The CPRS and the Australian

agriculture sector

Australia’s Independent Farm Policy Research Institute

www.farminstitute.org.au

Mick Keogh

Australian Farm Institute

• Policy proposals

•Industry impacts

•Unresolved issues

• Major energy users and emitters required to furnish annual greenhouse

returns commencing for 2008 year (National Greenhouse and Energy

Reporting Act, 2007)

• 1,200 largest direct emitters (25 Kt threshold) including bulk fuel distributors

required to directly participate in the CPRS from June 2011.

• Legislation will make it illegal for these to release emissions without a permit

(each permit equals one tonne of emissions)

• Permits to be released (auctioned) by Government, and will be tradable.

Less permits released each year.

• Permit prices will be capped at $10 for 2011/12.

• Emissions from “Emissions Intensive Trade Exposed” (EITE) activities will

initially receive 95%/66% of required permits for free (declining by 1.3% pa)

Main features of the CPRS

Start

Does

business

exceed

NGERS

Threshold

?

Complete Annual

emission

statement

Submit to

Government

Is business in

fuel or a

„covered‟ sector

and >25,000 t

CO2-e ?

No CPRS

obligation

Calculate

emissions

using

standard

activity

emission

factors

Is

business

involved

in EITE

activities

?

Calculate

emissions

from

EITE

activities

Receive free

permits EITE

Purchase or earn

required emission

permits

Complete

annual

emission

return

Surrender emission

permits to

Government

No

No

NGERS Carbon Pollution Reduction Scheme

Yes

Post

2011 YesYes

• Agriculture to remain „uncovered‟ until measurement/administration issues

resolved – potentially to participate post 2015

• Petrol price increases to be offset by reduced petrol tax for first three years.

• Off-road diesel users compensated with increased rebates for first three

years.

• Heavy vehicle fuel costs compensated for first year only

• Forestry to be covered on a voluntary basis

Additional elements of the CPRS

Australian emission trajectory – CPRS -5%

0

200

400

600

800

0

200

400

600

800

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Net emissions Gross emissions Permits imported

Mt CO2-e Mt CO2-e

• Agriculture to remain „uncovered‟ indefinitely, with the Productivity

Commission to conduct a review in 2015 of potential measures to reduce

agricultural emissions.

• Agricultural offsets (livestock, fertiliser emissions) to be recognised as

generating emission permits.

• Soil carbon offsets to be recognised in „voluntary‟ carbon markets, pending

changes to Kyoto Protocol accounting rules.

• Post-1990 regrowth forests to be recognised as forestry offsets.

“The deal” – now Government policy

• Policy proposals

•Industry impacts

•Unresolved issues

40%

60%

80%

100%

120%

140%

160%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Perc

en

t o

f 1990 e

mis

sio

ns

Combined Energy, Industrial

and Waste sector emissions

Combined Agriculture and

Landuse change emissions

Total Australian emissions

Farm emissions Impacts Challenges

Cattle (digestion)

50%

Sheep (digestion)

16%

Others (digestion)0%

Manure management

4%

Direct soil emissions

6%

Animal wastes5%

Indirect emissions8%

Savannah burning

10%

Rice cultivation0%

Stubble burning1%

Share of Australian agricultural emissions.

Fuel

Fuel – emissions

allocated to major

fuel distributors

Electricity – emissions

allocated to electricity

generators

Direct farm emissions – Livestock and wastes,

Non-CO2 soil emissions,

fertilisers

A farm emissions „rule of thumb‟ calculator

• 2 tonnes per annum CO2-e

for each adult cattle

• 0.2 tonnes per annum CO2-e

for each adult sheep

• 0.5 tonnes per annum CO2-e

for each Hectare of dryland

crop.

Farm greenhouse emissions.(1,000 head cattle herd on 5,000 ha, of which 500 ha cropped)

N2O - wastes

N2O - soils

N2O - Fertiliser

CH4 - Cattle

TOTAL

2,5000 1,000 2,000

Emissions - Tonnes CO2-e

209

706

49

1,475

2,439

2010 2020 2030

$10b

$20b

Outp

ut $

b

Time

Business

as usual

CPRS

scenario

Change in

projected

output

Economic modelling

0

50

100

150

200

250

2010 2015 2020 2025 2030 2035 2040 2045 2050

CPRS -5 CPRS -15

$2005/tCO2-e

Projected carbon prices (Treasury, 2008)

CPRS impacts on energy prices

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

Cen

ts/lit

re

Fuel prices

High

Medium

Low

$0

$50

$100

$150

$200

$250

$300

$350

Do

llars

per

Meg

aw

att

ho

ur

Electricity prices

High

Medium

Low

Emission intensity and free permits.

