- 3.1 THEORETICAL ISSUES
- 3.2 POLICY INSTRUMENTS
- 3.3 QUANTITATIVE IMPACTS ON NZ AGRICULTURE (15% REDUCTION IN CO2 EMISSIONS)
- 3.4 QUANTITATIVE IMPACTS ON NZ AGRICULTURE (35% REDUCTION IN C02 EMISSIONS)
- 3.5 ANALYSIS OF ENERGY TAXES
COSTS AND BENEFITS TO AGRICULTURE OF GHG EMISSIONS REDUCTIONS POLICIES
3.1 THEORETICAL ISSUES
In economic terms the GHG problem is a public externality. Policy intervention is required to ensure that the benefits and costs of atmospheric capital, and its degradation are incorporated into private decision making. A trade-off is required at the margin over time between the marginal cost of abating emissions and the net damage of these emissions.
Decisions on actions must take into account the risks and uncertainties of the benefits and costs, the time frame over which the impacts take place - the discount rate issue, the global nature of the impacts including the 'free rider' problem and equity between nations, and valuing environmental goods where there is no market.
These issues are discussed in more detail in Appendix II.
3.2 POLICY INSTRUMENTS
The two policy instruments most often proposed for reducing GHG emissions are emission taxes and tradeable permits to emit specified quantities (sometimes referred to as tradeable absorbtion obligations). Of the two, tradeable permits appear to have advantages over emission taxes. Firstly, permits are more likely to achieve the desired level of reduction. On the other hand considerable experimentation with the level of a tax may be required before the desired reduction is reached. Secondly, it would be possible to create a futures market around tradeable permits as a hedge against the risks of combating the GHG effect (ABARE, op cit).
Jones and Tobler (1993) reviewed policies to reduce GHG emissions and concluded that emission taxes and tradeable emission permits were of greatest interest. In their view, such measures have theoretical merits compared to alternatives such as regulations or standards. However, the choice between taxes and permits is complicated by uncertainties over the magnitudes of GHG abatement costs and benefits. They state there are a number of significant practical difficulties still surrounding the measures that are still poorly understood. Such problems include:
- what point in the market chain should the tax be applied
- what should be done with tax revenues
- how to avoid cheating at the international level
- how to provide the information necessary for a tradeable emissions scheme to work.
A word of warning is required on the issue of mandatory taxes and permits. Because there is little information on how cost effective these policies may be in either domestic or international terms there is the danger that an inappropriate setting of policies could reduce welfare. Thus further research is required before considering the introduction of stronger measures than already applied.
3.3 QUANTITATIVE IMPACTS ON NZ AGRICULTURE (15% REDUCTION IN CO2 EMISSIONS)
3.3.1 No Regrets Measures
None of the policies as set out under Group I and II (policies required to reduce emissions in the year 2000 to 1990 levels) impose significant measurable direct or indirect costs on agriculture. The policies are generally aimed at improving (through voluntary action) liquid fuel use efficiency, reducing fossil fuel use and removing constraints to improving GHG sinks. They are all in the category of 'no regrets' policies in that individuals and the nation should be better off by adopting them.
In terms of net GHG emissions, the greatest impact on agriculture is expect to result from the planting of trees on farm land, thus forming carbon sinks. This is not directly related to the GHG policies. but a response to market signals, as such it is market led and could he expected to provide a net benefit. Appraisal of the establishment of pine trees on pasture shows Internal Rates of Return in the vicinity of 7-9% real.
It is expected that private plantings of pine trees, which are estimated at 48,000 ha in 1992 and forecast at 60,000 for 1993, could reach 100,000 ha by 1996 (MoF, 1992). This would have an absorbtion effect of 44.7 million tonnes of CO2 per annum which is equivalent to 169% of 1990 emissions.
