Member Advisory

HWEN: The Good, the Bad, and the Ugly

8 June 2022

Good morning

This morning I attended the release of the He Waka Eke Noa industry partnership final recommendations report. Feds is one of the 13 industry groups involved in HWEN.

The report released this morning is called “Recommendations for Pricing Agricultural Emissions Report to Ministers”. The Ministers are Climate Change Minister James Shaw and Minister of Agriculture Damien O’Connor. They received the report last week.

Three weeks ago the Federated Farmers National Council reviewed our involvement in HWEN and agreed to continue with the process and be signatories to the final report, provided some outstanding concerns with the report were addressed. These concerns have been addressed and Feds was supportive of the release of this document today.

BUT. This doesn’t mean we don’t have deep concerns about some aspects of the proposal, and that’s why I’m sending you this lengthy message.

I need our members to understand why we have supported this process to date, and why we continue to do so. In short, we think the outcome is better for farmers if we stay involved.

The Report

So this is our take on where we got to with today’s report.

If you want to read it for yourself here is a link to the full document.

Pages 10 to 14 are the main summary of recommendations, up to page 10 is all the waffle you expect in documents these days, 15 to 16 is the chapter on Iwi rights, and the rest is just more detail on the recommendations.

The History

In 2019 our National Council agreed to take part in this HWEN partnership process based on a key statement in the original (July 2019) founding document that we would:

"Work with Government to design a pricing mechanism where any price is part of a broader framework to support on-farm practice change, set at the margin and only to the extent necessary to incentivise the uptake of economically viable opportunities that contribute to lower global emissions."

This has been our guiding principle in this process to date.  We felt that this original proposal provided a much better alternative to farmers than the existing plan by the government to levy agriculture via the Emissions Trading Scheme at the processor level with no consideration for the split gas approach taken in the Zero Carbon Act (The "ETS backstop”).

The ETS ‘backstop’ still remains the politically imposed alternative to He Waka Eke Noa.  

Last month our National Council met again to consider a final draft of the report. The council’s view was this pricing mechanism could plausibly deliver the outcome we signed up for in 2019.

We believe this is a better option than the existing ETS.

BUT if Ministers or the “System Oversight Body” (the agency set up to run all this) place too much weight on meeting domestic emission reduction targets (we strongly oppose the current ones for methane), then it could fail to deliver on what we signed up for in 2019.

Forcing farmers to take uneconomic measures will result in cuts to food and fibre production and significant economic losses in New Zealand. This will in turn result in higher global emissions – this is called “emissions leakage”. Reductions in our production means increased production in countries, where their emissions are higher per unit of production.

It will be the government of the day’s decision on what they wish to do. The proposed pricing mechanism in the report released today in no way makes that decision for them. The mechanism is merely a toolkit, a toolkit that could be used to drive increased emissions efficiency, or a toolkit that could be used to poor effect.

What Has Feds Achieved?

The document itself is different in a couple of respects from what you would have seen previously. There are a few very hard-fought wins delivered by Feds, plus some dead rats we had to swallow.

So here is my ‘good, bad and ugly’ from this report.

