CARBON POLLUTION REDUCTION SCHEME GREEN PAPER NFF SUBMISSION

Transcription

1 CARBON POLLUTION REDUCTION SCHEME GREEN PAPER NFF SUBMISSION 10 September 2008

2 Table of Contents Executive summary... 4 Introduction Timeframes for agriculture s coverage by a CPRS Obstacles to agriculture s coverage Industry consultation Point of obligation Direct obligation Indirect (up or downstream) obligation Hybrid obligation Sectoral considerations Table 1: Overview of Agriculture Industry Relationships Emissions Intensive Trade Exposed (EITE) sector assistance EITE assessment of uncovered sectors Table 2: Agriculture s exposure to energy costs Definition of EITE sectors EITE threshold levels Baseline calculations for EITE permit allocations Allocation of free permits to EITE activities Allocation of Australian carbon pollution permits Land use change Forestry component of a CPRS The treatment of regrowth within the CPRS Managed Investment Schemes (MIS) Carbon sink forest legislation Land use impact analysis, review and education needs International carbon accounting rules and forestry International carbon accounting rules Principles for effective greenhouse accounting frameworks Limitations of current framework for agriculture Article Soil carbon sequestration Permanence and balance sheet farm carbon accounting Accounting for forestry-based sequestration What needs to be done? Research and development needs Chart 1: Trends in global yields for the major food crops The Climate Change Research Program Reducing greenhouse pollution Better soil management Adapting to a changing climate Nationally coordinated R&D Fuel offset mechanism Complementary measures Lack of a positive market signal for uncovered sectors The interdependence of regional Australia and farming Utility scale renewable energy in regional Australia

3 Beyond complementary measures - the interrelationship of a CPRS with other major policy frameworks NFF Contact

4 Executive summary The National Farmers Federation (NFF) welcomes the opportunity to provide comments on the Carbon Pollution Reduction Scheme (CPRS) Green Paper. The NFF reinforces that climate change is a global issue requiring a global solution. In this context, it should be recognised that Australian agriculture is a lower intensity emitter of carbon than the agricultural sectors of other developed countries. It is critical therefore, that the CPRS design does not have the perverse consequence of driving food and fibre production off-shore and in so doing, increase global emissions. The costs of a CPRS and other domestic policy responses to mitigate greenhouse gases must be distributed fairly across the Australian community. Farmers, as price takers in the marketplace, are extremely vulnerable to increasing costs that may result from the implementation of a CPRS even as an uncovered sector. In the context of the current global shortage of food stocks, Australian farmers must not be forced into a position whereby the only way that they can meet their liabilities under a CPRS is by reducing production. Government must ensure that the design of a CPRS and other complementary policies do not inhibit a demand responsive future expansion of agricultural production. Timeframes for agriculture s coverage by a CPRS The NFF believes that the CPRS Green Paper takes a prudent position regarding the coverage of agriculture should it be included within a CPRS. Clearly, agriculture s coverage within a CPRS at this time is impractical. Australian farmers can and will make a further significant contribution to reducing Australia s greenhouse gas emissions potentially through a mechanism such as a CPRS or other complementary measures, but achieving this will require a range of issues to be addressed. Obstacles to agriculture s coverage Accurate measurement, monitoring, verification and reporting of emissions at the individual enterprise are major obstacles to agriculture s coverage. The National Carbon Accounting System (NCAS) cannot currently provide an appropriate farm scale carbon estimation mechanism for agriculture. However, the question of when agriculture should be covered involves more than simply questions about measurement, monitoring, verification and reporting of emissions. Government and industry must determine an appropriate point of obligation for each agricultural activity that provides signals to reduce emissions without excessive cost. The international greenhouse accounting rules do not appropriately acknowledge the full sequestration function of agricultural production systems. These accounting rules are not appropriate for the longer term goals of Australia s CPRS and are adding to misleading interpretations of agriculture s contribution to global warming. 4

5 Cost-effective mitigation options are not yet widely available for most agricultural sectors nor their supply chains. Despite operating in the most distorted of all global goods sectors, Australian farmers have competed due to productivity gains. These gains should not be jeopardized by the CPRS. Industry consultation The NFF agrees that considerable consultation and joint effort with the industry are required to determine if or when it may be appropriate for agriculture to be covered by the CPRS. This process of consultation should include: 1. A common work plan agreed with clear timeframes and milestones. 3. Continuation of an agriculture specific technical working group. 5. Involvement with the complete agriculture supply chain. 7. Detailed economic modelling of the direct, on-farm impacts of a CPRS. 9. A clear outline of what minimum conditions need to be met for agriculture to be covered. 2. A comprehensive R&D strategy. 4. Development of a program for Government to provide progress updates to the whole of industry at regular intervals. 6. A coordinated communication strategy to educate farmers about the CPRS. 8. A coordinated workplan to deal with international competitiveness and carbon accounting issues. 10. Development of mechanisms to examine the appropriateness of complementary policies. Point of obligation The NFF believes that with the current level of knowledge, it is impossible to make a decision on an appropriate point of obligation for agriculture. The NFF believes that a system needs to be developed that both creates incentives to reduce emissions while minimising transaction and administration costs involved in monitoring and measuring emissions. Direct obligation It is the NFF s view therefore that if agriculture becomes a covered sector, it would be desirable to set the point of obligation directly at a farm level. However, there are a large number of practical obstacles that must first be resolved before a direct point of on-farm obligation can be realistically achieved. These include the following: o How can transaction / compliance costs be maintained at acceptable levels? o How can on-farm emissions and sequestration be accurately measured? o How will changes in on-farm practices be recognised? o What is the definition of a farm / farmer for this purpose? o o The range of available on-farm abatement options must be identified and be available. There may be significant equity issues if the threshold for emissions on-farm is set significantly lower than for the rest of industry. Indirect (up or downstream) obligation 5

6 In many sectors of agriculture, the relationship between inputs / outputs and the emissions produced on the farms is extremely tenuous. Therefore, in order for policy to encourage a reduction in emissions, it must recognise, measure (or estimate) accurately the impact of particular farming techniques on emissions. Selecting a downstream or upstream sector as the point of obligation places the onus on sectors such as raw material / food processors or fertilizer suppliers to develop mechanisms that deliver a strong signal to their suppliers and customers, while accurately measuring emissions. Therefore, the NFF believes that it is incorrect to suggest that the issue of transaction and administrative costs will be resolved by shifting the point of obligation either up or downstream from the farm producer. Doing so merely shifts these costs onto industry. The NFF urges the Government to systematically test the contention that indirect obligation would achieve significant reductions in compliance costs, and at the same time would also be effective in reducing emissions from agriculture is required. Hybrid obligation Under a hybrid scenario, there is the potential to create two sets of establishment costs and the need to have multiple entities involved. Sectoral considerations The optimal approach to defining the point of obligation for each sector will also depend on the composition of the industry in question. Supply chain relationships will vary in their structure and extent, depending on the industry. In moving the point of obligation downstream from the farm sector, a single solution may not always exist within each agricultural sector. Government must ensure that unintended structural implications are not created in addressing this issue that skew produce towards a particular marketing channel. Because of the complexity of many markets, the NFF believes that a detailed assessment of the risk of unintended structural consequences to arise from the design of the scheme is required. Emissions Intensive Trade Exposed (EITE) sector assistance Agriculture must have assurances that its export competitiveness will not be placed at risk as a result of the implementation of a CPRS. Similarly, import exposed sectors should not be placed at a disadvantage on the domestic market, particularly those industries that have a lower emissions profile than that of their international competition. It would be perverse if agriculture was more adversely treated in the Australian CPRS than in any other ETS in the world. EITE assessment of uncovered sectors Farmers, as price-takers in the marketplace, are vulnerable to increasing costs that may result from the implementation of a CPRS either as a covered or uncovered sector. The potential for leakage therefore exists even for uncovered sectors, particularly those with a high elasticity of demand such as those of many agricultural commodities. 6

7 The NFF believes that comprehensive analysis should be undertaken on the direct on-farm impacts of a CPRS, including the relative price elasticities of agricultural commodities, to enable agriculture to understand the impacts of the scheme on its international competitiveness. Definition of EITE sectors The NFF believes that there are significant variations between each tradeable industry and their capacity to pass on cost increases that may be incurred. The NFF therefore believes that making emissions intensity per unit of revenue the sole distinguishing feature in the calculation of EITE assistance is inadequate. The NFF believes that it is vital that the EITE measure also include a measure of the price elasticities of individual products at the farm gate. Failing to recognise the differences in each industry s ability to pass on costs will deliver a skewed indicator of the true global exposure to a CPRS. EITE threshold levels The EITE threshold calculations raise the following issues: What will happen if certain sectors move above or below the various EITE thresholds based on new data availability? Movement within the various thresholds will not only be very difficult to administer, but will also be a significant destabilising factor for industries due to the uncertainty that this will bring. It may be found that based on the new input / output tables that some agricultural sectors may fall below one of the proposed industry assistance thresholds despite their margins having potentially decreased. The NFF does not believe this would be an intended outcome of the policy setting and such industries should retain access to the same level of EITE assistance. A perverse incentive to increase emissions or to decrease revenues may exist for sectors sitting just beneath the thresholds. The NFF questions why the wool and rice sectors have not been allocated as specific categories within the EITE threshold tables. What does the Government propose will happen should the share of permits aligned with sectors meeting the thresholds exceed 30% of total permit availability? The NFF questions why indirect emissions from fuel usage are not included within the EITE assessment? Baseline calculations for EITE permit allocations The NFF believes that, where possible, the permit allocation percentage should be determined by an Australian industry average baseline and that this must factor in drought and the generally fluctuating nature of agricultural production and emissions. Allocation of free permits to EITE activities 7

