Climate Change Policy: Measures to address - Agriculture Sector GHG Emissions
5. Bringing it together – short term options and longer term strategy
5.1 Possible package for CP1
Economic instruments
There are many ways in which elements of the options outlined in the preceding section could be brought together as a package for CP1. One possible combination might comprise the following:
A Charge On:
• Nitrogen fertilizer, calibrated to cover the cost of the N2O emissions attributable to nitrogen fertilizer in the GHG inventory calculations; or
• A more broad-based charge on all agriculture sector N2O emissions (attributable to both fertilizer and livestock) and on enteric methane emissions, but only in respect of emissions above a (either >1990 or > 2006) threshold level; plus
• Payment of a credit for uptake of nitrification inhibitor – subject to (a) the payment being committed for CP1 only and (b) the payment per unit of inhibitor not to exceed the amount by which its use reduces the Crown’s Kyoto liability (hence inclusion of nitrification inhibitors in New Zealand’s GHG inventory calculations would be a prerequisite);
Payment of a credit for use of nitrification inhibitors is proposed in favour of compulsion for two reasons. First, nitrification inhibitors remain a relatively unproven product. To make use mandatory before their effectiveness is well-established would involve some risk, should it become apparent over time that their effectiveness falls short of expectations. Ravensdown recognizes, for example, that the effectiveness of its eco-nTM product is variable according to conditions, and that there is some uncertainty as to the permanence of its inhibitor properties. These uncertainties can be factored in to a pricing regime by discounting the credit paid, for example, by calibrating the credit to, say, half what might be suggested by the experimental results to date. (In any event, it seems likely that until nitrification inhibitors’ emission reduction properties are more firmly established, they will be only part-recognized in GHG inventory calculations.) By contrast, a mandatory use requirement is, by its nature, an ‘all-or-nothing’ measure.
Secondly, pricing the emission-reducing benefits of nitrification inhibitors by way of a credit payable for use would be more efficient than a compulsory use requirement. To be sure, paying a credit would involve a fiscal outlay, and thus no inroads would be made into the Crown’s underlying Kyoto liability, ie, the diminution in the Kyoto liability from the uptake of inhibitors would be offset by the cost of paying the credit. That may appear sufficient of a disadvantage to outweigh the economic inefficiency of a compulsory use requirement (bearing in mind that the taxes required to fund fiscal obligations generate their own efficiency, or dead-weight, costs). However, that disadvantage from paying a credit for use of inhibitors is more apparent than real.
While compulsion is one way in which to avoid fiscal outlay, another is to charge emission sources, eg, nitrogen fertilizer, and/or livestock. A charge applied to emission sources could raise the revenue required to cover the fiscal outlay arising from paying credits for use of nitrification inhibitors, and leave the Crown with a net fiscal benefit (from the diminution of the Kyoto liability resulting from inhibitor use). The sector, on the other hand, would face a net zero fiscal position, with the fertilizer charge being cancelled out by the inhibitor credit. Such a structure, of charges and credits, based on the world price for emissions, would result in the economic cost of emissions, and benefit of emission reductions, being factored in to input and production decisions in a way that would result in economically efficient outcomes.
Two options for charging emissions are listed above, that is, to charge for the emissions generated by nitrogen fertilizer, or to apply a marginal charge to all pastoral N2O and CH4 emissions above either a 1990, or 2006, threshold.
Of the two charging options presented above, the broad-based but marginal charge on all agriculture emissions has the advantage of introducing a price for all incremental pastoral emissions and would be neutral as between dairying and sheep and beef farming. If applied from a 1990 threshold, it would cover the full amount of the Crown’s Kyoto liability in respect of pastoral emissions, not just credits paid in respect of use of nitrification inhibitors. If the same charge was applied only to above-2006 emissions, the revenue raised would still make a dent in that liability, perhaps to the extent of about $114 million out of $570 million projected for CP1. The narrower, but zero-based, charge on nitrogen fertilizer would make a larger dent, of about $190 million. In each case any outlay on an inhibitor credit would be offset by a dollar-for-dollar diminution in the Crown’s Kyoto liability. Thus, combining either of the charging options outlined with payment of a credit for use of nitrification inhibitors would result in a net improvement in the Crown’s fiscal position over CP1 of, $115 million and $190 million, respectively. A possible advantage in adopting the option to charge nitrogen fertilizer is that it would be better attuned with a preference, including for strategic reasons, to avoid measures that directly penalize production. Compared with a marginal charge on livestock production above 2006 levels, it would also raise a greater amount of revenue (and sufficient to fund the inhibitor credit, if that measure also was to be adopted).
