Emissions pricing options

Pricing options: what was discussed in February and March

He Waka Eke Noa partners asked farmers and growers about policy options in February and March, before giving advice and putting forward a preferred recommendation to the Government on 31 May 2022. The Partnership considered the trade-offs between the options when preparing final recommendations, including the feedback received from farmers and growers.

A range of options were considered by the partners.

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).

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 levying would be applied, which means that different levy rates would apply to short- (CH4) and long-lived (N2O and CO2) gases. This approach reflects that CH4 is not required to reduce to net zero 
• Rewards eligible on-farm sequestration, which 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 support emissions reductions through research and development, support adoption of mitigations, or pay for/provide credit for additional emissions reductions.

Advantages: 

• Enables a split-gas approach (treats short- (CH4) and long-lived (N2O and CO2) differently) 
• Calculates emissions at farm level which recognises a greater number of efficiencies and mitigations that could be taken up by farms  
• Farms that have taken early action to reduce emissions will face a lower emissions cost because emission reductions from on-farm efficiencies and mitigations are recognised in the tool to calculate on-farm emissions 
• Farms that have taken early action to maintain and increase sequestration will be rewarded because annual sequestration from existing vegetation will be recognised (if it meets He Waka Eke Noa requirements) 

• Any revenue raised through the levy would be invested back into the agricultural sector to generate further emissions reductions and support lower emissions food production. 

Disadvantages: 

• Significant administration costs, currently estimated at $80 million – $96 million per annum. This would be made up of $32 million – $43 million cost to farmers in time spent reporting i.e. up to $1,200 – $1,600 in time per farm, and $48 million – $53 million for operational costs. Establishment costs are estimated to be $124 million – $149 million. Further work is underway to refine these costs. 

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 levying would be applied, which means that different levy rates would apply to short- and long-lived gases. This approach reflects that CH4 is not required to reduce to net zero 
• Any revenue raised through the levy would be invested back into the agricultural sector to support emissions reductions through research and development, support adoption of mitigations, or pay for/provide credit for additional emissions reductions through Emission Management Contracts (EMC) and/or on-farm sequestration through Sequestration Management Contracts (SMC)  
• Farms and collectives could choose to enter into an EMC to get a payment for reducing emissions and/or an SMC to get payment for sequestration on-farm. 

Advantages: 

• Enables a split-gas approach (treats short- (CH4) and long-lived (N2O and CO2) gases differently) 
• Administration costs are lower than Farm-level Levy, but higher than NZ ETS, currently estimated at $39 – 66 million per annum. This would be made up of $4 million cost to processors, $8 million – $19 million cost to farmers i.e. up to $600 – $1,600 in time per farm and $27 million – $43 million for operational costs. Establishment costs are estimated to be $79 million – $129 million. Further work is underway to refine these costs 
• Could provide a transitional step towards a farm-level pricing system  
• EMCs would reward individual farm action and make a processor-level levy more effective at reducing emissions  

• Farms who have taken early action to maintain and increase sequestration can be rewarded via an SMC because this includes recognising future sequestration associated with existing vegetation (if it meets He Waka Eke Noa requirements).  

Disadvantages: 

• A processor-level price signal is blunt, applies only to fertiliser sales and farms that sell directly to processors and does not recognise individual farms for the actions they take to reduce emissions  
• To be effective at incentivising emission reductions, some EMCs may require a benchmark that could disadvantage those who have taken early action to reduce or already have low emissions.   

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 could decide whether to 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. short- (CH4) and long-lived (N2O and CO2) gases would be priced at the same rate per tonne of carbon dioxide equivalent (CO2e)  
• Currently only sequestration (carbon removals from vegetation) eligible for entry into 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 elements of revenue recycling designed through He Waka Eke Noa and paying for sequestration not eligible for the NZ ETS (e.g. riparian plantings). 

Advantages:  

• Low administration costs, estimated at $10 million per annum. This would be made up of $8 million in costs to processors, (which includes additional time spent reporting and auditing, passing on the cost to farmers, and purchase of New Zealand Units (NZU) and hedging costs) and $2 million for operational costs.  Establishment costs are estimated to be $3 million. If the Government were to introduce revenue recycling or recognise additional sequestration this would increase the administration costs, including costs for farmers 

• Any revenue raised through the NZ ETS would be invested back into the agricultural sector to generate further emissions reductions.  

Disadvantages: 

• A processor-level price signal is blunt, applies only to fertiliser sales and farms that sell directly to processors and does not recognise individual farms for the actions they take to reduce emissions 
• Does not treat short- (CH4) and long-lived (N2O and CO2) gases differently. The same rate would apply to short- and long-lived gases. 

On-Farm Sequestration

Both the Farm-level Levy and Processor-level Hybrid Levy would recognise on-farm sequestration. Recognition for on-farm sequestration will be funded through the revenue from pricing emissions. The value of sequestration would be set at a price that balances the incentives to recognise sequestration and reduce emissions while ensuring the affordability of the system. 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 indigenous regenerating/planted forests, riparian planting, shelter belts, perennial cropland, non-NZ ETS eligible woodlots/tree lots, and scattered exotics 
• Use different methods to calculate sequestration rates depending on the vegetation type, state, and stage of development 
• Place liabilities on vegetation if it is cleared (permanent categories) or cleared and not replanted (cyclical categories). This relates only 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 
• Provide a pathway for other forms of sequestration (e.g. soil carbon, tussock grasslands) to be on-boarded when there is sufficient evidence and 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
Threshold	None	200 T CO2-e (or 40 T of N)	None
Price Setting	ETS Market	Independent Body	Independent Body
Price Exposure	Free Allocation. 95% and 1 % phase out	To be determined by independent body	To be determined by independent body
Farm Plan and farm level reporting	No	GAP farm Plan	Voluntary through an Emissions Management Contract
Sequestration	Earn units for eligible forestry	Offset - eligible woody vegetation	Offset - eligible woody vegetation through Sequestration Management Contract
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	$80 - 96,000,000	$39 -66,000,000

 

Effectiveness of Options based on Updated He Waka Eke Noa modelling

Gas	Farm-level Levy and revenue recycling	Existing policies	Waste sector	Total
CH4	4.3%	4.4%	1.7%	10.4%
N2O	1.8%	2.9%		4.7%

 

Gas	Processor-Hybrid Levy and revenue recycling	Existing policies	Waste sector	Total
CH4	3.9%	4.4%	1.7%	10%
N2O	1.7%	2.9%		4.6%

 

What happens after the recommendations in May?

The He Waka Eke Noa partners completed broad nationwide engagement with their farmers and growers in February and March 2022. Feedback from engagement will form part of the final policy recommendations to the Minister of Climate Change and the Minister of Agriculture by 31 May 2022. 

The Government will consider He Waka Eke Noa recommendations and make final decisions on an agricultural emissions pricing system. This will involve consideration of a range of factors such as implications of meeting New Zealand’s climate change targets, and engagement with wider stakeholders outside the agricultural sector

• 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.