Emissions units aren't just for Christmas

The real cost of an Emission Trading Scheme on dairy farmers – The New Zealand Experience. Speech by Don Nicolson, President of Federated Farmers, to the United Dairy Farmers of Victoria on 20 May 2011.

Chairman John Keely, President Chris Griffin, members of your executive and members and staff of the United Dairy Farmers of Victoria, it’s my warm pleasure to be here, once again, in New Zealand’s ‘West Island’.

Almost 12-months ago today, I delivered a preview of our Emissions Trading Scheme (ETS) to the Australian Farm Institute’s Agriculture and Greenhouse Emissions Conference.

At the time it was a policy in flux. Many would argue it is now in legislated flux.

My presentation to you marks one of my last as the President of Federated Farmers with the ETS and what has preceded it. It has dominated much of my political career with Federated Farmers and in the past 12 months, we have seen the New Zealand scheme enacted.

In Australia, your versions have lived a zombie-like existence. Almost alive, but at other times, quite dead but it is once again, out of the crypt. However, I would like to first start by reacquainting you with the situation in New Zealand.

Welcome to New Zealand (slides 2-5)

Over the Tasman, we are told that the Emissions Trading Scheme (ETS) is an essential part of ‘brand NZ’, but it is not.

Otago University’s Associate Professor John Knight, surveyed 515 first time arrivals at Auckland airport, finding only three who would be put off coming here if we had genetic modification.

Even adding in ‘bogeyman’ issues like factory farming and even nuclear power, didn’t much change the positive perception visitors have of New Zealand. My point is that while much is made of customer expectation by our officials and marketers, it is often made without substance. To them, it is about a short-lived ‘point of difference’, and of course it sounds good to their bosses.

You see, humans have made a fairly good fist at changing the New Zealand environment.

How humans have changed the environment (slide 6)
Pre-human, about 1000 years ago, New Zealand boasted around 80 percent natural forest cover. All of our major centres today were covered by lush native forest.

Māori, our Tāngata whenua or ‘people of the land’, arrived in New Zealand around 1000 AD and, over the next 840 years reduced that forest cover by some 31 percent.

With European settlement, from around 1840, New Zealand’s forest cover fell by a further 58 percent to its current level of 23 percent.

Where there was once forest we now have grass and crops but apparently that’s different. It’s green but the wrong kind of green.

Now, since bureaucracy moves in mysterious ways, we have a Draft National Policy Statement to protect ‘regenerating native biodiversity’ wherever it appears. Grass regenerates, can feed animals and ultimately humans. Apparently, that’s not good enough either.

If New Zealand wants a truly natural environment the logical end for these policies is to evacuate all humans and introduced pests, allowing nature to take over.

That’s not going to happen but who knows, in a thousand years, we may get back to 80 percent forest cover, but it won’t be native and begs the question where the humans will live. Never mind, there’s always Queensland. Will that be good enough for the alarmists? I doubt it.

What the ETS truly represents (slide 7)

An important point about New Zealand’s Emissions Trading Scheme, is that it seems to have come straight out of Monty Python.

Welcome to New Zealand’s ETS
All New Zealanders, and I accentuate that word “all” because farmers are treated by a self-appointed elite as being different, are paying to enrich largely foreign owned carbon dioxide foresters.

Some Government officials act like used-car salespeople peddling the ETS rather than delivering the facts we farmers need to make commercial decisions. Our Ministry of Agriculture and Forestry has spent tens of millions of dollars in just the past two years on ETS policy advice and that is just one department out of 38.

I see the ETS as a huge and destructive ‘anti-jobs’ scheme, but one that leaves some non-jobs in its wake.

Several years ago, a study by Madrid’s King Juan Carlos University found that for every new position depending on energy price support, at least 2.2 jobs in other industries ‘disappeared’. I further recall reading that each new job using this example cost about US$750,000.

In New Zealand, the process for enrolling forests of less than 100 hectares, while simple, involves a forest of paperwork. The process for registering a post-1989 forest of more than 100 hectares is even more involved and costly due to verification.

