Emissions trading – world famous in New Zealand

New Zealand’s emissions trading scheme – world famous in New Zealand

Don Nicolson, President of Federated Farmers, speaking to the Australian Farm Institute’s Agriculture and Greenhouse Emissions Conference.

It’s my warm pleasure to be here in the beautiful city of Adelaide. I know Australians consider New Zealand the shaky isles while we, in turn, look to Australia, Queensland especially, as potentially the West Island of New Zealand.

So I wish to sincerely thank Mick Keogh and the Institute’s staff, for the opportunity to be on the big island. Only last month we collectively celebrated on ANZAC Day, the strong bond that exists between our two nations. Yet when it comes to emissions trading we are striking out on divergent paths.

Its ironic Federated Farmers has had more media coverage in Australia on the New Zealand Emissions Trading Scheme than back across the Tasman. Here, you have a media that has shown a detachment and a willingness to revisit past positions; in New Zealand we get clichés. Let me illustrate.

At very the end of April, the editorial of the New Zealand Herald proclaimed:
“The Government is right to carry on with its relatively timid emissions trading scheme… Price increases will in practice be small, probably lower than the recent rises and falls in a competitive market…Agriculture, our key exporter, will not be covered until 2015 and then enjoy generous taxpayer assistance to make the scheme's impact negligible for years beyond.”

At the beginning of this month, Wellington’s Dominion Post editorial read:
“In the wake of Australia's climate change backtrack, Federated Farmers and several business lobby groups have called upon the Government to do likewise here. It should resist the temptation. Just because Australian Prime Minister Kevin Rudd has gone wobbly at the knees…is not reason for John Key and his colleagues to do the same…The emissions trading scheme that is due to come into force on July 1 is the very least New Zealand can do and hope to maintain international credibility – credibility that is vital to a small trading nation which ships much of its produce half way around the world.”

Editorials in other major papers and other ‘experts’ exclaimed the need for New Zealand to stay the ETS path. The fact no one else is taking this path is immaterial. Last year I labelled this zeal ‘Greenicide’ – being an act or an instance of intentionally ruining an economy by slavishly following green policies.

The ETS is greenicide led by zealots but I ask you this, how many of you have heard of Lucy Lawless, Robyn Malcolm, James Salinger or Sir Stephen Tindall? New Zealand’s ETS is only world famous in New Zealand.

According to 117 New Zealand Parliamentarians, a chunk of our media, actors and 9,000 carbon foresters, New Zealand is embarking on the most audacious branding exercise ever conceived. Global in scope, ‘the brand’ takes market forces, supercharges them with the power of righteousness and uses them to drive what to-all-intents-and-purposes, is a moral crusade. All going to plan, other nations will be powerless to resist New Zealand’s underlying logic with our goods sailing (but not, of course, flying) out the door to buyers willing to pay more for carbon neutrality.

Or, just maybe, New Zealand has embarked on a lonely, delusional and badly-timed odyssey that will cost my country dearly. Leaving the rest of the world, including the highly influential Wall Street Journal, shaking its collective head in bewilderment. New Zealand, the land which swallowed its own propaganda. It’s no wonder our Government receives congratulatory emails from overseas about our acronym rich Emissions Trading Scheme (ETS). I would send one if in their shoes.

The Kiwi ETS becomes reality on July 1, though in hindsight, April 1 would have been more auspicious date.

On that day, electricity generation, transport fuels and industrial sectors will be required to buy emissions units to cover their greenhouse gas emissions, known as GHG’s. It’s estimated that New Zealand’s retail electricity prices will rise by five percent and add four cents a litre to the cost of petrol and diesel. ‘Trifling’ stuff according to the New Zealand Herald. We farmers, according to our uncritical media, have absolutely no extra costs to face from a ‘timid’ ETS.

Very odd then that its first year, being 1 July 2010 and not 2015, it will cost pastoral agriculture at least $87 million. This figure is not hard to compute and is publicly available given company announcements and Monitor Farm budgets. There’s a massive disservice to the New Zealand public that these costs have not been outed by our media. Yet that doesn’t count the impact of the ETS will have on horticulture, plantation forestry or fishing – a third of New Zealand agriculture.

We know the ETS will from 1 July, add $17 million to the cost of dairy farming, $16 million for sheep and beef farmers and $5 million to the cost of arable farming. That’s the ‘trifling’ impact of just these fuel and electricity increases. That’s just two out of some 30 farm inputs.