Sub-sector Emissions intensity(T CO2-e/$ Million)

Proposed EITE status

Beef cattle 6,687 95% free permits

Sheep 3,513 95% free permits

Dairy 3,240 95% free permits

Rice 2,500 95% free permits

Pigs 1,958 66% free permits

Sugar 1,054 66% free permits

Poultry 792 0 free permits

Grains 523 0 free permits

Cotton 494 0 free permits

0

1

2

3

4

5

% C

han

ge

Increase in production costs(ABARE 2015, CPRS-5 emission price)

Agriculture not covered

Electricity, freight, fuel costs only. No indirect costs

0

1

2

3

4

5

% c

ha

ng

e

Increase in production costs(ABARE, 2015, CPRS-5 emission price)

Uncovered

ETS

Electricity, freight, fuel costs only. No indirect cost increases

-30

-25

-20

-15

-10

-5

0

% c

ha

ng

e f

rom

bu

sin

es

s a

s u

su

al

Percent change in net GVP (CIE)

2020

2030

Assumes no international cooperation

Source: CIE modelling for AFI

* Assumes cropping businesses receive no free permits

-28.00%

-24.00%

-20.00%

-16.00%

-12.00%

-8.00%

-4.00%

0.00%

% C

ha

ng

e f

rom

bu

sin

es

s-a

s-u

su

al

CPRS impact on farm cash margins 2016 (CPRS-5 emission price)

Uncovered

ETS-EITE

-25

-20

-15

-10

-5

0

Ch

an

ge

in

fa

rm e

co

no

mic

ou

tpu

t (%

)

CPRS impacts on agriculture, 2015

CPRS cost

Processor cost

Input costs

Source: ABARE

• Policy proposals

•Industry impacts

•Unresolved issues

Soil carbon and Article 3.4 of Kyoto Protocol

Additional activities that capture or release carbon on agricultural

lands (soil, vegetation) can be included in national emissions

BUT ..

1. Net-net accounting rules apply

2. One-in – all-in (for a nation or business) – not just areas where

soil carbon is increasing.

3. No separation of natural and man-made changes (major soil

emissions during drought)

Annual yield of 10 tonnes of dry matter and 5 tonnes of roots per hectare, consisting of 40% elemental carbon.

Stocked at 2 cattle per hectare, with 70% pasture utilisation by cattle. Cattle weight gain of 1 kg per day, with beef

estimated to contain 50% elemental carbon. Data is approximate.

22 tonnes

Co2-e fixed

from the

atmosphere

in plant

matter

3 tonnes Co2-e

released as

methane

Up to 1 tonne CO2-e per hectare per annum fixed in soil

(depending on season, management)

Balance

recycled to

atmosphere

through decay,

insects,

micro-organisms

etc.

1.4 tonnes

Co2-e in

beef

Money from trees

Years

To

nn

es C

O2-e

= P

erm

its

2010 2015 2020 2025

50

100

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2010 2015 2020 2025 2030 2035 2040 2045 2050

CPRS -15 CPRS -5

'000 hectares '000 hectares

Additional land under forestry

0

50

100

150

200

250

300

350

<$100k $1-200k $2-400k $400k+

He

cta

res

(@

70%

esti

ma

ted

tim

be

r yie

ld)

Plantation area required to offset 100% of livestock emissions

<500mm rain

500-700mm rain

700mm +

Sheep specialists Farm gross turnover

<$100k $1-200k $2-400k $400k+

dse 1,291 2,746 4,663 8,837

T CO2-e 267 558 948 1,816

Non-participant

Direct participant

Upstream-downstream

Hybrid model

Full

Participant

Upstream/

Downstream

Hybrid

model

Baseline/

Credit

Intensity

model

Broadacre

Livestock ?

Broadacre

Cropping

Specialised

Cropping

Horticulture

Intensive

Livestock

Industry Government

Meeting industry and Government needs

USA, NZ & Australia

Australia N.Z. USA

International

linkage

Kyoto Protocol ratified Kyoto Protocol ratified No ratification of Kyoto

Protocol

Agriculture

Coverage

Not before 2015 From 2015 – Processor

point-of-obligation

Draft legislation exempts

agriculture

“Offsets” Permanent forestry and

offsets from livestock,

fertiliser mitigation.

Permanent forestry Wide range of soil, pasture,

livestock, fertiliser, (5 yrs)

forestry (20 yrs) and

effluent management

options administered by

USDA. Harvested timber.

Concessions •Farm – 94.5% free

permits for

Cattle/Sheep(?)

•Processors – no free

permits

•$10 permits 2011

•Farm and processors 90%

free permits initially,

reducing 1.3% pa

•50% obligation yrs 1-3

•$25 cap yrs 1-3

•EITE measures – free

permits

•Foreshadows importers

requiring permits

•Product Carbon

Disclosure requirements.

Conclusions

• Modelling studies highlight indirect and direct impacts of CPRS on

agriculture. Clarification of assumptions , metrics essential.

• ETS will present a bigger challenge than climate change in the medium

term, and will reduce agricultural competitiveness.

• Livestock industries face a particular challenge if made responsible for the

cost of „measured‟ emissions.

• Forestry abatement presents a significant opportunity, depending on policy

settings.

• R & D investment , productivity and targeting higher-value markets will be

the key to continued profitability.

www.farminstitute.org.au

www.farminstitute.org.au

Australia’s Independent Farm Policy Research Institute