation where imperfect farm-level proxies are used.

Issues and options for emissions-trading schemes

Issues similar to those for the design and administration of an emissions tax also apply to the potential design and implementation of an emissions trading scheme. Key points include:

  • allocation methods and allowance levels
  • monitoring and reporting tools
  • points of obligation.

Without accurate, practicable and cost-effective monitoring and reporting tools, an emissions trading scheme would entail the risk of high transaction costs and related inefficiencies but would not create any greater abatement opportunities than a taxation system at this stage. These difficulties suggest that an emissions trading scheme involving agricultural non-CO 2 emissions would be unlikely to be efficient or effective in the near future.

Partial price measure – taxation of nitrogen fertilisers

A tax on nitrogen fertilisers could be a first, small step towards including the agricultural sector in the climate change framework. Given the small contribution to overall farm emissions, fertiliser use is a poor proxy for total nitrous oxide emissions at farm level. However, it does have the advantage of providing an abatement incentive that farmers can respond with measures that do not necessarily require a reduction in productivity (ie, through the supplementary use of nitrification inhibitors and targeted nitrogen budgeting).

The total costs and benefits of a nitrogen tax on fertilisers for total farm production would depend on the relative cost increase of nitrogen fertilisers and the availability, applicability and actual use of nutrient budget management tools to optimise fertiliser application. It also would depend on the relative costs and benefits of nitrification inhibitors.

Sheep and extensive beef farms tend to use less nitrogen fertilisers and therefore would face lower cost increases, but nitrification inhibitors would also tend to be less cost-effective. Areas affected by clover root weevil rely heavily on nitrogen fertiliser to replace lost nitrogen fixation.

The main advantages of a tax on nitrogen fertilisers are:

  • nitrogen fertiliser inputs could be used as an effective proxy for nitrous oxide emissions created by use of the fertiliser
  • farmers can respond to the tax by measures than do not necessarily require reducing productivity (ie, through supplementary use of nitrification inhibitors)
  • if large enough it may reduce stocking densities and therefore methane emissions (if farmers respond to the price signal). However, current information we have suggests the tax level would be too small to make a material impact on stocking densities
  • any changes in fertiliser use would be directly reflected in the national greenhouse gas inventory.

The arguments against a tax on nitrogen fertiliser are:

  • fertilisers are directly responsible for only 7% of agricultural emissions
  • for some farming systems, alternative means to ensure high pasture productivity are significantly more expensive than nitrogen fertiliser; in these situations, the demand for nitrogen fertilisers is likely to be resistant to an emissions tax and actual use may change very little
  • net farm emissions could increase if stocking densities increase through use of nitrification inhibitors that lead to increased pasture production.

Applying a tax on nitrogen fertilisers during CP1 would require additional analysis:

  • what is the actual cost of the tax for a range of farming systems?
  • what are the mitigation options and likely overall response by different farming systems to a tax, and how would this change the cost?
  • what options exist for the Government and industry to reduce the economic impact of the tax and enhance its acceptability at the farm level (eg, by increased extension of nutrient budgeting tools and improved management of clover root weevil)?
  • what is the likely overall change in nitrous oxide and total greenhouse gas emissions as a result of the tax, including through changes in farm productivity?

Regulatory approach to nitrogen loading

An alternative approach to greenhouse gas management is to focus primarily on the local environmental benefits of limiting total nitrogen loading in catchments with regard to nitrate pollution and water quality. This approach would deliver reductions in nitrous oxide emissions largely as a national-level co-benefit of local environmental protection.

The core of such an approach would be to set caps on the total nitrogen loading in individual catchments, based on the combined input from animal excreta and fertilisers, and the leaching of nitrate into water ways. A permit system could then allow trading of nitrogen permits between permit holders within catchment-specific caps. Limiting the total amount of nitrogen loading in catchments would implicitly control the nitrous oxide emissions associated with urine and dung deposits and fertiliser application.

The main advantage of a catchment-specific nitrogen cap-and-trade system would be that it reflects primarily local environmental concerns and may therefore have greater support from local communities and farmers themselves than a tax motivated by a greenhouse gas that is intangible at local level. Wider use of tools to monitor and report total nitrogen loadings and nutrient budgets would also deliver practical benefits to farmers.

Such an approach at national level would represent a substantial shift from current practice. Currently, only the Lake Taupo catchment has a nitrogen cap proposed, driven by environmental concerns about water quality.

The actual costs of a cap-and-trade approach cannot be fully determined as part of this review and would require further work. Methods for allocation of permits would require additional work to ensure they are efficient and equitable. Transaction and administration costs could be substantial and would likely fall on local government (regional councils) and farmers or other permit holders. There could also be considerable costs to central government, since such a system would likely take many years to design and implement on a national scale.

The main disadvantage is that it may have limited or no effect on nitrous oxide emissions in regions where caps are based primarily on local water quality and nitrate leaching. The scheme would have to be implemented on a national scale to allow tightening of targets as mitigation options are defined. This would place significant resource requirements on smaller councils and could also cause tensions with land-holders.

A National Environmental Standard or a National Policy Statement would probably be required to detail methods for setting catchment caps and to administer the scheme. This would avoid regional inconsistencies and give guidance to regional councils on how to balance local environmental objectives (ie, water quality) and national objectives (ie, nitrous oxide emissions reductions).