3.4 QUANTITATIVE IMPACTS ON NZ AGRICULTURE (35% REDUCTION IN C02 EMISSIONS)
3.4.1 Least Cost Measures
The 'least cost' measures required to reduce emissions by 20% compared to 1990 levels (Group III) are currently under investigation. Details of possible impacts are not expected to be available until April-June 1993 at the earliest because of reporting deadlines.
Potentially these policies could result in severely negative impacts on agriculture. Even so no policy is expected to be implemented that would place New Zealand at a competitive disadvantage without an internationally binding agreement imposing equitable costs on all countries. Such an agreement would be complex and take a number of years to implement. This provides a breathing space to improve the level of knowledge about the potential costs and benefits through research in the areas of greatest uncertainty.
An Australian study cited below in section 3.4.5 suggests a carbon tax alone could actually increase GHG emissions from agriculture. In the authors view any GHG emissions tax would need to include all significant greenhouse enhancing gases, for agriculture the most important being methane, to be effective.
At the very least, the least cost pathway to achieving the objective of reducing GHG emissions needs to be estimated, let alone the need to determine the optimal level of GHG emissions. Initially it may be best to acquire information aimed at reducing the level of uncertainty surrounding environmental costs (Jones, 1992).
The two main types of policies discussed in the literature are emissions taxes and tradeable permits.
3.4.2 Emission Taxes
Emission taxes, as opposed to carbon taxes, attempt to capture in the tax all the main GHG emissions not just CO2. The principle ones in addition to CO2 are methane and nitrous oxide. The tax would most likely be levied in terms of CO2 equivalents. Carbon taxes are rejected as policy instruments because they ignore the possibility of substitution of carbon emissions for other potentially higher GHG enhancing emissions such as methane.
There are massive problems to be overcome before an emissions tax could be implemented. Such problems include:
- reaching an internationally binding agreement to implement the tax
- agreeing over appropriate CO2 equivalence figures
- deciding on the level of the tax including differentials between countries on equity grounds
- setting up mechanisms to ensure compliance (as there is a large incentive to 'free ride')
- deciding how the tax revenue should be used.
It is likely that there would be a considerable amount of experimentation on the level of tax that would be required to achieve the desired effect. There are doubts that the emissions tax idea is even feasible. Initial work by Arnoux (pers. com. 1993) indicates that the tax would have to be set so high that it would destroy the fabric of society we know today. Arnoux believes emission taxes would prove to be politically unacceptable.
Assuming an agreement has been reached to implement an emissions tax, impacts can be expected directly on the cost structure of agriculture. This would be not only through the first round effects of increased energy prices - fuel and power, but also second round effects through increased prices of transport, chemicals and other energy intensive products and services. Subsequent rounds would raise prices in all other areas. In addition, livestock farmers could expect to be levied on the methane emissions of their animals.
As noted above, the very high level of such taxes required to achieve the desired level of abatement may rule them- out as a practical and politically acceptable policy.
3.4.3 Tradeable Emission Permits
Tradeable emission permits appear to be more practical particularly as the levels can be set much more easily. Each country may be allocated a certain quantity of permits to emit. These would have to be allocated within the country. While it is easy to see how the policy could be managed for major emitters such as thermal power stations and cement works, it is less clear how a comprehensive policy could be implemented to cover all emitters equitably. For example, would every livestock farmer be allocated a permit for the methane emissions of his animals, the main GHG from agriculture.
In addition, policies related to absorbtion incentives are also likely to provide opportunities for farmers and rural communities, particularly in planting and tending trees as an alternative or substitution for livestock farming. Such activities could become very attractive if tradeable permit policies came in affect. Firms with significant emissions of GHGs may be willing to compensate farmers through planting incentives or annual payments for growing trees to offset their own emissions.
3.4.4 Benefits to Agriculture
While there will be a cost impost on agriculture there may also be benefits. An upward shift in the price of energy could open up opportunities for energy farming.