8 While the NFF believes that it is appropriate that the EITE measure be calculated on an activity basis rather than that of a firm or industry, it has significant questions regarding how these free permits will be allocated to individual entities in fragmented sectors such as agriculture. While agriculture will not receive permits under EITE guidelines unless agriculture is covered by the CPRS, the sector will face cost pressures from upstream price increases and price squeeze from downstream customers that will hurt farmers global competitiveness from Allocation of Australian carbon pollution permits Should agriculture be covered by a CPRS at some point in the future, the sector is very concerned that its financial capacity to engage in a majority permit auction will be restricted and place financial stress on the sector, from which many may not be able to recover. The NFF strongly disagrees with the comment in the CPRS Green Paper that firms will generally pass the carbon cost through to consumers for emissions intensive goods. Agriculture s capacity to pass on costs is notoriously poor, meaning that many farmers will be forced to absorb the vast majority of the cost of these permits. The NFF believes that the potential to raise revenue from the permit allocation process should be avoided, and suggests that the goals of allocative equity and efficient price discovery can be delivered through a majority free allocation method. The NFF therefore believes that majority (>90%) of carbon pollution permits should be allocated to the market by way of free allocation. In a competitive market, free allocation with an efficiently working secondary market will deliver the same outcome and efficient price discovery as an auction system, while minimising the revenue shock that will be associated with a CPRS implementation. This process has been adopted in both Europe and New Zealand. The NFF believes that free allocation of permits to the agriculture sector would be justified in light of prior efforts undertaken by farmers, both voluntarily and due to regulation, that have seen emissions from agriculture, forestry and fishing reduce by 41.7% between 1990 and Land use change The NFF acknowledges that forestry can make a valuable and positive contribution to the environment and the economy. However, Government must recognise the broader ramifications that may emerge if the balance of incentives is inappropriate. Collectively, policies that provide incentives for forestry have the potential to lead to significant perverse outcomes in areas such as water runoff, ground water hydrology on neighbouring farms, biodiversity, social structures and Australia s ability to continue to make a contribution to global food and fibre supplies. The NFF believes that Government must examine the broad suit of current and proposed policies that are designed to regulate and manage land use and land use change in rural and regional Australia. These include the following: Forestry component of a CPRS The NFF has significant concerns regarding the proposal for forestry to be able to opt-in to the CPRS. An opt in model has the potential to cause significant distortions in land use within 8

9 regional areas as well as perverse environmental outcomes in the areas of water and biodiversity The NFF has a number of significant concerns about the treatment of re-growth in national accounts and under the CPRS: o o Freedom in landuse is essential to enable farmers to manage their land productively and must be preserved. A positive incentive for retention of tree and shrub re-growth, however, could be provided by enabling farmers to generate carbon credits from re-growth. It is essential that the national policy framework recognizes that not all re-growth is good and that re-growth which is classified as invasive native species or woody weeds has strongly negative environmental impacts and results in net carbon losses by causing land degradation. Scope should be provided in the scheme to allow farmers to generate carbon credits by clearing invasive native species and restoring native grasslands. Managed Investment Schemes (MIS) The NFF is concerned about the growth in MIS forestry projects and believes that the MIS mechanism does not promote sound investment decisions in rural and regional Australia. The NFF encourages the Government to provide assurances that a CPRS will not provide MIS operators and/or MIS investors with the opportunity to generate an additional financial advantage from the CPRS provisions. Carbon sink forest legislation The NFF believes that it is appropriate to enhance the potential for small scale, on-farm forestry as a means of complimenting agricultural production while making a genuine contribution to sequestering carbon. The NFF believes that the requirement for trees to occupy a continuous land area of 0.2 hectares or more to be eligible under the provision in the new Carbon sink forest legislation must be removed if Government is serious about providing an incentive for farmers, while allowing farmers to make a meaningful contribution to sequestering carbon through on-farm forestry practices. The NFF is also concerned that this same condition may incentivise farmers to plant trees in areas that deliver a poor environmental outcome. Land use impact analysis, review and education needs The NFF believes that further analysis is needed to quantify the level of incentive towards the various levels of forestry as a matter of urgency in order to understand the extent of the land use change risks identified in the CPRS Green Paper. This analysis must also be undertaken in the context of the new carbon sink forest legislation and MIS. The Government must also ensure that appropriate, comprehensive information is available to farmers outlining their responsibilities in claiming a reduction for capital expenditure for the establishment of trees in carbon sink forests. International carbon accounting rules and forestry 9

10 The NFF is concerned by the current global accounting rule s emphasis on reforestation as the primary tool for achieving sequestration. A number of factors need to be considered in this regard: o o o o The current 1990 benchmark for Kyoto compliant reforestation offsets excludes forests planted before The Kyoto rules need to reflect the value of managing carbon stocks in all standing vegetation regardless of spatial characteristics and age. Farming demands flexibility in land-use. Plantations can have significant impacts on water yield. Monoculture carbon plantations can lead to biodiversity issues. International greenhouse accounting rules that acknowledge sequestration in addition to that achieved through forestry are needed to enable agriculture to participate effectively in the global response to climate change. The international greenhouse accounting rules must be changed to make a distinction between human and natural emissions from land systems, such as occur in relation to soil carbon losses. The Government should acknowledge the sequestration capacity of agriculture in its policy thinking, and is encouraged to highlight the ramifications of poor international carbon accounting and its influence on domestic policy formation. International carbon accounting rules The NFF is concerned that the current Kyoto accounting rules both misrepresent agricultural emissions and are a barrier to increasing the carbon storage potential of agricultural lands. While the international accounting framework continues to be skewed against the interests of the agriculture sector, farmers risk the adoption of domestic greenhouse gas mitigation policies that place inequitable costs on agriculture and limit the sector s ability to engage. It is vital that the international carbon accounting rules are adjusted to appropriately account for agricultural emissions and sequestration before agriculture can be equitably covered by a CPRS. The NFF will work closely with Government and assist wherever possible to change the international carbon accounting rules so that they appropriately account for agriculture. In the meantime, the NFF encourages the Government to ensure that a CPRS as it relates to agriculture, and alternative domestic policies to drive mitigation of greenhouse gas emissions should not be bound by the current international carbon accounting rules. Limitations of current framework for agriculture Under Article 3.4, if the area allocated to the particular activity in increases, there is a risk that even if emissions per hectare are reduced, the total emissions reported increase solely due to an increase in land area. Current Kyoto accounting rules do not allow a distinction to be made between anthropogenic and non-anthropogenic soil carbon losses. Under Article 3.4, natural emissions and annual variability on all relevant lands are included in the account. There may be risks that emissions outcomes could increase or decrease regardless of management effects, but rather due to the effects of natural variability and the effects of climate conditions. 10

11 It is difficult for soil carbon to meet current permanence criteria as soil carbon fluxes can be rapid, with some fractions moving in and out of soil on a daily basis. The Kyoto permanence principle creates significant practical problems for land-based offset schemes, often requiring complex contractual arrangements involving land title. Research and development needs The NFF recognises that significant R&D resources are required for farmers to access the right tools to effectively manage the risks and capitalise on the opportunities arising from climate change and climate change policy. It is important that the research priorities identified for the Climate Change Research Program do not reduce or delay the delivery of existing research outcomes which are aimed at improving productivity and building resilient, sustainable, well managed agricultural businesses. The Climate Change Research Program The NFF would like to develop a detailed research program for agriculture building on the CCRSPI work. Some of the themes identified by CCRSPI are outlined below under the Government s initial priority headings: Reducing greenhouse pollution Life Cycle Assessment Global emissions comparison Emissions reduction Reducing methane emissions Reducing nitrous oxide emissions Better soil management Opportunities for sequestration Adapting to a changing climate Climate research for the primary industries Supporting change in primary industries Management of biodiversity and ecosystem services in a changing climate The NFF has been supportive of a nationally coordinated approach to research, development and extension programs which recognises the needs of specific industries. Fuel offset mechanism In light of the enormous escalation in the price of oil in recent times and the significant shock that this is having on all sectors of the Australian economy, including agriculture, the NFF is supportive of the CPRS Green Paper s recommendation that that fuel price impacts from a CPRS be offset for at least the first three years of the scheme. The NFF would welcome the opportunity to work with Government in determining the most appropriate mechanism for delivering this offset to the agriculture sector while ensuring that transaction costs incurred are minimized. 11

12 The offset recommendation is particularly welcomed by the NFF considering that the majority of our members are located in regional areas, which have less access to public transport, and are therefore more exposed to the cost of fuel. The NFF believes that the offset for heavy vehicles should also be offered for at least three years to give farmers and other trade exposed industries appropriate time to adjust their operating systems. Many Australian farmers have limited options to reduce their utilisation of heavy vehicles as part of the process of getting produce to their markets. Complementary measures While a CPRS is the central measure being proposed by Government to reduce Australia s emissions, it will not by itself be sufficient to achieve the desired results across the economy. For agriculture, the NFF believes that complementary measures may represent the most costeffective way of achieving abatement and long term structural change. Lack of a positive market signal for uncovered sectors The CPRS Green Paper proposes that no decision will be made about the coverage of agriculture until 2013, nor does it recommend establishment of a program for allocating early action credits. Therefore, if not supported by appropriate complementary policies, this could fail to send a positive market signal to agriculture and for some sectors may potentially create a disincentive for farmers to reduce emissions and confusion about how to reduce their businesses exposure to carbon risk. In the view of the NFF, this leaves two options, both based on complementary measures: 1. An upfront decision to exclude agriculture, plus the introduction of a suite of permanent complementary measures that motivate farmers to reduce emissions and sequester carbon from 2010 onwards. 2. A 2013 decision regarding coverage (as proposed in the CPRS Green Paper), plus transitional complementary measures that can be made permanent should a decision for non-inclusion be made in Complementary policy options may include: o Additional investment in R&D. o Financial support for best management practices that deliver emissions abatement. o Investment in low emissions transport. o Alignment of water and drought policy programs to support abatement and sequestration goals without jeopardizing productivity. The interdependence of regional Australia and farming The dependence of many rural communities on a single agricultural industry makes the economic risks of a CPRS higher for regional Australia than for urban Australia. A focus of complementary measures, therefore, should be finding ways for agriculture and regional processing facilities to contribute to the national climate change effort without threatening the viability of agricultural businesses and the communities that depend on them. 12

13 The NFF seeks further clarification on the Climate Change Action Fund (CCAF) and whether it could be targeted towards the broader regional community. The NFF would also like to examine further opportunities through the taxation system that a CPRS can deliver equitable impacts across the entire community. In this regards, systems such as Tax Zone Rebates may need to be considered to deliver this equity outcome. Utility scale renewable energy in regional Australia The NFF believes that there is a need for detailed national dialogue about the potential for utility scale renewable energy as a new business sector in regional Australia. The NFF believes that it would be strongly in the national interest to provide policy incentives for utility scale renewable power generation based in regional centres. To facilitate this dialogue, the NFF requests the federal government to commission modeling of Australia s transmission line network and energy demand in regional centres so as to develop a robust integrated least-cost planning model for Australia s transition to bioenergy, solar, wind and other renewable energy supply. The interrelationship of a CPRS with other major policy frameworks There is a complex inter-relationship between a CPRS and other current policy reforms including drought, water, biodiversity conservation, land use planning, infrastructure and energy supply. The NFF believes that a detailed public process is required, in addition to the CPRS Green Paper process, to explore and document the various policy frameworks and measures (and the connections between them) that affect and are affected by climate change. It is essential that common objectives are identified across a CPRS, water, drought, infrastructure, land use planning and energy policy agendas and that decisions are evaluated, not in isolation, but as part of an integrated whole. 13

