Motu Policy Fellow Catherine Leining explains why pricing agricultural emissions can begin sooner at the processor level, before transitioning to the farm level.

A Golden Oldie has been making a comeback. The refrain goes something like this:

Farmers shouldn’t pay for biological emissions
until they have new technology solutions.

This topped the charts in 2003, 2008, and 2012, and recently it’s been playing on a radio near you.  

However, a new tune could be in the making. This week, the Government announced that pricing of biological emissions will start at the farm level in 2025 and the sector is supportive.

At first farmers will only pay five percent of the cost of their emissions, and the associated revenue will be returned to the sector to help with adjusting.

Given the history on this issue, that five-percent cost is one small step for the climate and one giant leap for the sector. Important details still need to be worked out – like whether the price will be through the ETS or a levy/rebate, how to structure free allocation, and how to improve on-farm measurement, reporting, and verification. We have time for that.

The immediate consultation spotlight is focused on what happens between now and 2025. The Government proposes to start pricing livestock and fertiliser emissions at the processor level from 2021.

This means that for the first four years, dairy processors, slaughter works, livestock exporters, and fertiliser importers or manufacturers would need to pay for 5 percent of the biological emissions from their products.

For example, Fonterra would pay for the emissions from the dairy cows producing their milk. Under the NZ ETS, these processors are already reporting emissions annually on this basis. Responsibility for livestock – but not fertiliser – emissions would then transfer to farmers from 2025.

As an alternative, the sector has suggested no interim pricing and an impressive menu of measures to help farmers prepare for the transition.

Should we start pricing biological emissions at the processor level now? For fertilisers, a processor approach works well. For livestock, both the Government and the sector rightly agree that an on-farm price signal is much better for on-farm change. But there are additional rationales to consider, and that’s why charging at the processor level stacks up as a gap measure.

Four reasons to start pricing at processor level now

First, it would reinforce to farmers and lenders the credibility of the policy change, which otherwise would be two elections away. Second, it would create a stronger price incentive to shift land use toward lower-emission forestry and horticulture. Third, it would send a price signal to consumers to choose lower-emission food and reduce waste. Fourth, recycled revenue could support on-farm incentives and make innovation more competitive.  

Importantly, research by the sector-led Biological Emissions Reference Group and others highlights that farmers have economically feasible options to reduce emissions with the current technology. These options will be more profitable for some than others.

Motu’s research has found that farmers face both price- and non-price barriers to change, so additional measures beyond pricing may be required for adoption of even profitable options. There is a broad distribution of efficiency across the sector. If today’s leading-edge performers were to become the new normal, we could capture gains in both productivity and emissions. This opens the possibility of using fewer stock to produce the same amount of product – or profit.

The Interim Climate Change Committee has given the tick of approval for starting pricing with the processors (with 2020 preferred) before transitioning to the farm for livestock emissions. It also recommended the use of a package of measures to help address the sector’s complex needs.

Under the Paris Agreement, if farmers don’t reduce or pay for their biological emissions, that cost shifts to other sectors or taxpayers. With emission pricing, we can turn the cost of biological emissions from a dead weight into a constructive incentive for the producers and consumers who can make change happen.

Pricing biological emissions does not have to wait and pricing alone is not enough. That’s why we need exactly the kinds of transition measures proposed by the sector. Why should we have to choose between emission pricing and sector leadership when they could harmonise so well together?

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