A further risk of a nationwide regulatory approach to nitrogen loading is that the goodwill that currently exists under the Clean Streams Accord may be eroded, harming the relationship between the farming sector, industry, and local and central government. The accord includes provisions for comprehensive use of nutrient budgeting tools on dairy farms and protection of water ways.

If the Government wishes to further explore the options for a nitrogen cap-and-trade system, the following issues would require priority attention:

  • identification of measures to define acceptable nitrogen loading in different catchment types
  • assessment of the types of monitoring and reporting tools
  • information requirements to operationalise a permit system
  • evaluation of the most efficient and equitable allocation of permits
  • analysis of the transaction and administration costs for a trading system
  • analysis of the implications of creating a property right through emissions allocation and consequences for flexibility in changing catchment caps
  • assessment of the likely overall costs to farmers and land-holders, and comparison of these costs against benefits of water quality
  • assessment of the capacity of local government to set caps and administer such a scheme
  • assessment of the likely change in nitrous oxide emissions resulting from caps in different catchments, and the national benefits of such emissions reductions.

The current proposal for a nitrogen cap for Lake Taupo, despite its much smaller scale compared to a general nitrogen cap-and-trade system, is an important pilot area that can help further identify possible implementation and administration issues, costs and benefits. The complexity and novelty of such an approach limits the speed with which a nationwide cap-and-trade system could be implemented.

Direct financial support for uptake of mitigation options

If the Government does not wish to apply any price or regulatory signals to agricultural greenhouse gas emissions, it is likely that no mitigation options that come at a net cost to farmers would be taken up. If and where low-cost mitigation options exist, the Government could consider direct financial incentives and support for the use of relevant tools and practices. This would be efficient if it allows the Government to achieve measurable emissions reductions at a cost below the international price of carbon.

The main area where, based on current information, such an approach might be feasible would be financial support for the use of nitrification inhibitors where their use is not commercially cost-effective, and support for marketing of mitigation tools. The best mechanism would be an analysis of emissions and costs by relevant industry bodies for specific regions and catchments. How and whether these emissions reductions could be included in the national inventory would also need to be assessed.

Such an approach could be taken as an independent programme, or it could be integrated into a partnership arrangement between industry and the Government on mitigation research and extension.

Timing considerations

The options outlined in this section for sector-wide or partial price measures or regulatory approaches face different constraints in terms of their possible timing.

During CP1

Sector-wide price signals are limited by the lack of farm-level monitoring and reporting tools, and by difficulties of capturing the effect of farm-level mitigation actions in the national inventory. A sector-wide price measure could nonetheless be implemented through the use of other proxies for emissions such as stock numbers and land area. However, this would not be a fully effective abatement measure, since it would emphasise structural adjustment over incentives for more efficient production.

The only price measure that would send an effective abatement signal would be a tax on nitrogen fertilisers, which would cover only a small part of total agricultural emissions. Such a tax would require no additional monitoring and reporting tools. The main analysis that would need to be carried out is the detailed economic impact and responses by the sector, and the effect on actual total greenhouse gas emissions.

If the Government does not wish to introduce any price on emissions, it could consider providing direct financial support for any identified low-cost mitigation options where the cost to the Government of supporting such mitigation actions is less than the international price of carbon for the avoided emissions.

By the end of CP1

A move towards a sector-wide price signal on all agricultural greenhouse gas emissions could be implemented by about 2012 if dedicated efforts are made to develop and deploy on-farm monitoring and reporting tools and establish systems to collect the necessary information on farm-level greenhouse gas emissions.

Alternatively, the Government could initiate and continue direct financial support for low-cost mitigation options where the cost to the Government of supporting such mitigation actions is less than the international price of carbon for the avoided emissions.

Both options are likely to be relevant only if there is a cost associated with agricultural greenhouse gas emissions in international agreements beyond 2012.

Long-term alternative option

As a fundamental alternative to a price measure, the Government could consider addressing nitrous oxide emissions from agriculture primarily through the co-benefits to managing local environmental effects of nitrate leaching on water quality. The development and implementation of nationwide cap-and-trade systems for nitrogen loadings would require significant additional work and consultation with a range of stakeholders. Actual reductions of nitrous oxide emissions under this approach are likely to occur only over the long term beyond 2012.

4.7.5 Research, extension services and voluntary approaches

The current research approach has the potential to deliver mitigation technologies, but:

  • it is unlikely that the current research and farm extension arrangements will result in the PGGRC’s goal of reducing emissions by 20% below business-as-usual by 2012
  • current arrangements do not clearly develop and maintain long-term scientific capacity to underpin mitigation research
  • there are limited provisions for developing internationally acceptable national inventory methodologies to reflect farm-level mitigation options
  • research focus may under-emphasise research into farm-level greenhouse gas management options and does not currently plan for farm extension issues and the development and dissemination of monitoring and reporting tools
  • given the typical time lags between research and practical results, even a substantial increase in research investment would not be expected to significantly increase the chances of reaching the emissions reductions goal by 2012, but it might improve the chance of emissions reductions over the longer term.

