Voluntary Greenhouse Gas Reporting Feasibility Study
5 Possible incentives and disincentives for farmers
5.1 Introduction
This section contains an overview of the possible factors that may provide incentives or disincentives to farmers to participate in a VGGR. Where applicable, the review provided in this section has been used to contribute to development of the VGGR options provided in the next section of this report (Section 6).
This section also contains an assessment framework that can be used to assess the likely uptake of farmers, of any particular VGGR option. This assessment framework is used to complete a high level assessment (contained in Section 6.4) of the likely uptake by farmers of a core VGGR option. More detailed assessment of a VGGR option could be completed at any future stage using this framework.
The information provided in this section is based on the professional experience and knowledge of the AgriBusiness Group, a sub consultant to the project team. The project team did not consult directly with farmers to complete this section.
5.2 Incentives to participate
This section discusses possible benefits that could be provided in a VGGR system that would incentivise farmer uptake.
5.2.1 Financial incentives
Currently, farmers are not directly financially penalised for emissions or rewarded for emission reductions. Introduction of financial incentives (for example via an emissions trading regime) would be expected to significantly increase participation in a VGGR, as farmers would need to understand the source of their emissions and how to manage emissions in order to avoid financial penalties or accrue rewards.
In the absence of a direct financial driver, overall participation rates would be expected to be low, but may increase slightly as a result of other incentives including stewardship, market demand and the ability to protect baseline emissions (each of which is outlined in more detail below).
5.2.2 Stewardship
There is a general desire amongst the farming community to be, and be seen to be, acting as responsible stewards of the land and environment and to be recognised as such by the wider New Zealand and international communities. This driver has increased lately as the benefits of sustainability have become increasingly accepted and expected by the public, markets, regulatory agencies and farmers themselves.
Farmers may perceive a benefit in participating in a VGGR if they anticipate that a VGGR would enable them to achieve and demonstrate a responsible stewardship approach within their farming systems.
For this benefit to be realized, an organisation (e.g. industry or export group) would be required to provide promotion and/or branding of the system, and assistance to farmers.
5.2.3 Market incentives
Farmers may be incentivised to participate in a VGGR if they receive market pressure to respond to a consumer focus on the impacts of agriculture on climate change (e.g. food miles and carbon footprints). This situation may arise if an industry group responded to the market by introducing standards or criteria to demonstrate a response to climate change and passed this requirement onto farmers. In such a case, participation in a VGGR may provide a method of allowing farmers to demonstrate their compliance.
Farmers would be able to strengthen their claims to the market, if a VGGR included a form of verification or auditing, providing reassurance to the market that farmers’ estimates were accurate and mitigation measures reported correctly. This would require the VGGR to include an auditing/verification component, and the ability of farmers or industry groups to report on their compliance with this system.
5.2.4 Protecting baseline emissions
The government is currently reviewing a range of options to manage GHG emissions in the future, including establishment of an emissions trading market (MAF, 2006).
Farmers may identify a benefit in participating in a VGGR if they anticipate that an allocation of emission units will occur based on a baseline emission level and the VGGR allows them to demonstrate previous emission levels and the effect over time of any previously implemented emission reduction projects. This would effectively ensure that farmers who had reduced emissions over time were not ‘penalised’ for any emission reductions they had achieved prior to the introduction of an emissions trading scheme.
For this benefit to occur a VGGR would need to provide a method of recording baseline emissions, a method for farmers to record their mitigation projects and the effectiveness of those projects, and the resulting annual changes to emission levels.
5.2.5 Information about emissions and mitigation opportunities
A VGGR that delivered information to farmers about their farm’s emission profile and enabled farmers to effectively maximise mitigation opportunities may provide an incentive to farmers. For this to occur, the VGGR would be required to deliver information about the existing emissions profile of a farm, provide a modelling capability to allow farmers to identify how different management techniques would affect their emissions profile, and provide specific information about how to apply those management techniques. The VGGR system may also be useful if it provided information that enabled farmers to benchmark their performance against their peers. The level of benchmarking detail possible would need to be weighed up against confidentiality issues.
The incentive provided by information provision would strongly increase, if other incentives existed to encourage farmers to reduce emissions (e.g. trading regimes, emissions taxes), as information provision would allow farmers to act to reduce their emissions as much as possible, and therefore avoid penalties or accrue benefits.
Farmers may still be motivated to act in the absence of an incentivised environment, if they anticipated such an environment in the future, and could therefore perceive a benefit in terms of gaining knowledge in preparation for future action.