There is also evidence that agricultural commodity prices may rise. Kane, et al (1989) conclude that changes in production as well as the implementation of policies to further reduce CO2 emissions, such as carbon taxes, could raise world prices for most agricultural commodities.
Policies related to improving the efficiency of the energy system may prove to be of little burden and could result in improved farm profitability.
3.4.5 Impact of GHG Reduction Policies on Australian Agriculture
A study in Australia has shown that reductions in agricultural CO2 emissions alone would have little impact on the total global warming potential of GHG emissions from Australian agriculture (Anandajayasekeram, et al, 1992). This is because CO2, although the largest component by weight, of GHG emissions in Australian agriculture, contributes only a small proportion to the total agricultural GHG emissions.
The study, which used a partial equilibrium approach, showed a reduction in CO2 emissions of 20 per cent required a significant change in the pattern of agricultural production away from cropping and into livestock production. Such a change was estimated to impose substantial adjustment costs on the community in addition to a reduction in agricultural revenue of about 5600 million a year.
The major source of GHG emissions from Australian agriculture are methane from livestock, both those from ruminants and those resulting from the fermentation of the dung of livestock raised intensively. The effect of a 20% reduction in CO2 emissions was to cut CO2 impact from 15% to 11%, raise methane from 62% to 65% and nitrous oxide from 23% to 24%. Total CO2 equivalents actually rose from 181 Mt to 188 Mt.
Further details of the study are contained in Appendix III.
3.4.6 Dynamic General Equilibrium Modelling Required
In order to assess agricultural impacts satisfactorily a dynamic general equilibrium type model would be required.
As a final word, the authors of the Australian study conclude the general equilibrium effect of emission taxes is likely to be complex and beyond the scope of the type of partial equilibrium model used in their analysis. They state that the actual effect will depend on the way in which the emission tax is integrated into the whole tax system, on the expenditure structure of the economy, and on the effects of corresponding taxes in ,other countries. Such an analysis is beyond the scope of the present study.
3.5 ANALYSIS OF ENERGY TAXES
Given the uncertain nature and degree of impact of the possible least cost policies, the approach adopted to determine the impacts on agriculture is to set up a simple framework against which differing policies can be assessed.
On the cost side, input/output coefficients are useful as a basis to determine the initial impacts of energy price changes on agriculture. Energy in this case is taken to mean liquid fuels and electricity.
3.5.1 Input/Output Model Analysis
Input/Output analysis has the potential to provide a basis to estimate the direct and indirect impacts of energy tax policies on agriculture from an aggregate and per farm basis. The basic framework for utilising Input/Output analysis to determine the impacts of changes to energy policies has been provided by Peet et al, (1987). SriRamaratnam and Narayan (1991) have adapted the inter-industry tables to provide additional information for analysis in the agricultural sector. They have aggregated industries of little interest to agriculture while maintaining the disaggregation of the pastoral and related sub-sectors in upstream and downstream activities. Their work is based on the 1986/87 inter-industry data.
3.5.2 Direct Input
Row elements in the Transactions table represent the physical input of a particular activity (in dollar terms) to produce the output, also in dollar terms, from the activity represented by the column. This can be transformed through the Direct Coefficients table to show the input of an activity in cents required to produce a dollar of output. For example, Petroleum Refining provides $44,000 of input into the output of $2,443,000 from Sheep farming (see Appendix IV, Table A4.1). The conversion to a coefficient shows that every dollar of output from Sheep requires 1.8 cents of input from Petroleum Refining. This relationship is used below to estimate the direct impacts of an energy tax.
The SriRamaratnam and Narayan model breaks agriculture into eight activities: Sheep, Dairy, Beef, Mixed Livestock, Horticulture, Cropping, Fruit and Agricultural Services. These can be aggregated into a single sector - Agriculture. In addition, by aggregating Sheep, Beef, Mixed Livestock, and Cropping it is possible to obtain coefficients for the total Sheep and Beef sub-sector.
