It questions the absence of detailed economic analysis on the effects on the primary sector of meeting the Government’s proposed methane reduction targets.
And it describes Zero Carbon Bill’s regulatory impact statement on the cost to the economy as flawed and significantly underplaying the true cost.
DairyNZ quotes modelling from Economic Research Institute economists putting it at $27 billion and not $5b in the Government estimate.
Meeting dairy sector methane targets will slash farm profits 34% to 42% between 2020 and 2050 assuming a methane vaccine is available from 2030.
With the addition of zero emission targets for carbon and nitrous oxide the impact on the dairy sector will be significant.
“The dairy farming sector in this report is estimated to experience losses of profit that are around 25%, 45% and 60% below baseline levels in 2030, 2040 and 2050 respectively.”
It notes this profit impact analysis by NZIER was made available only following an Official Information Act request.
What economic analysis has been published underestimates the costs because it does not replicate the bill’s proposal to reduce methane by 10% below 2017 levels by 2030 and by between 24% and 47% by 2050.
“An absence of comprehensive modelling is concerning because the costs of the alternative methane targets underestimate the national, sectoral and farm level impacts.”
The Government assesses the cost to the sector at $5b a year, including $2500 a dairy farm a year and assumed 95% of free unit allocation under the Emissions Trading Scheme.
But the DairyNZ report considers that figure to be too low given annual economy-wide costs from the Zero Carbon Bill of up to $27b.
Its modelling shows, depending on the carbon price, the cost per farm from 2020 to 2030 could be $28,000 to $71,000 a year, much higher than Ministry for the Environment estimates.
“Together, the estimated costs emerging from the DairyNZ model also appear to challenge the statement by MFE that the change in the financial position of the dairy sector will be less significant, relative to the sheep and beef sector, over 2020-2050 provided it continues to innovate.”
The DairyNZ submission warns the bill will create solvency issues for dairy farmers and reduce the sector’s international competitiveness.
It calculates a 10% reduction in profit from 2020 to 2030 could make 7% of dairy farmers insolvent, rising to 12% insolvency in 2030-2040 should profits fall 37%.
“These results emphasise that even though the 2030 methane target imposes a lower cost to dairy farms in terms of baseline profit, particularly relative to later periods, these losses are still substantive.”
Those affected the most will be young farmers who typically carry higher levels of debt.
The competitiveness of the NZ dairy sector relies on being a low-cost producer and the DairyNZ paper notes the bill’s regulatory impact statement also does not address the sector’s competitiveness.
While acknowledging stronger environmental regulation can encourage efficiency and innovation that can open or grow market share, the report says there are strong indications the bill will affect the sector’s international competitiveness by increasing costs.
“It is highly probable that requiring a marked reduction in methane emissions within the NZ dairy sector will lead to lower production levels, even with the broad-scale adoption of a methane vaccine.”
That risk is heightened should other dairy producing countries not follow NZ’s example and price carbon.
“This negative economic effect is so great that it will likely require the free allocation of all emissions to offset it, consistent with international evidence.”
The report’s authors reject the notion efficiency gains will offset mitigation costs because the options are limited.
It quoted one report that calculates productivity gains will have to be 1% to 2% greater than has been historically achieved to maintain the existing level of export competitiveness.
“These rates are substantially greater than those estimates of efficiency observed over the last 20 years in the sector.”
The greenhouse reduction targets place NZ well ahead of other nations with productive agricultural sectors and the report notes NZ dairy’s emission intensity, the ratio of greenhouse gas emissions to the level of output, has fallen 0.8% each year between 1990 and 2012.
Despite a proposed transition period to soften the impacts the bill will still put significant pressure on dairy farming profitability and solvency, it said.
The dairy sector generated $2.5b in wages in 2017., of which 80% was in rural areas, and it employed 38,700 people with 70% of them on farms.
In Southland, Taranaki, Waikato and West Coast the dairy industry generates the most income and in Northland and Manawatu-Wanganui it is the second largest income earner.