The Good

The pricing system proposed would operate at the ‘Farm Level’ from the start, which is what farmers, and Feds, asked for. There has been a lot of lobbying from the government for the scheme to be at a ‘Processor Level’, which essentially means collecting the funding without any recognition of individual farm circumstances. Feds encouraged other organisations to fight to keep the ‘Farm Level’ approach. We say if the government wants to make changes, then they can make them, and they can own them.
One of the big arguments against the Farm Level system was its projected cost. We worked hard to get better analysis of the potential costs to set up this system and run it, and they have been scaled down. We think there is still plenty of room for improvement here, especially with developments in data interoperability.
The Farm Level system means we could get the addition of “incentives” to the pricing system. A big improvement. This means farms utilising good practices, or mitigations that are recognised as having emissions reductions, will receive a rebate on the levy. Yes, the mitigations toolbox is fairly empty at the moment, but the fact we managed to get this included without reference to historic baselines is a big improvement. At a concept level this is an important win, even if the details aren’t quite there yet, we can build on this step in the right direction. Currently, the incentives system is too input focussed and too prescriptive, but Feds will keep trying to get this changed. Feds and one other partner promoted an 'output-based rebate' which would have been an outcome focused incentive, but other partners opposed taking this option to farmers. We will keep pushing for an output-based rebate as it incentivises what consumers care about,(emissions efficiency). Other partners to take this policy to farmer consultation will be covered in the 'Bad' section and remains a frustration of mine.
You’ll find a reference to the Paris Accord on page 38 and its wording on the need to balance global food production vs emissions reductions. Given that there was talk that this section of the Paris Accord didn’t apply to New Zealand a few months previously, it was satisfying to get the reference included.
We managed to ensure the wording in this document in no way signified our acceptance of the government’s methane reduction targets, I definitely view this as a win, in military terms this ended up being a hell of a job protecting our flanks. Many times over the last two years there have been attempts to include wording which would have indicated agreeing to the document meant agreeing to the targets. Feds does not agree with the methane targets.
We argued to make sure the agency which will have responsibility for recommending to the Minister what the levy rates are to be, won’t just be looking at what is needed to achieve the government's targets. It will also consider available mitigations, economic impacts on farm and to the wider economy, the potential of emissions leakage (production moving offshore and thus higher global emissions), and food security. The weightings of how these will be considered against one another is yet to be determined, and the government will be making the final appointments to this body, so we could see it stacked with individuals who value meeting the targets more than the other factors.
We achieved a good compromise of recognising sequestration in He Waka Eke Noa so that farmers will get somewhat recognised in the short-term (all be it at a discount on the ETS). The issue of sequestration was one of those issues where Feds had to play the middle ground of finding balance for all farmers. We’ve also made a strong recommendation that the government make improvements to the ETS in the long term so that more of the sequestration can reliably be included within the ETS.
Feds managed to get a price ceiling included. This means farmers won’t end up paying more than what we would have under the ETS. Given where the ETS is heading though, that’s still a scary place but at least we will not be worse off.

The Bad

While He Waka Eke Noa was announced as an ‘historic, world-first partnership, of industry, iwi and government” at the 11th hour the government - represented by the Ministry for Primary Industries and the Ministry for the Environment - decided they couldn’t be signatories to the document because it jeopardised their independent advice to ministers. That may be a fair enough reason, but surely that issue should have been evident at the start? Throughout the life of this partnership until the last few months, the expectation was we needed to compromise with officials to be able to hand over this document.
The Federation of Maori Authorities has been one of the 13 partners from the beginning but was allowed to include its own chapter in the document. We are extremely concerned it made a reference to “costing water and other externalities” in the chapter provided on page 15. This chapter also mentions moving away from “our current industrial farming practices”. No other partners were allowed input into this chapter. Given this document is likely to be read by many of our foreign competitors, degrading remarks about our current farming practices is an absolute own goal for us as a country. Without the support of others we were unable to remove these references.
The economics graduate in me still thinks asking a committee to set a price is a very inaccurate way to try and achieve an outcome. Hopefully with more time and some input from people with more economics knowledge we might get some changes here.
Serious concerns remain with how sequestration is being ‘recognised under He Waka Eke Noa’. There remains overlap between the HWEN sequestration scheme and the ETS. This means that rather than the rest of the economy paying to recognise sequestration on a farm, it will be other farmers in the sector paying, turning a net benefit for the sector into a net cost. The 2008 baseline for new sequestration remains, the requirements for stock exclusion for pre-1990 sequestration remain and there is no recognition for early adopting farmers who have already integrated as much mature vegetation into their farms as they can.
One big disappointment in this body of work is that there was never a decent cost-benefit analysis done of what this means to the whole NZ economy. What will the He Waka Eke Noa pricing mechanism or the ETS do to the national economy? What will it do to each regional economy, what will it do to jobs?
Feds strongly promoted an output-based rebate but was only able to get the support of one other partner for this idea. An output-based rebate is a policy that puts more money back into the hands of farmers and that provides a strong marginal incentive to reduce emissions while protecting farmer profits. The idea is only farmers who sell to processors would pay a levy and receive a rebate (the levy would apply to methane only). Under this option all farms would pay a levy on nitrous oxide and only those farmers that supply milk or finished animals for slaughter would pay a methane levy. Farms who pay the methane levy would receive an automatic rebate against this levy up to a benchmark level per unit of that output. This would incentivise emissions efficiency per unit of product and avoid emissions leakage. Feds strongly believes in this concept and will continue to push for an output-based rebate.