The ETS, according to one of our policy advisors is grey and I doubt any more than one of two of our elected politicians truly understands it. They’ve got the sales patter down, but have no idea of how it actually works. This is an opportunity for our Australian peers scratch that knowledge, record the answers and put them on the spot over detail.

It’s strange that legislation is meant to deliver certainty but in New Zealand, our ETS doesn’t. It’s effectively being made on the fly. The scary thing about its evolution is that some officials charged with making it work don’t know where it’s going.

We’re literally on a journey into the unknown, or to nowhere.

Federated Farmers policy staff have helped to fill this vacuum by interpreting what our members are told when they call our Ministry of Agriculture and Forestry for advice. We owe it to our members to inform them of the facts, as opposed to the confusing advice they get from a Government ‘helpline’. And I use that word advisedly.

The biggest advice we can give is for landowners to take independent financial advice before registering a forest.

So what is the real cost of the ETS to dairy farmers?
One lie, which needs to be put to bed, is that New Zealand’s farmers are getting a free ride.

Those on the left are not listening given they still describe this as ‘meek’ and not enough because carbon dioxide, the fourth most common element in the air we breathe, has been labelled pollution. Tell that that to crops, pasture, trees and plankton.

Fonterra’s submission to the recent ETS Review Panel in New Zealand, describes the current costs to the average dairy farmer at NZ$3,600.

Remember, this NZ$3,600 is something you will potentially face as that’s the added cost on farm inputs. Farm scale biological emissions are not yet in our scheme.

Two-thirds of this cost, NZ$2,400, relates to Fonterra’s collection and processing of milk with one third, or NZ$1,200, being the added cost of farm electricity and fuel cost increases.

However, as we have numerous inputs that are made and transported, the real cost is much higher and that’s why it’s so insidious as a compliance cost.

Come 2015, the average dairy farmer could be up for an annual ETTS bill of NZ$11,921 with one third or around NZ$4,000, relating to livestock and soil emissions. The balance will be related to dairy company collection and processing, on-farm electricity and more fuel cost increases.

At that time could anyone say with certainty the carbon dioxide tonne still be $25? This is also where we get trapped into an inelegant inflationary loop.

Unintended consequences slide (slide 8)

To meet these added on-farm costs means that each farm will need to produce more, not less, to pay these taxes.

At a net profit before tax of NZ$2 per kilogram of milk solids and assuming $25 per tonne CO2-e, another 150,000 dairy cows will be needed Just think what happens when the carbon dioxide prices goes to $75, as our Green Party and some fast money ‘experts’ want.
Perhaps 450,000 more cows to stand-still? This we can’t do, because these additional animals create more yet biological emissions in an ever inflating loop.

Since this is about removing animals, it seems like an own-goal for the alarmists.

So either we take it on the chin initially as a collective and lose NZ$131 million plus from dairy farm gates. This has a massive economic impact many times greater because this is all from farm revenue.

Or, we can follow the rest of the world and remove biological emissions because taxing efficient food producers in a world with increasing food poverty is perverse.

Oh, I should repeat, both scenarios assume a carbon dioxide price of $25 tCO2-e, while the first also applies the half obligation. Simple, eh!

So what are the actions farmers can take to change their businesses to reduce production risk?
Under our current legislative settings, not a lot.

The processor point of obligation, the point of tax collection for dairy, means that direct dairy farmer liability is based on the volume of milk collected and processed by the processor.

The liability that company bears on the farmer’s behalf is recovered pre-payout.
Given the liability is based purely on volume of product received, any effort by an individual farmer to improve on-farm efficiency won’t be recognised under the current reporting methodologies.

Is that a problem, given the complexities and cost of compliance for individual farm reporting will be mind boggling? Even before seeing the farm balance sheet destroyed.

It’s the same with meat processing. When dairy farmers send stock to meat processors, processors will recover the ETS cost pre-payout back to the farmer-supplier.

The Federation’s long held position is that the point of obligation should be inside the farm gate to recognise efficient regimes at the farm scale. However, I still question the logic of such a position. It seems illogical to have payment for the raw product equalised as a collective once it flows into the vat, but not the imposed levy regime at the same point.