14 Introduction The NFF welcomes the opportunity to provide comments on the Carbon Pollution Reduction Scheme (CPRS) Green Paper. In recognition of the importance of the issue to the agricultural sector, the NFF has consulted widely across the agricultural sector and its supply chains, including both member and non-member farming organisations. The NFF does not underestimate the complexities involved in designing a domestic emissions trading scheme (ETS) and other complementary policies that deliver equitable outcomes across all sectors of the economy. The NFF agrees that any domestic policy response aimed at mitigating emissions, including the design of a CPRS, must be formulated in the context of a global solution. Australian agriculture is a lower intensity emitter of carbon than the agricultural sectors of other developed countries. 1 It is critical therefore, that the CPRS design does not have the perverse consequence of driving food and fibre production off-shore and in so doing, increase global emissions. Likewise, the NFF appreciates the difficulty of ensuring that the costs of a CPRS and other domestic policy responses to mitigate greenhouse gases are distributed fairly across the Australian community. This principle must apply to sectors and communities regardless of whether they are covered under a CPRS. This is crucial for agriculture which currently faces significant practical limitations for coverage in a CPRS. Farmers, as price takers in the marketplace, are extremely vulnerable to increasing costs that may result from the implementation of a CPRS even as an uncovered sector. Using Australian Bureau of Agriculture and Resource Economics data, approximately a third of total broad acre farming input costs are energy dependant. This includes direct costs such as fuel and electricity, as well as other energy dependent farm costs such as freight, fertilizers and crop contracting. This figure increases to a substantial 45% of input costs for cropping operations. In addition, the NFF also recognises that a CPRS will inevitably lead to increased costs throughout the complete agricultural supply chain - costs that in most cases will be borne by farmers in the form of lower prices for produce. In the context of the current global shortage of food, Australian farmers must not be forced into a position whereby the only way that they can meet their liabilities under a CPRS is by reducing production. Government must ensure that the design of a CPRS and other complementary policies, provides incentives for Australian farmers to continue to make an equitable contribution to reducing greenhouse gas emissions, and does not inhibit a demand-responsive future expansion of agricultural production. It will be equally important that strong market signals are given to farmers, suppliers of farm inputs and to the transport sector, to invest in technologies that enable agriculture to adopt practices that increase production capacity while delivering a lower intensity of emissions per unit of agricultural output. Increased R&D capacity and detailed supply chain analysis delivered in a partnership arrangement between Government and industry can play a key role in achieving these outcomes. Australia has a major responsibility to provide a highly nutritious, affordable, sustainable and secure food source for the people of the developed and developing world, particularly in this time of global food shortages. Australian farmers are willing and able to play their part, 1 Garnaut Climate Change Review 2008, Media Release issued on 21/02/08 14

15 however, sensible, workable and equitable policies are required that will enable them to do so. The aim of Australian farmers is to continue to provide competitively priced, high quality, safe and environmentally sustainable food and fibre not only for Australian consumers but for millions of people across the globe. Timeframes for agriculture s coverage by a CPRS The NFF believes that the CPRS Green Paper takes a prudent position regarding the coverage of agriculture within a CPRS. Clearly, agriculture s coverage within a CPRS at this time is impractical and it is appropriate that a final decision on inclusion or exclusion to be made in 2013 in the light of progress in overcoming practical difficulties and after extensive consultation with the industry. Like the Garnaut Draft report and the Productivity Commission submission to the Garnaut review, the Green paper has recognised the substantial practical difficulties surrounding the coverage of agriculture within a CPRS and recognises that significantly more clarity is required before the Government can realistically consider covering agriculture within the CPRS. The agricultural sector has already paid a significant price to reduce greenhouse gas emissions as a consequence of the cessation of land clearing, and this is the primary reason that Australia is ontrack to meet its Kyoto emissions targets. The entire Australian community has been the benefactor of this cost borne by the farm sector, which has seen emissions from agriculture plus deforestation (clearing of land the majority of which has been undertaken for agriculture, in particular to increase rangeland productivity) reduced by 40% since Australian farmers can and will make a further significant contribution to reducing Australia s greenhouse gas emissions, potentially through mechanisms such as a CPRS or other complementary measures, but achieving this will require a range of issues to be addressed that provide new opportunities for farmers to maintain and increase productivity while at the same time contributing to greenhouse emission reductions. The NFF agrees with the CPRS Green Paper in not supporting a regulatory approach to dealing with climate change. Such practices have been utilised by State Governments in Australia in the past, through the restrictive regulations of land clearing that have enabled Australia to meet its Kyoto targets. This regulatory practice has come at significant cost to Australian farmers, led to numerous perverse outcomes and has created significant limitations to future farm productivity. 2 Obstacles to agriculture s coverage The NFF notes that the CPRS Green Paper explicitly refers to the issues surrounding the development of reliable and cost-effective methods of emissions estimation and reporting at the individual enterprise level as being the principle obstacle to covering agriculture within a CPRS. The NFF agrees with this finding and believes that reportable emissions for agriculture should be a true reflection of actual emissions at an enterprise level. However, the threshold question of whether agriculture should be covered involves more than simply questions about measurement of emissions. There needs to be a clear set of objectives established for the decision about coverage of agriculture and a process laid out for making that decision. This issue is dealt with later in this submission. Furthermore, measurement and reporting of emissions must not involve excessive transaction costs. This will require systems that are substantially more precise than the National Carbon Accounting 2 Australian Farm Institute 2007, The new challenge for Australian agriculture: How to Muster a Paddock of Carbon. 15

16 System (NCAS), which provides spatially explicit accounting (Tier 3) for Australian forests, but cannot currently provide an appropriate farm scale carbon estimation mechanism for agriculture. The agricultural sector has concerns that the broad emissions factors used for estimating emissions for the sector (predominantly Tier 1 methodology) do not effectively account for the complexities of agricultural land use and management practices. Similarly Life Cycle Assessment (developed for factory-based industrial products where inputs and outputs are easily quantified and controlled) has significant limitations when applied to agricultural products that are produced in open systems. Given its limitations when applied to agricultural systems, Life Cycle Assessment should not be seen as a panacea that will allow benchmarking of emissions between products competing for the same natural resources or even between farmers producing the same products, until accurate measurement of emissions at the individual enterprise level can be achieved. One issue that will require significant analysis, testing and modelling is the level of disaggregation of agricultural practice and the environment that will be appropriate to provide signals to reduce emissions without excessive complexity. The NFF looks forward to working with government to resolve this difficult area. This issue is dealt with in further detail in the Point of obligation section in this submission. The NFF maintains that the international greenhouse accounting rules for the land-based sectors do not appropriately acknowledge the full sequestration function of agricultural production systems. These accounting rules do reflect Australia s obligation under the Kyoto Protocol but are not appropriate for the longer term goals of Australia s CPRS and are adding to misleading interpretations of agriculture s contribution to global warming. Significant development of comprehensive accounting calculators on a whole-of-farm enterprise basis is required to demonstrate the real greenhouse gas contribution of agriculture while acknowledging the wide variation of Australian agricultural systems. Research to generate the data requirements to accurately estimate greenhouse gas emissions for agricultural activities needs to be addressed before the sector can be included in a CPRS and a robust procedure for verification of agricultural emissions and sequestration developed. A review is also needed of the appropriateness of additionality and permanence rules as they apply to agriculture. The NFF concurs with the CPRS Green Paper acknowledgement that cost-effective mitigation options are not yet widely available for most agricultural sectors. The NFF reinforces the point made previouosly that with the current range of mitigation options, coverage of agriculture within a CPRS at this time may lead to perverse outcomes for the global environment. A large program of research and development will be required to resolve this problem, of which the current Australia s Farming Futures Program is a good start, recognising that much more will be required. It is critical that this investment in developing scientifically robust, measurable and practical mitigation options commences immediately to inform a 2013 decision on coverage for agriculture. It should also be noted that while preliminary identification of abatement options appear promising, most still require at least 10 to 20 years research and development before commercially available to the farming community. This will need to be taken into account within the decision on agriculture s coverage within a CPRS. The R&D section of this submission includes further discussion on research needs for agriculture. The CPRS Green Paper does not explore the critical role supply chains will play in determining the impacts and the effectiveness of the CPRS. Supply chain constraints will, in many cases, prevent farmers from responding to the market signal provided by the CPRS. For example, it is not possible for agriculture to reduce emissions from applying chemical fertilizers until alternatives to such fertilisers are readily available. Likewise, farmers cannot reduce fossil fuels costs in the absence of improved transport infrastructure to provide lower emissions exposure in this area. 16

17 In no other goods sector are trade barriers as high as those in agriculture, with average tariffs more than three times higher than in non-agricultural goods. However, Australian farmers cannot be accused of creating this situation, with Australia s farmer Producer Support Estimate (PSE) being the second lowest amongst the Organisation for Economic Cooperation and Development (OEDC) countries. Yet despite operating in a distorted global marketplace and experiencing declining terms of trade, Australian farmers have been able to remain internationally competitive and sustain their businesses largely through productivity growth. The productivity growth in Australian agriculture has averaged 2.8% over the past 20 years, consistently out-performing other sectors. 3 In light of the recent collapse of the Doha round of World Trade Organization (WTO) Ministerial talks, market distorting policies in the agriculture sector unfortunately show no sign of dissipating in the short to medium term. Australian farmers will therefore continue to find themselves needing to overcome this challenge through continuing to build on these productive efficiencies. Australian agriculture s exposure to a CPRS must not become a barrier to the sector achieving these productivity gains and another obstacle to farm competitiveness. Industry consultation The NFF agrees that considerable consultation and joint effort with the industry are still required to identify practical methods for inclusion, and to develop reliable and cost-effective methods of emissions estimation and reporting. The NFF looks forward to working with government to assist in this consultation. The NFF believes that it is now vital for industry and Government to develop a common work plan with agreed timeframes and milestones to examine the clear obstacles to agriculture s coverage that currently exist. This process of consultation should include: A common work plan agreed between industry and Government with clear timeframes and milestones. Continuation of an agriculture specific technical working group. Involvement with the complete agriculture supply chain, including processors, wholesalers, agents, input suppliers and retailers, particularly on issues such as point of obligation. Detailed economic modelling of the direct, on-farm impacts of a CPRS under various coverage scenarios and discussion of policy responses to ameliorate the impact on industry competitiveness. A clear outline of what minimum conditions need to be met in order for agriculture to be covered by the CPRS. A comprehensive strategy that coordinates Government and RDC involvement in climate change adaptation and mitigation R&D. This should include a stocktake of abatement opportunities existing for each sector of agriculture. Development of a program for Government to provide progress updates to the whole of industry at regular intervals (e.g. quarterly or half yearly). A coordinated communication strategy to educate Australia s 155,000 farmers to understand the key issues surrounding a CPRS and how they can engage in the mechanism. A coordinated workplan to deal with international issues including. o The maintenance of Australian agriculture s competitiveness o A comprehensive review of negotiations over post 2012 Kyoto rules. Agriculture must be central to the discussions. o Any workplan needs to include how research bodies and scientists who have a background and empathy for agriculture can be brought into the discussions on how to 3 Australian Farm Institute, March 2005, Australia s Farm Dependent Economy 17