The following are key steps that the Government may wish to consider to ensure continued and possibly increased research funding, as well as the extension of research results and information and reporting tools at farm level:

  • develop an overarching strategy for mitigation research and farm extension needs, including:
    • development and deployment of farm-level monitoring and reporting tools
    • national inventory methodologies to account for mitigation options
    • underpinning research and scientific capacity
  • consider total funding requirements and opportunities from the Government and industry, using existing bottom-up assessments and criteria for strategic outcomes and targets
  • consider the role it wishes price measures to play in achieving mitigation outcomes
  • discuss with the main industry bodies their preference for a clearer definition of mitigation targets and consequences for non-achievement, or a partnership approach in funding and management of strategic research, extension and capacity needs
  • clearly define industry-Government mutual responsibilities and targets across research, extension, inventory and reporting needs
  • consider benefits and risks of different sources of ongoing and additional Government investment, including the reprioritisation of general agricultural productivity research
  • work with industry to evaluate the possible benefits and risks of developing a “climate-friendly” brand for access to overseas markets
  • work with industry to develop a process for developing, testing and disseminating mitigation tools and practices through monitoring and demonstration farms
  • work with industry to integrate monitoring and reporting tools into standard farming and performance measurement and reporting practices.

Current research arrangements

All existing targeted mitigation research is being carried out through the PGGRC research consortium, which is funded to equal amounts by FRST and industry members of the consortium. The total funding level is $3.28 million in 2005, with funding approved for the FRST contribution until 2007. Research is driven by the commercial expectations of industry participants, based on the underlying research strategy.

Mitigation research is supported indirectly through other research programmes on farm efficiency, resource use, animal genomics and field trials carried out under the Pastoral Genomics research, BoviQuest and RED efficiency-improvement programmes.

Mitigation research funding has been agreed only to June 2007. The PGGRC has expressed a willingness to consider further funding from 2007 onwards until 2012. However, this is likely to require an equal commitment by the Government through FRST. The memorandum of understanding that governs the relationship between PGGRC and the Crown is also due for review in 2007. The need to renegotiate future investment into PGGRC research will enable reconsidering the adequacy of current funding levels, and of opportunities for increasing research funding by industry and/or government.

Crown Research Institutes and universities, through FRST contracts, are undertaking ongoing research related to greenhouse gas inventory methodologies and verification options estimated at over $1 million per annum. At present, there is little operational research funding by government departments for further inventory methodology development.

Other important initiatives that could support greenhouse gas mitigation and extension options include the dairy industry consortium “Dairy 21” and other research into agricultural productivity and environmental sustainability funded by FRST. At present, there appear to be few efforts to directly link greenhouse gas emission-reduction targets and management options to achieve emissions reductions with industry productivity research. The cost of monitoring emissions in field trials would require a re-prioritising of overall outcome expectations from such broader research programmes to include greenhouse gas mitigation objectives.

Adequacy, capability and focus of current research approach

Adequacy

As outlined earlier, the current research and farm extension arrangements are unlikely to result in an actual reduction of agricultural greenhouse gas emissions by 20% below business-as-usual by 2012. G iven the typical time lags between research and practical results, even a substantial increase in research investment would not be expected to significantly increase the chances of reaching the emissions-reductions goal by 2012, but would increase the chance of emissions reductions over the longer term.

In comparison with general agricultural research and development (Scobie and Eveleens, 1987), and with energy research, the research current extent of agriculture mitigation and extension may need to be reconsidered. A comparison of investment levels for agriculture with those for energy research and extension services is particularly relevant when considering that New Zealand is generally regarded as a “technology taker” with regard to energy technologies, whereas there is little doubt that New Zealand will have to develop its own research and technology options with regard to agricultural greenhouse gas emissions. Successful research outcomes, particularly if they also address other productivity or environmental sustainability concerns, could also offer opportunities to sell products on markets overseas.

It is also noteworthy that, traditionally, New Zealand has spent almost as much on extension (ie, dissemination and training of farmers in using research results) as on agricultural research itself (Scobie and Eveleens, 1987). While investments in dissemination of mitigation technologies may seem premature before mitigation technologies themselves have been developed, this suggests that total mitigation research investment may have to increase over time to fully capture through farm extension the potential benefits that mitigation technologies could bring.

Capability

A concern of the current commercial consortium model is the lack of focus on developing and sustaining underpinning scientific capacity. A number of key researchers will reach retirement age by 2012, and Crown Research Institutes report that both funding levels and uncertainty make it difficult to attract young researchers.

A further bottleneck is the limited funding for developing further inventory methodologies. As outlined in more detail in Section 4.7.7, it is not currently clear how the use of nitrification inhibitors or farm management choices such as the use of stand-off pads could be reflected in the national emissions inventory. Development of a robust inventory methodology requires operational efforts with a sound scientific basis. This is unlikely to be delivered under science provider-driven research contracts with FRST.

Inventory research is specifically excluded from the scope of the PGGRC strategy as agreed under the memorandum of understanding that inventory development was the responsibility of the Government under requirements of the UNFCCC and Kyoto Protocol.

Focus

In terms of exploring farm management options and their implications, the main management focus has been on the use of stand-off pads. However, studies have not explored systematically, even at the desk-top level, to what extent other possible changes in milking and slaughtering timing, stock numbers and densities, and balance between different age classes could reduce the impact of a tax on non-CO2 emissions.

As a consequence, there is still limited knowledge on whole-farm management options and the overall cost implications of these options on farm productivity and economic returns.

