KEY POINTS:
An ironic feature of the dairy boom is that it is underpinned by climate change. United States and Chinese policy to encourage the production of biofuels from corn is creating a phenomenon dubbed "agflation" - rising world prices for food as ethanol plants compete for one of the main feed grains, maize.
This is a wicked waste of food and hopefully will not last, as second-generation technology to produce ethanol from cellulosic wastes, or even pine trees, develops.
But in the meantime world prices for dairy products are gratifyingly high.
The ironic part is that those prices are likely to trigger a fresh wave of dairy conversions in New Zealand, pushing up the emissions arising from belching and urinating cattle.
This creates a double whammy for the economy. We face higher interest rates as the Reserve Bank leans against what is, from its point of view, an unfortunately timed boost in spending power.
And as taxpayers we face a higher bill when it comes time to square accounts with other Kyoto governments.
That is because the Government agreed in 2003 in a memorandum of understanding with Fonterra and other agriculture sector entities, such as Meat New Zealand, that the taxpayer would bear the cost of the agricultural sector's emissions of methane and nitrous oxide, which make up just under half of the country's emissions.
In exchange the industry would contribute to research into ways to reduce agricultural emissions.
That was based on the premise that "there are currently no proven, practical and cost-effective farm practices and technologies to reduce agricultural emissions, whether by improving agricultural emissions or otherwise".
That agreement is now subject to review. The Sustainability Council's Simon Terry is challenging the assertion that there is nothing farmers can do to reduce their emissions.
In particular, he points to the potential for a nitrification inhibitor, dicyandiamide, to reduce emissions of nitrous oxide from cattle urine. He cites, among other things, research by Lincoln University scientists on its effects on four different soil types in Canterbury, Waikato and near Lake Taupo, which found an average 70 per reduction in nitrous oxide emissions.
Fonterra's Mark Leslie, who also chairs the Pastoral Greenhouse Gas Research Consortium, sounds a cautious note, however.
"We would love to have a solution there tomorrow," he says. But the benefits claimed are based on trials on a limited number of soils. It's probably drawing a long bow to claim you would get the same response across all soils. Some of the less intensive trials that have started to occur on other soils haven't shown the same level of benefit."
And officialdom might have some work to do in international negotiations before New Zealand is able to claim emissions reduction based on this technology when calculating its national "inventory" - the quantity of greenhouse gas emissions it is accountable for.
The Government has said the emissions trading scheme it is working on will cover all sectors and all the greenhouse gases, a clear indication it intends to include agriculture.
But it immediately qualifies that by recognising that the ability to reduce emissions in response to a price signal varies from one sector to another.
The Australian emissions trading scheme, due to begin no later than 2012, will put no obligations on agriculture. It will, however, allow for land-use-based offsets to be used by those sectors that are covered by the scheme.
The European emissions trading scheme does not cover agricultural emissions either.
The standard argument for exempting agriculture is that it is hard to measure on-farm emissions accurately. Accurate measurement and monitoring are fundamental to a trading scheme which attaches a monetary value to increases and decreases in emissions.
At a national level proxies can be used, like the number of cattle in the national herd.
But a similar proxy approach at the level of an individual farm would not capture or reward reductions in emissions per animal.
There is a temptation to say, as the Greens do, that the official liability for the dairy sector's emissions should rest with Fonterra. In other words, leave it to the co-operative's decision-making processes to figure out how to avoid free-rider problems and pass on the price signal, so that progressive farmers who figure out how to reduce their emissions are rewarded at the expense of those who do not.
This smacks of collective punishment.
But in the context of a dairy boom the arguments for exempting agriculture is likely to fall on ears if not entirely deaf, at least hard of hearing.
The dairy sector, after all, would not be asked to physically reduce its emissions to some level.
It would only have to take financial responsibility for any increase in emissions above that level.
If it is cheaper to buy emissions reductions that have occurred elsewhere or offsets from forest sinks, well, that is exactly what a trading regime is for.
It is intended to achieve emissions reductions at least cost, and reflects the fact that the atmosphere does not care where the reduction occurs.
More cows, in short, may just mean more trees. Or biogas digesters. Or biodiesel from algae on effluent ponds.
New Zealanders' per capita use of fossil fuels and emissions of carbon dioxide are similar to European levels.
But when agricultural emissions of methane and nitrous oxide are included, our per capita emissions of greenhouse gases rank third after Australia and the United States. Both those countries are significantly richer than we are, however.
When you divide our emissions by our gross domestic product, to get the "emissions intensity" of the economy, the situation is worse still.
As the world moves to put a price on emissions, that high emissions intensity will become a serious source of competitive disadvantage.
Conversely, anything that reduces emissions will reduce that drag and make the boat go faster.
If nitrification inhibitors live up to only part of the hype - more grass for less fertiliser and less pollution too - then they could make a worthwhile contribution.
One of the options the Government is considering for encouraging uptake is a tax on chemical nitrogen fertilisers to fund a subsidy on nitrification inhibitors.
The Treasury calls that sort of thing "hypothecation" and does not approve at all.
But as dairy conversions increase, forest planting dries up, world carbon prices and the exchange rate falls, the Kyoto liability in the Crown's books is only going to grow.
