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Emissions pricing

Pricing options: what are we discussing in November and February?

He Waka Eke Noa partners will ask farmers and growers about policy options in February before giving advice to the Government. The Partnership has to consider the trade-offs between the options.

A range of options were considered by the partners, and the options that the partners will seek feedback on are:

1. Farm-level levy
2. Processor-level hybrid levy.

The alternative to these options is the ‘Backstop’ – Agriculture in the NZ Emissions Trading Scheme (NZ ETS).

The ‘Backstop’ – Agriculture in the NZ ETS

The Government has legislated that agricultural emissions will enter the NZ ETS if an effective, workable alternative is not put forward by the Partnership.

The key features of the ‘backstop’ are:

  • Emissions are calculated at the meat, milk, and fertiliser processor level, based on the quantity of product received from farms, or in the case of fertiliser, sold to farms.
  • Processors would likely pass on the cost to farms based on the quantity of product processed, or fertiliser bought.
  • Initially 5% of emissions from agriculture would be priced (95% of emissions would be freely allocated to processors). Free allocation is expected to reduce by one percentage point a year.
  • All gases would be treated the same; i.e., methane and nitrous oxide would be priced at the same rate per tonne of carbon dioxide equivalent (CO2e).
  • Currently only sequestration (carbon removals from vegetation) eligible for the NZ ETS is recognised.
  • Government intends that any revenue raised through the backstop would be invested back into the agricultural sector to support further emissions reductions. This could include paying for sequestration not eligible for the NZ ETS (e.g., riparian plantings).

Farm-Level Levy

The key features of farm-level levy are:

  • Emissions are calculated at farm level using farm-specific data. The farm then pays a price for its net emissions.
  • A split-gas approach to pricing would be applied, which means that different levy rates would apply to short- (methane) and long-lived (nitrous oxide and carbon dioxide) gases. This approach reflects that methane is not required to reduce to net zero.
  • Rewards eligible on-farm sequestration and can offset some of the cost of the emissions levy.
  • Any revenue raised through the levy would be invested back into the agricultural sector to generate further emissions reductions through research and development, incentives to uptake technology, or actions on-farm that help reduce emissions.

Processor-Level Hybrid Levy

The key features of the processor-level hybrid levy are:

  • Emissions are calculated at the meat, milk, and fertiliser processor level, based on the quantity of product received from farms, or in the case of fertiliser, sold to farms.
  • Processors would likely pass on the cost to farms based on the quantity of product processed, or fertiliser bought.
  • A split-gas approach to pricing would be applied, which means that different levy rates would apply to short- and long-lived gases. This approach reflects that methane is not required to reduce to net zero.
  • Farms (individually or in collectives) could choose to enter into an Emissions Management Contract (EMC) to get a payment for reducing emissions and/or for recognising sequestration on-farm.
  • Any revenue raised through the levy would be invested back into the agricultural sector to generate further emissions reductions through research and development, incentives to uptake technology, or to reward actions on-farm that help reduce emissions. One option considered for revenue recycling is an EMC.

On-Farm Sequestration

Both the farm-level levy and processor-level hybrid levy would recognise on-farm sequestration. These would:

  • Recognise some vegetation types not currently eligible for the NZ ETS. It would not recognise NZ ETS-eligible exotic forestry.
  • Recognise vegetation categories that are either permanent (indigenous/native vegetation that will not be harvested) or cyclical (vegetation that is felled and re-established, generally exotic species).
  • Recognise native regenerating/planted forests, riparian planting, shelter belts, perennial cropland, non-NZ ETS eligible woodlots/tree lots, and scattered exotics.
  • Place liabilities on vegetation if it is cleared (permanent categories) or cleared and not replanted (cyclical categories). This only relates to vegetation that is entered into the He Waka Eke Noa system. There are also provisions for when vegetation is removed as a result of adverse events and customary harvest.
  • Use different methods to calculate sequestration depending on the vegetation type.
  • Provide a pathway for other forms of sequestration (e.g., soil carbon, tussock grasslands) to be on-boarded when there is sufficient evidence or measurement techniques.

Options summary table

 

NZ ETS

Farm-level

Processor-level hybrid

Who Pays the Bill

Processor or Fertiliser Company

Farmer / Grower or collective

Processor / Fertiliser Company

Tax Type

Trading Scheme

Levy

Levy

Pricing Approach

Carbon Equivalent

Split Gas

Split Gas

Price Setting

ETS Market

Independent Body

Independent Body

Price Exposure

Free Allocation. 95% and 1 % phase out

To be determined

To be determined

Farm Plan and farm level reporting

No

GAP farm Plan

Voluntary through and Emissions Management Contract

Sequestration

Earn units for eligible forestry

Offset - eligible woody vegetation

Offset - eligible woody vegetation

Investment in R &D

Yes

Yes

Yes

Total cost to participate and operate the system (not including the cost of emissions) Per Annum

$10,000,000

 

$113,000,000

To be determined

Emission Reduction Achieved by 2030

 1%

1%

1%

Threshold

None

200 Tonnes C02 equivalent

None

What’s next?

Sector partners are currently running targeted engagement to test out the options and policy questions with small groups of farmers and growers using this document on pricing options.

The He Waka Eke Noa partners are planning broad nationwide engagement with farmers and growers in February 2022 to talk about the options. Feedback from these discussions with farmers and growers will form part of the final policy recommendations to the Minister of Climate Change and the Minister of Agriculture in April 2022.

What happens after the recommendations in April?

  • The Climate Change Commission will provide advice to Ministers in April 2022 on assistance to participants, to be considered alongside the Partnership’s recommendations for a farm-level pricing system.
  • This will feed into the broader advice from the Commission in June 2022, which assesses progress against legislated milestones and whether a farm-level pricing system can be implemented by 1 January 2025.
  • Ministers are required to prepare a report and make it publicly available by 31 December 2022 on what an alternative pricing system should look like, on the basis of He Waka Eke Noa recommendations and the Commission’s advice.
  • Cabinet will make decisions on the final pricing system and any changes to legislation required to implement this. Public consultation typically occurs as part of any legislative change process.
  • The pricing system will be running in 2025.