Modelling by banks has found 82% of sheep and beef farmers would be unprofitable if they had to pay farm emissions costs of $150/tonne of carbon dioxide equivalent.
The Reserve Bank asked banks to undertake the financial assessment, and said the conclusions have limitations as they were conditional on economic assumptions and the banks used various methodologies.
It asked banks to estimate the financial impact on their clients of four farm emission prices, from $15/t to $150/t of carbon dioxide equivalent.
The process made assumptions on the impact of revenue and expenses, that emissions pricing was introduced over two years and that the prices paid captured all direct and indirect costs linked to farm emissions.
At $15/t, banks estimated 8% of dairy and 22% of sheep and beef borrowers would be unprofitable, compared to the 6% and 15% of farmers respectively who will not be profitable without any emissions pricing.
At $50/t, the bank summary said the proportion of non-profitable farmers “rises substantially” to 14% percent of dairy and 44% of sheep and beef, compared to that baseline of 6% dairy and 15% sheep and beef.
This exposes banks to $4.1 billion of dairy lending and $4.8 billion in sheep and beef.
An emissions price of $100/t would make 28% of dairy farm lenders (equivalent to $8.1bn) and 69% of sheep and beef ($7.6bn) unprofitable. At $150/t, 44% of dairy ($12.7bn) and 82% of sheep and beef ($8.9bn) would be unprofitable.
“In particular, the results would be highly sensitive to changes in the assumptions for milk and meat prices,” the RB report says.
“In the case of dairy farms, an extra $100 per tonne of emissions price adds approximately $1 to an average farm’s costs per kilogram of milk solids, so its effect on profit is equivalent to the milk price falling by $1, and this linear relationship stays constant given the assumptions in the exercise.”
Modeling for the proposed He Waka Eke Noa solution for pricing farmgate greenhouse gas emissions showed a reduction in net revenue of between 18% and 24% for sheep and beef, and 6% to 7% for dairy.
In terms of output, sheep and beef production would fall between 16% and 20% and milk solids by around 5%.
The scale of the impact on sheep and beef farms was ultimately considered too severe and the proposal lost farmer support.
The RB says the exercise to determine the financial impact on farmers of paying for their emissions was designed to “assess a narrow selection of climate-related risks, while holding other risk factors constant”.
These exercises on their own were limited in scope, but considered useful in providing preliminary estimates on the magnitude of the impact of climate-related risks banks can expect.
“More importantly, they highlighted data and modelling challenges and supported banks’ ongoing work to find solutions to these, helping to set the stage for banks to better assess and manage climate-related risks as these risks continue to become more pronounced.”
Banks are also working on a Climate Stress Test that brings together multiple types of climate-related risks to improve capability in managing these.
A secondary objective is to assess financial stability risks and to identify how banks might mitigate climate risks.
It will be released early next year.