Hon Dr Nick Smith
Minister for Climate Change Issues

19 November 2009
Speech

Taking agriculture forward with the Emissions Trading Scheme

Federated Farmers National Council Meeting, Westpac Stadium, Wellington

Good morning

It's a great pleasure to be here today to talk to you all. While I know emissions trading is not farmers’ favourite subject, today has to be an improvement on talking to several thousand angry bikies.

Can I acknowledge your President, Don Nicolson, the Board of Federated Farmers, your CEO Conor English, your newly elected Vice-President, Donald Aubrey, provincial presidents and industry group leaders, and those of you who have travelled to be here from farms and rural communities all over the New Zealand.

The invitation from Federated Farmers invited me to talk about emissions trading and suggested the title “Taking agriculture forward with the Emissions Trading Scheme”.

Yesterday you heard from the Prime Minister a pretty unequivocal message that this Government is committed to a carefully balanced agenda of both economic and environmental goals.

The two are intricately intertwined. We need a strong growing economy to enable us to protect and enjoy this country’s plentiful natural resources. But equally so we are very dependent on the wise management of those natural resources for our ongoing wealth creation.

Many of you will have heard my Associate Tim Groser, who is more aware than anyone of the reality in global markets and the crucial balance we much strike between growing our economy and protecting our brand. He makes the point very eloquently that the opportunities for New Zealand food producers are great, that trade agreements are important to securing these opportunities but that the customer is the new regulator.

Last week the Guardian newspaper gave New Zealand a serve. It highlighted the gap between the rhetoric of New Zealand claiming to be a global leader on climate change and having one of the largest increases in greenhouse gas emissions. We are going to face scrutiny and it is in both our economic and environmental interests, for farmers more than anybody, that we match up.

I apply this view not just to climate change but to the issue of water quality, biodiversity, animal welfare, albeit it is on climate change and the ETS that I want to focus. Can I give this issue a bit of context?

Climate Change, as Australian advisor Ross Garnaut said, is a diabolical problem.

First, the science is complex. This is an issue in risk management where there remain unknowns, but on which we have sufficient information that we should act.

Secondly, the economics is huge. The emitting of greenhouse gases is at the core of our industrialised societies and change is going to come at significant cost.

Thirdly, as a global issue it suffers from the tragedy of the commons. No one country can solve the problem alone but getting agreement on a fair share for each country to reduce emissions requires the Wisdom of Solomon.

And finally, this is such a long term issue. It is about inter-generational equity. The harm from climate change is unlikely to cause us too much grief in our lifetimes, but for our grand children and beyond the consequences are very significant.

Can I take you through the logic of the Government’s climate change policies, from high level principles, to our ETS and on to the issues around agriculture

First up, it is our Government’s view that New Zealand needs to pull its weight and do its fair share on climate change. It’s important to us economically – we cannot expect trade access and consumers to buy our products if we are laggards. Its important to us environmentally – our important industries, our unique lifestyle are very reliant on natural systems. It’s also important to our reputation of how the world sees us and how we view ourselves.

The Anzacs weren’t bludgers. Doing our fair share on global issues is part of our national psyche.

This ‘fair share’ underpinning our approach is a change from the mantra of the previous Government who wanted to position New Zealand as a climate change world leader and proclaimed that we would be the first carbon neutral country in the world. The credibility problem with this approach is that our emissions over the past decade have increased at one of the fastest rates of any developed country.

We’ve brought a new sense of realism to climate change policy. For a small country, with half its emissions coming from agriculture, one of the highest proportions of renewable energy, with a far flung population with limited viability of public transport, the challenge to reduce emission is a pretty daunting task.

To avoid the sort of damaging criticism last week in the Guardian, our approach is about toning down the rhetoric and getting on with the substantive climate change policies that will change the track of our emissions growth.

It’s easy in this difficult area to get seduced by symbolic policies that make little difference. Earlier this year we dumped the $10 million carbon neutral public sector programme.

Our entire public bureaucracy emits in a year what Huntly at full throttle does in a couple of hours. It’s neither efficient nor practical to have the public sector making small emissions reductions at prices of several hundred dollars per tonne, while at the same time Huntly is trebling its emissions.

There is a very broad consensus that the most efficient emissions reduction policies are a broad based price instrument. That way we make the most reductions at the least cost across the economy.

The debate gets a bit trickier over whether a carbon tax or an emissions trading scheme is best and we have been going round and round this debate for over a decade. A forest of paper has been consumed in the flip-flopping between the two.

National has consistently bucked an ETS approach for three broad reasons.

First, an ETS mechanism is better able to deal with forestry, which particularly in the New Zealand context, is a significant issue.

Secondly, an ETS provides a greater level of certainty about the environmental outcome. It recognises that there is an underlying limit to the amount of greenhouse gas emissions that the atmosphere can sustain.

The third reason is that even if New Zealand thought in a theoretical sense that the carbon tax was the preferred instrument, we are but 0.2% of global emissions, and with the EU, Australia and the US all at different stages of introducing an ETS, we would have ourselves way out on a limb going in the opposite direction.

But there are ETSs and ETSs. There is a whole range of critical design issues that can make an enormous difference. This is probably the most complex and challenging economic reform since GST and there has been huge contention about the details.

A hot debate is which sectors and when. Political life is pretty predictable as to what sectors think, and there has been a barrage of lobbying from the transport, industrial, energy, agriculture and waste sectors on why they should be last in. It is good policy and not politics that should resolve this question.

We’ve applied four tests to this question. Which sectors have mitigation technologies at affordable prices that will reduce emissions?

Remember the goals of the ETS are not to drive up costs but to incentivise change. Which sectors are trade exposed so that they are at risk of just relocating to a country that does not price emissions?