18 measure agricultural emissions and in particular work more closely with the Department of Climate Change to further develop the National Carbon Accounting System for application to agriculture. Development of mechanisms to examine the appropriateness of complementary policies as applicable to agriculture. Point of obligation The NFF agrees with the CPRS Green Paper recognition that the point of obligation is a complex issue for agriculture due to the large number of farming enterprises and the nature of emissions and sequestration from the sector. Supply chains within agriculture are diverse, often complex, can vary from year to year and involvement is often optional - all important considerations for scheme design. The NFF believes therefore, that a system needs to be developed that both creates incentives to reduce emissions while minimising transaction and administration costs involved in monitoring and measuring emissions on-farm. Clearly, this generates a dilemma for incorporating the agriculture sector into a CPRS for which no clear solution currently exists. There are three key types of point of obligation mentioned in the Green Paper. These are: Imposing scheme obligations directly on emitters ( direct obligation ). Imposing an indirect scheme obligation on upstream points in the supply chain; and Imposing an indirect scheme obligation on downstream points in the supply chain. In addition, the Green paper discusses a combination of these alternatives (a hybrid approach) whereby the default point of obligation would be upstream or downstream with an option for voluntary direct obligation. These points of obligation are now addressed in turn. Direct obligation A CPRS will be most equitable and efficient where emissions can be estimated accurately and cost effectively at the source of emissions. It is the NFF s view therefore that if agriculture becomes a covered sector, it would be desirable to set the point of obligation directly at a farm level. In this way, emissions liability will correspond with actual emissions and better reflect and encourage emission mitigation actions on-farm. The NFF acknowledges, however, that there are a large number of practical obstacles that must first be resolved before a direct point of on-farm obligation can be realistically achieved. These issues, which will each need to be addressed before a decision on agriculture s coverage can be considered, include the following: How can transaction / compliance costs be maintained at acceptable levels? Efficient, streamlined systems of measurement, monitoring, verification and reporting will be needed for Australia s 155,000, mostly family owned and operated farms to directly report on their emissions. In addressing this problem, it needs to be clear about whom and how the compliance and transaction costs for farmers will be met. How can on-farm emissions and sequestration be accurately measured? It is the NFF s view that the Government should be very cautious about adopting rule of thumb calculations on 18

19 emissions for agricultural production systems across the whole of industry. While such proxies may be appropriate in certain circumstances, they must only be used when it can be demonstrated that equity and fairness principles are maintained. If rule of thumb measures are not appropriate, then capability must be developed to precisely measure emissions at farm level. How will changes in on-farm practices that deliver a positive net carbon outcome be recognised through a direct point of obligation mechanism? What is the definition of a farm / farmer for this purpose? There are clear differences for example between a landowner versus a stock owner. The range of available on-farm abatement options must be identified. Will agriculture face a lower reporting threshold than the existing 25kt emissions level stipulated under the National Greenhouse Energy Reporting System (NGERS)? There may be significant equity issues if the threshold for emissions on-farm is set significantly lower than for the rest of industry, particularly if the transaction costs of reporting those emissions is high. The NFF believes that the intended consequences of a CPRS should be the creation of incentives to reduce emissions. The point of obligation options should be assessed based on delivering the incentives for reductions as well as transactions costs. It is likely that implementing direct point of obligation will be most efficient in this regard as it will drive innovation in carbon pollution reduction (i.e. reward mitigation investment or penalize if unaltered management practices continue) but the practical implementation difficulties must not be underestimated. It should also be noted that devolving responsibility to the farm level should not necessarily preclude farmers from aggregating interests collectively, but this choice should rest with farmers. Indirect (up or downstream) obligation The NFF acknowledges that with products such as fuel, it makes logical sense for the point of obligation to be upstream with the fuel wholesaler. This is appropriate for the following reasons: There is a (reasonably) fixed relationship between the amount of fuel used and the amount of carbon dioxide released into the atmosphere. There is very little that motorists, for instance, can do to reduce their carbon dioxide emissions except to use less fuel either through fuel efficiency or reduced activity. There is no need to audit or verify that a motorist has emitted a given amount of carbon dioxide; if they have bought and used fuel they have emitted a known amount. In contrast, for the dairy sector and most livestock sectors, the relationship between the number and weight of milk or animals delivered to a processor and the emissions produced on the farms where those animals were raised is extremely tenuous. Each of these factors may vary depending on a range of techniques that a farmer can adopt in order to improve emissions performance including breed type, feed type, rainfall, age and gender of the animal and soil types. This is appropriately acknowledged within the CPRS Green Paper. Therefore, in order for policy to encourage a reduction in emissions, then it must recognise, measure or estimate accurately the impact of particular farming techniques on emissions and reward or penalise the farmer accordingly. Should a downstream or upstream sector become the point of obligation, farmers will not be directly exposed to a relevant market signal to reduce their net greenhouse emissions. This places the onus on businesses such as processors or fertilizer suppliers to develop mechanisms that deliver 19

20 a strong signal to their suppliers and customers, while accurately measuring issues such as the fertilizer absorption rates of soil, age of processed livestock or reporting livestock deaths on-farm, which will generate major complexities. While the number of liable entities may be reduced compared to on-farm obligation, this process will involve a significant administrative cost and financial burden up or downstream, and this cost is likely to be passed on to farmers in the form of lower prices or higher costs. The NFF notes with interest that New Zealand initially proposed that their Emissions Trading Scheme (ETS) may have the processing sector as the point of obligation for agriculture in order to overcome some of these transaction cost issues, but that New Zealand farmers believe that to be effective the scheme obligation must reside directly where emissions occur. The NFF is concerned that a processing obligation assumes that agricultural emissions are a function of output only, without recognising the emissions variations between different farm systems. For example, a downstream point of obligation is totally impractical for cropping sectors as the quantity of output is related to the emissions embodied in its production by only the most tenuous of relationships. Having the processing sector or fertiliser supplier as the point of obligation may therefore reduce the incentive for farm enterprises to utilise the full range of options to reduce emissions per unit of output. Farmers require this market signal in order to make appropriate adjustments to their farm systems and absence of this signal may exacerbate problems with leakage. 4 Therefore, the NFF believes that it is incorrect to suggest that the issue of transaction and administrative costs will be resolved by shifting the point of obligation either up or downstream from the farm producer. Rather, it could be suggested that doing so merely shifts the administrative costs from Government to industry. The NFF urges the Government to systematically test (in consultation with representatives of each agricultural industry) the contention in the Green Paper that indirect obligation would achieve significant reductions in compliance costs and at the same time be effective in reducing emissions from agriculture. Hybrid obligation An alternative approach is for the liability to be imposed indirectly ( upstream and downstream ) as a default option, but for farm businesses to be given the option of reporting and managing their own emissions liabilities (accepting direct liability). It has been suggested that this combined approach could be a way of obtaining the advantages of both direct and indirect approaches. Under this scenario, however, there is the potential to create two sets of establishment costs and the need to have a large number of multiple entities involved. There is also the potential for cross subsidization where downstream operators under this scenario may elect to spread the administration cost of compliance across all suppliers. Sectoral considerations The optimal approach to defining the point of obligation for each sector will also depend on the composition of the industry in question. In the cases cited in the Green Paper, an existing relationship between producers and processors is assumed. In reality, such relationships will vary in 4 Kerr S. 2007, Review of Proposed New Zealand Emissions Trading Scheme, Motu Economic and Public Policy Research 20

21 their structure and extent. They can also be episodic. Testing the feasibility beyond obvious candidates within an industry is required. In moving the point of obligation downstream from the farm sector, a single solution may not always exist within each agricultural sector. For example, livestock producers have a variety of marketing options available from the farm gate that will each require a separate system of measuring, monitoring, verification and reporting should the point of obligation be moved downstream. A sheep producer can either sell his sheep through the saleyard, direct to a processing plant, to another farmer, or to a live sheep exporter, each of which will require a separate system in order to administer CPRS obligations across the sector. Government must ensure that unintended structural implications are not created in addressing this issue that skew produce towards a particular marketing channel. The following table provides a summary of some of the supply chain relationships between processors and producers in key agricultural sectors. Table 1: Overview of Agriculture Industry Relationships Industry Possible Existing and Comments Indirect Point of Obligation Ongoing Formal Relationships Sugarcane, broadacre grains, oilseeds, rice, horticulture, cotton etc Fertiliser No Alternatives are diverse Dairy Milk Processors Can be variable. Includes a level of vertical integration Has a high degree of existing regulation through food safety and effluent controls on farm. Some mix of meat processing and live export. Beef Abattoir Variable There are many paths to market and relationships between producer and processor is not fixed Sheepmeat Abattoir Variable There are many paths to market and relationships between producer and processor is not fixed Wool Unsure No No direct link to processor Other livestock Variable links Cotton (output) Ginning Variable Bulk supply and options Sugar (output) Mill Yes Output (sugarcane) has only a weak relationship to emissions from fertiliser use Rice and other grains (output) Mill Yes One processor Grapes, stone fruit and vegetables (output) Unsure Variable Many paths to market including wholesale Because of the complexity of many markets, the NFF believes that a detailed assessment of the risk of unintended structural consequences to arise from the design of the scheme is required. Points of obligation, like each component of the scheme, may have associated negative spillovers, the nature 21