Practical, accurate and cost-effective on-farm monitoring and reporting tools for greenhouse gas emissions could be regarded as an example for research extension. The development, deployment and dissemination of such tools is not currently funded by the PGGRC, and the current research arrangements leave it unclear whether the Government or industry carries the lead for developing and disseminating such tools.

Options for continuing or increasing research efforts

If the Government agrees that:

  • a greater research effort on agricultural mitigation and extension is in the national interest, or
  • the risks identified to the sustainability and efficiency of the current approach need to be addressed,

then the main question is how the burden of any additional research should be shared between the Government and industry, and where responsibilities for specific components of the research effort (mitigation technologies, farm management options, inventory development, and farm extension) should sit.

Options and risks for private-sector engagement

Motivations for the agriculture sector in New Zealand to invest in mitigation research are:

  • to make a case for exemption from price measures on emissions
  • to reduce future costs associated with prices on greenhouse gas emissions and increase flexibility in responses to price and regulatory measures
  • to develop commercial opportunities for new technologies.

The most appropriate option for the Government to engage industry in research funding depends on policy options. The potential strategies (not necessarily exclusive) for engagement are:

  • price measures on emissions, which would provide a direct incentive for industry to undertake research to reduce its tax liability. In that case, decisions about the focus and quantity of research would be at the discretion of industry
  • possible industry desire to negotiate targets for research and mitigation outcomes in return for a continued exemption from an emissions tax. Targets could be negotiated as intensity-based or absolute emission targets, but would need to include clear consequences for failure. Targets expressed relative to business-as-usual would require a clear definition of business-as-usual
  • a strategic partnership approach through co-funding arrangements that consider the overall programme of work. Such an approach would require industry and the Government taking joint ownership of all issues related to agricultural emissions management.

As described in Section 4.3.4, there are advantages and disadvantages with relying on either a price measure to drive research and development investment or strong Government engagement.

The general benefit of relying on a price measure is that it leaves research and development investment decisions to industry to determine the most effective and promising research and extension needs to achieve on-farm emissions reductions. In the case of agricultural mitigation research, the main risk of this approach is that it would widen the gap between industry-driven research into mitigation tools at the farm level, and government-driven research at national level for inventory development tools to monitor and report emissions at the point of obligation for an emissions tax. Managing this risk would require early consultation with industry bodies about how to define responsibilities and collaboration for overlapping research and extension issues to ensure that mitigation actions can be reported and accounted in the national inventory. The long lead time for agricultural research also means that price signals would have to be stable for a decade or more in advance to provide reliable returns on research and development for industry. Similar benefits and risks would arise from negotiating specific research and development outcome targets with industry.

The benefit of a strong Government-private partnership approach in agricultural research is that it would allow an integrated and strategic look at New Zealand’s long-term interests and minimise gaps between mitigation tools, their implementation, and reporting at farm level and in the national inventory. It would, however, require a close collaboration, shared vision and distribution of core responsibilities between industry and the Government. This could create management conflicts between commercial and Government interests and expertise that need to be managed. This could lead to high administrative costs and reduced effectiveness of market mechanisms to find the most-effective research solutions or other market responses.

Government funding

If the Government decides that its contribution should increase in line with a general increase in agricultural mitigation research, as suggested in the preceding analysis, a key question is: where should the additional funds come from? Three main options exist:

  • additional appropriation
  • re-prioritisation of other climate change research funding
  • re-prioritisation of other agricultural productivity and sustainability research.

Additional appropriation would be justified if the Government decides to continue to carry liability for greenhouse gas emissions and does not wish to impose financial penalties on the sector if it does not achieve mitigation target outcomes.

Reprioritisation of existing climate change research would need to be based on a clear analysis of the Government’s research priorities for climate change. A prioritisation process would require clear guidance about political priorities as well as scientific advice and the value of underpinning science capacity. New Zealand also has to consider its international credibility in choosing its science priorities and international collaborations. The possible role, benefits and criteria for a strategic reprioritisation of the Government’s climate change research investment are discussed further in Section 3.4.4.

To date, there has been little priority given to directly address mitigation objectives within other agricultural productivity and sustainability research. Given that, mitigation tools and practices need to be consistent with the sector’s overall goals and industry structure, and investment levels may be more appropriately weighed up against other research needs within the same sector. Such an integration could offer better avenues for extension of research results at farm level, and the development of tools.

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If the Government decides that funding support on this scale is appropriate, this research programme could offer an important opportunity to integrate climate change mitigation research into a portfolio of issues covering overall productivity increases, economic performance, and sustainability within a broad range of environmental constraints and externalities.

Voluntary approaches and industry accords to encourage mitigation

Voluntary measures and industry accords are normally the preferred option for achieving environmental objectives due to the greater buy-in from farmers and suppliers to industry-led initiatives. Voluntary approaches avoid unnecessary and unforeseen costs to farmers because they are not bound by hard input or emission caps. Voluntary approaches also reduce the risk of using insufficiently tested mitigation tools without evaluation of their long-term sustainability.

Many farmers are motivated by a genuine desire to be positive stewards of the land they farm, but have to balance environmental concerns with commercial reality. They are also concerned that regulatory or price-based approaches would increase costs without recognising current land management actions by farmers. Monitoring and reporting of greenhouse gas emissions at farm level, as well as many other agricultural data collection efforts, rely heavily on voluntary participation by farmers.

