Climate Change Policy: Measures to address - Agriculture Sector GHG Emissions
4. Selected specific instruments – an evaluation of some options
Against the backdrop of the policy context and analytical frameworks outlined in sections 2 and 3, this section outlines some specific measures that might be considered for addressing agriculture emissions in CP1. These are provided to illustrate in a more tangible way how alternative approaches might be implemented, rather than as policy recommendations. The possibilities outlined cover a wide spectrum to facilitate comparison amongst the different classes of instrument. Some may go beyond current government policy, but are included for comparative purposes, and with a view to what could be longer term (post-CP1) policy possibilities.
4.1 Evaluation criteria:
There is a number of criteria against which policy instruments can be evaluated. These include: Emission mitigation Achieving a reduction in emissions is not the only measure of an instrument’s effectiveness in achieving climate change policy outcomes (cost also matters), but it is an important consideration. In particular, being seen to be making some progress in containing emissions may be important for New Zealand’s credibility in international negotiations.
Fiscal implications
The Kyoto Protocol allocates GHG rights and obligations to governments. As outlined in section 2, how and whether those rights and obligations are allocated (devolved), or priced, besides having important implications for economic efficiency, also has important fiscal implications.
Allocative efficiency and sector production
The choice of policy instrument to address GHG emissions will influence the level and efficiency of production in the agriculture sector. Production levels concern the aggregate level of output, while efficiency of production, that is, productivity, is concerned with optimizing production relative to the cost of that production.
The efficiency of production is maximized at the point where the economic value of a marginal unit of production just covers its marginal cost. A new element of production cost in agriculture (and other GHG emitting industries) is the cost of GHG emissions. These carry a marginal cost equal to their world price. For productivity to be maximized, the cost of GHG emissions needs to be factored into production decisions. All other things being equal, the efficient level of agriculture production with GHG emissions taken into account will be lower than was the case in the absence of a cost for emissions.
Consistency with long term
Desirably policy actions taken in the short-term should be consistent with intended long-term policy direction. Cabinet in its December 2005 decisions did not indicate a long-term strategic direction, pending further work and reporting back to Cabinet. The working assumption adopted for the purpose of this report, therefore, is that the desired long-term direction is as signaled in the Officials’ Review of Climate Change Policies. That was to move to more broadly-based pricing of GHG emissions, including possibly by developing cap-and-trade arrangements. Short-term policy options, accordingly, are evaluated in terms of their consistency with that policy direction for the longer term.
Sector responsibility for emissions
New Zealand has a long history of a “right to farm” as including an unlimited right to emit GHGs. Emerging concerns about climate change, and other environmental impacts, however, bring into question the unqualified nature of that right. Pressures already exist to address the unintended environmental effects of farming, whether by way of constraints imposed on the sector, or through structures that better “internalize” environmental impacts into land-use and production decisions. The former tend to work ‘against the grain’ of the incentives faced by emitters while the latter work more ‘with the grain’ and may engender a better embedding of environmental impacts into on-farm practices.
International influence
As noted, New Zealand has an interest in international climate change policy both because it is the only way we can influence the course of the climate changes faced by New Zealand, including by New Zealand agriculture, and because international policy will determine how much of the burden of global response New Zealand will shoulder. Domestic policy measures need to be evaluated in relation to whether they will help to bolster or undermine New Zealand’s international negotiating objectives. Consistency with the position New Zealand is taking on securing a sectoral approach to country emission targets is particularly relevant, as is the need to position domestic policy for a range of outcomes from international negotiations.
Compliance issues
An objective of all the government’s business regulation programmes is to avoid excessive compliance and administrative costs, for the firms involved as well as for the government. Generally this is easier to achieve with requirements that are simple rather than complex and that have an interface with a small rather than large number of points of obligation or entitlement.
Also, different categories of instrument can give rise to different types of compliance cost. Charges, mandatory standards and compensation payment/subsidy arrangements all require some form of compliance monitoring. Cap-and-trade arrangements require that tradable rights be defined, monitored and enforced, and additionally that mechanisms be established for recording transfers of ownership of those rights.
Cross-sector consistency Consistency of approach across different economic activities and sectors is necessary to avoid introducing distortion to the allocation of resources. This is particularly relevant as between agriculture and forestry which are competing uses for significant areas of land. A policy framework that provides for even-handedness across sectors can also help in building sector acceptance of the framework.
