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NZ farmers worry about ‘carbon leakage’ if they have to pay for emissions, but they could benefit from playing the long term


The recent report issued by the Intergovernmental Panel on Climate Change (IPCC) underlines the urgency of emission reductions. For Aotearoa, New Zealand, where 50% of emissions come from agriculture in the form of methane and nitrous oxide, this means the primary sector must be part of the response.

Indeed, New Zealand is the first country to study introducing a price on greenhouse gas emissions from agriculture.

The most recent price proposals Farmers would have to pay a levy on their agricultural emissions. To begin with, only 5% of issues would be priced, with proposals to gradually reduce the 95% free allocation over time.

Many of the existing models show that emissions can be reduced by up to 10% by reducing production intensity, often by reduction in the number of animals and the use of fertilizers. This does not necessarily mean lower profitability. With good grassland management, farmers may be able to reduce stocking density and increase profits.

But Aotearoa is already one of the most efficient producers of meat and dairy products worldwide. If we cut emissions here, wouldn’t that just result in other, less efficient countries picking up the lost production, while our farmers pay the price?

This idea is known as “carbon leakage” and is often used as an argument against any domestic policies that could lead to reduced agricultural production. The issue is important because New Zealand is heavily dependent on agricultural exports. In 2022, 65% of all goods trade was agricultural commodities.

Understanding whether carbon leakage will occur or not is a complex task. Here we look at the evidence we have and the insights from agricultural trade modelling.

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New Zealand models

It is difficult to know exactly what could happen in agriculture, as emission prices for agricultural products are not yet used elsewhere. There is no historical evidence to draw from.

International modeling studies give a mixed picture of the probability of leakage: an OECD study estimated 34% of agricultural emissions would be leaked, mainly to developing countries.

Recent modeling for New Zealand examines a range of scenarios of both domestic prices and international prices. The results show that for the current proposal, in which only 5% of emissions are priced to begin with, with an increase of 1% per year, New Zealand’s production of meat and dairy products could fall by 2050.

The effect on dairy producers would be a yield loss of less than 1%, while meat producers would suffer 6%. Part of the production would be taken over by other countries, but the total volume would be lower than in the baseline situation, where there was no emission pricing.

This graph shows the displacement of global dairy production in 2050, due to a levy on 5% of emissions from 2025, increasing by 1% annually.
Author provided, CC BY-ND

This shows that leakage can occur, with a reduction in production of New Zealand dairy products. But global meat and dairy production would be significantly lower than without the policy by 2050, which would have a positive overall climate impact.

As the proportion of emissions that are priced increases, we expect the amount of meat and dairy produced in New Zealand to decrease. This in turn could increase the leak volume. –

More sustainable future diets

It is important to remember that while there is a decrease in meat and dairy production, there will likely be an increase in the production of other types of food that do not contribute as much to climate change.

a recent research shows how food consumption alone could contribute to an additional degree of warming above pre-industrial temperatures by 2100. This demonstrates the importance of food choices in tackling climate change.

Read more: Perfecting cultured meat could hedge against food shortages as climate chaos intensifies

Many of New Zealand’s trading partners are exploring and beginning to implement their own agricultural emissions reduction targets and targets. Internationally, there is increasing attention to the role that international trade rules can play in tackling climate change limiting mechanisms for carbon adaptation And environmental standards for imports.

In a similar scenario to that described above, but where New Zealand’s main competitors also take action, New Zealand could even see a small increase in production by 2050, despite domestic pricing policies.

So the degree of leakage really depends on how other countries deal with their own emissions. Economy-wide net-zero emissions targets are in place for Australia, Chile, the countries of the European Union, the US and the UK by 2050, and for China by 2060.

The probability of leakage would be significantly reduced by multilateral agreements or through regional or bilateral commitments within trade agreements.

Read more: What if border carbon taxes applied to all carbon – including fossil fuels?

New Zealand could decide to become a leader and show the rest of the world its commitment to reducing emissions from our highest emitting sector. This may initially lead to some leakage, but this is likely to diminish as other countries adopt similar measures.

Or we can wait for other countries to take more serious measures against agricultural emissions. But in the meantime, emissions reductions will increasingly come from financial and private initiatives, such as access to processing plants, which gradually demand emission reductions in their value chains and through loans and financing, where banks are starting to provide reduced interest rates for sustainable practices.

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