Yesterday, the Government released its Te tātai utu o ngā tukunga ahuwhenua - Pricing Agricultural Emissions consultation document (Consultation Document), seeking feedback on a proposed new system that would, for the first time, price New Zealand's agricultural emissions. Given both the significance of agricultural emissions to New Zealand's overall emissions profile (agriculture accounts for approximately half of total emissions) and the importance of the agricultural sector to New Zealand's export revenue, the proposal is likely to be of interest to a wide range of organisations and individuals.
Consultation runs until 18 November 2022, after which the Minister of Agriculture and Minister of Climate Change will report on a proposed alternative pricing system by the end of this year. Legislation in relation to the final proposal will be introduced in 2023, with a pricing scheme to take effect from 2025. Given the tight timeframes involved, interested parties should take the opportunity to engage with the consultation and future developments.
Background to the current consultation
The Climate Change Response Act 2002 (CCRA) sets out New Zealand's domestic emission reduction targets. By 2050, greenhouse gases other than biogenic methane are required to reach "net zero", and biogenic methane (emitted primary by the agricultural sector) is required to be 24-47% below 2017 levels. There is also a 2030 target for biogenic methane of 10% less than 2017 levels.
The agricultural sector contributes around half of New Zealand's total emissions and is currently not subject to the Emissions Trading Scheme (ETS), the Government's primary tool in achieving both domestic and international emissions reduction targets. The Government has indicated that, while farmers and growers are taking action to reduce their emissions, further work is needed to achieve emissions reduction targets. It also highlights that opportunities arise for New Zealand exporters who are able to demonstrate that their products are made in a sustainable manner.
In May 2022, the He Waka Eke Noa partnership (between the industry, Māori and Government) presented a recommendations report, which proposed that farmers and growers be subject to a farm-level, split-gas levy as an alternative to the ETS. In June 2022, Climate Change Commission advice to the Government agreed that the proposed He Waka Eke Noa farm-level levy (with certain amendments) would be the most effective system.
If an alternative pricing system is not implemented by 1 January 2025, the default position under the CCRA is that agricultural emissions will be priced under the ETS at the processor level.
The Consultation Document
In the Consultation Document, the Government agrees with both He Waka Eke Noa and the Commission that a farm-level pricing system is the best approach for agricultural emissions and seeks feedback on a modified version of this. New Zealand would be the first country globally to introduce farm-level pricing for agricultural emissions.
Key features of the recommendations of He Waka Eke Noa accepted by the Government include:
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Requiring agricultural business owners that meet certain thresholds to report emissions annually through a single centralised calculation engine.
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The levy is proposed to be "split-gas", meaning that there are separate levies for long-lived greenhouse gas emissions (nitrous oxide and carbon dioxide) and short-lived greenhouse gas emissions (methane). The price for long-lived gases will be set annually and linked to the price of New Zealand Units under the ETS, with a proportional discount to be phased out over time, while biogenic methane levies will be set separately following advice from the Climate Change Commission.
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Funding mitigation technologies and practices through revenue raised from the pricing system.
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Recycling leftover revenue (after incentive payments and administration) back into the system to fund further research, tools, and technology.
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Creating a governance body to advise on the system strategy and use of its revenue.
Under this system, unlike the ETS, there will be no cap on emissions, and the market will not set the emissions price. The Government proposes introducing a penalties and offences regime similar to that already in existence under the CCRA.
As part of the consultation, the Government is also seeking feedback on a range of specific matters, including:
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Sequestration: The Consultation Document sets out a proposed pathway for dealing with sequestration from on-farm vegetation. He Waka Eke Noa had recommended that the capture of greenhouse gases by vegetation be recognised through on-farm pricing with a wide range of vegetation being eligible for sequestration discounts in the long-term. The Government has not accepted this aspect of the proposal. It instead proposes to permit the inclusion of new vegetation categories in the ETS where supported by science, with an interim system of incentive payments for additional sequestration in riparian vegetation and from managing indigenous vegetation until this can be achieved. These alternatives will capture a narrower range of vegetation than proposed by He Waka Eke Noa. We expect that this change will be of particular significance to interested parties – the Climate Change Commission has previously highlighted that recognising sequestration from non-ETS vegetation was a top priority for many farmers, although the Commission concluded that bringing non-ETS vegetation into the levy system was likely to increase complexity and was inconsistent with the split-gas target in the CCRA.
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Interim processor levy: An interim processor-levy that would apply if the farm-level is not ready to operationalise by 2025. The Government has acknowledged that the introduction of a farm-level system by 2025 is likely to be challenging. A decision as to which pricing system will be implemented in 2025 will be made next year.
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Synthetic nitrogen fertiliser: Options in relation to the pricing of emissions from the application of synthetic nitrogen fertiliser, either as part of the farm-level levy or within the ETS.
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Alternative schemes:
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The merits of a tradeable methane quota (which would operate more similarly to the ETS) as a potential future mechanism (although the Government has ruled out progressing this option in time for 2025). The primary reason for proceeding with a split-gas levy as opposed to a tradeable methane quota appears to be that it would be more complex and therefore difficult to implement by 2025.
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Whether bringing agricultural emissions within the surrendering obligations under the ETS is a preferable option to a farm-level system.
Please get in touch with a member of the team if you would like to discuss in more detail.