A voluntary approach with support from farmers is likely to be more robust and sustainable than regulations and taxation that may require legislation to enforce the collection and provision of farm-operations data to government agencies. A stringent regulatory approach could also have substantial negative spill-over effects into other areas that are based on cooperation between farmers and local and central government agencies.

Engagement by industry and at farm level in agricultural greenhouse gas mitigation has been hampered by significant fundamental information barriers. Many farmers and farming organisations are not sufficiently aware, or do not communicate to their members, that, under current policy setting, all taxpayers are carrying the cost of agricultural greenhouse gas emissions, while farmers are the direct beneficiaries from any productivity improvements associated with mitigation technologies.

While there is growing appreciation of the local environmental externalities of farming on water quality through nitrate leaching, there is still a very limited appreciation and understanding that emission of methane from ruminants represents a net energy loss from the production system, and that effort to reduce this loss could contribute to increased productivity as well as reduced global environmental externalities.

Communication channels should include the use of monitoring and demonstration farms to explore and demonstrate the impact of possible farm management changes on emissions and economic performance. The use and co-benefits of monitoring and reporting tools for greenhouse gases, nutrient budgets and nitrate leaching provide tangible measures of environmental externalities.

Additional incentives for the use of such tools could come through a number of sources:

  • voluntary standards set by industry bodies and major companies for their members and/or suppliers, possibly as part of existing accords with the Government
  • individual leadership, branding, certification and labelling schemes that give recognition to farmers that monitor and control their nitrogen and greenhouse gas emissions as part of broader environmental sustainability objectives
  • requirements as part of resource consents and Regional and District Plans under the RMA, where they encompass provisions for land use.

In contrast to the issue of water quality, public support for stringent controls on greenhouse gas emissions and domestic market premiums for “climate-friendly” products and operations appear too low to exert a strong pressure on the sector to take significant voluntary mitigation actions. A market premium may assist with market access to some niche markets. However, this market brand is currently not sufficiently developed to motivate the sector to undertake substantial mitigation action beyond no-regrets actions.

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A number of international research efforts and partnerships provide examples of countries committing to major research programmes:

  • Australia leads a Cooperative Research Centre for Greenhouse Gas Technologies (CO2CRC), which researches the logistic, technical, financial and environmental issues of storing industrial carbon dioxide emissions in deep geological formations. The total cash and in-kind funding for this centre by the Australian government and participating research organisations and companies is about A$17 million per annum for seven years to 2010. Three New Zealand companies are involved in this initiative
  • the United States initiated the Carbon Sequestration Leadership Forum (CSLF), a plurilateral partnership for the capture and storage of carbon dioxide from fossil fuel power plants. Twenty-five nations participate in collaborative research efforts. Funding is contributed in kind by participating countries, which are interacting at technical, policy and ministerial levels
  • the United States also initiated the Partnership for the Hydrogen Economy (IPHE), another plurilateral partnership for the development of hydrogen technologies. As with the CSLF, the IPHE’s main role is to leverage research funding and coordinate research efforts undertaken as in-kind contributions by participating countries, which also takes place at the technical, policy and ministerial level
  • the United States, Australia, China, South Korea, India and Japan have recently announced the Asia-Pacific Pact for Clean Development and Climate, a partnership initiative to promote the development and deployment of clean-energy technologies in developing countries. Details about this initiative are yet to emerge.

A comprehensive research programme on mitigation of agricultural non-CO2 emissions could also expand opportunities for international collaboration and increasing critical mass of research funding. There is growing interest in some research centres in Australia, the United States and Europe in New Zealand’s research programme into mitigation of agricultural non-CO2 greenhouse gases.

A comprehensive research programme on mitigation of agricultural non-CO2 emissions could:

  • expand opportunities for international collaboration and increase critical mass of research funding
  • lift New Zealand’s profile further without having to provide funding levels similar to those of Australian Cooperative Research Centres
  • increase industry-to-industry collaboration. (At present, the main focus of partnerships is with science-to-science or government-to-government collaboration; eg, under the bilateral climate change partnerships between New Zealand and Australia and the United States.)

A significant expansion of New Zealand’s research efforts and extension into an international research consortium would involve some risks. New Zealand might find it harder to control the direction of mitigation research and to ensure that farm-level solutions meet the needs of New Zealand’s farming situation and can be incorporated into New Zealand’s national emissions inventory.

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4.7.7 Other considerations

A number of other measures and uncertainties need to be considered to ensure climate change policies for the agriculture sector are robust and sustainable. The key issues are:

  • national inventory requirements to reflect mitigation actions at farm level
  • scientific risks and uncertainties regarding levels and trends of agricultural emissions
  • general communication of climate change issues to the farming sector.

Inventory requirements

Mitigation of greenhouse gas emissions is ultimately driven by the need to meet New Zealand’s international obligations and emission targets. Any mitigation action taken at the farm level “counts” only if it can be reflected in the national greenhouse gas inventory. With the exception of limiting fertiliser use, none of the potential agriculture mitigation options discussed in this review are or can be reported in the current national greenhouse gas inventory.

Emissions are reported at national level through annual national greenhouse gas inventories. These must meet international standards of “good practice” based on guidelines developed by the IPCC and endorsed by the Conference of the Parties to the UNFCCC. While specific rules and definitions for greenhouse gas reporting could be changed beyond 2012, the general requirement that reporting greenhouse gas emissions be consistent with internationally accepted and peer-reviewed methodologies is highly likely to remain.

