Emissions pricing process update

He Waka Eke Noa partners are currently working on more detailed information around the potential impacts of three emissions pricing options. HWEN will circulate this information in February, before giving advice to the Government. The Partnership has to consider the trade-offs between the options.

The options being considered are: 

1.  Farm-level levy
2.  Processor-level hybrid levy.
3. NZ Emissions Trading Scheme (NZ ETS)  - the backstop

The 'backstop: Agriculture in the NZ ETS

The Government has legislated that agricultural emissions will enter the NZ ETS if an effective, workable alternative is not put forward by the Partnership.

The key features of the ‘backstop’ are:

• Emissions are calculated at the meat, milk, and fertiliser processor level, based on the quantity of product received from farms, or in the case of fertiliser, sold to farms.
• Processors would likely pass on the cost to farms based on the quantity of product processed, or fertiliser bought.
• Initially 5% of emissions from agriculture would be priced (95% of emissions would be freely allocated to processors). Free allocation is expected to reduce by one percentage point a year.
• All gases would be treated the same; i.e., methane and nitrous oxide would be priced at the same rate per tonne of carbon dioxide equivalent (CO2e).
• Currently only sequestration (carbon removals from vegetation) eligible for the NZ ETS is recognised.
• Government intends that any revenue raised through the backstop would be invested back into the agricultural sector to support further emissions reductions. This could include paying for sequestration not eligible for the NZ ETS (e.g., riparian plantings).

Farm level levy

The key features of farm-level levy are:

• Emissions are calculated at farm level using farm-specific data. The farm then pays a price for its net emissions.
• A split-gas approach to pricing would be applied, which means that different levy rates would apply to short- (methane) and long-lived (nitrous oxide and carbon dioxide) gases. This approach reflects that methane is not required to reduce to net zero.
• Rewards eligible on-farm sequestration and can offset some of the cost of the emissions levy.
• Any revenue raised through the levy would be invested back into the agricultural sector to generate further emissions reductions through research and development, incentives to uptake technology, or actions on-farm that help reduce emissions.

Processor level hybrid levy

The key features of the processor-level hybrid levy are:

• Emissions are calculated at the meat, milk, and fertiliser processor level, based on the quantity of product received from farms, or in the case of fertiliser, sold to farms.
• Processors would likely pass on the cost to farms based on the quantity of product processed, or fertiliser bought.
• A split-gas approach to pricing would be applied, which means that different levy rates would apply to short- and long-lived gases. This approach reflects that methane is not required to reduce to net zero.
• Farms (individually or in collectives) could choose to enter into an Emissions Management Contract (EMC) to get a payment for reducing emissions and/or for recognising sequestration on-farm.
• Any revenue raised through the levy would be invested back into the agricultural sector to generate further emissions reductions through research and development, incentives to uptake technology, or to reward actions on-farm that help reduce emissions. One option considered for revenue recycling is an EMC.
• Farms (individually or in collectives) could choose to enter into an Emissions Management Contract (EMC) to get a payment for reducing emissions and/or for recognising sequestration on-farm.

On-farm sequestration

Both the farm-level levy and processor-level hybrid levy would recognise on-farm sequestration. These would:

• Recognise some vegetation types not currently eligible for the NZ ETS. It would not recognise NZ ETS-eligible exotic forestry.
• Recognise vegetation categories that are either permanent (indigenous/native vegetation that will not be harvested) or cyclical (vegetation that is felled and re-established, generally exotic species).
• Recognise native regenerating/planted forests, riparian planting, shelter belts, perennial cropland, non-NZ ETS eligible woodlots/tree lots, and scattered exotics.
• Place liabilities on vegetation if it is cleared (permanent categories) or cleared and not replanted (cyclical categories). This only relates to vegetation that is entered into the He Waka Eke Noa system. There are also provisions for when vegetation is removed as a result of adverse events and customary harvest.
• Use different methods to calculate sequestration depending on the vegetation type.
• Provide a pathway for other forms of sequestration (e.g., soil carbon, tussock grasslands) to be on-boarded when there is sufficient evidence or measurement techniques.