3.5.3 Aggregate Analysis
By applying the input/output coefficients for Agriculture to Gross Agricultural Production (GAP) it is possible to obtain an estimate of the input of fuels related activities to GAP in dollar terms. For example, GAP for the year ended March 1992 was estimated at $8,832 million (SONZA, 1992). The coefficient for Petroleum Refining input into Agriculture is 0.01731. This translates into $153 million of Petroleum Refining input into GAP (see Appendix IV, Table
The second round affects can be assessed by measuring the change in price of energy related activities. The key energy related activities in the input/output model are: Industrial Chemicals, Electricity and Road Freight. Applying the Direct coefficients from Table A4.1 indicates that in 1992 output from Agriculture of $8,832 million required input of $151 million of petroleum fuel, $437 million of industrial chemicals, $118 million of electrical energy and $157 million in road transport. Total direct energy inputs amounted to $865 million or 18% of Intermediate Consumption (the National Accounts definition of current expenditure).
Table 3.1 ENERGY INPUTS INTO GROSS AGRICULTURAL PRODUCTION
| First Round Input | ||
| Petroleum Refining | $153 million | |
| Second Round Inputs | ||
| Industrial Chemicals | 437 | |
| Electricity | 118 | |
| Road Freight | 157 | |
| Sub-total | 712 | |
| Total | 865 | |
| As % of Intermediate Consumption | 18% | |
3.5.4 Per Farm Analysis
The impact of energy price changes on the major farm types: Sheep and Beef, Dairy, Cropping, Deer, Kiwifruit and Apples can be approximated oil a per farm basis by applying appropriate coefficients to Gross Farm Revenue (see Appendix IV, Table A4. 1). The data used relating to farm type is the MAF Farm Monitoring representative farms for 1990/91 (MAF, 1992). Using these representative farms gives an indication of the impact on a typical farm of a particular farm type, but because the data is non-statistically valid it is not possible to aggregate back up to the national level. Energy inputs on Sheep and Beef and Cropping farms are shown below (see Appendix IV, Table A4.3 for the remaining farm types).
Table 3.2 ENERGY INPUT PER FARM
Sheep & Beef |
Cropping |
||
| Petroleum Refining | 2,213 |
7,526 |
|
| Industrial Chemicals | 6,187 |
18,517 |
|
| Electricity | 1,334 |
4,218 |
|
| Road Freight | 2,335 |
3,253 |
|
| Sub-total | 95856 |
25,987 |
|
| Total | 12,069 |
33,513 |
|
| % of Cash Farm Expenses | 16.3 |
26.1 |
|
The results show a significant difference between farm types in relation to exposure to energy inputs. The average sheep and beef farm with cash expenses of $74,000 has direct energy costs of $12,100 which represents 16% of cash farm expenses while the average mixed cropping farm requires direct energy inputs of $33,500 on total cash farm expenses of $128,400 (26%).
3.5.5 Impact of Energy Taxes
Assuming that petroleum prices rise by say 10%, this would mean that the cost of petroleum input into Agriculture would rise by $15 million ($153 million * 10%). This principle can be applied to assess the first round impact of various levels of energy tax on agriculture at the national level and at the per farm level.
It is assumed in this simple treatment that there is no change in demand for the input as a result of the change in price. Given price elasticities of demand for inputs, such as fuel, then the initial response by farmers to the change in price could be assessed. To our knowledge data specifically for agriculture is currently not available in New Zealand. Besides Howard and Tan (1992) cast doubt on the usefulness of energy elasticities. They regard the true value of energy elasticities as highly uncertain and caution the use of such estimates in forecasting future energy demand for many reasons.
Estimates of energy elasticities have been made for other sectors of which 'Other Industry' (i.e. industry excluding energy) is probably closest to agriculture. Elasticities based on the period 1961-90 show a short run price estimate of -0.06 and for the long run -0.11. Income elasticities were 0.72 and 1.26 for short and long run respectively. Short run is less than one year and long run greater than one year.