The Ugly

Obviously one of the big challenges with the document is that we are still not able to tell you what price you could end up paying. The modelling of various pricing impacts are sketchy to say the least, both for farms and for the economy. The report itself states “Modelling estimates that a farm-level split gas levy will result in a fall in production of milk of 1.4% and meat of 0.1%. This is the lower of the impacts discussed during consultation. Analysis1 identified that there is an emissions leakage risk for milk, beef and sheep meat associated production decreases.” Once again, a heroic price on agricultural emissions in New Zealand will likely lead to increased global emissions.
As we stressed before this will be a choice for the government, they will make this decision on their own, we have given them a mechanism they can use which could well drive the uptake of economically viable mitigations, that don’t create emissions leakage and harm the economy - that could plausibly happen, or they could make an absolute mess of things. The choice is theirs, on how they use this mechanism. The key thing to note here is that the price numbers that are used for modelling in this report are what we would get in the ETS. If the industry had not proposed HWEN, then that outcome is what farmers would have definitely got until some future government had the courage to change it.

Where to from Here?

Government ministers will now look at the report and consider it. At the same time the Climate Change Commission will also consider it and provide feedback to the government.
Eventually the government will introduce legislation into Parliament – this will either include aspects from this HWEN report fully or partially, or not at all. Then the standard Parliamentary procedure, which Feds can participate in if it chooses, will occur with submissions, hearings and debates.
Federated Farmers intends to continue with the partnership only so far as helping to get these final design details over the line.
Other parties have signalled a desire to be involved with governance oversight of the implementing agency. That is very definitely not Feds’ space, we need to be free to be the voice of farmers. We will look to work with other industry bodies in terms of nominations to the various bodies hopefully to ensure there are good people who understand farm systems (and farmers), economics, science and the global context we operate in.

Final thoughts

Finally, some reflections – this process has been hard. The hardest part has been the inability to keep farmers informed of the process, the direction it was heading in, the roadblocks, the frustrations, etc. This has meant farmers were disenfranchised from the process, you couldn’t see the mountain of work we were doing behind the scenes to try and get this thing to a better space. But you also couldn’t go on the journey with us, and understand the steps that were taken and why, and just ended up with a monstrous document dumped on you, seemingly out of the blue.

Compromise has been very hard but now we have a set of recommendations which would give us a better system than the ETS. I don’t take this as a win at all, in the midst of a global food crisis we are the only country planning to tax food production. I can only hope over time further work is done to allow these recommendations to help New Zealand agriculture ensure it remains the most carbon efficient farming nation.

The bones are there but more work is required, and we need to start thinking a bit more globally in what role we play rather than focussing on stupid percentages that don’t recognise the actual warming impact of ag emissions, or the fact those emissions should be spread across more than just the inhabitants of our country but also all the people who consume our produce.

If you would like more technical information on aspects of the recommendations and how they will impact your farming operation, please email your questions to [email protected].

For any questions or comments you wish to make about the politics of the decision taken then call your provincial president, national industry group chair or myself.

If you still want even more information about He Waka Eke Noa after reading all this then check out our FEDTalks podcasts on the FEDSVoice app – download from your Android or Apple stores.


Regards
Andrew Hoggard
National President