Equity
The implications of policy interventions for equity need to be taken into account alongside efficiency. It is sometimes indicated that instruments that can achieve emission reductions only by curtailing the emitting activity are less equitable than for where (low-cost) technology responses are available. An alternative, though perhaps related, aspect concerns whether a transition from one set of circumstances to another should be provided for; in effect, whether there should be a period during which ‘existing use’ rights are recognized, but with emitters on notice that those rights have a ‘use by’ date. The case for recognition of existing use rights during a transition may be stronger where technology-based low-cost responses are not available.
Co-benefits
GHG emissions are just one of a number of overlapping effects that agriculture has on the environment. Climate change policy therefore needs to be integrated as one element of an overall policy framework. The degree of alignment of instruments designed to address GHG emissions with the other elements of a framework for sustainable agriculture needs to be taken into account in choosing amongst the alternatives.
Risks and implementation issues
All policy interventions involve risks. In relation to climate change policy and agriculture these include:
• Those arising from the inherent uncertainties associated with climate change, including in relation to the future world price of emission rights, and future developments in the international framework for addressing climate change. These could evolve in unexpected ways.
• Sector resistance to policy change – which can complicate policy implementation, eg, the passage of necessary legislation.
Trade policy/WTO obligations
New Zealand has a virtually unblemished record in terms of avoiding subsidies for agriculture. In the case of policy measures that involve paying compensation for agriculture sector emission reductions, there could be a question concerning consistency with WTO requirements to avoid input subsidies, and/or for meeting the conditions for such payments to be classified as an environmental (“green box”) measure.
Treaty of Waitangi issues – land values
Cognizance of Treaty of Waitangi obligations is needed in respect of policy measures that have implications for land use rights and/or land values.
4.2 Some selected policy options
This section outlines and considers in some detail a range of specific possible policy possibilities for addressing greenhouse gas emissions in the agriculture sector. Five alternative economic instruments are canvassed, covering pricing emissions under charging, compensation, and devolution regimes, as well as a non-price, standards-based, approach. In each case a brief outline of the policy instrument is presented, followed by an assessment against the evaluation criteria outlined in 4.1 above.
4.2.1 A ‘Kyoto’ charge on nitrogen fertilizer
Instrument parameters
• A charge levied on nitrogen fertilizer calibrated to its emissions per tonne in New Zealand’s GHG inventory, valued at the world price of those emissions. The emissions covered would be those generated only by the fertilizer itself, not those stemming from the additional pasture growth and hence livestock production it promotes. In this sense, the charge would not directly penalize production (although, to the extent that it resulted in less fertilizer use, it would still have that effect, indirectly).
• A zero based charge. This would be on the basis that the 1990 level of nitrogen fertilizer application was only about 15 per cent of today’s level, that is, sufficiently close to zero that the complexity of an above-1990 marginal charging regime would be unwarranted.
• A wholesale point of obligation, that is, the manufacturer and, if applicable, importer. Currently there are only two (or three) principal manufacturing wholesalers of nitrogen fertilizer in New Zealand.
• The charge would be akin to an excise tax on nitrogen fertilizer and could be administered in a manner similar to the excises applied to, for example, motor spirits and alcohol. The rate of charge could be adjusted, say, annually to take account of changes in the world rice of missions. Indicatively, assuming a Kyoto price for emissions of NZ$15 per tonne, such a charge would add about 10% to the current price of urea of about $550 per tonne. (Detailed workings are attached as an Appendix.) Assuming little reduction in application rates, the charge would raise about $38 million of revenue per annum during CP1, or about $190 million over the five years. Overseas evidence indicates that the responsiveness of nitrogen fertilizer application to price is low and, although that evidence relates mainly to arable farming, best assessments are that the situation in New Zealand would be similar. The amount of nitrogen fertilizer applied in recent years has increased strongly, from about 50,000 tonne (nitrogen content) in 1988 to nearly 350,000 tonne in 2004/05. This increased rate of application reflects in part a structural shift from sheep to dairy farming and the increased incidence of clover root weevil (which diminishes clover nitrogen fixing). There also appears to have been increased farmer awareness of the contribution nitrogen fertilizer can make to pasture growth and hence production. To date the increased uptake has been mainly in the dairy sector, but increased application on sheep and beef farms remains a possibility. MAF has assessed that nitrogen fertilizer use could increase further, to between 408,000 and 433,000 tonnes by 2010.
