Agricultural emission levies to be paid by farmers will be set at the lowest price possible to achieve outcomes, the Government has confirmed as it makes changes to its proposed pricing scheme.
It's also been decided the pricing pathway for biogenic methane and nitrous oxide will be set for five years to provide certainty to the sector.
A board comprised of agriculture sector representatives and Māori will be established to provide advice to the Climate Change Commission, which will have oversight of the pricing system. The sector will also have input into how income raised through the levy system is then used.
The Government's also said it is urgently working with the sector to develop a way to recognise on-farm carbon sequestration, recognising it needs to be "fair, cost-effective and scientifically robust".
"I've always said we're open to changes if they build greater levels of buy-in," Prime Minister Jacinda Ardern said. "Today we move forward by moving closer together on a workable system."
The changes were included in a report released by the Government on Wednesday outlining its proposed system for pricing emissions from agricultural activities. Under the Climate Change Response Act 2002, the report had to be published by the end of the year.
It follows extensive consultation on the system, which will work as an alternative to the ETS, including with He Waka Eke Noa, a partnership between government agencies, the primary sector and iwi.
In June, the partnership recommended a farm-level split-gas levy and a package of incentives for farmers.
The Government then released a consultation document for the system, which is intended to come into effect in 2025, adopting many of the He Waka Eke Noa proposals. However, there was criticism about the approach to sequestration, which is the practice of removing and storing carbon dioxide, such as by planting some vegetation.
"After listening to farmers and growers through our recent consultation, and engaging over recent months with industry leaders, today we have taken the next steps in establishing a proposed farm-level emissions reduction system as an alternative to the ETS backstop," Ardern said on Wednesday.
"Our shared goal is supporting farmers to grow their exports, reduce emissions, and maintain our agricultural sectors international competitive edge into the future. By continuing to work through our different positions together, we move closer to achieving long term consensus on a plan that works."
The Prime Minister said it is important to establish a system "that lasts".
"We are working hard alongside the agriculture sector to strike the balance between building good levels of sector buy-in, while also ensuring the system is robust and meets our emissions reductions goals," she said.
Ardern has previously spoken about New Zealand benefitting from "being first movers" in the agricultural emissions pricing space. She was criticised over that in October, when ACT said the Government had an "obsession with overseas plaudits".
However, on Wednesday, she said New Zealand needed to be "at the front of the queue to stay competitive" in a global market that is "increasingly demanding sustainably produced products".
"Tesco, the biggest buyer of New Zealand products in Britain, wants all their products to be environmentally accredited and reach net zero across their entire supply chain by 2050.
"And Fonterra has warned farmers it risks losing customers and facing trade barriers if it doesn't meet sustainability expectations, prompting the co-operative to look at setting a target for reducing emissions across its supply chain.
"If we don't establish a credible plan to reduce agriculture emissions the future of our exports are at stake."
Now the report has been released, Cabinet will make final policy decisions on the system in early 2023, followed by legislation to give effect to its decisions.
He Waka Eke Noa partners reacted to the report by saying it moves the pricing system in the right direction, but more work is needed on the detail.
The partnership welcomed the decision for levy prices to be set at the lowest possible point and the five-year period of certainty as well as the recognition of all categories of sequestration.
However, it wants continued focus on ensuring there is a balanced approach to price setting as "there is no support for an approach which drives for emissions reductions at any cost".
It also wants to ensure advice from the board of agricultural and Māori representatives "is given adequate weight alongside the Climate Change Commission advice".
Nathan Guy, the former Minister for Primary Industries who is now chairman of the Meat Industry Association, expressed cautious optimism at the changes.
"The Government’s report confirms much of the approach put forward by the He Waka Eke Noa partnership and this is promising. However, there are still a number of issues that need to be worked through to ensure the system can deliver on its objectives.
"A key area that warrants further work and clarification is how exactly sequestration will be accounted for and rewarded within the emissions pricing system. This is a critical aspect and farmers must be able to count all genuine sequestration on farm."
He said creating a body to provide advice on the levy rate "is a sensible decision".
"It is good that the industry will now have input into advice on the levy rates and sequestration pricing but we remain concerned about the weight this advice will be given, and would prefer this was on the same footing as the Climate Change Commission."
However, Federated Farmers remains opposed to the system. President Andrew Hoggard said the report is "so high level we may not be able to clearly understand the detail until we actually see it when introduced as legislation next year".
"Feds stick by the position we took in our submission, that without a review of the methane targets based on what is required for warming neutrality and for methane to contribute no additional warming, we will not be giving our support to any pricing mechanism.
"Considering what is at stake, vague promises of an obscure future review with unknown terms of reference are simply not good enough."
The report released on Wednesday confirmed the proposed pricing system will have a farm-level split-gas levy where emissions from biogenic methane and nitrous oxide will be priced separately.
The levies will apply to GST-registered business owners who meet emissions thresholds. It will be their responsibility to report on and pay for the emissions, though reporting can also be done through a collective.
"It is proposed that relatively low, unique prices could be set initially for both biogenic methane and nitrous oxide for five years based on set criteria," the report said.
"It is proposed a price pathway for both biogenic methane and nitrous oxide would be set for five years, with a review after three years.
"The price of nitrous oxide would be capped for the first five years at a level that the sector would be no worse off than if the sector had entered the NZ ETS at this point."
A package of incentives will be in place, including for sequestration. A specific sequestration strategy will be developed to determine the details of how sequestration is accounted for and rewarded through the pricing system.
Revenue raised through the levy scheme will be recycled back into the system in line with a strategy outlining spending priorities to mitigate agricultural emissions and operate the overall pricing system. There will also be a dedicated fund for Māori landowners.
The Climate Change Commission will have oversight of the pricing system, but will also receive advice from a board comprised of representatives from the agriculture sector and Māori. Cabinet will set and update the levies after hearing from the commission and other parties.
The actual implementation of the system may involve the likes of the Ministry for the Environment, Ministry for Primary Industries and Inland Revenue.
"An interim, processor-level levy would be proposed only as a transitional step if the farm-level pricing system could not be operationalised by 2025."
The He Waka Eke Noa partners and the Meat Industry Association want the new system set up by 2025 as they don't support an interim processor-level levy.
"This would be ineffective, inequitable and complex. It also detracts the focus away from working hard to ensure the farm level pricing scheme is up and running by the deadline set by government," said Guy.
Agriculture Minister Damien O'Connor said committing to a five-year pricing pathway for levy rates from 2025 gives "farmers the price certainty they have asked for out to 2030".
Involving the sector in decisions around how revenue will be recycled also "means farmers will have a say on the types of actions that will make the greatest impact on-farm to reduce emissions", he said.
"Our farmers are among the most efficient in the world, but the international focus is on reducing total emissions and our efforts are to work together to achieve this," O'Connor said.
He pointed to other initiatives from the Government to support farmers, including the establishment of a Centre for Action on Agricultural Emissions to research new technology to reduce emissions.
The Zero Carbon Act, passed in 2019, set a domestic target of cutting greenhouse gases (except biogenic methane) to net-zero by 2050. Biogenic methane must be cut by 10 percent below 2017 levels by 2030 and to 24-47 percent below 2017 levels by 2050.