22 of which will depend on the option chosen. These may include distortions between industries and also variable effects between regions. The NFF believes that with the current level of knowledge, it is impossible to make a decision on an appropriate point of obligation. Clearly, significant consultation throughout the diverse range of (and involving complete) supply chains as well as R&D to develop farm scale carbon accounting will be required before a solution for the point of obligation for agriculture can be settled. This will need to be a key consideration on the possibility of agriculture s coverage within a CPRS. Emissions Intensive Trade Exposed (EITE) sector assistance Should agriculture be covered under a CPRS, the sector must have assurances that its export competitiveness will not be placed at risk. Similarly, import exposed sectors should not be placed at a disadvantage on the domestic market, particularly those industries that have a lower emissions profile than that of their international competition. As the Garnaut Interim Report noted, Australian agriculture is a low intensity greenhouse emitter in comparison with agricultural sectors internationally. Therefore, it is in the best interests of the global community to have more of the world s food and fibre production met from countries like Australia, where modern farmers are implementing cutting-edge technologies and greenhouse efficient farm systems. Compensatory provisions may be necessary to ensure that agriculture does not face such outcomes that lead to disproportionate loss being incurred by the sector while also leading to a negative global environmental outcome. The NFF is therefore pleased that the Green paper recognises the need to provide assistance to some Emissions Intensive Trade Exposed (EITE) industries that meet assigned thresholds. The NFF supports the Green Paper proposal to address the problem of potential carbon leakage by providing a share of free permits to the most emissions-intensive trade-exposed activities. It should be noted that the New Zealand Government has recognized the trade exposed nature of agriculture and the lack of availability of cost effective mitigation options necessitates an additional allocation of free permits to the entire sector, starting at 90% of emissions in 2013, and phasing out over 12 years from Such an approach might need to be considered in Australia if agriculture is covered by a CPRS in order to protect the competitiveness of the industry, while still providing a long term price incentive for technological improvements. New Zealand is the only other country currently considering including agriculture in an emissions trading scheme. It would be perverse indeed if agriculture was more adversely treated in the Australian ETS than in any other ETS in the world. EITE assessment of uncovered sectors The NFF notes that assistance will only be provided to covered sectors and that agriculture, as an uncovered sector until at least 2015, will not be eligible for assistance. Farmers, as price-takers in the marketplace, are vulnerable to increasing costs that may result from the implementation of a CPRS either as a covered or uncovered sector. Using Australian Bureau of Agriculture and Resource Economics data, approximately one-third of total broad acre farming input costs are energy dependent. This includes direct costs such as fuel and electricity, as well as other energy dependent farm costs such as freight, fertilizers and crop contracting. This figure increases to a substantial 45% of input costs for cropping operations and even that does not take into account additional indirect cost impacts on inputs such as steel and concrete. All of these input costs will increase markedly when the electricity and fuel sectors are covered by a CPRS and different cost 22

23 impacts will affect each agricultural sector to varying degrees (for instance, electricity is a key input for the dairy industry and is an area where dairy costs are 2-3 times higher than those of other broad-acre industries). The potential for leakage therefore exists even for uncovered sectors, particularly those with a high elasticity of demand such as those for many agricultural commodities. Table 2 below demonstrates the extent of agriculture s exposure across a range of broad-acre sectors. This analysis is preliminary and at broad brush level of aggregation. The effect on some specific sectors within these categories will be significantly larger and it is noted that many agricultural pursuits are not included in this analysis. This analysis is currently hampered by lack of data and modelling. Table 2: Agriculture s exposure to energy costs 5 The NFF believes that comprehensive analysis should be undertaken on the direct on-farm impacts of a CPRS, including the relative price elasticities of agricultural commodities, to enable agriculture to understand the impacts of the scheme on its international competitiveness. While some level of this analysis may be available when the Treasury modelling is released, NFF notes that this will not be until well after the due date for submissions on the Green Paper. Comments on the impact on agriculture must therefore be preliminary. Definition of EITE sectors The NFF agrees with the Green Paper assessment that all tradeable industries are somewhat limited in their ability to pass through cost increases, at least over the medium term. However, the NFF believes that there are significant variations between each tradeable industry and their capacity to pass on cost increases that may be incurred. The NFF therefore believes that making emissions intensity per unit of revenue the sole distinguishing feature in the calculation of EITE assistance is inadequate. 5 Australia Farm Institute 2008, using ABARE data 23

24 If indeed it is the Government s preferred position to provide assistance to those industries that face the greatest material impact of the carbon cost and that are constrained in their ability to pass through these costs because of international competition then the NFF believes that it is vital that the EITE measure also include a measure of the price elasticities of individual products at the farm gate. The NFF acknowledges that this is a difficult and complex exercise, however failing to recognise the differences between industry s abilities to pass on costs will deliver a skewed indicator of the true global exposure to a CPRS. The elasticities would be fed into a calculation of the likely revenue loss from the scheme, which would form an additional test for trade exposure. EITE threshold levels The NFF has paid particular attention to the indicative thresholds selected within the CPRS Green Paper for EITE assistance. The NFF notes that agricultural sectors including beef cattle, sheep and dairy cattle have been identified as meeting the highest recommended threshold for assistance (i.e.: an emissions intensity above 2,000 t CO2 e/$ million revenue). Only the pig and rice sectors have been identified as meeting the second tier of assistance (emissions intensities between about 1,500 and 2,000t CO2 e/$ million revenue). Sectors such as sugar, grain, cotton, poultry and horticulture will miss out entirely on any EITE assistance according to the recommended thresholds. The EITE threshold calculations raise the following issues: 1. The Green Paper calculations for EITE use Australian Bureau of Statistics (ABS) Australian National Accounts Input-Output Tables from 2001/02. The NFF also notes that updated input/output tables are now available to Government that may significantly change the standing of many sectors within these tables. The NFF therefore questions what will happen if certain sectors move above or below the various EITE thresholds based on new data availability. Changes within the various thresholds will not only be very difficult to administer, but will also be a significant destabilising factor for industries due to the uncertainty that this will bring. Nonetheless, there is a need for a mechanism to review and modify calculations both on emissions and on revenue. 2. The NFF notes that while the revenues for some agricultural sectors have increased since 2001/02, this same increase is not reflected in profit margins which have been eroded by a significant increase in input costs. Cost increases include: Fertiliser and chemical prices have more than doubled in the past 12 months; Labour wage rates have lifted on the back of 30 year lows in unemployment; Fuel prices have increased more than five-fold since Since the start of 2008, the international diesel cost has risen by approximately 40%. 6 The price of crude oil has approximately doubled in the last 12 months. 7 Official interest rates have lifted by three percentage points since 2002 and have been combined with unilateral increases by the major banks; On top of these input costs, the Australian dollar has appreciated by over 45% since With 70% of all Australian agricultural production destined for export markets, this has made it significantly more difficult for Australian farmers to compete on global markets. Therefore it may be found that based on the new revenue data, some agricultural sectors may fall below one of the proposed industry assistance thresholds despite their margins having 6 ACCC 2008, ACCC focuses on soaring diesel prices. Sourced on 19 August Australian Institute of Petroleum 2008, Sourced 19 August

25 decreased. The NFF does not believe this would be an intended outcome of the policy setting and such industries should retain access to the same level of EITE assistance. 3. A perverse incentive to increase emissions or to decrease revenues may exist for sectors sitting just beneath the thresholds. 4. The NFF has already registered with the Department of Climate Change and the Department of Agriculture, Fisheries and Forestry that the wool sector has not been allocated as a specific category. While the NFF believes that it is appropriate that the EITE measure be calculated on an activity basis rather than that of a firm or industry, we note that the activity of wool production is completely different to that of sheep meat production. It would be inappropriate for wool s unit of revenue to be grouped within the sheep category as the two sectors have vastly different revenue measures. We also note that rice has not been allocated a specific category within the table. 5. The CPRS Green Paper has indicated that its preferred position is to allocate up to around 30% of carbon pollution permits to emissions intensive trade exposed activities. However, the Paper also proposes clear thresholds for EITE sectors becoming eligible for free permits. What does the Government propose will happen should the share of permits aligned with sectors meeting the thresholds exceed 30% of total permit availability? Will the thresholds then be subject to change or will the 30% free permit target be lifted? 6. The NFF questions why indirect emissions from fuel usage are not included within the EITE assessment? Of the Scope II indirect costs, the CPRS Green Paper indicates that only electricity is included, which significantly underestimates agriculture s indirect cost exposure. For example, electricity usage accounts for just 1% of farm costs for a wheat/cropping farm, while fuel and fuel related inputs account for 44%. As such, the emission intensity measure for agriculture is significantly understated in the tables. Baseline calculations for EITE permit allocations The NFF notes that agricultural sectors eligible for free permits will have these allocated as a proportion of their baseline emissions. The NFF believes that, where possible, this baseline should be determined based on an Australian industry average baseline and that this must factor in drought and the generally fluctuating nature of agricultural production and emissions. Therefore any baselines must reflect business-as-usual conditions. Australian agriculture is currently facing severe drought conditions to varying degrees across the country, and has done so for the past five years. As a result, stock numbers and fertiliser use are down significantly on levels that would be incurred in the normal course of business. Farmers should not be bound by emissions caps that are set using periods when climatic conditions have artificially adjusted emissions from the sector. Furthermore, diverse agricultural commodity sectors from different regions across Australia will not necessarily experience the same emissions profile under a business-as-usual scenario. For example, under normal rainfall and operating conditions, the emissions from a dairy cow in the Goulburn Valley in Victoria will differ vastly to those from a dairy cow in the South Burnett in Queensland. Variations such as these must be taken into account in any future policy decisions determining the baseline permit allocation level for agriculture. Detailed analysis must be undertaken on what 25