Table 2: Assessment of a nitrogen fertilizer charge
| Criterion | Overall assessment | Comments |
|---|---|---|
| Emission mitigration | Favourable, but only slightly so. | The charge would be narrowly based (nitrogen fertilizer contributes less than 5% of agriculture emissions) and the available evidence, including from other countries where nitrogen fertilizers have been taxed, indicates that responsiveness to price would most likely be low. fertilizers have been taxed, indicates that responsiveness to price would most likely be low. |
| Fiscal position | Moderately favourable | The levy on nitrogen fertilizer emissions would fully offset the Crown’s Kyoto liability in respect of this emission source a source which accounts for a significant share of the growth in agricultural emissions since 1990. The offset to the Kyoto liability would be achieved both if, as expected, price esponsiveness was low (in which case revenue would be raised to cover nitrogen fertilizer’s Kyoto liability) or high (in which case emissions would be curtailed, and the Kyoto liability correspondingly reduced). |
| Allocative efficiency/productivity | Marginally favourable. | Incorporating the cost of nitrogen fertilizer emissions into the price of the fertilizer would enhance economic efficiency. Currently some fertilizer will be adding less to production than the all-up (inclusive of emission) cost of that production. In those situations, less fertilizer use would be associated with increased sector productivity, albeit at a slightly lower level ofproduction.However,consistent with low price responsiveness, the productivity benefit would be only at the margin. Mostly the charge would be expected to result in a revenue flow to the government rather than reduced fertilizer pplication.Nonetheless it would be an efficient source of revenue, compared with the alternative of covering the fiscal cost of nitrogen fertilizer emissions from general taxes, which distort economic allocation and hence cause ‘deadweight’ costs. In sum, a Kyoto charge for nitrogen fertilizer would make a marginally positivecontribution to sector, and economy wide, productivity. However the level of sector output would be slightly lower than otherwise |
| Consistency with long term strategy (broad-based pricing) |
A potentially significant first step toward broader-based pricing of emissions. | Introducing this charge would represent a significant, albeit narrow, step toward pricing agriculture sector emissions. Its value may lie as much in signaling future policy directions as in its direct emission mitigation, though the revenue raised would be material in relation to the sector’s overall Kyoto liability. |
| Sector responsibility for emissions | Small favourable | The charge would result in the sector facing a price for one element of sector emissions, although it would be a charge imposed by the government rather than within a market. Hence the internalization of the cost of emissions into production decisions may face some resistance, certainly compared with if the government was to make compensation payments for reducing fertilizer use, and possibly also compared with a cap-and-trade structure. (Under the latter, once emission rights and responsibilities had been devolved, the government would cease to be an active participant in the process, unlike under a government charging regime.) |
| International Influence | Moderately favourable | Charging for the emissions attributable to nitrogen fertilizer is an obvious candidate for demonstrating New Zealand’s willingness to take agriculture emissions seriously. (A number of Annex 1 countries already have measures in place to address the adverse environmental effects of nitrogen fertilizers.) At the same time, confining pricing to just the emissions attributable to the fertilizer itself, and not the additional production it supports, would be consistent with maintaining a position that New Zealand does not favour emission-reducing measures that penalize farm production. |
| Compliance issues | Favourable | A wholesale level point of obligation would mean that there would be only a handful of entities subject to the charge (possibly no more than 3 or 4). Determining the amount of obligation would also be straightforward if, as proposed, it was linked directly to the relevant GHG inventory emission factors and world price for emissions. The charging regime could be very similar to the specific duties payable on, for example, motor spirits and alcohol. |