Complementary and supporting policy measures
While economic instruments may provide a core to an overall package, complementary research, voluntary and information dissemination activities can play an important mutually reinforcing role.
Correspondingly, such activities by themselves may be of limited effectiveness.
With respect to research, the most obvious and immediate priority is to obtain confirmation of the mitigation properties of nitrification inhibitors so that their use can count as a reduction in New Zealand’s GHG inventory. Ravensdown has identified a research funding need in respect of its eco-TM product of $635,000. If the government was to signal its willingness to pass on the Kyoto credit value of the product, that may be sufficient for Ravensdown itself to make the necessary research investment, although some government co-financing could also be justified on the basis that inventory measurement is explicitly a government responsibility. Comparable co-funding of the research that could be required to also achieve inventory recognition for other forms of inhibitor product funding, including so as to maintain a “level playing field”.
Less advanced is research into the emission mitigation value, in the New Zealand context, of other on-farm management practices with emission reduction potential, such as use of stand-off and feed-lot pads (in dairying). Introducing pricing for livestock emissions (and signaling potential broadening of that pricing in the future) would help to incentivise the research that will be needed for on-farm mitigation possibilities also to obtain inventory recognition. Co-financing of well-directed programs with the potential for an inventory recognition pay-off would appear warranted.
These areas of research may be at a more applied level than typically regarded as a government funding priority. (The case for government funding is generally regarded as strongest for pure research with a strong ‘public good’ character.) However, climate change is an area of policy where it is in the government’s own fiscal, as well as New Zealand’s international negotiating, interests, for positive applied research to be pursued. The government already has a significant investment in demonstration/research farm programmes, which provides a base for the applied research required for bringing new technologies to market.
To be effective, research needs to include tools and methods that foster engagement and uptake of new technologies at the farm level. Demonstration farms provide one such link. Voluntary reporting arrangements can also play a useful role in piloting the reporting and verification arrangements that would be needed under regimes in which tradable emission rights and obligations are devolved to the farm level, and/or if Kyoto credits are to be paid for adoption of emission-mitigating farm management practices.
In sum, a package organized around these – economic pricing and complementary – elements would:
• introduce (some) pricing of emissions to the agriculture sector;
• involve only a handful of points of obligation/entitlement (perhaps no more than three or four fertilizer companies);
• in a way that could be fiscally neutral to the sector, while fiscally positive for the government7;
• reflect favourably on New Zealand in terms of being seen to take feasible steps to address agriculture sector emissions;
• preserve a position of being unwilling to adopt measures that achieve emission reductions only by curtailing farm production; and
• Help to lay foundations for a range of future options (eg, cap-and-trade arrangements and the Passing through of the Kyoto value of emission reducing on-farm management practices), and without closing off future options.
5.2 Cross sector integration – climate change, water quality and land use policy
The illustrative package outlined above has been framed with climate change policy mainly in mind. Concordance with water quality (and soil erosion) policy objectives, and cross-sector consistency, particularly as between the agriculture and forestry which are competing land uses, also needs to be considered.
Integration with water quality policy
The leading example of policy under development to achieve water quality objectives is that being developed for the Taupo/Waikato catchment by Environment Waikato and MAF. Its centre-piece is a proposed cap-and-trade arrangement in respect of nutrient inputs. The methodology proposed to be used in accounting for nutrient inputs is the OverseerTM nutrient budgeting programme.
7 Of course the sector would bear the net of credit cost of the nitrification inhibitor, but would capture the productivity benefits it delivers (and presumably would not use inhibitors beyond the point that the net cost exceeded the production benefit).The basic approach would be to allocate at the farm level a nutrient input entitlement (with the basis of allocation yet to be determined and subject to unresolved issues), with those entitlements being eligible for trading. This would enable property owners who reduce nutrient input, for example by adopting nitrogen-reducing dairy farm practices, to sell nutrient input entitlements to those wishing to increase nutrient input to above the level of their initial allocation.