26 genuinely constitutes a business-as-usual operating environment for the various sectors of agriculture in various locations. Allocation of free permits to EITE activities While the NFF believes that it is appropriate that the EITE measure be calculated on an activity basis rather than that of a firm or industry, it has significant questions regarding how these free permits will be allocated to individual entities in fragmented sectors such as agriculture. This issue is also particularly complex for the farm sector as there are often multiple activities within each farm enterprise, and activities that farmers engage in can change frequently over time. The NFF recognises that this also creates concerns regarding the cessation of EITE activities during a reporting period. Individual farmers must have a mechanism whereby they can individually access the free permits allocated for the emissions that they are responsible for. This question is one that should be addressed in some detail during the Government consultation with agriculture in the lead up to 2013 when a decision will be made regarding coverage of the sector and particularly the issue of point of obligation for the sector. The NFF notes that, even without coverage of agriculture under the scheme, there will be significant effects on input costs, and hence on returns, to the agricultural sector. Thus, while agriculture will not receive permits under EITE guidelines unless agriculture is covered by the CPRS, it will face cost pressures from upstream price increases and price squeeze from downstream customers that will hurt farmers global competitiveness from There is therefore likely to be some leakage of production to less carbon efficient producers in any case. Allocation of Australian carbon pollution permits Auction versus free allocation of permits - The NFF believes that majority (>90%) of carbon pollution permits should be allocated to the market by way of free allocation. In a competitive market, free allocation with an efficiently working secondary market will deliver the same outcome and efficient price discovery as an auction system, while minimising the revenue shock that will be associated with a CPRS implementation. This process has been adopted in Europe in the second trading period of the European Union Emissions Trading Scheme, where only about 10% of emission permits will be auctioned. 8 As mentioned earlier, New Zealand is similarly offering 90% free permits to agriculture within their ETS until The NFF highlights analysis within the Garnaut Climate Change Review Draft Report that shows the ratio of permit costs to value of production for the agriculture, fishing and forestry sector as being significantly higher than any other sector within the Australian economy. 9 Therefore, should agriculture be covered by a CPRS at some point in the future, the sector is very concerned that its financial capacity to engage in a permit auction will be restricted and place financial stress on the sector, from which many participants may not be able to recover. The NFF strongly disagrees with the comment in the CPRS Green Paper that firms will generally pass the carbon cost through to consumers for emissions intensive goods. Agriculture s capacity to pass on costs is notoriously poor (as discussed within the EITE section) meaning that many farmers will be forced to absorb the vast majority of the cost of these permits. The CPRS Green Paper signals that the potential to raise revenue, while not an objective of an auction design, is seen as one advantage of using an auction system in favour of free allocation. The 8 Parliamentary Library 2008, The EU ETS Lessons for Australia. 9 Garnaut Climate Change Review 2008, Draft Report p208 26

27 NFF believes that the potential to raise revenue from the permit allocation process should be avoided, and suggests that the goals of allocative equity and efficient price discovery can be delivered through a free allocation method. Overall the CPRS Green Paper highlights the multi-layered complexity of auctioning entitlements and the risk of inappropriate reallocation of resources in a transition phase. Therefore, there is a clear need to make sure that sectors like agriculture are treated sensitively in any system development and design. The NFF believes that free allocation of permits to the agriculture sector would be particularly justified in light of prior efforts undertaken by farmers, both voluntarily and due to regulation, that have seen emissions from agriculture, forestry and fishing reduce by 41.7% between 1990 and Land use change The NFF believes that Government must examine the broad suit of current and proposed policies that are designed to regulate and manage land use and land use change in rural and regional Australia. In particular, Government must examine the forestry component of the proposed CPRS, the impact of Managed Investment Schemes (MIS) and the new carbon sink forest legislation, amending Division 40 of the Income Tax Assessment Act 1997 each of which have significant potential to influence land use in regional Australia. All of these policy levers are targeted at addressing specific policy goals such as reducing greenhouse gas concentrations or meeting the notional target of trebling the area of commercial tree crops by The NFF acknowledges that forestry can make a valuable and positive contribution to the environment and the economy. However, Government must recognise the broader ramifications that may emerge if in the event the balance of incentives is inappropriate. Collectively, these policies have the potential to lead to significant perverse outcomes in areas such as water runoff, biodiversity, social structures and Australia s ability to continue to make a contribution to global food and fibre supplies. The NFF is particularly concerned about the risk to water resources from poorly considered forestry decisions. Some Australian regions are already seeing significant ramifications surrounding this issue, particularly in the upper catchments and the south eastern parts of South Australia. 11 In the context of the climate change issue, the NFF would also urge the Australian Government to insist on a review of the international accounting rules that are underpinning Australia s domestic action on mitigating greenhouse gas emissions and the carbon sink forest legislation. These international rules place an undue emphasis on reforestation as the primary tool for achieving sequestration, largely ignoring the sequestration potential of agriculture and soils. In designing the CPRS, the Australian Government must not fall into the same trap of ignoring the ability of agriculture to make a significant contribution to sequestering carbon and skewing carbon policies in favour of forestry. Forestry component of a CPRS Presently in Australia there is a dramatic and unjustifiable disparity between how the forest sector and farm sector is treated with regard to carbon in standing vegetation. 10 Plantations2020 website, accessed on 23/07/08 11 Australian Bureau of Statistics, WaterAccount, Australia, Document 27

28 The forest industry is exempted from accounting for its most significant emissions, namely those associated with harvesting and re-establishing timber in native forests. It is well documented that clear felling and burning of forest residues, which is common practice in Tasmanian and mainland native forests, is a major contributor to Australia s emissions. It appears, however, that the Government is willing to turn a blind eye to this. On the other side of the ledger, significant taxation incentives have been provided for the establishment of carbon plantations, which will enable forestry companies to generate carbon credits. The NFF has significant concerns regarding the proposal for forestry to be able to opt-in to the CPRS. An opt in model has the potential to cause significant distortions in land use within regional areas as well as perverse environmental outcomes in the areas of water and biodiversity - concerns that have been reinforced by the Government s CPRS Green Paper which states: The inclusion of forestry on an opt-in basis will provide an incentive for forest landholders, including indigenous land managers, to establish additional forests, or carbon sinks (forests planted for the purpose of permanently storing carbon). This raises other questions regarding potential shifts in land use from agriculture and other environmental impacts such as on water systems and biodiversity. 12 In contrast, clearing bans on farm land have effectively nationalized the carbon credits embodied in farmer s pre 1990 vegetation. The NFF believes that farmers should be able to gain credits for the accumulation of carbon in all vegetation on their land, irrespective of its age and whether it is woody or non-woody (not to be confused with invasive native species ). The treatment of regrowth within the CPRS The NFF has a number of significant concerns about the treatment of re-growth in national accounts and under the CPRS: 1. While native vegetation legislation varies across jurisdictions, in general, landholders are legally able to clear native vegetation that has re-grown post This freedom in landuse is essential to enable farmers to manage their land productively and must be preserved. A positive incentive for retention however, could be provided by enabling farmers to generate carbon credits from re-growth. A further consideration in this regard is that the presence of tax incentives for carbon plantations creates a perverse incentive for landholders to clear re-growth in order to establish plantations. It would be logical to avoid this step by allowing landholders to create equivalent credits directly in the re-growth. 2. It is essential that the national policy framework recognizes that not all re-growth is good and that re-growth which is classified as invasive native species or woody weeds has strongly negative environmental impacts and results in net carbon losses by causing land degradation. Scope should be provided in the scheme to allow farmers to generate carbon credits by clearing invasive native species and restoring native grasslands (thus increasing biomass in ground cover and soil and net carbon storage). Consistent national legislation is needed that defines and treats re-growth in the same way and that makes a clear distinction between invasive species and other forms of re-growth. Managed Investment Schemes (MIS) 12 Carbon Pollution Reduction Scheme Green Paper, July

29 Managed Investment Schemes (MIS) have proven to be a significant driver of plantation forestry, particularly since the Plantations 2020 Vision was launched by the then Minister for Primary Industries and Energy, The Hon John Anderson MP, in October Australian Agribusiness Group's seventh annual survey of funds raised in the MIS industry showed the sector managed to raise $1.079 billion in the 2007/08 financial year. Timber projects received 65% of total MIS funds ($705 million). 13 The NFF has been publicly concerned about the exponential growth in MIS forestry projects and believes that the MIS mechanism does not promote sound investment decisions in rural and regional Australia. The NFF believes that decisions to invest in MIS are largely based on the tax deductibility of the investment, rather than driven by long-term profitability. As a result, MIS have traditionally been primarily focused on industries with a high proportion of up-front expenses, with little regard given to the output returns that are generated. We believe that many MIS projects have created distortions in resource allocation in regional areas and this issue may be exacerbated by a CPRS. In this regard, we note that the CPRS Green Paper states that.scheme participation might not be beneficial for single-rotation plantations, such as those owned through managed investment schemes, because of the risk that the value of scheme obligations for harvest emissions would exceed the value of permits received for sequestration. 14 The NFF does not take comfort in the above language and encourages the Government to provide assurances that a CPRS will not provide MIS operators and/or MIS investors with the opportunity to generate an additional financial advantage from a CPRS provisions. Carbon sink forest legislation The NFF believes that it is appropriate to enhance the potential for small scale, on-farm forestry as a means of complimenting agricultural production while making a genuine contribution to sequestering carbon. Future on-farm forestry practices are currently one of the only recognised carbon sinks for the farm sector and in certain circumstances may provide future capacity for farmers to offset some of the additional costs that will emerge following implementation of the Government s CPRS. In addition, the NFF recognises that on-farm forestry can provide shelterbelts, salinity control, erosion control, riparian protection and amenity benefits. The practice can also provide shelter and corridors for native animals therefore adding significantly to biodiversity values. However, the condition under paragraph (2)(a) of the new carbon sink forest legislation states: at the end of the income year, the trees occupy a continuous land area in Australia of 0.2 hectares or more. This condition places a significant limitation on primary producers claiming the tax provisions for onfarm forestry practices that deliver carbon sink benefits. This definition is that agreed by the Australian Government for forests in the national greenhouse gas accounts and also includes the thresholds for crown cover (20%), height (2m) and width (10m). New plantings of vegetation that do not meet this definition are not included in Australia s national accounts because Australia did not elect to count re-vegetation as an option under Article 3.4 of the Kyoto Protocol. However, the NFF believes that accounting rules beyond 2012 should give serious consideration to including carbon sequestration in re-vegetation as this is a significant component of management of large areas of rangelands. 13 Farm Online Website, accessed on 23 July Carbon Pollution Reduction Scheme Green Paper, July