For any mitigation policies to be effective, the agriculture emissions inventory must capture the effect of farm-scale mitigation actions at national level.

A robust and comprehensive inventory is also important to be able to test the effect of policies and mitigation actions on total greenhouse gas emissions at national level, and to provide crucial underpinning and scientific capacity for further development of mitigation options.

The credibility of mitigation technologies and practices will depend on the scientific robustness and level of detail of the agriculture emissions inventory methodology. Any substantial emissions reductions claimed as a result of specific mitigation technologies is likely to undergo significant international expert scrutiny and peer review.

Inventory improvements required to reflect mitigation options

Reductions in fertiliser use would be directly reflected in the national inventory and therefore need no specific inventory development. The most important other currently identified mitigation options are the use of nitrification inhibitors and stand-off pads.

Research needs to quantify the effect of nitrification inhibitors on nitrous oxide emissions for a range of soils, climates, livestock types and stock-management regimes. This also includes seasonal effects, the long-term effects of the use of nitrification inhibitors on New Zealand ecosystems and their efficiency in reducing nitrous oxide emissions, and quantification of the life-cycle of greenhouse gas emissions from nitrification inhibitors compared with those of conventional farming practices.

Relevant research needs to be published in internationally recognised scientific journals, and findings need to be combined into a credible inventory methodology that meets the guidelines and good-practice requirements defined by the IPCC. Consideration also needs to be given to how the application of nitrification inhibitors can be recorded and monitored to ensure that national data is available for use in the annual greenhouse gas inventory.

Because the scale of nitrous oxide emissions reductions that could potentially be achieved through nitrification inhibitors is large, a comprehensive inventory research programme is likely to be cost-effective at the national scale.

Using stand-off and feed pads presents challenges to the national inventory system because it is difficult to monitor and verify the effect of such management options at a national scale, and provide credible evidence of their use to international expert review. Capturing the effect of such management changes in the national inventory is likely to require investment for publishing scientific studies in the international literature, and adapting annual animal production surveys that collect and store information on farm management choices that affect the national emissions inventory.

The only other mitigation technology that shows some potential for reducing methane emissions is sodium monensin; its primary use is to control bloat in lactating dairy cows. To be able to account for the effect of monensin, it would be necessary to undertake and publish scientific studies that demonstrate its effect on emissions, and incorporate this effect in the national inventory methodology. While the maximum effect of monensin on total emissions is thought to be small (less than 1%), it may nonetheless represent an important trial for such inventory development, including the necessary international expert review, since a similar process would have to be followed to incorporate almost any other future mitigation technology, such as a methane vaccine, into the national inventory.

Inventory improvements to provide more accurate reporting and accounting

For the purposes of accounting under the Kyoto Protocol, parties are required to routinely update their inventory methodology, estimate uncertainties and prioritise efforts to improve the accuracy of inventories in the future. There are several areas where preliminary analysis suggests that the current inventory methodology may not estimate emissions as accurately as possible:

  • nitrous oxide emission rates from hill country
  • refinement of emission factors for different livestock and age classes
  • recognition of methane adsorption by forest soils.

In some areas, the current methodology may overestimate agricultural greenhouse gas emission trends. These are generally thought to be small, but more accurate accounting would be expected to reduce the excess emissions accounted for in CP1, and thus would have a similar fiscal effect to the implementation of mitigation measures. Preliminary estimates indicate that inventory improvement that leads to more accurate reporting in these areas would have a high benefit/cost ratio.

Changes in carbon stored in agricultural soils

Under Article 3.4 of the Kyoto Protocol, countries can choose whether they want to account for carbon dioxide emissions and absorptions arising from the management of agricultural soils. Current information on actual carbon dioxide flux in New Zealand’s agricultural soils, resulting from changes in management practices, is not sufficient for developing a robust inventory consistent with good-practice requirements under IPCC guidelines. It is not clear whether, for the whole of New Zealand, changes in agricultural soil management have resulted in positive or negative carbon dioxide emission trends over the past few decades. Therefore, the current policy position is not to account for carbon emissions or absorptions to or from agricultural soils.

Accounting for soil carbon changes could become a binding requirement under future international climate change agreements. At present, it is not known whether such a requirement would reduce or increase New Zealand’s net greenhouse gas emission trends, or to what extent specific reporting and accounting rules could influence the direction and magnitude of reported emissions.

An area of potential significance is soil erosion. The net effect of soil erosion on atmospheric carbon dioxide is uncertain because the carbon removed may be deposited elsewhere and does not necessarily lead to carbon dioxide emissions to the atmosphere. However, significant amounts of carbon can be absorbed and stored in soils where erosion is reverted and a stable humus layer rebuilt.

FRST currently funds some work on these issues, but substantial additional investment would be necessary to provide robust estimates of soil carbon changes across New Zealand farm and crop lands. Future climate change agreements requiring mandatory reporting and accounting for carbon changes in agricultural soils would create a significant uncertainty with regard to New Zealand’s projected future liabilities, and would likely require increased funding for scientific systems to monitor, report and account for soil carbon changes.

