2 June 2009:
Agriculture and the CPRS: The ABARE Report

Yesterday ABARE released a new report on the effects of the CPRS on the economic value of farm production, and in particular, the impacts of the recent changes announced by the Federal Government in May 2009.

This is an area where tensions run high, and policy to encourage efficient, low-cost abatement in the agriculture sector is best described as a work-in-progress.

The CPRS is the main policy instrument through which Australia will reduce emissions. However, it is well recognised that additional policies are required to reduce emissions in uncovered sectors. This raises the issue of how best to achieve abatement in agriculture, the costs and benefits associated with bringing agriculture into a CPRS, and even whether there are more cost effective approaches than including agriculture in the CPRS.

Unlike other sectors, agriculture’s inclusion has been delayed due to the unique complexity of the sector’s emissions profile. Agriculture has proven difficult to cost-effectively incorporate into the CPRS because emissions are generated by many dispersed and relatively small sources, and the emissions from each are uncertain and depend on a multitude of variables. The uncertainty inherent in the measurement of agricultural emissions is exacerbated by the costs of adequately monitoring, verifying and reporting emissions.

Although the agricultural sector will not be covered from scheme commencement (which at this stage is 2011), the sector will nevertheless feel the direct impact of a carbon price through higher electricity, fuel and freight costs. The Government is targeting Agriculture for inclusion from 2015, with a decision due in 2013.

ABARE’s report has been taken up by some as vindication that the CPRS is bad policy – bad policy that will cost jobs and place further burden on farmers. The report suggests that:

i) if agriculture is included in the CPRS and farmers are liable for emissions produced on-farm, the dairy and beef industries are likely to incur high liabilities (due to the high methane emissions of livestock);

ii) given an assumed carbon price of $28, no cost-price pass-through from processors to farmers, and inclusion of agriculture in the CPRS, the economic value of beef, sheep and broadacre industries will decrease by 13 per cent, 12.7 per cent and 9.1 per cent respectively in 2015. These figures are lower, but still represent a contraction in value, if agriculture is not included in the CPRS, and are estimated as 4.5 per cent, 7.1 per cent and 5.1 per cent respectively for the same industries. All estimates increase when the potential for producers to pass off-farm cost increases through to farmers is modelled; and

iii) given an assumed carbon price of $28, no cost-price pass-through from processors to farmers, increases in on-farm input costs in response to the CPRS peak at 2.4 per cent for beef and 1.9 per cent for broadacre industries if the sector is included in the CPRS, and 0.8 per cent and 1 per cent if not.

Few would argue that Australia’s crop and livestock production needs to be assured. However, there are also few who would disagree that abatement needs to occur in all sectors of the economy – including agriculture. If the CPRS is passed in the Senate (and some reports indicate this could occur as early as this week), several options remain for agriculture. The sector can:

i) remain outside of the CPRS, in which case complementary policies will be needed; or

ii) enter the CPRS at a later date, with complementary policies to encourage abatement in the meantime, and perhaps EITE assistance measures upon inclusion.

A lot of thinking needs to go into the appropriate ‘package’ for tapping the abatement potential of agriculture, and keeping ongoing abatement incentives in place. No sector wishes to bear carbon costs, but a free ride for one sector represents an extra burden for others. And it only takes a quick look at previous modeling of agricultural emission impacts to suggest that there is a long way to go before we can claim to have a reliable picture of abatement costs in the sector.