30 The NFF believes that this continuous land area provision must be removed if Government is serious about providing an incentive for farmers that is complementary to a CPRS, while allowing farmers to make a meaningful contribution to sequestering carbon through on-farm forestry practices. Indeed, the NFF is also concerned that this same condition may instead lead to the perverse outcome of incentivising farmers to plant trees in areas that deliver a poor environmental outcome, purely in order to maximise the potential claim. Continuous areas may not suit particular landscape planning and may therefore lead to inappropriate land use decisions on-farm. The NFF is also concerned that it is incorrect to have carbon sink provisions based purely on a spatial definition. This fails to recognise that carbon stored in a forest is a function of the mass of vegetation rather than area. While the current definitions allow for satellite monitoring of forest cover as is required for spatial monitoring of deforestation and reforestation under Article 3.4, significant carbon can be stored in woody vegetation that does not meet the spatial extent in the current definition. Agricultural landscapes may have vegetation retained or planted in many configurations. Land use impact analysis, review and education needs The NFF therefore believes that further analysis is needed to quantify the level of incentive towards the various levels of forestry as a matter of urgency in order to understand the extent of the land use change risks identified in the CPRS Green Paper. This analysis must also be undertaken in the context of the new carbon sink forest legislation and MIS. In addition, the NFF believes that a comprehensive review of the full suite of taxation based incentives for forestry is required in the context of a CPRS. This review must analyse the potential for negative externalities to emerge from the combination of incentives including reduced water availability, biodiversity implications and negative social and economic impacts on rural communities. A CPRS has the potential to provide incentives for the provision of just one environmental service delivered by farmers carbon sequestration rather than a balanced suite of services that would arise from more broadly focused incentives. The Government must also ensure that appropriate, comprehensive information is available to farmers outlining their responsibilities in claiming a reduction for capital expenditure for the establishment of trees in carbon sink forests. In order for farmers to be able to make informed commercial decisions on the utilization of their land, the broader ramifications of meeting the permanence requirements associated with Kyoto compliant forests must be made clear. This may influence farmer s decisions in relation to issues such as succession planning as well as potentially having implications on their responsibilities with their debt financiers. International carbon accounting rules and forestry While recognizing the valuable role that trees play in land systems, the NFF is also concerned by the current global accounting rule s emphasis on reforestation as the primary tool for achieving sequestration. A number of factors need to be considered in this regard: The current 1990 benchmark for Kyoto compliant reforestation offsets in Article 3.3, excludes forests planted before These older mature forests frequently show no net carbon change but where management results in an increase in stored carbon it is not counted towards Australia s Kyoto target because Australia accepted a zero cap on the Article 3.4 category of Forest Management. It will be important for Australia to influence 30

31 the international accounting rules for the post-2012 period to recognise long-term carbon sequestration in forests, woodlands and savanna communities but not to disadvantage forest managers due to the vulnerability of Australian landscapes to variable climate and fire regimes. The Kyoto rules need to reflect the value of managing carbon stocks in all standing vegetation regardless of spatial characteristics and age, in order to reward good practice. Farming demands flexibility in land-use. Locking up a large proportion of the planet s productive farming land under plantations (which could be a perverse outcome of carbon markets) is not compatible with the need to meet the world s growing demand for food and fibre. Plantations can have significant impacts on water yield. Unplanned land-use change and increased water scarcity resulting from reforestation incentives can have significant detrimental social and economic impacts. Monoculture carbon plantations do not offer the range of environmental values that arise from a mosaic pattern of mixed species plantations within productive farming systems. Integrated plantings that encourage biodiversity values and maintain net agricultural production are more sustainable. International greenhouse accounting rules that acknowledge sequestration in addition to that achieved through forestry (e.g. in soil and pasture), are needed to enable agriculture to participate effectively in the global response to climate change. For this to occur, the international greenhouse accounting rules must be changed to make a distinction between human and natural emissions from land systems, such as occur in relation to soil carbon losses. The broad suite of proposed changes to the international rules are outlined in more detail in the International Carbon accounting rules section within this submission. While there is broad acknowledgement of the inadequacies of such international greenhouse gas accounting rules, the NFF is concerned when the Australian Government supports these same rules within the formation of its domestic climate change policies. This has been demonstrated in the CPRS Green Paper which states: A shift towards less emissions-intensive activities, including farm forestry, is an intended consequence of the scheme Such comments show that the Government, based on the precedent provided by the international greenhouse accounting rules, fails to acknowledge the sequestration capacity of agriculture in its policy thinking, and highlights the ramifications of poor international carbon accounting and its influence on domestic policy formation. Australian s will continue to demand food into the future and Australia s ability to contribute to world food supplies will become more important if global food production is constrained by the effects of climate change. Removing land for food production in favour of forestry, while ignoring the mitigation potential of agricultural production systems, would be a perverse outcome for Government to be championing as an intended consequence of the scheme. International carbon accounting rules The emissions accounting framework established under the Kyoto protocol is an underpinning factor in domestic climate change policy. Nations such as Australia intend to ensure that their commitments to targets and their domestic emissions trading schemes are compliant with the global 15 Carbon Pollution Reduction Scheme Green Paper, July

32 policy regime and a future global carbon market. Despite the importance of the Kyoto carbon accounting construct to economic and environmental outcomes, few stakeholders understand the principles behind the rules and the implications for their sector. This is particularly the case for agriculture. The NFF is concerned that the current Kyoto accounting rules both misrepresent agricultural emissions and are a barrier to increasing the carbon storage potential of agricultural lands. The NFF is deeply concerned that the major agricultural nations have so far been relatively minor players in the development of Kyoto accounting policy and that as a result, the accounting construct does not accommodate the special characteristics and needs of agriculture. With one of the core aims of the Government being to meet its Kyoto obligations, clearly there is pressure for the rules of the Australian CPRS to be underpinned by the international carbon accounting rules framing the global Kyoto obligations. This is clear within the CPRS Green Paper which states, it is relevant to consider the international accounting framework for land-based emissions, particularly given the need for the scheme to contribute towards Australia s international climate change obligations. This being the case, it is vital that the international carbon accounting rules are adjusted to appropriately account for agricultural emissions and sequestration before agriculture can be equitably covered by a CPRS. Principles for effective greenhouse accounting frameworks When considering an accounting framework that appropriately recognises the specific needs of agriculture, a number of principles must be outlined. These principles include the following: The rules must acknowledge features specifically relating to agricultural production. There are particular characteristics associated with greenhouse gas emissions from agricultural production activities. These include the following: Farmers do not directly control the emissions from the land systems they manage. Emission from soil and ground cover are largely driven by climate factors which, in a country like Australia, are highly variable and moreover, negatively impacted by climate change. Agriculture is a source of multiple greenhouse gases yet also provides carbon sinks. Extensive agricultural industries, such as livestock grazing and cropping, produce highly geographically diffuse emissions. That is, the emissions profile of extensive agricultural production varies significantly between different regions. Emissions from more intensive production systems are less diffuse. Significant heterogeneity exists within production systems. For example, cattle breeds and feed types in tropical/sub-tropical regions differ from those in temperate regions, and have methane conversion rates that are significantly different. Emissions from a particular source may not be constant. For example, nitrous oxide emissions from soils vary with soil types, as well as in response to seasonal and even daily variations in nutrient and water availability. Agricultural businesses are often diversified, undertaking multiple different activities, and altering the activity mix over time. Agriculture requires flexibility in land use, with the need to adapt production to changing environmental and market conditions. Internationally recognised calculation protocols need to be established that are able to generate reliable Life Cycle Analysis (LCA), of animals and production systems globally. 32

33 In considering appropriate greenhouse gas accounting frameworks that can reflect these characteristics, questions must therefore be asked about how to: Estimate emissions and sequestration in a way that represents the true characteristics of the specific farming operation involved. Ensure that greenhouse accounts reflect the effects of different management practices on emissions. Ensure that agricultural industries understand the relationships between management practice and emissions, so that emissions management actions can be integrated with other agricultural production strategies that may also improve productivity and sustainability; and Enable farmers to obtain credit for sequestration activities that are an integral part of production farming systems. The rules must be a reflection of the genuine impact that human actions have on net greenhouse gas emissions. It is important that the international greenhouse accounting rules do not penalise countries or sectors for an increase in emissions independent of management effects, but rather due to natural variability and climate conditions. Such outcomes are beyond human control and therefore should not be accounted for. This is a particular concern for the agriculture sector which faces extensive variability in natural emissions due to factors such as variable rainfall/drought and bushfires. Countries should not be liable for outcomes that are beyond human control. The rules must be comprehensive, maximise simplicity, be transparent and be a true reflection of all emissions and sinks. Greenhouse accounting frameworks should reflect comprehensive and integrated coverage of all emissions where and when they occur, including all pools (e.g. biomass and soils), all gases, and all emissions and sinks. This in turn must be balanced against reducing the transaction costs as much as possible, therefore ensuring that compliance is simple and costs are kept low. However, it must be noted that by making the approach more comprehensive and integrated, other emission sources and carbon sinks could be included expanding the framework. This could pose risks for all sectors that may either benefit or be hindered by such an approach. Transparency in the measures reported against is therefore paramount. It must also be considered that this principle can introduce a greater level of uncertainty where data and measurement techniques are not available. The rules must provide mechanisms to address national circumstances. Particularly when it comes to the treatment of agriculture and land use within international accounting frameworks, it is important that the variations in national circumstances are taken into account. For example, the provision of net net accounting measures under Article 3.4 of the Kyoto Protocol is a far less risky proposition for those countries facing consistent rainfall and with wetter, cooler climatic conditions, less susceptible to droughts or bushfires. This does not allow provisions for countries such as Australia, which has a far more variable climate and has a greater risk of bushfire and very diverse management practices across the nation within the same Article 3.4 land management category. In addition, variations in the internal governance capacity of countries to implement measurement processes that meet their international reporting obligations must also be acknowledged. Agriculture should not be penalised in countries that do not have the capacity to implement entity 33

34 level reporting that in turn, may allow them to be rewarded for improvements in on-farm management practices that reduce the intensity of greenhouse emissions. Limitations of current framework for agriculture Conceptually, the current accounting framework under the Kyoto Protocol provides for tracking of most types of land-based greenhouse gas emissions and sinks, if countries were to elect to include in their accounts the Article 3.4 activities in addition to mandatory reporting under Articles 3.1 and 3.3. However, in practice this framework has limitations as outlined below. Article 3.4 Article 3.4 provides options for electing to more comprehensively account for emissions and removals. Decisions by countries on whether to elect these activities are based on consideration of benefits compared to potential negative outcomes. Article 3.4 accounts for all land affected by the relevant land use activity in the 1990 base year and the period. If the area allocated to the particular activity in is higher, there is a risk that even if emissions per hectare are reduced, the total emissions reported increase solely due to an increase in land area. Article 3.4 activities may be subject to considerable variability over time, for example due to fire and drought induced changes in soil and biomass carbon stocks. Natural emissions and annual variability on all relevant lands are included in the account. There may be risks that emissions outcomes could increase or decrease regardless of management effects, but rather due to the effects of natural variability and the effects of climate conditions in the 1990 base year relative to the period. The net rate of emissions in is compared to five times the net rate of emissions in For some agricultural production activities, management practices provide the prime driver for patterns and trends in greenhouse gas emissions and sinks. However, in many instances, climate variability becomes the principal driver of emissions trends and sinks, with large inter-annual fluctuations. As a consequence of the climate drivers and the risks arising in terms of projected outcomes in a defined future period, Australia did not elect any Article 3.4 activities. Soil carbon sequestration. There is a substantial body of research addressing the role of agricultural soils as a carbon sink. Agriculture could potentially achieve a significant reduction in the risk of climate change by taking CO 2 out of the atmosphere and storing it in the soil 16. Globally, approximately half of all soil carbon in farmed land has been lost to the atmosphere during the past two centuries. This loss, however, creates an opportunity for carbon storage. The global additional storage potential in agricultural soils is estimated as being in the order of 80 billion tonnes, or 10% of total atmospheric carbon. Net sequestration occurs with farming systems that increase plant material being returned to the soil, reduction of carbon loss and/or the introduction of carbon from external sources such as industrial and urban waste streams. 17 This does take substantial management changes, therefore 16 Rosenberg, N.J. and Izaurralde, R.C ( 2001), Storing carbon in agricultural soils to help head-off a global warming, in J.N. Rosenberg and R.C. Izaurralde (eds.), Storing Carbon in Agricultural Soils: A Multi-Purpose Environmental Strategy, Dordrecht, Kluwer Academic Publishers, pp Okimori Y., Makoto Ogawa M, Takahashi F (2003), Potential Of Co2 Emission Reductions By Carbonizing Biomasswaste From Industrial Tree Plantation In South Sumatra, Indonesia, Mitigation and Adaptation Strategies for Global Change, Springer Netherlands ISSN