| Cross-sector consistency | Slightly - moderately favourable | The charge would act as counter-weight to existing incentives to deforest land capable of dairying (eg, Central North Island), for which significant application of nitrogen fertilizer may be required to maximize early pasture growth. |
| Equity | Favourable | Much of the increase in nitrogen fertilizer application has occurred post the commencement of Kyoto negotiations – the sector has been on notice. |
| Co-benefits - water quality - soil erosion | Small favourable | A charge on nitrogen fertilizer would be consistent with policies aimed at addressing both climate change and water quality problems. Soil nitrates, to which the fertilizer adds both directly and indirectly, are a common source of both N2O emissions and nitrate contamination of water bodies. However, achieving water quality goals in sensitive catchments may require stronger policy action than would be consistent with meeting Kyoto Protocol responsibilities at least cost. A charge on nitrogen fertilizer at the rate envisaged would be a step toward achieving water quality goals, but perhaps only a small one. |
| Risks | Potentially significant | The main risk relating to a nitrogen fertilizer charge might be sector resistance. The argument might be made that the carbon tax was rolled back because the base became too narrow, but that a charge on nitrogen fertilizer would be much narrower still. That indicates the importance of such a charge being introduced as part of a well-explained and comprehensive package (possibly including ‘carrots’ as well as ‘sticks’). |
| Implementation issues | Legislation required. | |
| Trade- policy/ | No issues | |
| WTO compliance | ||
| Treaty of Waitangi | Need to consult with the Office of Treaty Settlements | Prima facie, a charge on nitrogen fertilizer would be akin to the government introducing or varying the rate of tax on, for example motor spirits or alcohol. However, as it may also have implications for land use, albeit at the margin, the Office of Treaty Settlements may need to be consulted. |
4.2.2 A broader based Kyoto charge on sector emissions
Instrument parameters:
• A broader charge to cover above-1990 (or a more recent year, eg, 2006) level emissions of:
• N2O fertilizer emissions (as above); and
• N2O livestock-attributed emissions; and
• Enteric methane emissions.
Cumulatively, these amount to about 5%, 32% and 100% of New Zealand’s agriculture sector emissions:
• A wholesale point of obligation, that is, the charge would be applied to dairy and meat processing companies on the basis of production throughput; with
• The charge calibrated to the Kyoto factors for each emissions source, at the world price of emissions.
Assuming a Kyoto price for emissions of NZ$15 per tonne, and again relatively low responsiveness to price, such a charge on > 1990 level emissions would raise about $570 million per annum. (This amount is only about three times that from the nitrogen fertilizer charge, notwithstanding that nitrogen fertilizer accounts for only 5 per cent of sector emissions, because in this case only emissions > 1990 levels would be charged.) The same charge if applied only to > 2006 emissions, of course, would raise no revenue initially, but would be expected also to raise about $115 over the five-year term of CP1, or $23 million per annum on average.
The assumption that responsiveness to price would be low is based on there being no more – indeed even less – scope to mitigate enteric methane emissions without reducing production than is the case for N2O emissions. However, a broader-based charge could result in a larger financial impost on the sector, and this could act as more of a counterweight to future production growth than a narrow fertilizer-only charge.
Devising a broad-based charge to apply to incremental emissions with a wholesale point of obligation would present some design issues. These include:
• whether the charge should apply to units of livestock or units of livestock production (eg, milk solids, meat, etc); and
• How to allocate 1990 base levels (up to which there would be a zero rate of charge), given industry structural and ownership changes that have occurred since 1990.
However, in principle, such an approach should be feasible. For example, one way of coping with post- 1990 structural change would be to allocate current processing companies a 1990 base level of through-put as a percentage of current through-put, the percentage being based on by how much industry through-put has increased since 1990. Going forward, 1990 base level emissions could also be adjusted to take account of changes in market share, so as not to penalize successful companies that grow their market share, to the benefit of those that lose market share.
