KEY POINTS:
Tucked away discreetly inside the Ministry of Agriculture and Forestry's website is a report entitled "Projected impacts of the New Zealand emissions trading scheme at the farm level".
It deserves a wider readership, because it is a first stab at estimating the impact on our most important industry
of the carbon pricing regime the Government is determined to enact this year.
It plots, for a typical dairy farm, sheep and beef farm and so on, what various combinations of product prices and carbon prices, with or without grandfathering, would have done to their profitability had the regime been in place in the 2006-07 year and if all the other costs had been the same as they were.
The conclusion, entirely unsurprising, is that the new carbon cost reduces profits significantly, unless farmers are shielded from it - as they will be at first but subject to a rapid phase-out - or unless meat and milkfat prices are a lot better than last year.
But the good news is that mitigation strategies such as using nitrification inhibitors or planting part of a property in trees can make a big difference to the impact.
The MAF analysis comes with several health warnings attached.
The results are for an average farm but each farm is different.
And the base year used, 2006-07, was one of particularly low prices and low profitability; the dairy payout for example was $4.14 a kilogram of milk solids, compared with the $7.30 Fonterra forecasts for this year.
"Therefore the relative impacts shown here are higher than might be the case for other years."
The best-case scenario assumes a carbon price of $15 a tonne and that farmers get a free allocation of credits equivalent to 90 per cent of 2005 emissions. For the typical dairy farm, profitability is reduced by 12 per cent, while for a sheep and beef operation the drop is 4.6 per cent.
The worst-case scenario takes a carbon price of $50 and assumes the farmer is liable for all of his farm's emissions. In that case, the impact is dramatic. The dairy farm's profitability drops by 123 per cent and a sheep and beef farm's by 160 per cent.
The outcomes also assume 2006-07 product prices. If the dairy payout was $6.40 per kg instead of $4.14 the decline in profit would be "only" 24.5 per cent. Surely it would be crazy to expose farm emitters to the full cost of carbon, on every tonne of methane and nitrous oxide and not just the marginal one.
Yet that is what the legislation proposes.
It delays the entry of agriculture into the emissions trading scheme until 2013 and initially grandfathers it, by way of a free allocation of carbon credits to the tune of 90 per cent of 2005 emissions.
That protection is rapidly withdrawn, though. The proposal is to reduce the free allocation until it is all gone by 2025.
The policy, in short, is for the agriculture sector to be fully carbon neutral by that date.
But hang on. That is a much tougher target than any responsible government would accept for the country as a whole.
Over the next five years, our net emissions (including the benefit from forest sinks) are expected to be about 13 per cent above 1990 levels.
To get from that starting point to 100 per cent below 1990 levels over the following 12 years (or be prepared to pay for the difference) is not even remotely conceivable.
It would probably require half the population to leave the country.
Even the Europeans are only talking about getting to 25 to 40 per cent below 1990 levels over that sort of time frame and from a much better starting point. It would also mean a reversal for the current position, where taxpayers pick up the Kyoto bill for the agriculture sector's emissions, to one where the sector was subsidising emissions in the rest of the country.
Neither is efficient.
As the Dairy Companies Association says in its submission to the finance select committee, which is considering the legislation: "The purpose of an emissions trading scheme should be to change behaviour. It should not result in excess revenue generation of the Government."
A submission on behalf of the sheep, beef and deer industry makes the point that because of productivity gains, greenhouse gas emissions from their sector are lower than they were in 1990, even though production has increased.
In the case of sheepmeat, the emissions intensity or carbon footprint has shrunk by 17 per cent.
Similar gains in future will be harder to come by, and by taking 2005 as the base year for grandfathering, the Government in effects pocket the benefit of what the sector has achieved already.
The smokestack sector also takes issue with the aggressive phase-out of grandfathering, so this may be an element of the scheme that gets changed by the select committee.
More useful than this static analysis is the MAF report's discussion of how farmers might react to the carbon price signal coming their way.
It is diplomatically silent on the biggest likely dynamic adjustment, which would be a drop in land values of the kind, but hopefully not of the extent that occurred in the 1980s when subsidies were abolished and the dollar floated.
It envisages fewer conversions to land uses which would be more heavily affected, like those which rely on pumped irrigation. Meat producers might send stock to the works younger, when there was a lower ratio of lifetime emissions to weight.
Farmers can be expected to look around for means of reducing their use of emissions-intensive inputs like urea and fossil fuels.
And it expects to see some hedging of the carbon price through investing in Kyoto forests either on or off farm.
It reckons its typical sheep and beef farm, if 20 per cent of it was planted in radiata pine, would see a 20 per cent rise in profits, instead of a 160 per cent fall, in the $50 carbon and no free allocation case.
It is also bullish about the potential of nitrification inhibitors for more intensive dairy operations.
These substances can significantly reduce emissions of nitrous oxide, a potent greenhouse gas, provided soil temperatures are not too high or the soil too wet.
Conservatively estimating a 20 per cent reduction in N2O emissions, the use of inhibitors would increase the average dairy farm's profits, assuming 90 per cent grandfathering, MAF says.
And if farmers faced the full cost on all emissions it would at least reduce the drop in profitability by two-thirds for a $25 carbon price and one-third at $50.
"At least we have concurrence now that nitrification inhibitors are profitable irrespective of any emissions tax," says Simon Terry of the Sustainability Council.
"And there are other emerging technologies for achieving emissions savings, like high sugar grasses."