Wake up New Zealand farmers I say. I repeat this is my personal view not that of the Federation.

Either way, we’ve created our own ‘hockey stick’. Our own financial hockey stick showing us that a massive cost spiral is looming.

Mitigation by way of forestry
As I mentioned earlier, forestry figures prominently as the solution over the Tasman.

Forests are an option but not one that is particularly recommended because at its core, post-1989 Kyoto forests are a zero-sum game. Any emissions units claimed against those trees becomes an enduring contingent liability attached to the land title for the same number of units.

So here is a caution.

Before Kiwi farmers rush into planting or registering a qualifying post-1989 forest they need to understand what this actually means.

If there is a possibility that land could be used for something else in the future, then farmers need to think hard. Once registered, it will carry an enduring financial liability for the units claimed. If you want to use that land in the future you will have to reimburse Government for the units received at the prevailing unit cost too.

What’s more, forests, like livestock, are subject to disease, injury or death.

Trees carry an ETS liability slide (slide 9)

A forest fire or a landslide will require a landowner to reimburse Government for all the emissions units earned.

The sting is that the current price of emissions units will apply rather than the original price. Even with permanent forests, this demands astute risk management and appropriate insurance cover. It also has to be remembered that post-1989 forests won’t deliver an endless supply of emissions units either. They will run out over time

If a farmer in New Zealand considers applying for the pre-1990 allocation, it means surrendering any ability to seek exemptions for deforestation of less than 50 hectares and that includes tree weeds. What the consultants don’t warn farmers and something our farmers struggle to get their head around, is the obligations around pre-1990 forests on their land.

There is also the unappealing aspect of progressively removing land from production to host trees instead. It is the economic version of ever decreasing circles.

So here are the current problems we are seeing with forestry on farmland in New Zealand are:

Selective recognition of what happens on-farm (previously forested pre-1990 land is compulsorily enrolled whereas for post-1989 forests it remains voluntary, then there is indigenous forests vs exotic and the difficult issue of tree weeds etc.)

An overly-complicated process for registering forests and claiming emissions units such as deforestation exemptions, etc.

Very little understanding of the ETS and its technical aspects by private sector consultants who are too focused on the dollar value New Zealand Units may represent versus future land use liabilities

Measures that cap the price of carbon dioxide and allow for cash to be paid in lieu of emissions units to the government are temporary transitional measures.

A disjoint between short-term land management decisions and far longer-term ETS implications.

And if farmers think they could play a fast game and ‘cheat’, big brother is watching in the form of high resolution satellite imagery.

What are the consequences of the ETS on New Zealand’s farm businesses?
Right now, Federated Farmers is seeing a lot of interest from farmers to understand what the ETS means to them.

Sadly, the livestock aspects of the ETS are still ‘in development’ while the forestry aspects suffer from a lack of easily-understood information and processes to pursue. As mentioned earlier, those who should know find it hard to communicate anything in plain-English, which has us having to interpret for them.

Right now, on-farm fuel and electricity price impacts, as well as building supplies, fertiliser and veterinary supplies etc, are being borne by retailers meaning farmer exposure can only be managed by consuming less.

One small positive note is that this sends price signals about resource efficiency but it’s a hell of a cack-handed way of doing it.

The biggest effect the ETS on our farm businesses, as mentioned repeatedly, is forestry and land-use. That’s not to understate those significant costs I mentioned earlier.

Strategically, the world’s population will expand by a third in the next few decades but instead of Government balancing environmental and economic considerations, there are major price signals to take land our of pastoral agriculture in favour of forestry.

As farmers register their post-1989 forests, they are effectively agreeing to lock up parts of their farm in unproductive forestry given these are permanent forestry carbon dioxide sinks.