Table 3: Assessment of a broader-based Kyoto charge on agriculture sector emissions
| Criterion | Overall assessment | Comments |
|---|---|---|
| Emission mitigation | Slightly-moderately favourable | Given that the limited scope to curtail N2O, and (at existing levels of intensity) becomes an uneconomic land use, relative to alternatives. At a Kyoto price of $15 per tonne Mt CO2 e, the impact on production, given current meat and milk-fat prices, would likely be slight to moderate. (For an ‘average’ dairy farm, for example, the cost has been estimated at about $2,500 to $4,500 per annum, relative to annual milk solid proceeds of about $400,000 (assuming 100,000 kg of milk solids @$4 a kg). |
| Fiscal position | Favourable | A broadly-based levy on sector emissions above the 1990 level would fully offset the Crown’s Kyoto liability in respect of those emissions. This would be the case whether the responsiveness was low (in which case revenue raised would cover the liability) or high (in which case emissions would be curtailed and the liability would be respondingly reduced). However, if the charge applied only to > 2006 emissions, the Crown would be left responsible for sector missions from the 1990 level up to current levels. The fiscal cost of that would amount to about $114 million per annum ($570 million over the five-year term of CP1). |
| Efficiency/ productivity | Favourable | Under this option, virtually all sources of emissions from agriculture would be priced at the margin. This would result in emission costs being factored into production decisions in away that results in economically efficient outcomes. |
| Consistency with long term (broad-based pricing) | Favourable | Under this option, virtually all sources of emissions from agriculture would be priced at the margin, ie, it would bring broad-based pricing of emissions to the agriculture sector. |
| Sector responsibility for emissions | Medium | Though sector emissions would be priced, the price would still be one imposed by the government, rather than established within a market. |
| International influence | Favourable | Implementing broad-based pricing of agriculture emissions at this stage could be seen as a strong response; one that might even place New Zealand ‘ahead of the game’. |
| Compliance issues | Favourable | Despite the breadth of the pricing, compliance costs could be kept low if the point of obligation was to be at the wholesale level (processing companies and fertilizer manufacturers/wholesalers). This could limit the points of obligation to a relatively low double-digit number. |
| Cross-sector consistency | Favourable | Applying a charge to agriculture sector emissions over and above current levels would be broadly aligned with compensating new afforestation, and charging for deforestation. A policy shift from the status quo, which is skewed in favour of agriculture, toward neutrality. |
| Equity | Favourable | The charge would apply only to above-1990 level, or “new” emissions, hence a moderate, or no, burden would be imposed on the ‘existing’ level of farming. |
| Co-benefits: - water quality - soil erosion |
Slightly favourable | A broad-based charge on agriculture emissions would be consistent with, but not targeted at, water quality and soil erosion objectives. It could result in small-modest changes in land-use at the margin. |
| Risks | Significant risks | Sector resistance could be significant, particularly if the charge was not accompanied with similarly broad-based pricing of other sector emissions – which Cabinet decisions have ruled out. |
| Implementation issues | Legislation would be required. | |
| Trade-policy/WTO compliance | No issues | |
| Treaty of Waitangi | Need to consult with the Office of Treaty Settlements | Prima facie, a charge on (ruminant) livestock farming could be seen as having implications for land use/land values, albeit at the margin; hence the Office of Treaty Settlements may need to be consulted. |
4.2.3 A ‘Kyoto credit’ for use of nitrification inhibitors
Instrument parameters
• Payment of a credit for treating pasture with an approved nitrification inhibitor;
• For the duration of CP1 (with a sunset clause);
• Calibrated to the Kyoto value of the inhibitor’s emission reduction properties;
• Approval being subject to recognition of the inhibitor’s emission reduction properties in Kyoto inventory calculations.
Nitrification inhibitors are products that reduce the extent to which both fertilizer and animal excrement form soil nitrates, and hence N2O emissions from both within the soil and from nitrate contaminated water bodies. They correspondingly increase the extent to which nitrogen taken into the soil is taken up in pasture growth (and initially were brought to market as products to improve nitrogen efficiency rather than to mitigate emissions). To some extent nitrification inhibitors, besides contributing to emission reductions, can serve as a substitute for nitrogen fertilizer, and in this way make a dual contribution to emission reduction goals.
Currently nitrification inhibitor products are being marketed by two companies, Ravensdown Fertilizer Co-operative Company Ltd, and Balance Agri-Nutrients Limited, and in two forms. One form, know as eco-n TM and marketed by Ravensdown, comes in a fine suspension (slurry) form, and is applied by spraying on to pasture. If applied in the correct manner under the correct conditions, it is assessed as being capable of reducing N2O emissions by 50 per cent – 70 per cent and leaching of soil nitrates into water bodies by 35 per cent – 50 per cent. (Given that correct application is critical for the product to be fully effective, it is made available to farmers only through applicators approved by Ravensdown; the product and the cost of application are purchased as a package, at a price per hectare of treated pasture.)
Other inhibitors take the form of a coating to nitrogen fertilizer and are applied in combination with the fertilizer. The emission reduction properties of these products are less well established.