The New Zealand Carbon Accounting System aims to provide information on soil carbon changes associated with land-use change from forestry to agriculture and back again, and within indigenous forests. But, it does not address the question of soil carbon changes within existing land uses. Climate change impacts could also alter emissions from soils.

Scientific uncertainties

Estimates of agricultural greenhouse gas emissions generally have to rely on a combination of field trials and spot measurements (usually for a few days and small numbers of animals for methane), extrapolation and verification at farm and national levels, and reporting according to international good-practice guidelines. Significant assumptions and uncertainties are associated with scaling up to the national level.

Uncertainties are associated with each of these steps. New scientific knowledge could change calculated absolute emissions and emission trends in future:

  • further refinement of the national inventory methodology and changes in default emission factors could lead to changes in absolute emissions and trends. The uncertainty of emission trends, if there are no changes to default emission factors, is estimated to be less than 5%. The uncertainty of absolute emissions is about 50% for methane and 70% for nitrous oxide
  • the effectiveness of non-CO2 gases is translated into a common currency using the so-called global warming potential (GWP) relative to the warming effectiveness of CO2. The GWP of gases is subject to scientific uncertainties and possible revisions. Recent studies have increased the GWP of methane from 21 to 23, and further revisions cannot be ruled out. The GWP also involves policy choices for time horizons over which the global warming effectiveness is measured. Future international agreements could choose different time horizons, or an entirely different method to compare the effect of different greenhouse gases on global warming. Such choices could alter the relative importance of non-CO2 greenhouse gas emissions in New Zealand’s national inventory.

National inventory methodology alterations that cause changes in emission trends and absolute emission levels would be relevant for both CP1 under the Kyoto Protocol and any future climate change agreements. Changes in the GWP of non-CO2 gases would not be relevant during CP1, as the GWPs have been fixed, to provide certainty to all parties. However, future agreements are likely to use the most up-to-date information and so changes in GWPs could affect the balance between CO2 and non-CO 2 emissions as reported by New Zealand.

General communication on climate change issues with the farming sector

Apart from contributing a large part of New Zealand’s greenhouse gas emissions, agriculture as an industry is exposed to the impacts of climate change (see Box 4 ).

Box 4: Climate Change Impacts and Adaptation Issues for Agriculture

Most of the expected positive impacts are related to gradual changes in mean climate and atmospheric conditions. The most important factors are:

  • higher winter temperatures leading to an extension of the growing season
  • higher CO2 concentrations supporting growth and more efficient use of water
  • higher average temperatures increasing range of crops that can be grown
  • reduced occurrence of frosts and late winter snow storms.

Negative impacts of climate change are related to some changes in averages, but in particular to changes in extremes:

  • reduced winter chilling reduces bud set in some fruit crops
  • warmer winters lead to higher survival rates of pests and diseases, and higher summer temperatures encourage the spread of subtropical low-quality pastures and increased biosecurity risks
  • increased frequency and intensity of droughts in already dry regions could jeopardise some dryland farming systems and/or increase water demand
  • changes in seasonal availability of fruits may not match international demand
  • increased risk of flooding increases erosion and loss of soil nutrients
  • increased heat puts stress on crops and animals during hot summers.

Adaptation can reduce risks and increase opportunities, but will in itself incur costs. The most relevant issues are costs related to changing production, processing and transport centres, changes in land use to suit new crops, forced retirement of land that is becoming uneconomical with irrigation requirements, and social and cultural issues arising from changing production patterns and increased competition for water.

The costs and benefits of climate change impacts, and costs and social-adjustment issues of adaptation, are insufficiently quantified to allow reliable economic estimates.

The possible impacts of climate change on agriculture raise two policy-relevant issues:

  • are there opportunities to combine information about climate change impacts and adaptation options with the need to get greater engagement at the farm level about mitigation options and needs?
  • if climate change impacts impose costs or produce benefits for the agricultural sector, should these costs and/or benefits be considered in decisions about overall price measures related to greenhouse gas emissions?

Farmers are increasingly aware of the possible impacts of climate change and the need to adapt their activities to such changes. A series of workshops and case studies at farm level has caused significant engagement by some leading farmers, especially in dry eastern regions, where changes in water availability and pasture composition could pose significant risks over the coming decades (Kenny, 2005).

This bottom-up mechanism for engagement on adaptation has been highly productive and has contrasted strongly to the top-down engagement on mitigation. Further climate change discussions aimed at engaging the grass-roots level of farmers should include a similar bottom-up approach; tapping into the local knowledge and interests of farmers encourages them to consider climate change from a farm resilience and sustainability perspective.

4.7.8 Conclusions and recommendations

Key decisions

Based on this review, the Government will need to make three inter-related key decisions to guide further policy development:

  • does the Government want to move towards price or regulatory measures for agricultural greenhouse gas emissions?
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  • does the Government want to reconsider the extent of current agriculture mitigation research, extension, inventory methodology development and maintenance of scientific capacity optimal?
Move towards price-based or regulatory measures

The review suggests that a sector-wide price measure during CP1 would be feasible but not fully efficient – it would have to rely largely on proxies for emissions at the farm level. The use of proxies would tend to reduce sector output and change land use to lower-emission regimes, rather than make the production system more efficient. In addition, estimates of the economic impacts of a price measure on the sector and its likely structural responses are still subject to considerable uncertainties.

