What if Kiwi Farmers were in the ETS?

What would be the cost to a dairy farmer if they were in the Emissions Trading Scheme (ETS)?

It is estimated that to produce one tonne of milk solids, dairy cows emit about ten tonnes of carbon dioxide equivalent (CO2e) largely in the form of methane. The current value of milk solids is estimated by Fonterra to earn a dairy farmer about $8 a kilo this season, about $8000 a tonne.

If dairy was in the ETS, which it is not, at $50 a tonne for CO2e, of the $8000 gross revenue the farmer earned, they would contribute $500 towards Aotearoa’s likely payment to the world for offshore mitigation.

Matching foreign earnings from emissions with New Zealand’s likely foreign payments for emissions seems reasonable.

Currently, the proposal is, at least initially, to provide dairy farmers with a 95 percent subsidy, meaning that a farmer would pay only $25 of their $500 emissions charge for which they had earned gross income of $8000 as their contribution, the rest of New Zealand would effectively pay the other $475.

To avoid all dairy farmers paying the average of all farmer emissions, dairy farmers, along with all farmers, pleaded for and were granted a further five-year exemption from emissions pricing to develop a scheme for a farm-by-farm measurement of emissions.

The NZ ETS was launched in 2008 when it was intended that the phasing into the ETS of agricultural emissions over 10 years would have meant full inclusion by 2018.

Let’s assume the worst dairy herds emit three times as much methane as the best to produce the same milk solids and that the best emit 25 percent less than the average, so 7.5 tonnes v. 10 tonnes per tonne of milk solids.

That means the worst emit say 22.5 tonnes of CO2e per tonne of milk solids. So, the best pay an emissions charge of $18.75 (save $6.25) per $8000 of gross revenue and the worst pay $56.25 per $8000 gross revenue.

To get the benefit of being a low emission dairy farmer, every dairy farmer will need to measure, report, and have the ability to verify their unique on-farm emissions. The plan for measurement of emissions at the farm level was in response to farmer demands. On this occasion, they cannot blame politicians for bureaucratic overhead.

On a 1000 cow dairy herd, producing 400 kilos of milk solids per cow per annum (400,000 kilos of milk solids in total and $3.2 million gross revenue), with 95 percent emissions subsidy, at average efficiency, the ETS would cost that farmer $10,000.

The efficient, low emitting farmer would pay $7500 (save $2500 compared with the average) that year and the inefficient, the high emitting farmer would pay $22,500 (an extra $12,500) compared to the average.

If the difference between the best and the worst is only $15,000 on $3.2 million of gross revenue, will such a price signal make a difference?

Of course, what matters over time is:

  • What happens to the milk payout per kilo of milk solids?
  • What happens to the emissions price both domestically and globally, including any border adjustments to sell in foreign markets to offset any domestic subsidy?
  • What happens to the 95 percent subsidy?
  • What happens to average emissions per kilo of milk solids?
  • What happens to the gap between the most and the least efficient dairy producers?

Likely trends: emission prices rise, the subsidy reduces, average emissions per kilo of milk solids produced decline, the gap between the best and the worst converges on the average level of emissions.

One can only assume the higher the emissions price, the faster we reduce the subsidy, the bigger the reward for low emissions innovation and farm management practices and the sooner emissions will reduce and converge on the average lower level.

The higher the subsidy and the longer it lasts, the slower will be the reduction in emissions to the lower level which reflects better, low emissions herd and farm management practices.