Comment: The real cost of zero carbon and the ETS

David Clark, President Federated Farmers Mid-Canterbury. Photo / Supplied

Comment: Farmers need to crunch the numbers now to find out what the Zero Carbon Bill and ETS will cost them years down the track, writes David Clark, President Federated Farmers Mid-Canterbury.

The risks to the viability of farming businesses with the Zero Carbon Bill and emissions trading scheme (ETS) are being grossly under-played.

It's time farmers and farming leaders got out their calculators and crunched the numbers based on the likely costs some years down the track.

I did, and it's frightening.

At present we're being told that the liability is only 1 cent per kilogram of milk solids and 3 cents per kg of lamb.

We're brushing it off as relatively minor but we're being lulled into a false sense of security because those costs are on the basis of $25 a tonne for carbon and a 95 per cent free allocation under the ETS.

The Zero Carbon Bill is still going through the select committee process.

Read more from Federated Farmers here.

Once it's law, in possibly amended form, we'll have a Commission working to five-yearly carbon budgets and the market setting the carbon price.

The 95 per cent free allocation for agriculture under the ETS only runs as long as the Coalition agreement with NZ First lasts.

After that, all bets are off. Any future allocation rates will only require a majority decision of the Cabinet of whatever government holds the reins.

Agriculture's total ETS liability can be met by the public/Crown, by farmers or some mix of the two.

The public purse is always under pressure/subject to politicking so I'm quite sure the NZ taxpayer is not going to continue to subsidise a free allocation for my production in the long term.

So, with no free allocation under the ETS the liability for the 8,500 lambs my farm finishes each year, with carbon priced at $25 a tonne, is $120,000 – or 60 cents per kilogram of meat.

But here's another certainty. The carbon price won't stay at $25 a tonne.

The Productivity Commission's report of April 2018 stated the carbon price may well have to increase to $250 a tonne for the ETS to be truly effective.

There has also been published comments by investors in the forestry sector that they are making their land purchase decisions on the basis of future carbon prices of up to $250 a tonne.

At $250/t, the cost to my business under the ETS is $1.2 million or $6 per kilogram of lamb.

Given lamb returns are around $6/kg in summer, even as high as $7.60/kg just now, clearly I'm not going to be in business very long with that level of climate change liabilities.

And here's the problem we all face. Who is going to invest in a farming business with a potential liability at the whim of Cabinet of between 60 cents and $6 per kg of meat, that may or may not be subsidised by the taxpayer?

What bank is going to lend on a farming business without doing a sensitivity analysis on how vulnerable that business is to a change in the carbon price or a change in ETS allocation?

The figures are no better for a dairy farm.

The costs are being portrayed at 1 cent per kilogram of milk product, which is actually a total obligation in the ETS of 20 cents per kg at $25 a tonne. At $250 a tonne of carbon, it's $2 per kg of milk solids.

That puts every dairy farmer in New Zealand out of business.

Just as important as all of this, is that farmers can forget about catchment loads, nutrient and water allocations, the new Freshwater National Policy Statement and all the rest of it.

What this climate change legislation does is give government a mechanism to put a sinking lid on the profitability and viability of agriculture in New Zealand because they can simply turn the carbon dial up and blow us out of business.

It's time for farmers – and New Zealand – to wake up.