The Government’s economic advisors warned He Waka Eke Noa’s proposal wasn’t grounded in sound economic principles, Marc Daalder reports
Treasury officials pushed hard for changes to the primary sector’s greenhouse pollution levy, warning it could cost the Government money and fail to reduce methane emissions if left untouched.
The past month has seen the fracturing of a consensus on climate action between farming groups and the Government. Ministers in October revealed their preference for a scheme to price greenhouse gas emissions from agriculture, which are currently the only form of climate pollution which isn’t priced.
That proposal contained a handful of changes from the one submitted to the Government by the primary sector partnership He Waka Eke Noa.
Documents released under the Official Information Act show the Treasury wanted the sector to be placed into the Emissions Trading Scheme (ETS) as it “prices all emissions in a single market that recognises the relative externalities of these emissions and supports whole-of-economy trade-offs”. Farmers have strongly opposed entry into the ETS for decades.
If the He Waka Eke Noa approach of pricing emissions at the farm level through separate levies – one for methane and one for long-lived gases – was to be adopted, officials said two “critical” and “essential” changes were needed.
“At minimum we strongly recommend” removing payments for carbon absorbed by on-farm vegetation and creating an independent mechanism for setting the levy price, the Treasury advised Finance Minister Grant Robertson in July.
These two changes were adopted by the Government in its October proposals.
The sector’s preferred scheme would have paid farmers for new planting which isn’t eligible for generating carbon credits in the ETS.
Officials said this could dilute the effectiveness of the scheme at cutting methane emissions, which must fall 10 percent by 2030 under the Zero Carbon Act and which cannot be offset. It would also create fairness issues as other landowners with non-ETS vegetation wouldn’t enjoy the same benefits.
There was also limited scientific evidence to support the inclusion of many of the proposed categories of planting.
In the Government’s proposal, carbon sequestered by a more limited set of non-ETS vegetation will be paid for by the Government as an interim solution until these categories of planting can be added to the ETS.
The second key change related to the governance structure, which in the sector’s version would have seen industry groups setting the levy price alongside government.
“The governance approach proposed by the partnership may risk regulatory capture, given their recommendations to have industry representatives on a governing board responsible for recommending levy prices,” officials wrote.
The October consultation document detailed a new process by which ministers would set the levy on advice from the Climate Change Commission and a sector-led advisory body.
Other concerns from the Treasury weren’t addressed and remain live issues in the Government’s proposal.
The consultation document didn’t state a position on whether nitrogen fertiliser should be priced as part of the long-lived gas levy on farms or be placed within the ETS. The Treasury documents show other agencies wanted to remove the ETS option from the proposal but Treasury pushed for it to stay.
The agency was also worried that the low proposed price of the levy and the use of generous incentive payments would dilute the price signal, potentially leading to failure to meet emissions targets and costing the Government money in what is meant to be a revenue-neutral scheme.
“As currently proposed, the pricing system would not rely primarily on emissions pricing to drive emissions reductions. Instead, the levy would primarily be used to raise revenue to fund incentive payments. We have concerns with the effectiveness of such an approach, as well as the ability for it to be enhanced over time,” officials wrote.
“Mitigating adverse impacts on the sector by keeping levy prices low and relying on incentive payments to drive abatement may not support achievement of our 2050 targets.”
Low prices would mean farmers are not actually exposed to the costs of polluting. As designed, the price wasn’t likely to motivate reducing pollution – a Newsroom analysis found it would come to $0.14 per kilo of beef, $0.09 per kilo of lamb and half a cent per litre of milk by 2030.
The incentives were also based in “optimistic forecasts for as-yet-unavailable technologies”. If reality fell short of those forecasts, the emissions targets were unlikely to be achieved. Even if the 2030 target was met, the steeper 2050 one could still be out of reach.
Then there’s the alternative, where technologies become available and high demand for the incentive payments means the pricing scheme actually starts to lose money.
“We believe the incentive model generates a significant fiscal risk, with the combination of low levy prices and uncertain demand for incentive payments (rewarded at a rate higher than the levy price),” the agency wrote.
Instead of using the generous payouts to offset the financial hit from the levy, the Treasury said the Government should impose a stronger price signal and follow that up with targeted support based on farm output if there was evidence of hardship. This would also address concerns about the most productive farms facing the highest costs.
At the same time, officials said, the Government shouldn’t intervene to prevent every single farm from failing.
“We expect to see structural change across land-based primary industries because of pricing, given the historic lack of incentives addressing the sector’s emissions and the implicit subsidy that it has received to date. In some places there are likely to be existing land uses that are no longer viable when facing the full costs of their production (i.e., including externalities),” they wrote.
“However, it is important that structural change is signalled well in advance and appropriately paced to support the agriculture sector’s resilience, the development of new supply chains, mitigate risks of emissions leakage, and uphold the Government’s commitment to a just and equitable transition.
“When making decisions on the pricing policy, ministers will need to manage the tension between near-term economic security (such as supporting food security and trade) and the scale and pace of the change needed by the sector to deliver on our climate targets. Structural change will be beneficial and needs to occur; but abrupt, poorly signalled change is unlikely to support the delivery of the Government’s economic vision either.”