The New Zealand government has reached an informal agreement with the agricultural sector to price emissions from livestock and synthetic fertilizers starting 2025 at the latest. Based on this agreement, the government is proposing a range of carbon pricing measures for agricultural GHG emissions both within and alongside the New Zealand ETS (NZ ETS).

Emissions from the agricultural sector make up around half of New Zealand’s emissions profile, consisting mostly of methane from ruminant livestock and nitrous oxide both from livestock and from fertilizer use for crops (for more, see ICAP's NZ ETS fact sheet). Agricultural emissions were originally planned to be included in the NZ ETS from 2008 but were excluded indefinitely by the previous government. The agreement to price agricultural emissions marks not only a turning point for New Zealand’s climate policy but will set a precedent for domestic carbon pricing worldwide.

On 16 July 2019 the government opened a public consultation outlining its proposed approach. The proposal is based on recommendations from New Zealand’s Interim Climate Change Committee (ICCC), as outlined in its report “Action on agricultural emissions: Evidence, analysis and recommendations”, which was submitted to the government in April 2019 and released to the public with the proposal. The report was commissioned one year ago to provide recommendations on policies to reduce methane and nitrous oxide emissions from the agricultural sector.

The government’s consultation document includes the following proposals for 2025 based on the ICCC recommendations and stakeholder feedback.

Pricing livestock emissions at farm-level with levy/rebate scheme

Livestock emissions (methane and nitrous oxide from livestock farming) should be priced through a farm-level levy/rebate scheme, rather than through the NZ ETS. Such a scheme is considered simpler and less costly than including New Zealand’s 20,000 to 30,000 small farms downstream in the NZ ETS. However, the levy/rebate scheme should be integrated into the same decision-making process and rules for setting the NZ ETS cap.

How this should be done is still to be decided. For nitrous oxide emissions, the rate of the levy could be set in line with the NZ ETS price. A different rate for methane could apply, depending on the national mitigation target for methane proposed under the Climate Change Response (Zero Carbon) Amendment Bill. This scheme is proposed to enter into force in 2025, with mandatory farm-level reporting from 2024 and voluntary reporting from 2023.

Including synthetic nitrogen fertilizers in NZ ETS

Manufacturers and importers of synthetic nitrogen fertilizers (precursors to nitrous oxide emissions from fertilizer use) should be fully included in the NZ ETS from 2025 at the latest. Pricing emissions from fertilizer use at the manufacturer/importer level is considered to provide the same incentives as pricing them at the farm-level.

This is different for livestock emissions, where abatement can be achieved through on-farm management techniques.

Next steps, allocation, and revenue use

The government proposes two options for interim measures up to 2025. Due to information and infrastructure needs, the farm-level scheme for livestock emissions cannot practically be implemented until then. The first option (based on ICCC recommendations) is for agricultural emissions to be priced through the NZ ETS at the processor-level (e.g. meat and dairy processors) ideally from 2020.

Processors already report on emissions generated by their agricultural products under the NZ ETS. While processor-level pricing would not be as effective at incentivizing emissions reductions on the farm, it would allow processors and farmers to already begin accounting for their emissions. In consultation with the agricultural sector, the government is also considering a different interim measure up until 2025.

The second option would not include processor-level pricing, but would consist of a formal agreement between the agricultural sector and the government to foster on-farm emissions reductions and make progress towards implementing on-farm pricing, funded both by the government and industry.

In 2022 the government will publish a report on the feasibility of implementing farm-level pricing by 2025. If the report shows it to be unfeasible, all agricultural emissions would be priced at the processor level from 2025.

In line with a previous political agreement, any carbon pricing mechanism will allow all agricultural sector emitters to receive the equivalent of 95% free allocation. The ICCC recommends that in order to maintain a strong incentive to reduce emissions, free allocation at the farm level should be based on a combination of farm output and land productivity, while output-based allocation is most suitable for the processor level. Assuming a carbon price of NZD 25/tCO2e (USD 17) and 95% free allocation, farmers could expect a carbon cost of, for example, NZD 0.01 per kg of milk solids or beef produced, currently priced at around NZD 5 (USD 3.38) per kg.

The government has indicated that funds generated from pricing agricultural emissions should go back to the sector to “encourage agricultural innovation, mitigation and additional planting of forestry.” The ICCC proposes that the estimated NZD 47 million (USD 32 million) per year generated by the scheme should be put into a dedicated Agricultural Emissions Fund for programs that directly help farmers and indigenous land owners to reduce emissions.

Public consultation is due to end on 13 August 2019, with any decisions on pricing agricultural emissions to be included in the Climate Change Response Amendment Bill in early 2020, together with a range of other planned reforms to the NZ ETS.