INCENTIVISING CLIMATE-SMART

AGRICULTURE

Alan Matthews

Professor Emeritus of European Agricultural Policy

Trinity College Dublin

Presentation to the Institute for International and European Affairs

5 June 2015

Climate-smart agriculture

• Climate-smart agriculture involves sustainably increasing

agricultural productivity and incomes, adapting and

building resilience to climate change, and reducing

greenhouse gases emissions where possible

• (UN Climate Summit 2014).

• Today, will only talk about the first and last aspects and

will not discuss adaptation for lack of time

2

The issue

Don’t blame

me! I’m only

doing my best

to produce milk

and meat to

satisfy human

needs

… but she’s also producing greenhouse

gas emissions without realising it

4

Perceptions and cost

• Greenhouse gas emissions are a negative externality

• Causes unpriced damage

• But invisible, long-term, far-away, global

• Compare to water pollution

• Very difficult for farmers to comprehend (Bogue, 2013)

• But emissions are a real cost. Placing a value on carbon

is important to ensure effective incentives are in place to

tackle climate change

• Measured either by

• Social cost of carbon – the marginal damage cost of emissions

caused by emitting 1 additional unit of carbon to the atmosphere

• Carbon price - the marginal abatement cost to the state of meeting

targets set by international commitments

5

EU targets

• Emissions Trading Sector (ETS)

• Energy and energy-intensive industry

• EU-wide target

• Non-ETS sector

• Transport, agriculture, housing, waste, small industry

• National targets set by the Effort-Sharing Directive

6

Target and flexibility mechanisms - 2020

• 2020 target

• Irish target is 20% reduction in non-ETS emissions by 2020 relative

to 2005 (10% average for EU)

• Flexibilities

• Annual targets, but banking and borrowing allowed across years

• Use of transfers from other Member States

• Limited use of international credits from project activities

• Land Use, Land Use Change and Forestry (LULUCF) not included

• Recognised that this target was relatively more stringent (implying

higher carbon price) in Ireland than in other MS

7

Target and flexibility mechanisms - 2030

• 2030 target • 30% EU-wide reduction in non-ETS emissions

• National targets to be distributed on basis of relative GDP per capita spanning from 0% to -40%, taking account of cost-effectiveness for countries with above-average GDP per capita.

• Coherence between EU’s food security and climate change objectives to be ensured

• Flexibilities • International offsets will not be counted

• Possibility of transfers between MS will be significantly enhanced

• Possibility to offset non-ETS emissions with ETS allowances mooted

• Policy proposal how to include (LULUCF) in the mitigation framework to be brought forward before 2020

8

Separate methane targets?

• EU Clean Air Programme

• Revision of the National Emissions Ceiling Directive 2013

• Establishes new national reduction commitments for

ammonia in 2020 and 2030 as well as for methane in

2030

• Proposed EU-wide methane reductions up to 30% in 2025

and 33% in 2030 compared with 2005, differentiated by

Member State

• Ireland’s proposed targets (-7% for both ammonia and

methane by 2030) the lowest for any MS

9

Estimates of cost of carbon

• Social cost of carbon

• Current UK government guidance for policy appraisal include

central estimates for 2010 of £14/tCO2e for sectors covered by the

EU Emissions trading scheme (ETS) and £52/tCO2e for non-ETS

sectors, both rising over time to £200/tCO2e in 2050 at 2009 prices

(DECC 2010)

• Carbon price

• EPA estimate is for €2010/tCO2 of €20 in 2020 and €57 in 2035

(EPA, 2015)

10

Costing livestock GHG emissions, 2012 data

with estimated carbon costs 2020 and 2030-35

Cost of GHG emissions 2020 2030-35 Source

Dairy Beef Dairy Beef

Carbon tax €2010/tCO2 20 20 57 57 EPA GHG Projections Report, 2015

Production (milk in million litres, beef in tonnes cwt)

5,232

495,400

5,232

495,400 CSO Statistical database

Value of production, €m

1,630

2,120

1,630

2,120

CSO Output, Input and Income Arising in Agriculture

Total CO2e emissions (million tonnes)

5.32

11.38

5.32

11.38

Own calculations based on EPA National Inventory Report 2015

Total cost (€ million)

106.4

227.6

303.2 648.8

Average value (litre, kg), € 0.31

4.28 0.31 4.28

Cost of GHG emissions as % of sales value 6.5% 10.7% 18.6% 30.6%

Cost per unit (€/l, €/kg) 0.02 0.46 0.06 1.31 Source: Own calculations

11

The agricultural industry narrative

• Irish agriculture is, relatively, highly carbon efficient

• Restricting Irish production flies in the face of the world’s

increasing demand for food

• Restricting Irish production means production moves to

less carbon-efficient areas, increasing global emissions

• Abatement is difficult, so focus should be put on reducing

emissions intensity

• These are all arguments to be made in setting Ireland’s

target, but when the target is set, they become irrelevant

• Target is absolute and must be met in absolute terms.