We’re seeing farmers become frustrated by thwarted land development or realising higher-value land-use opportunities. One example, dairy from forestry is now effectively halted. Our experience as an organisation is that many of our members are trying to avoid the ETS as much as they can, but with very little luck or avenue to do so

In conclusion slide (slide 10)

What can be deduced from this experience for Victorian producers?
Federated Farmers is in a position to provide two key learning’s from our experience:

First don’t follow New Zealand’s example! Do whatever it takes to keep livestock out of any carbon dioxide pricing arrangement. There will be some who will see this as accommodating Government and ‘being up with the play’, which it is not. All it means is adding costs, considerable costs that will close markets in a world where the human population will expand by a third.

Secondly, understand that there are real consequences from participating in a Kyoto mechanism like the ETS. No matter how abstract or remote it seems, get inside it and the policy process underpinning it. You need to understand it to get on the front foot than pretending it will go away. That’s how Federated Farmers has blunted but not deflected our ETS juggernaut. If you can get in even earlier, it saves tears later. As a forestry owner I first read of carbon dioxide trading back in 1989 but at the time I thought it was whimsical. I would bet, there is no one in this room who a decade ago would be contemplating investment decisions based on the prospect of ‘carbon dioxide’.

Or, could it all become our version of your home solar electricity subsidies?

My personal observation, as a forester-farmer, is that the New Zealand forestry industry has been bedevilled by schemes and subsidies. It makes me wonder if our ETS is just the latest incarnation of schemes that have come and gone leaving some up a tree without a ladder.

Instead of lurching from one hope to another, it’s time for foresters to see the intrinsic value of cellulose for the carbon dioxide.

In Australia, in recent days, you have a fine example of what I mean with the Federal Government winding back subsidies encouraging home solar electricity panels.

It’s the law of unintended consequences really.

Subsidies encouraged home owners to pour tens of thousands of dollars to jump into a scheme that looked too good to be true. After all, homeowners were assured a “feed-in tariff” of A60 cents a kilowatt-hour until the end of the 2016 so it made the cost and case of installing micro generation too hard to resist.

If something looks too good to be true, it’s because it is. In New South Wales, this “feed-in tariff” has been slashed by a third to AU40 cents. The level of Federal subsidy will also drop over the next two years from a peak of about $6200 to about $1200 for a basic 1.5kw system.

All because it was too compelling and people banked on government sticking to its word.
They forgot former US President Ronald Reagan’s accurate assessment that the nine most terrifying words in the English language are, 'I'm from the government and I'm here to help”.

A lesson to draw from this is that by properly pricing ‘clean tech’, household power bills will actually drop by $35 a year. The much bigger lesson is that when the going gets costly, governments find the reverse gear.

Governments can create and impose anti-markets, whether it’s solar electricity or emissions units. These are not proper markets in any sense of the word because it isn’t voluntary and the pricing signals are prone to interference and influence. They are distorting and Government’s track record on our side of Tasman means there are very few banks, if any, actively bank rolling carbon dioxide forestry conversions.

The other thing is that collective political madness is not new.

Almost 20-years ago, the United Kingdom’s slavish adherence to the European Exchange Rate Mechanism enriched George Soros by a cool one billion pounds culminating in ‘Black Wednesday’, which made Mr Soros ‘the man who broke the Bank of England’.

The thing with the ‘Eternal Recession Mechanism’, as it later became known, was that it strongly supported by the Conservatives and by Labour. While the Conservatives were electorally destroyed by it until very recently, Labour would have done nothing different. Nothing.

That collective political madness sounds scarily familiar on the ETS, except the Opposition, who wish to make entry earlier and the scheme much harder on farming. Great.

No country will place food into it because everyone has to eat, except that is, for New Zealand. The challenge is for politicians to face reality is that climate is bigger than humanity so it’s time to stop being a lemming heading towards the cliff.

And as a scheme to plant trees, our ETS has never made it more convoluted or for that matter, expensive. All for a policy with no measures of success.

Then again….maybe this will benefit Australia.

I would warn you to not let Julia lead you over the cliff, but, then again, it’s lonely for New Zealand being in this international club of one.

Using resources wisely and responsibly is so important. Building resilience in our communities is so important, adapting to climate variation is so important, but an ETS or a carbon dioxide tax solves nothing.

The end game – letsinvadenewzealand.com (slide 11)