Information about offset opportunities
Offset opportunities exist through a range of mechanisms including planting of vegetation or may exist through the ability to purchase credits in the future. Because mitigation opportunities are limited, in a financially driven environment (e.g. trading regime) the farming community may consider the ability to offset emissions as more desirable and cost effective than management options that mitigate emissions.
A VGGR that provides the capability to calculate the degree of offset required may provide a benefit to farmers. For the benefit to occur, the VGGR would be required to deliver information about the existing emissions profile of a farm, and a modelling capacity to allow farmers to identify how different offset techniques would affect their profile, and specific information about how to apply these offset techniques.
This benefit would increase in an incentivised environment (refer Section 5.2.1 above).
5.2.6 Ability to improve productivity
The scientific and farming communities continue to introduce technologies and management changes designed to improve productivity, some of which also deliver GHG emission reductions. Examples include improvements in the efficiency of ruminant nutrition processes and reduction in loss of nitrogen from pasture systems. Improvements in productivity can deliver the co-benefit of a reduction in GHG emission per head of animal (refer Section 2).
A VGGR that delivers GHG emission profile and reduction information which is either used to decrease GHG emissions via improvements in productivity or provide information that can also be used to improve productivity may be seen as an incentive to farmers to participate, particularly in a financially driven environment (e.g. trading regime).
For this to occur, the VGGR would be required to deliver detailed and accurate information about the specific area of emissions losses from within the farming system. These losses would need to be calculated and expressed as losses per unit of inputs and outputs. In that way farmers would be able to consider their own emissions performance within a productivity framework and consider emissions as losses that reduce the efficiency of their productive system.
5.2.7 Ability to improve nutrient management
The dairy industry has voluntarily adopted nutrient budgeting as one of the key targets within its “Clean Streams Accord”18 (refer Table 5-1). Dairy farmers commit to carry out a nutrient budgeting exercise and match fertiliser application to the requirements of their farm. The purpose of the budgeting exercise is to reduce nutrient loss, therefore increasing productivity on farms (see above), reduce nutrient application costs and to reduce environmental impacts of nutrient loss into groundwater or surface water.
A VGGR that delivers GHG emission profile and reduction information and information to manage and reduce nutrient loss may be seen as an incentive to farmers, particularly in a financially driven environment (e.g. trading regime), as it would allow them to complete two tasks through a single step.
The table below contains a review of two programmes, currently operated in the agriculture sector in New Zealand, which have elements similar to a possible VGGR system. This review has been used to inform both the incentives and disincentives described in this section.
Table 5-1 Comparison with similar programmes
| Programme | Description | Uptake |
|---|---|---|
| Nutrient budgeting | Nutrient budgeting is being promoted by a number of agencies as a tool that can be used by farmers to calculate and match fertiliser application to the nutrient requirements of a specific property in order to reduce losses of nitrogen and phosphorus. Nutrient budgeting has the dual benefit of reducing environmental impacts and providing efficiency gains. The programme Overseer® (Section 3.4.2) is an example of a model that is being promoted by local government and by some industry groups to carry out nutrient budgeting. | Nutrient budgeting is an exercise which delivers a number of benefits to farmers and would be relatively easy for farmers to implement owing to the amount of assistance available. Following 5 years of heavy promotion of the nutrient budgeting requirement in the “Clean Streams Accord”, and the fact that nutrient budgeting is a requirement of participation, only 33% of farmers have completed the nutrient budgeting requirement (MfE, 2006a). |
| DairyBase | DairyBase is a national benchmarking system set up and promoted by the dairy industry in order to provide benchmarking capability for productive and financial performance information. The system works on submission of information to a central database through initial property registration of core data and then provision of actual performance data. The second level data provision is mainly done through accountants and consultants who can enter data (which is created for tax or other standard reporting needs) on line. This reduces complexity and farmer technical engagement. The dairy industry has a long history of localised benchmarking within discussion groups and peer groups and therefore is well aware of the benefits that can be gained from benchmarking. Promotion of the DairyBase system has been heavy both within the farming community and the accountant /consultant communities during its development and since it became operative approximately 9 months ago. | There are a multitude of drivers within the assessment framework that are positive for a high level of uptake or engagement for dairy farmers. However, at present only 7% of the possible participants have registered to belong to the system and of those 32% have submitted actual data to give an effective uptake rate at this stage of 2.3% 19. |
5.2.8 Ability to ‘demystify’ the science
Farmers are more likely to participate in a VGGR if they perceive that it will contribute to a “demystification” of the science and technology behind GHG emissions. On its own, this is unlikely to be perceived as a benefit, but a VGGR that delivered any of the other benefits outlined in this section and contributed to an improvement in farmers understanding of the science, is likely to attract higher participation rates.