If the Government wishes to explore possibilities for moving towards sector-wide price signals that encourage mitigation, the following actions are recommended:

  • developing a more realistic understanding of the economic impact and likely mitigation responses, and/or structural adjustment, of the sector, sub-sectors and regions to different price signals
  • testing the long-term practical and environmental sustainability of mitigation technologies, and acceptance by international customers of agricultural products
  • developing and deploying monitoring and reporting tools that provide accurate, practical and cost-effective estimates of on-farm greenhouse gas emissions, including technological or farm management mitigation actions
  • developing methods and data systems to reflect mitigation actions at farm level in the national greenhouse gas inventory consistent with UNFCCC good-practice requirements.

There are alternatives that could avoid some of the shortcomings of sector-wide emissions taxes. Some of these would allow the Government to send an early signal of its longer-term intention to move towards a sector-wide price measure in agriculture.

The main alternatives to a sector-wide price measure are:

  • a tax on nitrous oxide emissions associated with the use of nitrogen fertilisers
  • regulation of total nitrogen loadings in catchments
  • direct financial support for the uptake of low-cost mitigation technologies.

The only price measures that appear feasible, practical and effective in providing full abatement incentives during CP1 are a tax on nitrogen fertilisers, and/or direct financial support for the uptake of mitigation technologies that are below the international price of carbon. The nitrogen tax would cover only 7% of emissions and the net effect on total emissions is uncertain. These partial options have specific risks and benefits that need further analysis; the Government will have to decide whether it wants to investigate these options further.

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Research, farm extension, and voluntary approaches

Research into mitigation options, farm extension, and inventory development must continue to underpin climate change policies for agriculture to increase cost-effective and practical mitigation options.

The review suggests that current research and extension arrangements should be reconsidered in terms of total funding levels, coverage of research and sharing of responsibilities between industry and the Government. It would be desirable to assess the current research responsibilities and efforts between industry and government for any critical gaps between mitigation research, the need to develop the national greenhouse gas inventory, and the development, extension and dissemination of mitigation, monitoring and reporting tools at farm level.

This review cannot suggest a robust figure for overall research funding requirements. Decisions about price measures and expectations about future obligations and emission targets will influence the amount of research effort required. Development of the national inventory for capturing any mitigation actions taken at the farm level will be of high priority, regardless of other policy settings, and this is likely to remain the Government’s responsibility.

Decisions about the overall agricultural research strategy and outcome expectations will help determine optimal funding levels and the possible sharing of responsibilities between the Government and industry, and ensure no critical gaps in overall efforts jeopardise the national interest.

Synergies and trade-offs between policy elements

These decisions and their mode of implementation are not independent from each other. The following links appear critical:

  • moving towards price signals could erode the current joint approach to mitigation research, as well as other voluntary approaches by the industry to environmental management and voluntary reporting of information. Early engagement with the sector would be critical to manage these risks

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  • the current lack of a price measure limits incentives for developing and disseminating farm-level greenhouse gas monitoring and reporting tools, and for fully exploring innovative management options aimed at minimising the economic impact of an emissions tax. The lack of knowledge about mitigation options and the aggregate impacts of a price measure on the sector in turn make decisions about the future implementation of an effective price measure difficult. The development and deployment of mitigation tools, case studies, and emissions reporting tools must be undertaken well before any price measure is considered.

Farmers tend to consider the entirety of their farm operations and respond better to policies that allow them to use their own expertise, local knowledge and innovation. A package approach that considers the overall sustainability of farm operations in a context of climate change impacts, environmental externalities (arising from greenhouse gas emissions and nitrate leaching), and overseas market access and branding issues may be received better at the farm level than policies that focus on mitigation only. Emissions monitoring and reporting tools are more likely to be accepted if they can act as practical indicators for farm performance and efficiency, rather than if they only provide estimates of greenhouse gas emissions.

Links of agriculture with other land uses, particularly forestry

Agriculture is only one of a range of possible land uses. Since the total amount of land available is limited, changing incentives for other land uses will have an indirect effect on land area and total stock numbers in agriculture; this will impact on agricultural greenhouse gas emissions. The key linkages are:

  • any price incentives for forestry, in recognition of their role as carbon sinks, would reduce the relative value of land for agricultural purposes. The effect of carbon-sink incentives on overall emissions will be greater than the amount of carbon stored in newly planted trees since it will also, to some extent, replace some agricultural activity
  • other restrictions on land uses and land-use changes under the RMA can also influence agricultural activities. While it is not generally cost-effective to use such regulations specifically to control greenhouse gas emissions, where such regulations are undertaken for other purposes, they would also affect emission trends.

Most farmers take a whole-farm perspective on their operations and do not distinguish between forestry and agricultural activities. A sector-wide price measure on agricultural emissions would receive greater support if it allowed offsets of agricultural emissions through the planting of trees. Such a scheme would raise a wide number of issues regarding monitoring, verification, and liabilities associated with carbon sinks,

some of which are discussed in Section 4.6. It is recommended that options for farm-level offsets be considered only if a decision in principle is made to explore sector-wide price measures for agricultural emissions.

The interaction between policies that affect agriculture and forestry is also of relevance to equity considerations for Māori. Māori have a relatively higher stake in forestry than in dairying, and would therefore be affected differently by a policy approach that provides no price signal on agricultural emissions.