Climate setbacks possible as New Zealand redesigns agriculture carbon pricing

New Zealand's decision to exclude agriculture from the emissions trading scheme will make it difficult for the country to meet climate goals, with concerns raised regarding a restart of the planning process and over-reliance on technology, experts told S&P Global Commodity Insights.

Agriculture contributes about 50% of New Zealand's greenhouse gas emissions and 90% of biogenic methane production.

It is also a major contributor to the economy with the country's food and fiber export revenue expected to have reached NZ$54.6 billion ($34 billion) in fiscal year 2023-24 (July-June) and accounted for 81% of total merchandise exports, according to government data.

New Zealand aims to reach net-zero emissions for long-lived greenhouse gases, mainly CO2 and nitrous oxide, by 2050 and reduce biogenic methane emissions by 10% below 2017 levels by 2030.

"There are other policies that can be implemented to achieve our targets, but according to the government the ETS is meant to be the 'main lever' so I do not see this as a positive step toward the goal," said Sebastian Gehricke, senior lecturer and director at Climate and Energy Finance Group, University of Otago.

Under the Climate Change Response Act 2002, the absence of an agricultural pricing system would have triggered a provision that would bring the sector within the country's ETS scheme.

That came after the National-led coalition government said pricing of agricultural emissions will begin by no later than 2030, effectively delaying the policy to the end of the decade from 2025 proposed by the previous Labor government.

The government will amend the law to remove agriculture, animal processors and fertilizer companies from the ETS before Jan. 1, 2025.

Market reaction

"Starting fresh after so many years of delay is preposterous," Gehricke said, referring to the government's decision to replace the previous administration's partnership with a new Pastoral Sector Group to directly engage with sector organizations.

He Waka Eke Noa, the previous government's initiative, aimed to develop and implement an on-farm emissions pricing mechanism starting 2025.

"He Waka Eke Noa proposals were inadequate and far from ambitious, so disestablishing that makes sense, but not if agricultural emissions are to not be priced at all," Gehricke said.

The earlier proposal involved pricing methane at 11 cents/kg, equivalent to an NZU price of NZ$4.40/mtCO2e, with a recent parliamentary report modeling the high price scenario at $1.06/kg methane, equivalent to an NZU price of NZ$42.40, he said.

Platts, part of S&P Global Commodity Insights, assessed the price of NZU at NZ$53/mtCO2e on July 12.

"At first it would appear to make achieving the 2030 target more difficult, but that has mainly to do with emissions outside agriculture," said Troy Baisden, acting program director of climate change science and policy at Victoria University of Wellington.

If the efficiency of agricultural systems improved as expected at 1%/year, it would mean no change in agricultural production, Baisden said.

Alternative reduction methods

The shift has led to more funding for AgriZero, a public-private partnership owned by the government and agribusiness companies that aim to invest in ventures that reduce biogenic emissions from ruminant animals.

There was considerable hope in evolving products and strategies to reduce methane emissions from ruminants, particularly cattle, Baisden said.

"Some products like Elanco's offer substantial reductions and are going to market in countries like the US. However, these work as supplements to feed mixtures and getting the same gains will be challenging in New Zealand's pasture-fed systems, so timing will be everything," he said.

However, many of these technologies were unproven or not yet developed and might just serve as a distraction to allow business as usual, said Mike Joy, senior research fellow in freshwater ecology and environmental science, Victoria University of Wellington.

While new technology was needed and welcome, it was not game-changing enough to create a breakthrough in emissions reduction and ultimately New Zealand will need a carbon pricing model in some form, said Kristen Green, director at Kapiti Climate Insights and a former advisor to the government.

Implications for exports

"With the delay in pricing agricultural emission, New Zealand farmers may find they like European regulation via trade even less than the policies they have now jumped ship from," Baisden said.

New Zealand's agricultural exports will inevitably have to pay the carbon price to the EU based on its Carbon Border Adjustment Mechanism instead of generating revenue for the government, Gehricke said.

The EU's CBAM will start in 2026, putting a carbon tax on emission-intensive commodities exported to the region, mirroring the EU's internal carbon price under its Emissions Trading System.

Baisden said New Zealand could find itself trapped as a provider of commodities without the value capture from its brand associated with environmentally friendly and healthy products as the rest of the world works to reduce agricultural emissions.

There will likely be diplomatic pressure from the EU and the UK, but it will take some time to ramp up to a level that really affects New Zealand as a lot of those countries do not have their own agriculture emissions pricing systems, Green said.

"We are likely to see a situation where government takes a back seat role and reductions are driven by the likes of Nestle, Danone and other entities along the supply chain in the UK and EU who buy New Zealand commodities," Baisden said.