For this to occur, the VGGR would need to provide information in a simple manner, be easy to use, and include provision of appropriate technical support. This is an important consideration in system design.
5.3 Disincentives to participate
This section discusses possible costs that could be incurred in a VGGR system and other disincentives to farmer uptake.
5.3.1 Mitigation opportunities
At present, opportunities for farmers to mitigate agricultural emissions are largely limited to nitrification inhibitors (refer Section 2). Although ongoing research would be expected to develop further mitigation opportunities over time, the current absence of strong mitigation opportunities may limit farmers’ participation in a VGGR, even if financial or other incentives exist.
5.3.2 Capital costs
The only direct cost to farmers would be the requirement to own (or have access to) a computer and have internet connectivity. Most farmers already own a computer and have access to the internet. Direct costs would therefore be limited to the requirement to maintain internet connectivity and for those who don’t already, obtain a computer.
5.3.3 Time and effort
The principal cost to farmers is expected to be the time and effort required to collect and submit data to the reporting system. Possible disincentives relating to time and effort are described in detail below under specific subject headings.
Information required
The time farmers would be required to spend on a VGGR would be minimised if the information required to be entered into the system is already available or can easily be derived from other sources, such as an existing nutrient budgeting system or farm management software.
The time cost to farmers will also vary depending on the level of assessment they are required to carry out before submitting their results. Costs to farmers will decrease if they are able to input raw data and the system is able to carry out the modelling internally.
Data entry into a VGGR may include posted hard copy, e-mailed electronic copy or on-line data entry. Farmers may be disincentivised if their options for data entry are limited.
Depending on the design of a VGGR system, it may be possible for third parties to provide, complete analysis/modelling and enter the information for farmers. If the VGGR requires an initial comprehensive data set, followed by updates only in subsequent years, it may be possible for third parties to provide the initial data set with farmers providing the subsequent data. Employment of a third party would increase direct costs to farmers; however this would decrease their indirect time costs. Costs to farmers would be reduced by use of third parties, if the provision of third party services was provided free of charge. This may occur if the government felt that use of third parties would improve the integrity of the system and data set.
Complexity of system
Time costs to farmers will increase if the system is complex and difficult to use as it will take longer for farmers to understand the system and enter information.
Entity level
It is becoming increasingly common for farm businesses to comprise multiple land holdings across both farming types and geographic regions. Costs to farmers may increase if they are required to report on each holding, and will decrease if they are able to report at an overall business level.
Frequency of reporting
The time costs to farmers will increase with the required frequency of reporting. Costs will decrease if farmers are able to report either a less detailed set of information after the initial yearly report, and/or they are able to report less than annually (e.g. every two years) following the initial yearly report. However it should be noted that allowing farmers to report less than annually may reduce farmers’ engagement in the process.
5.3.4 Concern about confidentiality
Farmers would be less likely to participate if they were concerned that the specific information they provided was available to parties other than the system administrators or if they suspected the integrity of the system with regard to confidentiality. Farmers tend to be very reluctant to submit any form of individual farm data that is able to be identified back to them (directly or indirectly) and accessed by third parties. This disincentive would be removed if farmers knew that the information they provided was able to be viewed by system administrators only and that all information retained its confidentiality and that only aggregated data is reported.
The ability of a farmer to benchmark his/her performance against other farmers may be an incentive to participate. A benchmarking capability could still be provided in a confidential system by providing information to an individual farmer on their performance against local, regional or national averages as long as the comparator datasets were sufficiently aggregated to maintain confidentiality of information.
5.3.5 Suspicion about purpose
Farmers will be less likely to participate in a VGGR if they do not receive clear information about the purpose of the VGGR. Lack of transparency about the purpose of a VGGR could lead farmers to perceive that their participation in the system could be used to contribute to a future regulatory system, with possible costs to farmers. This may reduce participation, or may lead to skewed results, if farmers are suspicious of the government’s future purpose for the information in the VGGR. Participation is likely to increase if farmers feel comfortable that they are receiving honest information about the current purpose of the VGGR and its possible future role.
