The New Zealand Government is currently considering He Waka Eke Noa and contrasting it with integrating Agriculture into the New Zealand Emissions Trading Scheme. NZETS is the most cost-efficient vehicle for emissions reductions; it will achieve its stated goal. 

I suggest that as New Zealand will be a world leader in integrating agriculture into a national emissions trading scheme, we have the opportunity to set the applicable boundaries. Currently emissions are captured by the NZETS at point of source: for dairy that is the production of milk but for petrol that is consumption (as the combustion releases the emissions). This means exported petroleum products are not captured by the NZETS as it is the importing country that creates the emissions. If Dairy is added to the NZETS the current policy intention is for all exported dairy products to be captured by the NZETS: this is an accounting line in the sand drawn on a science basis however I suggest that the economic basis would attribute emissions to the importing country like we do for petroleum. 

This would be a simple accounting change that would mean the 95% of dairy that is exported would not be in the NZETS and would have no surrender obligations. The justification would be to keep our exports on a level playing field with it’s competitors. If, say, the European Union wanted to, they could add NZ imported dairy products into their ETS on import (they wouldn’t even necessarily have to add their domestic dairy production into their scheme) but it is their consumers that ultimately determine the emissions of their consumption. If we export to a country that has no relevant ETS then we would sell dairy to that country with no capture mechanism, as that country would otherwise buy cheaper milk elsewhere anyway.

If farmers were communicated this policy shift they should be very willing to join the NZETS in full force in 2025 as the only ETS units they surrender would be for domestic consumption.

The implementation of this export clawback would have to be nuanced as it would risk stopping the incentive for behvaviour change that the NZETS is designed for. My suggested policy implementation would be:

The ETS would function as intended: Farm inputs would have NZETS obligations as far up the production change as possible (fertilizer at production or import). This ‘hides’ the cost from farmers but is the most efficient method for administration and behaviour change. Farm level emissions would be measured as they already are and surrender obligations would begin. Farmers would then be fully paying for every unit of emissions – at this point there would be no accounting for product headed for export or domestic consumption.

 The exported product would then be eligible for receiving NZETS units upon export. That means administration of earning emissions units would be done by Fonterra or other cooperatives. The NZETS export units that Fonterra earns would then be used to increase the milk payout.

 In effect, farmers would find all of their inputs would go up in cost due to emissions charging, and they would surrender their own units at farm level, however they would also receive a permanently higher milk payout to subisidise the total % of processed product headed for export. This will keep the NZETS pushing behavioural change (farmers can avoid NZETS obligations by changing product mixes to lower emissions but also continue to earn back the % export returns) while keeping administration cheap and pushing the emissions obligations onto the importing countries.

We would publicly encourage importing countries to add imported agricultural products to their ETS systems and clearly communicate the emissions of every product we export so they have the information necessary to do so, but we would not force the requirement.