While this proposal is well-developed in concept, it appears that much may remain to be done for it to become operational. The strategy being followed appears to have been “top down”, with an operational cap-and-trade regime having been identified as an end-goal, and current efforts directed to developing some operational arrangements. However, it is unclear how advanced those arrangements are, for example, with respect to determining the basis on which initial allocations would be made, and developing the registry on which allocations and trades would need to be recorded. There may also be issues concerning the consistency of the nutrient accounting provided by the Overseer TM methodology across individual farms, and the procedures that would be required to verify/audit individual farm measurements. It is also unclear to what extent the accounting methodology incorporates allowance for variations in (existing and potential future) on-farm farm management practices, such as in the spreading of effluent, use of stand-off pads, wintering off, and use of nitrification inhibitors.
By contrast, the strategy outlined above for bringing the agriculture sector within the ambit of climate change policy is more “from the ground up”. It envisages a pragmatic path forward, commencing with pricing that would operate at a wholesale, rather than individual farm, level. Further development is seen as being required before pricing at, and/or devolution of emission (trading) rights and obligations to, the farm level could be implemented.
It is therefore not obvious that the respective approaches to climate change and water quality are aligned in a way that would enable maximum co-leveraging. An alternative to the current quite different starting points might be to follow more parallel tracks.
A more integrated strategy might entail ensuring that the GHG research and extension activities incorporate a dual focus on water quality as well as climate change objectives. Nitrogen management issues are common to both areas of policy concern. The water quality focus could be used to spear-head some specific initiatives where sector buy-in to climate change policy has yet to become well established.
At the same time, the same research and extension programmes would serve to strengthen the foundations for implementing pricing and or/market based instruments in the water quality space, the foundations for which, currently, may be relatively weak. These programmes could provide a basis for vigorous promotion within the Taupo/Waikato catchment of on-farm practices that reduce water contamination, in conjunction with the introduction of voluntary reporting.
There could be advantage in getting some ‘runs on the board’ in these ways before progressing to a-cap-trade approach for managing water quality. Meanwhile the intention to move in that direction could be firmly foreshadowed for, say, 5 or 6 years time (incidentally, 2012 would correspond with the end of the Kyoto CP1). That would incentivise greater uptake of mitigating practices during the lead-up period, together with voluntary reporting to preserve future nutrient allocation entitlements. Such initial steps could set up a platform for a positive transition, with adjustment being fostered by combination of ‘sticks’ and ‘carrots’. Such an approach may also help to resolve the fraught issues that are inherent in making an initial allocation. The terms of allocation could be signaled well in advance and reward ‘good’ rather than ‘bad’ lead-in behaviours (possibly including some compensation for land that remains less intensively farmed, or forested). An approach along these lines to progressing water quality goals would put climate change and water quality policies on more parallel tracks and provide greater opportunities for each to leverage off the other. For example, if government was able to indicate that there will be an economic benefit to farms that adopt GHG-reducing practices, based on the world price of GHG emissions, that could help ease the burden of achieving the water quality policy goals. (It seems that achieving desired water quality standards in sensitive catchments may be more significantly demanding than will be required of those regions in respect of climate change policy alone.)
Land use and land use change: forestry and agriculture
The frameworks for climate change policy under development for the agriculture and forestry sectors appear to be broadly congruent, at least in principle. The basic approach in both cases is to move toward pricing marginal emissions and emission offsets at their Kyoto value. That is, incremental emissions (from farming and from deforestation) would be subject to a charge and verified activities that offset emissions (application of nitrification inhibitors and afforestation) would be eligible for the payment of a Kyoto credit.
Table 7: Cross sector overview – agriculture and forestry.
| Agriculture | Forestry | ||
|---|---|---|---|
| Charge | Credit | Charge | Credit |
Either:
|
Nitrification inhibitors (Fiscally neutral as cash outlay is offset by reduced CP1 liability) |
Deforestation in excess of 21 million tonne CO2 e. (Caps CP1 fiscal cost at $315 m) |
Emission credits resulting from new (post 2006?) afforestation (Fiscally neutral, as cash outlay is offset by reduced CP1 liability) |
The symmetry of approach across both sectors is illustrated in table 7 (along with estimated CP1 fiscal implications). In each sector, emissions would be priced by way of a combination of charges and credits, in a way that would be broadly neutral with respect to land use choices as between agriculture and forestry.
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