Executive Summary
This paper summarises the results of a range of analyses carried out by the Ministry of Agriculture and Forestry (MAF) on the potential impacts of the New Zealand Emissions Trading Scheme (NZETS) at the individual farm level. The purpose of these analyses is to inform the policy process and indicate how typical farms of varying types could be financially affected by the NZETS.
The report shows the results of an illustrative “static” analysis of the potential impacts of the NZETS on farms using MAF’s 2006/07 model farm budgets. In effect, the analyses reveal how some typical farm types might be affected if the NZETS, including agricultural gases, were implemented without warning on 1 July 2006.
At a high level, the results show that if the NZETS were applied to a typical farm business in the 2006/07 year, there would be significant impacts on overall farm level profitability for some farms and farm types. The relative impacts would be greater for sheep and beef and deer farms than for dairy farms, and as expected, the potential impacts increase along with the price of carbon and as the quantity of free allocations are reduced.
The results should, however, be considered within the context of a range of important assumptions used in the analyses, and with reference to some important observations about the 2006/07 production year for New Zealand farmers. These include:
- The flow-on impact on farm output prices from increased costs at the processor level were not taken into account;
- The 2006/07 production year was one of particularly low farm output prices and overall farm profitability, therefore the relative impacts shown here are higher than might be the case in other years;
- The base case results assume that farmers do nothing to adapt to the new cost structure over time; no allowance was given to the ability for farmers to adjust to the new structure over the period in which free allocations are phased-out;
- There is no allowance made for potential for advances in abatement technology over the phase-out period;
- There is no allowance made for possible macro-economic changes or effects which may influence the impact on farms (eg. exchange rate).
Beyond the static analysis described above, the report provides some perspective on the importance of base-year farm profitability and the importance of mitigation technology and options such as forestry offsets. An analysis of farm output prices for dairy, sheep and beef and venison over the past ten years indicates that variation in farm output prices tend to have a higher relative impact on farm profitability than do the carbon costs.
An analysis of the potential impacts of nitrification inhibitors on dairy farms shows that use of the inhibitor can potentially ameliorate the impacts of the carbon cost to a large degree.
This rests on an important assumption that farmers will be able to receive credit for inhibitors under the NZETS however.
Also, an analysis of the potential use of forestry as an offset on sheep and beef farms indicates that some conversion of land away from sheep and beef towards forestry would positively impact on farm profits - particularly as the price of carbon increases.
In general, the report shows that the potential impacts of the NZETS at the farm level should not be understated. However, it also indicates that we should not underestimate farmers’ capacity to innovate, adapt their businesses to manage new cost structures, and adopt new technology where it exists. This analysis also speaks nothing of the potential costs to New Zealand agriculture of doing nothing to address greenhouse gas emissions in the sector.
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