5.4 Proposed assessment framework
Table 5-2 below provides a proposed framework that could be used to assess the likely uptake of farmers of a VGGR. The subjects listed in the assessment framework have been derived from the scoping of incentives and disincentives provided in this section. For each subject area, we have provided key questions that should be answered to provide an assessment of likely uptake.
This assessment framework is used to complete a high level assessment (contained in Section 6.4) of the likely uptake by farmers of the core VGGR option described in Section 6. More detailed assessment of a more highly developed option could be completed at any future stage using this framework:
Table 5-2 Framework to assess likely uptake by farmers
| Subject | Key Questions |
|---|---|
| Possible incentives | |
| Financial incentive | Are there any financial incentives for farmers to reduce their emissions? |
| Demonstrate stewardship | Does the VGGR enable a farmer to both increase and demonstrate an increase in on farm stewardship? |
| Respond to market | Does the VGGR provide an ability to respond to market concerns around climate change (e.g. branding, logos, certification)? |
| Protect baseline emissions | Does the VGGR allow a farmer to record emissions baselines and subsequent reductions to protect early reducers in the case of a future grandfathering scheme? |
| Receipt of information | What information is provided to farmers about their emissions, mitigation opportunities and offset ability? |
| Ability to improve nutrient management or productivity | Does the VGGR provide a co-benefit in terms of the ability to also manage nutrients or improve productivity? |
| Ability to use third parties | Can a farmer use a third party to collect, model or enter information (as required)? |
| Increase understanding | Does the VGGR provide information in such a way that through participation, farmers will be better able to understand the science of greenhouse gas emissions and reductions? |
| Possible disincentives | |
| Mitigation opportunities | Do mitigation opportunities exist? |
| Direct costs | Will a farmer have any additional capital costs (e.g. purchase of a computer)? |
| Time and effort | How complex are the data input requirements? |
| Does the system provide a farmer with flexibility around the level at which he/she can report (i.e. entity level or whole business level?) | |
| Is a farmer required to report a full set of information every year, or do requirements decrease in subsequent years and/or does the frequency of reporting decrease? | |
| Confidentiality/Perception of reduced competitiveness | Will the VGGR enable others to access individual farm level information potentially reducing an individual farmer’s competitiveness? Is confidentiality ensured? |
| Suspicision about motives | Is the government being transparent information about the current and future use of the system? |
5.5 Summary
The incentives for farmers to participate in a VGGR are limited in the absence of financial incentives to reduce emissions. Even in such an environment, opportunities for farmers to mitigate emissions are limited. Experience from other reporting schemes (including Dairy Base and nutrient budgeting) show very low farmer uptake rates even in situations where the system is being heavily promoted by an umbrella sector organisation and indirect benefits exist (for example better understanding of fertiliser application requirements and therefore possible operational cost savings). It is therefore unlikely that farmers will voluntarily participate in a VGGR without financial incentives, and even then, participation may be hindered by the lack of mitigation opportunities. This may be countered to some extent by the desire of farmers to improve their stewardship or respond to the market, in line with an increasing focus on sustainability.
If farmers are driven to participate, there are key elements of VGGR design which should be taken into account to maximise benefits. Benefits will be greater if:
• farmers are provided with information about a farm’s emissions profile, a modelling capacity to identify how different management techniques would affect the profile, and information about how to apply mitigation
• farmers are able to easily understand the information provided and it helps them to ‘demystify’ the science of climate change
• the information farmers receive could also help them improve productivity or nutrient management
• the VGGR allows farmers to respond to market concerns over climate change or demonstrate stewardship
• the VGGR provides a mechanism for farmers to protect baseline emission levels against future grandfathering
• direct costs (for data gathering and entry) are minimised;
• confidentiality provisions are included in the VGGR;
• the system is simple to use.
The incentives and disincentives outlined in this section can be used to assess the likely uptake of farmers of any particular VGGR option proposed. Table 5-2 provides a framework to complete this assessment.
Careful consideration of the likely uptake by farmers is required prior to proceeding with a VGGR, particularly in relation to the existence or otherwise of financial incentives.
If a decision is made to pursue a VGGR, design of the system should aim to maximise the incentives and minimise the disincentives outlined in this section.
18 The Clean Streams Accord is an accord between Fonterra, Regional Councils, Ministry for the Environment and the Ministry of Agriculture and Forestry.
19 Mathew Newman: Dexcel, personal communication
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