3.5.6 Indirect and Induced Requirements
Further transformations of the Transactions table of the input/output model would allow the estimation of Indirect Impacts and Induced Requirements from changes in energy prices. Indirect Impacts relate to upstream and downstream industries from agriculture. Induced Requirements arise from changes in household income due to an initial change in output. To our knowledge this data is not currently available for New Zealand.
3.5.7 Level of Energy Tax
A major problem associated with assessing the impact of taxes on agriculture is determining the level of tax that would apply. Estimates of the appropriate level for a 15% or 35% decrease in emissions by the year 2000 have not as yet been made for New Zealand.
One study from the United States indicates that the level of tax that would be effective in abating emissions is around US$100-$240 per tonne of carbon. This equates to a tax of between 10-30 NZ cents per litre of petroleum fuel. While these levels may appear low compared to petroleum prices, the main impact is on coal usage because of its higher carbon content and lower price per tonne.
The situation in New Zealand, however, may differ as coal usage is much lower than many overseas countries. For example, coal represents only 1.9% of the energy input into electricity generation and 11.9% of total primary energy. If coal usage is a significantly lower proportion of energy consumption compared to that used in overseas studies then the size of the tax on liquid fuels may have to he considerably higher to achieve an equivalent reduction in emissions.
New Zealand estimates of the appropriate level (Arnoux, pers. corn.) are far higher. In order to straddle the possible range of taxes the results of the analysis are presented for a range of liquid fuel tax levels covering 10% to 200%.
3.5.8 Results
Given the assumptions above it is possible to obtain broad indications of the initial impacts of energy taxes on agriculture. The results of this analysis assuming a 10% increase in energy prices are set out in Table 3.3. Impacts of an energy tax at levels between 10% and 200% are provided in Appendix IV.
3.5.9 Discussion
These results represent only a rough indication of the immediate first and second round impacts on agriculture of a range of energy price increases. To adequately assess the response of the agriculture sector over time would require a dynamic simulation approach within a general equilibrium framework. Such an analysis was beyond the resources of the present study.
Table 3.3 INITIAL IMPACT OF 10% ENERGY PRICE INCREASE
(increase in expenditure)
As % of |
|||||
First |
Second |
Combined |
Cash Farm |
||
AGGREGATE ($ million) |
Round |
Round |
Impact |
Expenditure |
|
| Agriculture | 15.3 | 71.2 | 86.5 | 1.9* | |
| PER FARM ($) | |||||
| Sheep and beef | 221 | 986 | 1,207 | 1.6 | |
| Cropping | 753 | 2,599 | 3,351 | 2.6 | |
| Dairy | 255 | 1,661 | 1,926 | 2.5 | |
| Deer | 214 | 952 | 1,166 | 2.2 | |
| Kiwifruit | 154 | 746 | 900 | 0.8 | |
| Apples | 389 | 1,884 | 2,273 | 1.3 | |
* % of Intermediate Consumption
The partial equilibrium approach utilised by Anandajayasekeram, et al, was able to cover only changes due to reductions of emissions of CO2 resulting from cultivation. The model was not able to cope with reductions in emissions of methane or changes due to reductions in carbon emissions from farm vehicles. It did not consider opportunities that may arise in the area of energy farming either.
The contribution of the Australian study was the conclusion that the application of an emissions tax on CO2 alone would actually increase GHG emissions from agriculture. It drew attention to the need for a comprehensive policy on GHG emissions reduction. The implication of this is that there will be increasing attention paid to methane and nitrous oxide in the future.
The actual impact of an emissions tax on New Zealand agriculture over time (which would not only cover energy usage in the form of liquid fuels and electricity but, emissions of methane from livestock) will depend on many factors. Such factors will include the way the emissions tax is integrated into the whole tax system, the expenditure structure of the economy and on the effects of corresponding taxes in other countries.
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