At which rate are emissions growing in each sector, remembering that it is not absolute emissions that cost Government but increases above 1990 levels?

And the forth practical question is: How difficult is the administrative systems and compliance costs to implement an ETS to that sector?

Apply these tests and you can see why the energy sector is the first cab off the rank.

120% increase in emissions, lots of alternatives to coal and gas like wind, geothermal and hydro, no power cable connected to the outside world and only four large players.

Equally so, you can see why on a principled basis the Government has determined that agriculture should be the last to be included in 2015.

I must be frank with you that there are very real practical challenges in including agriculture emissions into the ETS. The timetable to 2013 was not realistic and that is why we have deferred.

We are upping the effort into resolving these technical issues and will be establishing a technical advisory implementation group in 2010. 2015 is some years away. We will be keeping a watching brief on international developments and mitigation technologies.

The hardest part of the design of an ETS in around the issue of leakage for trade exposed industries. This is the problem of just exporting industries and jobs to other country and arises as a consequence of countries moving a different pace on this issue.

The common response I get is that we should not move until every else does. This is not realistic. When 90% of the increase in global atmospheric greenhouse gases has come from a small club of better of nations, it is inevitable that we will be expected to move first in curbing future growth.

The pragmatic way to try and mitigate the risks of these trade exposed sectors is to provide an allocation of units. The issues are to whom and for how much.

Our approach to this differs from the previous Government in three respects.

First, the thresholds for being eligible are to be based on intensity and not absolute levels. We don’t want to favour big business over smaller ones. The test should be not the total tonnage of emissions, but the amount of emissions relative to turnover. The levels we have set of 1,600 tonne per $1 million turnover and 800 tonne per $1 million turnover for 90% and 60% allocations are aligned to Australia taking into account exchange rates.

The second change to allocations is that we are making them intensity based. This approach was recommended in the economic analysis as part of the Select Committee review and is consistent with the approach in Australia.

In short, it means that growth is not disadvantaged. Rather than industry getting an absolute allocation based on 2005 emissions, it will go up or down with production.

Under Labour’s scheme, each additional lamb or kg milk fat would face 100% carbon cost, whereas our approach gives the same 90% allocation.

The third change is the phase-out rate for such industry support. The current law reduces this at 8% per year; our Bill aligns it with Australia at 1.3% per year.

This has a substantive effect on the long term costs and is major reason why in 2030 the existing law according to analysis by MAF would cost farmers the average farmer $30,000 a year whereas our amended scheme would cost the average farmer $3,000 per year.

On such a large reform, it would have been desirable to get a broader political consensus. There is much on which National and Labour agree including the importance of the problem, the need to make progress, support for an all sectors, all gases ETS, the need for transitional arrangements and allocations for trade exposed industry. The point where talks broke down is that Labour, while they could accept and intensity approach to industry, have a different and harder view on agriculture. This is odd in the context of the international debate where generally agriculture is considered more sympathetically than industry because of the global concern about the capacity to feed an ever growing world population.

National was not prepared to contravene a deal that disadvantaged agriculture relative to other industries. It is just too important to New Zealand’s economic future.

Some are questioning the merits of the Government’s ambition to try and pass our amendments by Christmas with the support of the Maori Party. However, if the Bill is not passed, the existing scheme comes into effect on 1 January and will increase power prices up 10% and put $400 million a year on to costs on industry without allocation plans and a number of serious errors in the existing ETS legislation.

The option of trying to get the Parliamentary numbers to just defer the issue again is not desirable. It will take at least six months to implement the regulations to make the scheme effective and would mean further delaying the introduction of the price of carbon, continuing to have no incentive to plant trees or to use renewable energy or improve energy efficiency while the taxpayer would continue to pick up the Kyoto tab.

The third reason is that having the scheme settled does enhance our position in the international negotiations in Copenhagen. That is countries aren’t foolish, they don’t just look at our rhetoric, they look at what you are actually doing. For us to go to Copenhagen with our ETS settled puts us in a better position to go into hard nosed negotiations about what sort of targets we have to meet in future. Our approach in a number of areas is around trying to get this scheme by year’s end.

The last point I’d like to make is with respect to some of the issue around agriculture. Agriculture in New Zealand makes up 48% of our emissions as compared to 16% in Australia. That makes the issue of Australia excluding agriculture so much more challenging for us. Furthermore, agricultural emissions in New Zealand have gone up by 12% since 1990, there’s have gone down by 6% largely due to drought and with climate change it is likely that might continue there.

You should also be aware though that Australian farmers are going to face a regulatory cost to getting their emissions down, which the Government is saying will need to be imposed as an alternative.

We in New Zealand just do not have the luxury of excluding agriculture when your sector is such a large portion of New Zealand emissions.

The last point is that climate change policy is an ongoing issue, and that we need to keep nimble footed.

The ETS in its amended form is not the final say on this issue.

The science is continuing to evolve. If it gets more concerning, we will need to ramp up our endeavours. We need to keep a watching brief.

The international context is changing too. It is difficult to predict how much progress we will make at Copenhagen or in Mexico or South Africa in coming years. We need to recalibrate our response as the world moves too so that we are neither caught to far ahead nor too far behind.

Technology change is also crucial thus the global initiative that the PM took to the UN. If technologies allow lesser cost mitigation, we should pick up the pace at which we move.

I note the advice from MAF that over the past two decades, emissions per kg of milk fat and of meat have improved by 1.3% per year, and I think with smart investment we can improve this.

New Zealand’s agricultural industries are the world’s most competitive because of a history of innovation and a history of leadership.

My challenge to you is to work with the Government on this difficult challenge.

We are pragmatic; we are focused on results and committed to your future. Together, we can find solutions.

ENDS

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