Fonterra Cooperative Group has said its annual cost of processing will increase by $38 million from 1 July while we estimate the impact on the meat processors will be more than $10 million.

By 2015, the entire processing sector will face increased costs pushing $127 million dollars. Farmers will ultimately bear the brunt by way of reduced payouts and costs.

Yet the scary unknown remains the impact the ETS will have on the $12.5 billion worth of farm inputs we use each year. If the ETS impacts our cost base by, for example, one percent, the real impact on agriculture from 1 July 2010 could well be north of $200 million.

That’s a lot of money for a ‘trifling’ impact on a sector supposedly ‘immune’ from the ETS.

Back on Planet Earth, Federated Farmers vigorous lobbying over 2008 and 2009 means agriculture will be the last sector to enter the scheme. At Federated Farmers 2009 National Council, the New Zealand Prime Minister, the Hon John Key, said the ‘predicted’ annual cost per farm from and I must stress that word, from 2015 had reduced 90 percent – from $30,000 under Labour to $3,000 under National.

Yet that ‘$3,000’ is only for farm based methane (CH4) and nitrous oxide (N2O) emissions. It takes absolutely no account of the ETS’ impact from 1 July 2010 on the $866 million worth of fuel and electricity consumed by New Zealand’s sheep, beef, dairy and arable farmers. Nor increased processing and cost increases on the other $11.6 billion of farm inputs.

Cynics rightly ask that if scientists can’t accurately model the ash cloud from Iceland’s volcano, how can the New Zealand Government be so definite about future costs? Yet, given significant recent backsliding overseas, our Government has signalled it won’t do unto agriculture unless our trading partners do undo their farmers. Talk is cheap unless the current legislation is amended putting that option into law.

While our ETS may win kudos on the climate change cocktail circuit, our scheme won’t make one jot of difference to global emissions.

Kiwi families from 1 July will be forced to pay more for every good and service, but the $25 billion question is this, will overseas consumers do likewise? It’s a huge gamble with 64 percent of New Zealand’s commodity exports. New Zealand farmers are the only farmers in the world to be penalised under an ETS for the natural emissions of ruminant animals. Is it not a natural gas?

In 2007, the Rudd Government won power with high sounding claims climate change was the ‘great moral and economic challenge of our time’. Yet as the costs, claims and science underpinning it have come under scrutiny, the Australian electorate has shifted your politicians.

Before 1990 adverse events were treated as ‘acts of God’ but post 1990, have you noticed they have become ‘evidence’ of climate variation. Evidence shaken to its very core by ‘climategate’ leading to a number of scientists reappraising recent assumptions. That Icelandic ash cloud is reason alone to look at how computer models can make huge and expensive mistakes.

So with your Carbon Pollution Reduction Scheme now put back to 2013, any pretence of harmonisation has gone. Our current Climate Change Minister, the Hon Nick Smith, has gone to Damascus. In 2003 he stood on the steps of New Zealand’s Parliament to berate the then Labour Government’s plan to tax farm animal emissions In August 2009, as a Minister, he listed harmonisation as the third major plank in amending Labour’s ETS. I quote:
“First, as I mentioned before, we recognise that climate change is a global issue. Success is only possible when countries work together. Australia is our nearest neighbour, with deep political, social and economic ties between our countries. It makes sense for such close cousins to work together for the betterment of both.

Secondly, harmonisation of carbon pollution reduction schemes, just as with the advantages of trade, benefits both countries by ensuring the lowest-cost means for reducing emissions.

Thirdly, harmonisation reduces the compliance costs on both sides. There will be considerable public and private expense in measuring, reporting and ensuring compliance with emissions trading regimes, and these can best be minimised through a common approach.

Finally, harmonisation reduces trans-Tasman competitiveness issues. We don’t want investment decisions being made on either side of the Tasman on the basis of who has the softest climate change policies. That could do harm to both economies.”

Despite that being said less than a year ago, we continue to plug ahead, without you.

Europe’s ETS, in comparison to our ‘all gases, all sectors approach,’ targets just 43 percent of industrial emissions and is based solely on carbon dioxide. It doesn’t apply to methane, nitrous oxide and even fluorocarbons – 48 percent of the European Union’s GHG profile. It begs the question why New Zealand’s ETS is timid when in fact, it’s the most onerous scheme in the world.