Ravensdown has proposed that the government pay a credit for the eco-nTM product at the rate of $30 per hectare (compared with the current cost of $124 per hectare). This rate of credit has been based on a carbon dioxide price of $25 per tonne. If applied to all dairy pasture, the fiscal cost in CP1 has been assessed by Ravensdown at about $200 million, or $40 million per annum. The corresponding figures at $15 per tonne are $120 million and $24 million per annum. Ravensdown has also sought additional government funding of $650,000 over three years for research that is required for eco-nTM to obtain GHG inventory recognition.
The option outlined below broadly corresponds with the proposal being advanced by Ravensdown.
Table 4: Assessment of a ‘Kyoto credit’ for use of nitrification inhibitors
| Criterion | Overall assessment | Comments |
|---|---|---|
| Emission mitigation | Favourable (subject to confirming research) | The eco-nTM inhibitor is slated to reduce N2O emissions by 50% - 70%, depending on soil and other conditions. However questions remain about the permanence of the mitigation effect. It also promotes pasture growth and hence potentially increased CH4 emissions, but could offset some nitrogen fertilizer use and hence emissions from that source. Responsiveness to price could be significant given that production benefits already put inhibitors on the margins of economic viability. |
| Fiscal position | Neutral relative to status quo; but no inroad into the underlying Kyoto liability. | Credit payments, if calibrated to the value of the emission reduction of the product (at the world price of emissions), would be offset dollar-for- dollar by a diminution in the Crown’s Kyoto liability (subject to inhibitors being recognized in the GHG inventory calculation). But those payments would have to be funded; hence no inroad would be made into the Crown’s underlying Kyoto liability. |
| Allocative efficiency and productivity | Partly favourable, partly unfavourable | Introduces a price for nitrogen emissions. Hence least-cost reductions in nitrogen emissions, from both fertilizer and livestock sources, would be promoted. Also, production would be supported rather than penalized. But a fiscal cost, which would have to be covered by (distorting) general taxes would remain. |
| Consistency with long term (broad-based pricing) | Favourable | Introduces a price for emitting N2O, albeit a credit payment forgone. The pricing would be broader- based than a charge on nitrogen fertilizer alone, as it would address all N2O emissions (from livestock excrement as well as from fertilizer). |
| Sector responsibility for emissions | Unfavourable | The agriculture sector would face a price for nitrogen emissions, but as a compensation payment rather than a charge. This would imply an “existing use right” to emit, and would still leave for the future a shift of responsibility for emissions to the sector itself. (The ‘sunset’ provision would terminate the compensation payment, but if nitrogen emissions were to continue to be priced thereafter, a new charge on those emissions would then need to be put in place.) |
| International influence | Somewhat favourable | Could be regarded as a meaningful response to agriculture emissions (though it could be viewed less positively than would a charge on nitrogen emissions, as above, or a compulsory requirement to use nitrification inhibitor, as below). |
| Compliance issues | Favourable | Low compliance costs if the credit was paid at the wholesale level. |
| Cross-sector consistency | Favourable | While a compensation payment to agriculture, it would be paid only to the extent that the sector reduced its GHG emissions. It can be viewed as the equivalent of a compensation payment for new afforestation. |
| Equity | Favourable | Recognizes transitional ‘existing use rights’. |
| Co-benefits - water quality - soil erosion |
Favourable | Widespread use on dairy pasture could materially reduce the nitrate element of water contamination by agriculture (subject to outstanding questions about the permanence of the effect). Little if any implication for hill country erosion. The required method of application of the eco-nTM product at least precludes its use on hill country. |
| Risks | Some policy risks | The main risk is that the performance of nitrification inhibitors cannot be sufficiently proven to count towards reducing New Zealand’s GHG inventory. However, partial recognition would be a possibility if full recognition cannot be obtained. No sector resistance should be encountered to a credit payment, but there could be resistance to its termination at the end of CP1. |
| Implementation issues | Budgetary appropriation required. | |
| Trade policy/WTO compliance | Issues would need to be managed. | Prima facie a credit payment for use of nitrification inhibitors could be seen as an input subsidy; hence a need to structure the credit so that it meets WTO requirements to qualify as a “green” measure. |
| Treaty of Waitangi | No issues. |
4.2.4 Mandatory use of nitrification inhibitor
Instrument parameters
• A farm level point of obligation.
