New Zealand reaches agreement with agricultural sector to price emissions from 2025

The New Zealand government has reached consensus with the agriculture sector to foster on-farm emissions reductions and work towards implementing farm-level pricing by 2025.

After announcing in July 2019 a proposal to examine options to price emissions from livestock and synthetic fertilizers starting 2025 at the latest, the government conducted a review of available evidence on two possible approaches as well as a stakeholder consultation from 16 July 2019 to 13 August 2019. The result was a decision to implement the second option, an agreement announced 24 October 2019 between the agricultural sector and the government to foster on-farm emissions reductions and work towards implementing a farm-level emissions pricing mechanism.

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.

Livestock emissions, which include methane and nitrous oxide from livestock farming, will be priced through a farm-level levy/rebate scheme starting 2025. How this will be implemented 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. The agreement excludes interim options to price agricultural emissions at the processor level, which were a part of the government’s July 2019 proposal.

Synthetic nitrogen fertilizers will be priced at the producer/importer level starting in 2025. Fertilizer is being treated differently from livestock emissions because there are currently no measurable farm- specific practices to reduce emissions other than to use less. As fertilizer emissions depend on the amount of fertilizer used, the incentive for farmers is the same whether these emissions are priced at the farm level or at the manufacturer/importer level, with the cost passed on to farmers. 

Under the current agreement, the agricultural sector will work with the government to develop a method to measure, report, and price GHG emissions at the farm level, including:

• improved tools for estimating and benchmarking emissions on farms
• integrated farm plans that include a climate module
• investment in research, development, and commercialization of low-carbon farming methods
• increased farm advisory capacity and capability
• incentives for early adopters
• recognition of on-farm forestry mitigation such as small plantings, riparian areas, and natural cover.

The agreement also includes provisions for a 2022 review by the independent Climate Change Commission. Should the review find that there is insufficient progress in developing a pricing mechanism for the sector, the government maintains the right to bring the sector into the NZ ETS (with the point of obligation at the processor level), even before 2025. There is also a provision to review in 2022 whether fertilizer emissions should be priced at the producer/importer level or farm level. The decision to price fertilizer emissions at the farm level is only likely if there is a verifiable practice that could be used to reduce emissions from fertilizer other than applying less.

Action taken will be based on the sector’s proposal He Waka Eke Noa: A Primary Sector Climate Change Commitment. The proposal emphasizes developing a partnership-based approach between the agricultural sector, indigenous Maori, and the government. It also highlights a specific action program with work streams, actions, and milestones to 2025. Some of the work streams include developing a methodology and system for calculating net-farm emissions, developing a farm environment plan (FEP) framework, progressive targets for the uptake of FEPs, and designing an on-farm emissions pricing mechanism.

The government’s original proposal was 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 July 2019 announcement. The report was commissioned a year ago to provide recommendations on policies to put a price on methane and nitrous oxide emissions from the agricultural sector.

The decision on pricing agricultural emissions is part of a range of other planned reforms to the NZ ETS, all introduced to parliament in the Climate Change Response (Zero Carbon) Amendment Bill on 24 October 2019. It is expected that the amendment bill will be referred to the Environment Select Committee after the first reading and enacted in early 2020.