Sectorally, Europe’s ETS excludes emissions from transport (21 percent of EU emissions), households and small business (17 percent), agriculture (10 percent), construction and waste (9 percent). So the EU’s much trumpeted ETS, from where we’re told by New Zealand MP’s and the media, a ‘consumer backlash’ against New Zealand goods would come, omits just 57 percent of its own emissions.

The EU seems to realise that people have to eat, have shelter and be able to get from point A to point B. But what about our other major trading partners?

The United States’ Waxman-Markey Bill, a ‘cap and trade’ system has, like Australia’s, fallen under an electoral bus. Even then U.S. farmers weren’t just exempted from liabilities but were to be rewarded with emissions units. In February, it was announced that Japan’s troubled trading mechanism has been delayed until 2012, with its farmers similarly exempted. France’s carbon-tax plan died in March while plans for a trading scheme in Canada remain just that. Meanwhile China and India have no intention of going anywhere near an emissions cap. None of New Zealand’s trading partners are currently proposing the inclusion of primary food production either. None.

So will consumers in China and Asia pay more for our carbon neutral food?

The stark reality is that even if our ETS achieved significant reductions in our GHG profile down to zero, it would have almost no effect on global GHG emissions. New Zealand’s impact on global emissions, a mere 0.2 percent, dwindles as the global population and economy grows. Indeed emissions and population growth are inextricably linked. I predict that over the next thirty-years global GHG emissions will grow by some 30 percent irrespective of New Zealand’s ETS.

But the truly scary thing for New Zealand’s farmers is that the clock is ticking and no one seems to have the detail to hand. A request for detailed information from the Government on the Voluntary Reporting of Emissions, starting 1 January, draws a complete blank. It rams home my belief this is still big picture stuff struggling to be turned into a real policy.

While about two thirds of New Zealand’s GHG emissions is said to be methane there are no quick fixes either. The biggest single influence on emissions per animal is the quantity and type of feed eaten. Age also affects emissions per animal so farmers’ ability to influence things is limited to animal husbandry and the economics of farm management. Or, as one Australian wit suggested, we could replace all of our cows and sheep with kangaroos as they don’t produce methane during digestion. Genetic engineering may offer solutions but that opens up a fresh can of worms.

About one-sixth of New Zealand’s CO2-equivalent agricultural emissions is said to be nitrous oxide. Options to reduce it include removing animals from pasture during wet periods, stand-off pads and using feeds, high in energy but low in nitrogen. Nitrification inhibitors may help but only where these are feasible.

Farmers ‘could’ reduce their CO2 emissions by ‘investing’ in fuel efficient farm machinery, no-tillage technologies, maximising irrigation efficiency and improving fertiliser application accuracy for example. But given agriculture’s year-on-year productivity growth since 1990 has been 1.8 percent, efficient resource use defines New Zealand’s farmers.

In the hope of a eureka moment, the New Zealand Government has committed $45 million, over four years, to the 29-member Global Research Alliance on Agricultural Greenhouse Gas Research and $50 million more to the Agricultural Greenhouse Gas Research Centre based in Palmerston North. New Zealand’s funding for international collaborative research works out at $11 million annually, the United States is chipping in around $26 million a year, while Canada is putting in just under $10 million.

So New Zealand’s international research contribution into supposedly the ‘biggest crisis facing Planet Earth,’ is equivalent to one referendum or about a quarter of what’s spent each year just to support our 122 MP’s.

The farmer funded Pastoral Greenhouse Gas Research Consortium is working hard to develop technologies to reduce methane emissions. However, this technology is at least 10 to 20 years away from practical and profitable application at farm level You don’t turn around ruminant evolution with a piece of legislation.

But what about offsetting agricultural emissions by bringing New Zealand’s soil carbon into the equation? According to Professor Jacqueline Rowarth, Director of Massey University Agriculture, this could result in Kiwi farmers being worse off. Major factors driving New Zealand soil carbon changes are difficult to manage – drought and increased temperature for instance, cause a loss of carbon. Putting New Zealand soil carbon into the ETS could result in liabilities rather than credits. But Rowarth believes countries should be rewarded for maintaining carbon stocks in forests and soils. Federated Farmers agrees.

Given New Zealand farming is already highly efficient, so the law of diminishing returns will kick in. Lincoln University’s life cycle assessment, taking into account energy use and CO2 emissions associated with the production and transport of food products, shows New Zealand producers are far more efficient than our competitors. UK farmers use twice the energy per tonne of milk solids and four times more energy per lamb, even after shipping to Europe.