• Compulsory application of an approved (GHG inventory-recognized) nitrification inhibitor product either:
• In conjunction with the application of nitrogen fertilizer; or
• To prescribed pasture, for example, dairy pasture that carries more than ‘x’ cows per hectare.
Table 5: Assessment of mandatory use of nitrification inhibitor
| Criterion | Overall assessment | Comments |
|---|---|---|
| Emission mitigation | Favourable | The eco-nTM product marketed by Ravensdown is slated as reducing N2O emissions by up to 50%-75%. Compulsory application could result in more certain and (depending on the details of the compulsory requirement) greater uptake of nitrification inhibitors than under the option to pay a Kyoto credit. Compulsory co-use with nitrogen fertilizer would result in less broad-based emission mitigation, since it would not address emissions attributable to livestock on unfertilized pasture. |
| Fiscal position | Favourable | Fiscally positive as the Crown’s Kyoto liability would be reduced (by the amount of inhibitor applied times its emission reducing factor), at no fiscal cost. |
| Allocative efficiency/productivity | Unfavourable for allocative efficiency. Favourable for the level of sector output. | Optimal use of inhibitors depends on soil and other conditions. Thus, a compulsory requirement to achieve full uptake in some situations would result in over- (wasteful) use. On the other hand, a compulsory requirement at a relatively low level would result in situations where the required rate of application would be less than what the combined production and emission reduction benefits would warrant. Nonetheless, a low-level compulsory requirement would boost rather than reduce production, just not as efficiently as under a pricing approach. |
| Consistency with long term (broad-based pricing) | Unfavourable. | Imposing a compulsory requirement would run counter to a strategy to move toward broad-based pricing of GHG emissions. |
| Sector responsibility for emissions | Unfavourable. | Compulsion is less likely than pricing to engender acceptance by the sector of responsibility for GHG emissions. |
| Compliance issues | Unfavourable if a farm level point of obligation. Favourable if a co-use requirement with a wholesale point of obligation. | A compulsory requirement applied at the individual farm level would involve compliance having to be monitored and enforced at a very large number of points of obligation. Compliance issues would be less problematic in the case of a nitrogen fertilizer/nitrification inhibitor co- use requirement, at least in the case of inhibitor that takes the form of a coating to nitrogen fertilizer. However, that is not the case for the eco-nTM product, which is applied separately, and at different times, from nitrogen fertilizer. |
| Cross-sector consistency | Unfavourable | A compulsory standards approach has not been applied in other sectors – though may be with respect to vehicle emissions/ages. |
| Equity | Unfavourable | Compulsion implies imposition of uneven costs. |
| International influence | Moderately favourable | Requiring use of nitrification inhibitors could be regarded internationally as a moderately strong response to agriculture emissions (though still consistent with not penalizing production). |
| Co-benefits - water quality - soil erosion |
Favourable | Inhibitors are slated as reducing nitrate leaching into water bodies by up to 35%-50%. Widespread use on dairy pasture could materially reduce the nitrate element of water contamination by agriculture. Little if any implication for hill country erosion. (The required method of application of the eco-nTM product at least precludes its use on hill country.) |
| Risks | Moderately unfavourable | The major risks relate to: - sector resistance to a compulsory requirement - the possibility that inhibitors fail to achieve recognition as reducing New Zealand’s GHG inventory. |
| Trade policy/WTO compliance | No issues | |
| Implementation issues | Legislation probably required (or possibly capable of implementation under esource Management Act legislation.) | Whether it would be possible to mandate use of nitrification inhibitors by way of a National Policy Statement under the Resource Management Act is uncertain; if so probably only as a water quality related measure. (The Resource Management was amended to exclude greenhouse gases from the scope of the environmental effects it is concerned with.) |
| Treaty of Waitangi | No issues |
4.2.5 Cap-and-trade allocation of (nitrogen) emissions to dairy companies
Instrument parameters
Under this option, a level of (N2O) emission rights would be allocated to the dairy sector, with dairy processing companies being the point of allocation. Dairy companies would be responsible for any emissions above the level allocated and, correspondingly, able to sell any rights that become excess to requirements owing to emission reductions achieved by suppliers. Accordingly, the dairy processing companies – principally Fonterra – would face an incentive to work with their farmer suppliers to contain or reduce emissions, with financial benefits expected to flow back to farmers by way of a higher price for milk solids supplied. (A full flow-back of benefit to farmer suppliers could be expected in the case of the co-operatively-owned Fonterra and other companies could be expected to follow suit in order to maintain a competitive position vis-à-vis Fonterra.)