35 requiring significant economic incentives to enable farmers and industry partners to implement changes in practice These management changes will also create several other beneficial environmental outcomes that may be attractive for other areas of government to consider when providing incentives for change. Several challenges face the establishment of a viable market for soil carbon offsets: Under Kyoto rules, offsets must be permanent. It is difficult, however, to meet current permanence criteria as soil carbon fluxes can be rapid, with some fractions moving in and out of soil on a daily basis. Potentially, this problem could be addressed by adopting a net balance sheet farm carbon accounting model, with an averaging approach to soil carbon accrual. Current Kyoto accounting rules do not allow a distinction to be made between anthropogenic and non-anthropogenic soil carbon losses. This is a major reason why Australia has so far elected not to include soil carbon under Article 3.4. Net soil carbon losses occur in dry, hot periods, irrespective of land-use practices. Under the current net net accounting rules, a farmer could create and sell soil carbon offsets, but a period of extended drought could wipe out the soil carbon gains, leaving the farmer (and Australia) with an obligation to restore the carbon. This may be difficult to comply with due to natural climatic conditions. This problem applies to any nation where climatic conditions result in high soil carbon mobility. Practical measurement and monitoring tools are needed to enable soil carbon accounting. Conditions for establishing a viable international soil carbon market therefore include: Measurement and monitoring techniques that both meet compliance standards and are not prohibitive complex or expensive to implement. A net balance sheet approach to permanence rules and carbon accounting. Changing Kyoto rules to distinguish between natural and human induced soil carbon losses (i.e. to exclude losses that are out of the farmer s control). An accounting construct and policy framework that rewards actions to increase soil carbon rather than the absolute outcomes (since these will partly be determined by factors that are outside of the control of the farmer). It is essential that the accounting construct under Kyoto II is modified to recognize that the causality of emissions from agricultural land is inherently different to that associated with fossil fuels and therefore demands a different policy approach. A power station can directly control its emissions. A farmer can only influence the emissions from the land system he manages. Agrichar or biochar, the carbon product resulting from low temperature pyrolysis of biomass in the absence of oxygen, is a special product in this regard. It would appear that it can remain stable in the soil for millennia, although further study is required to confirm this. If this is so, the addition of agrichar to soils should not be counted with soil organic carbon but should be regarded as an additional carbon storage mechanism in the same way as the storage of carbon dioxide underground within carbon capture and storage systems is regarded as permanent. Permanence and balance sheet farm carbon accounting. 18 McCarl B. A., Metting F.B. Rice C., (2007) Soil carbon sequestration, Climatic Change 80: Bruce, J.P., M. Frome, E. Haites, H. Janzen, R. Lal, and K. Paustian. (1999). Carbon sequestration in soils. J. Soil and Water Conservation.. 54: Rosenberg, N.J. and Izaurralde, R.C ( 2001), Storing carbon in agricultural soils to help head-off a global warming, in J.N. Rosenberg and R.C. Izaurralde (eds.), Storing Carbon in Agricultural Soils: A Multi-Purpose Environmental Strategy, Dordrecht, Kluwer Academic Publishers, pp

36 The Kyoto permanence principle is a key element in the international carbon market model. It requires that credits created through avoided emissions and sequestration credits used to offset emissions are permanent. In other words, a prevented emission is prevented forever. However, the permanence principle creates significant practical problems for land-based offset schemes. In forestry based schemes, permanence is often defined as greater than 100 years. It is clearly impractical, however, to lock up land for such periods in the context of productive agriculture. The objective of permanence is to guarantee the validity of the carbon credit (and assign liability for preserving the offset) and in doing so, preserve the integrity of the carbon market. This can be achieved by other means, however, for example by renting, rather than selling credits 21. A rental contract for emissions credits could establish continuous responsibility for sequestered carbon; credit would be assigned when carbon is sequestered and debits would accrue when carbon is emitted. This would be compatible with a balance sheet approach to farm carbon accounting, whereby farmers maintain a certain net balance across an operation, without having to lock into specific land uses and complex contractual arrangements involving land title, as is currently required under forestry based offset schemes. Concepts like this need to be explored further and promoted by nations with a major stake in agriculture. Accounting for forestry-based sequestration. While recognizing the valuable role that trees play in land systems, the NFF is concerned by the current international rule s emphasis on reforestation as the primary tool for achieving sequestration. This issue is addressed further within the land-use change section within this submission. What needs to be done? While the international accounting framework continues to be skewed against the interests of the agriculture sector, farmers are at risk from the adoption of domestic greenhouse gas mitigation policies that place inequitable costs on agriculture and limit the sector s ability to engage. The NFF is very conscious of this threat as the Australian Government looks to implement a CPRS with a primary aim of helping Australia meet its international greenhouse commitments. The Australian Government must act quickly to ensure that the Kyoto Protocol accounting framework is adjusted accordingly for compliance reporting in a second Kyoto commitment period or alternative international agreement, commencing from The NFF is buoyed by the CPRS Green Paper s acknowledgment of the need to change the international carbon accounting rules to reflect Australia s particular circumstances by stating, Australia will, therefore, increase its efforts to influence changes to the international climate change framework in ways that reflect Australia s particular circumstances, are based on science and provide appropriate incentives to reduce emissions. The NFF will work closely with Government and assist wherever possible to change the international carbon accounting rules so that they appropriately account for agriculture. While the current international carbon accounting rules remain, the NFF encourages the Government to ensure that a CPRS as it relates to agriculture, and alternative domestic policies to drive mitigation of greenhouse 21 Marland, G., Fruit K., Sedjo R. (2001) Accounting for sequestered carbon: the question of permanence, Environmental Science & Policy 4 (2001)

37 gas emissions should not be bound by the current international carbon accounting rules which prevent agriculture from effectively engaging in the provision of workable solutions. Research and development needs The NFF recognises that farmers need access to the right tools to effectively manage the risks and capitalise on the opportunities arising from climate change and climate change policy. Failing to dedicate an appropriate level of resourcing to this need will expose the agricultural sectors and indeed to broader community to the potential for significant perverse outcomes from a CPRS implementation. The NFF therefore agrees with the CPRS Green Paper finding that Regardless of the policy approach, additional support for research and development into mitigation options for the agricultural sector may be required. However, in an environment of increasing concerns over global food supplies and the need for Australian agriculture to continually improve productivity, it is important that the research priorities identified for Climate Change Research Program do not reduce or delay the delivery of research outcomes which are aimed at improving productivity and building resilient, sustainable, well managed agricultural businesses. With declining terms of trade in agricultural commodities, Australian agriculture has been challenged to maintain a low cost base in order to remain globally competitive. Indeed, Australia s balance of payments is strongly dependent on this being the case. Despite declining terms of trade, Australian farmers have been able to remain internationally competitive and sustain their businesses largely through productivity growth. The productivity growth in Australian agriculture has average 2.8% over the past 20 years, consistently out-performing other sectors. 22 Productivity based R&D by the Australian agricultural sector has been vital in attaining this outcome, and may provide opportunities in the future to export such knowledge to other agricultural producing nations. However, concerning to the NFF is the fact that the impact of the green revolution (which had contributed to more rapid yield increases in the 1960s and 1970s), appears to now be petering out. This is noticeable through yield growth rates which have been declining over time (see Chart 1). 23 Now is clearly not the time to be reducing real investment in productivity R&D if we are serious about halting the declining trend and discovering the next major wave of productivity enhancement. 22 Australian Farm Institute, March 2005, Australia s Farm Dependent Economy 23 RIRDC 2008, High Food Prices - Causes, implications and solutions (research undertaken by the Centre for International Economics) 37

38 Chart 1: Trends in global yields for the major food crops 38 (tonnes per hectare) annual percentage changes Therefore, while the NFF notes that some proportion of the emissions abatement R&D outcomes may be complementary to enhancing on-farm productivity (e.g. building soil carbon stocks, improving animal breeding programs), we believe that climate change funding should not come at the expense of R&D designed to deliver productivity improvements. The Climate Change Research Program While the NFF believes that significantly more R&D funding is required in the climate change space, the NFF has welcomed the Government s $46.2 million commitment for a new Climate Change Research Program as a positive first step in helping Australia s farmers to prepare for climate change by closing gaps in research and development. While it should never be assumed that increased research and development will deliver immediate, guaranteed solutions to the problems surrounding climate change, appropriate, coordinated and targeted research and development may offer vital assistance in ensuring that farmers can effectively meet the climate change challenge. The NFF notes that the following three key research priorities have been identified for the new Climate Change Research Program: 1. Reducing greenhouse pollution 2. Better soil management 3. Adapting to a changing climate In 2007, Land & Water Australia coordinated a national Climate Change Research Strategy for Primary Industries (CCRSPI) that drew together advice from industry on research and development in the climate change area. The NFF has been supportive of this strategy. While the NFF agrees with the three broad priorities identified by the Climate Change Research Program, it is important that other priorities are also addressed that are not necessarily captured under the prescribed headings yet that have significant implications for agriculture s capacity to engage with a CPRS or alternative climate change policies. For example, research and development for practical farm carbon accounting systems and the infrastructure needed for farmers to participate in a CPRS with acceptable compliance costs is urgently needed.