New Zealand’s efficiency gains since 1990 has 7 percent more lamb produced from 55 percent fewer sheep. Beef volumes are up 23 percent from 11 percent fewer cattle. Dairy production growth per cow has averaged 26 percent since 1990 – it’s the success story New Zealanders never hear. Let me paraphrase Lara Bingle, ‘so where the bloody hell is the New Zealand Government in telling this story to our consumers rather than pushing the ETS tax?’

Countering food miles is strategically more important. Our ETS will not make one single difference in fact, the opposite. Embracing an ETS, come hell or high water, tells the world we are a major polluter when we’re not. Food Miles maybe lowbrow, but fits with a laypersons perception that distance equates to pollution. Communicating our efficiency by way of factual defensible marketing ensures that when the recovery takes hold, Food Miles is put into its rightful place. The ETS cannot do that because New Zealand’s global efficiency as a food producer becomes a negative. The ETS becomes what it truly is – an efficiency transfer scheme from us to our less efficient, but geographically closer, competitors.

But we are nudging our technical limits and without a scientific breakthrough, the only way for farmers to radically reduce future costs under our ETS, is mitigation through carbon-sink forestry.

Landowners can generate carbon credits, called NZU’s, from forests planted after 1989 on land not previously planted in trees. I recently challenged carbon foresters with this, ‘hand on heart, who, in 2000, would have made investment decisions based only on the prospect of carbon trading?’ It seems bizarre 9,000 carbon foresters have won privilege at the expense of 63,000 farm businesses and plantation foresters. What about our property rights? For these carbon foresters to win financially, I, as a sheep farmer, have to lose financially. I cannot afford that.

Yet growing trees to sequester carbon – carbon farming – is radical because you can’t eat trees. The penalties that lie in our ETS for non-compliance, particularly with forests, is instructive – $8,000 for not notifying MAF that pre-1990 trees have been cleared, another $8,000 for not filing an emissions return and then being forced to surrender emissions units equal to what was lost in the forest plus an additional $30 per NZU surrendered. That’s a lot of punishment.

But if more land is put into trees it begs this question – in the face of a growing world population that will grow by three billion mouths over the next four decades – does it make sense for New Zealand, an efficient exporter of food, to grow trees?

The Government in public appears to be ignoring warning signs. A bit like Captain Smith who infamously ignored this message – “Captain, Titanic – Westbound steamers report bergs…and field ice…” So is our ETS malleable? Domestic pressure will build after 1 July 2010, when middle New Zealand and retirees, find the intellectual attraction of carbon neutrality in conflict with their bank balance. Despite the criticism our Government has copped from the business community, especially following U.S and Australian moves, it’s not for turning. At least not yet.

But here are some ‘caution – electoral harm’ facts. New Zealand imports around 3.4 billion litres of petrol and 3 billion litres of diesel so the ‘trifling’ four cents per litre of the ETS will add $256 million to the cost of fuel. In 2008, New Zealand consumed almost 39,000 GWH of electricity so the ‘trifling’ five percent ETS increase will add a mere $270 million more to electricity bills.
That’s $526 million sucked out of Kiwi pockets from 1 July in just the first year. Over half a billion New Zealand dollars more on doing business across the Tasman. That doesn’t count the cascade effect on goods and services all Kiwis, not just farmers, consume so costs will snowball through the economy. Agriculture’s $86 million direct cost burden is 16 percent of the total year one costs. I don’t feel left out until 2015!

Yet the research commitment just pales in comparison to what looks, feels and smells like a tax. So why, globally and nationally, are we not putting the same energy and the same political capital into efficient resource use and research? Farmers are progressive, innovative and dynamic and fully support the tools to profitably cut emissions while increasing production. If that was the vision then I’d sign onto it. So why the energy into a punitive ETS and not progressive research?

Emissions trading is a legislative gun forcing every Kiwi to participate even if they want to or not.

The ETS ascribes value to gases that are neither scarce nor desirable. This makes emissions trading the antithesis of a real market. The ETS is in fact an anti-market. It begs a question why we have not learnt from sub-prime or the Dutch Tulip crisis? We are ascribing value to gases that are neither scarce nor desirable and that’s nothing less than financial alchemy. If not nipped in the bud, billions and then trillions will become locked up in something resembling a cross between a Monty Python skit and a Greek tragedy.

The ETS is a Hydra so it falls to us and our allies to be New Zealand’s Hercules.

Thank you.

ENDS

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