A number of pre-conditions, however, would need to be met before such an arrangement could be established. One relates to the availability of means – that are recognized for GHG inventory purposes – by which dairy farms can manage-down or contain N2O emissions. Currently the only such means is to reduce application of nitrogen fertilizer. Others, yet to be recognized in inventory calculations, but which potentially could be (on their emission-reducing properties being confirmed by further research) include use of nitrification inhibitors and of stand-off and feed-lot pads.
Importantly, such an arrangement would need to be negotiated rather than imposed: it does not appear possible to make one party (a processing company) responsible for the actions of others (farm suppliers). And the processing companies could be expected to enter into such an arrangement only on terms that would be advantageous to them, possibly, for example, by seeking allocations of emission rights above existing levels.
Table 6: Assessment of a cap-and-trade allocation of (nitrogen) emissions to dairy companies
| Criterion | Overall assessment | Comments |
|---|---|---|
| Emission mitigation | Moderately favourable | Emitters, via the processing companies, would face a world price for emissions – which depending on the extent of the mission allocation could be either a cost of having to purchase additional emission rights, or the cost of forgoing the opportunity to sell emission rights for financial benefit. Hence the emission mitigation effect, with respect to N2O emissions, could be expected to be similar to that under option 2.1.2 above. |
| Fiscal position | Uncertain – would depend on the size of the emission right allocation. | The greater the allocation of N2O emission rights, the less inroad would be made into the Crown’s Kyoto liability. Allocating emission rights for free, which recipients can sell on the world market, is equivalent to the Crown paying a compensation payment at the world price for emission reductions.) |
| Allocative efficiency/productivity | Mostly favourable | Emissions would be subject to a price, which could be expected to converge on the world price. This would be allocatively efficient. Under such the structure envisaged, processing companies could be expected to drive/fund the development of mitigating technologies (inhibitors, stand-off pads, nutrient budgeting etc). A qualification is that the Kyoto liability that remained with the Crown would need to continue to be funded from general taxes, which impose deadweight (efficiency) costs. |
| Consistency with long term strategy (broad-based pricing) | Favourable | The structure would result in pricing of marginal dairy sector N2O emissions, and could pave the way for the development of broader trading of emission rights. |
| Sector responsibility for emissions | Uncertain | The sector would assume responsibility for emissions above the level allocated – but if the allocation was generous, eg, above existing levels, that would mean significant responsibility would remain with the Crown. |
| International influence | Favourable | Could be regarded as a significant response to, and useful signal in relation to, agriculture emissions. |
| Compliance issues | A possible impediment | Compliance monitoring and enforcement would be devolved to the dairy rocessing companies – something which they may see as sufficiently problematic as to make them unwilling participants. |
| Cross-sector consistency | Potentially unfavourable | A generous allocation of emission rights could set unhelpful precedents for other sectors. |
| Equity | Likely generous recognition of ‘existing use rights’ | A generous allocation of emission rights could set unhelpful precedents for other sectors. |
| Co-benefits - water quality - soil erosion |
Moderately favourable. | Co-benefits would parallel the extent of emission mitigation achieved. |
| Risks | Some policy risks. | The main risks that would need to be considered are: - sector resistance, the degree of which would be inversely related to the size of the allocation. - that if the allocation was generous, that other sectors would claim similar entitlements – a potential fiscal risk. - that mitigating technologies are not sufficiently proven to count as reductions to NZ’s GHG inventory (hence limiting the scope for on-farm reductions of emissions and correspondingly lessening sector interest in participation). |
| Implementation issues | Unfavourable | Such an arrangement would need to be negotiated. The Crown would need to have alternative arrangements available as a credible fall-back. |
| Trade policy/WTO compliance | No issues apparent | |
| Treaty of Waitangi | Need to consult the Office of Treaty Settlements | An allocation of a property right would be involved. |
Contact for Enquiries
Sustainable Land Management and Climate Change
MAF
Pastoral House
25 The Terrace
PO Box 2526, Wellington
Tel: 0800 CLIMATE (254 628)
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