Thursday, August 11, 2022

No cheap entry to split-gas options

The cost to run the alternative greenhouse gas (GHG) system for the primary sector now under discussion could cost the sector as much as $90 million a year.

Tim Mackle makes no secret the proposed split-gas options will cost more up front than entering the ETS directly.

The cost to run the alternative greenhouse gas (GHG) system for the primary sector now under discussion could cost the sector as much as $90 million a year.

The He Waka Eke Noa (HWEN) split-gas emissions proposal roadshow is now well under way across New Zealand, with farmers having a chance to get under the hood of the two schemes presented, both likely to hit farm profits by between 4-6%.

DairyNZ chief executive Tim Mackle said the estimate of up to a $90m a year cost was “quite possible”, but was also one that had been fully imputed into estimates of what the respective farm based or industry-based schemes are likely to have on farm profits.

“Under the farm-level levy option, annual operating cost estimates are $69m to $84m. Under the other He Waka Eke Noa option (the processor-hybrid levy option), the total estimated annual operating costs are $6 million a year (that is, $4 million cost to processors and $2m for operational costs). 

“The He Waka Eke Noa partners will be doing a lot more work to see how they can get these numbers down.

“There is no doubt, when you scale up the costs at a farm level to an industry level it does come to quite a big number,” Mackle said.

He emphasised neither the processor hybrid levy nor farm levy models were ever likely to be cheaper than the alternative option, that of being folded into the ETS. 

However, after 2030 this was likely to change. 

As carbon prices continued to surge, and farmers lowered methane emissions in response to price signals from the HWEN options, it was highly likely the cost of being in the ETS would well outstrip the cost of the alternatives.

Separating the split-gas approach from the carbon-based ETS scheme enables the primary sector to determine a price per unit for methane separate from whatever carbon is trading at. 

“It really is not about the price of methane itself, but about the job we are trying to achieve and the strength of the signal that price sends to farmers to shift behaviour,” he said.

He said there would need to be an exercise in price discovery to determine what the trigger price of methane will be to ensure changes in farm emissions, while still maintaining profitability. A working group was presently exploring this subject.

Industry analyst Professor Keith Woodford has criticised HWEN on grounds that of the funds it raises by charging farmers for emissions, only $10 million a year, may be returned a year into emission reduction research. 

In a recent column he maintained this was a trivial amount, given the pastoral sector’s $30 billion a year of export earnings.

“It is fair to say, we do not want too much of the income going into research, as we need to use it to be the ‘carrot’ to bring change in emission levels on-farm,” Mackle said. 

The $10m investment into R&D a year still compares healthily to the NZ Agricultural Greenhouse Gas Research Centre, which is investing $48.5m over 10 years into emissions research. 

“It’s likely any new He Waka Eke Noa research funding could be in addition to existing research, and we are working on a plan with the Government, Māori and science providers to recommend how to accelerate getting emissions mitigation tools to farmers. That process will also recommend what funding is needed for methane and nitrous oxide mitigation research,” Mackle said.

He acknowledged a sense among farmers at meetings that they were facing an increase in production costs whichever scheme they opted for and were the only sector unable to simply increase prices to cover that.

“But having said that, it is not uncommon in any sector to need to take these steps just to stay in the game,” he said.

Achieving a premium price under new constraints like lower methane could be difficult to achieve, given it was becoming a requirement for standard business practice as more food companies moved towards zero carbon policies and expected suppliers to do the same.

“But NZ dairy is attracting a premium, for a number of reasons. Farmers are the only ones who cannot increase their prices, but a number of companies and all industries are facing costs in things like carbon credits to achieve this,” he said.

He confirmed he was getting the impression the majority of farmers are keen to land on a farm-based emissions scheme. Some wanted to get there straight away, while others were prepared to work through an industry levy hybrid to start with, transitioning to on-farm emissions pricing.

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