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CO2e emissions per hectare, EU countries 2012

Ireland is carbon-

efficient but not a low-

emission agriculture

Source: FAOSTAT

Agricultural emissions and food consumption

• IPCC inventories (and EU targets) aim at measuring and

reducing production of emissions.

• At global level, increasingly recognised that diet changes

towards less-carbon intensive diets (especially in

developed countries) are an important part of the solution

• Consumers should pay the full economic cost of food

• This implies both domestic production and imports must

be treated equally

• However, very limited pay-off in terms of meeting Irish

non-ETS targets from either changing food consumption

patterns or reducing food waste given IPCC accounting

rules

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WHAT IS SCALE OF PROBLEM?

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Trend in Emissions from Agriculture 1990-2012

Source: Duffy et al, EPA National Inventory Report 2015

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Agricultural output index, 1990-2014, 2020?

Food Harvest 2020?

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Agricultural emissions have fallen in the

past because agricultural output has not

grown over the past quarter-century while

productivity improvement has meant fewer

cows and less nitrogen required

This will change due to ambitious growth

targets under FH2020

Projected sectoral share of non-ETS greenhouse gas emissions

in 2020 and 2035 for the With Additional Measures scenario

Source: EPA 2015

2020

2035

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With Measures and With Additional Measures greenhouse gas

emissions projections for the non-ETS sectors to 2035

Source: Based on EPA 2015

Path to 30% reduction in non-ETS

emissions by 2030 extended to 2035

21

Possible

scale of

reduction

required

Responses

• Emissions reduction

• Changes in farm management practices and introduction of

technological options to reduce emissions intensity of output

• Shifts to less emissions-intensive land uses

• Carbon sequestration

• Forests

• Agricultural soils

• Avoided emissions elsewhere

• Bioenergy

• Wood products

23

Marginal abatement cost curve

• Measures the cost and abatement potential associated

with different potential abatement measures

• Irish MAC curve based on Teagasc research on mitigation

measures

• Considers measures to reduce emissions intensity but

does not focus on options to switch land use to less

emission-intensive or sequestration activities (only

bioenergy options)

• Actual vs technical potential – why are the large win-win

options not already exploited?

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Source: Donnellan (2013)

Illustrative MAC curve

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10% 20% 15% 5% Source: Donnellan (2013)

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Farming and ‘avoided emissions’ in other sectors

• Farming has the potential to produce bioenergy (solid,

liquid, gas) which can replace (fossil) energy use in the

heat, transport and electricity sectors

• Controversial because of potential competition with food

production and because total GHG emission savings are

questioned

• Credits for use in electricity generation (co-firing in peat

plants) lower demand for allowances in the ETS sector

• Some potential (e.g. solid fuel heating, biogas) to reduce

fossil fuel use for heat on farms, institutions and homes,

indirectly contributing to meeting non-ETS target

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Prospects for carbon sequestration

• Awaiting Commission proposal on how LULUCF sector

will be treated in meeting 2030 targets

• Measuring soil carbon stocks

• High spatial variability within fields

• Annual changes in stocks are small relative to total store, so long

period (5 years or more) needed to reliably detect and measure

stock changes

• Forestry is a potential sink in Irish circumstances

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Trend in Emissions and Removals from Land

Use Land-Use Change and Forestry 1990-2012

Source: Duffy et al, EPA National Inventory Report 2015

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Land use and carbon sinks 2030 cost curve

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Source: SEAI McKinsey (2009)

HOW TO INCENTIVISE?

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Climate Action and Low Carbon

Development Bill 2015

• The Bill sets out the national objective of transitioning to a

low carbon, climate resilient and environmentally

sustainable economy in the period up to and including the

year 2050.

• ….

• “the need to achieve the objectives of a national mitigation

plan at the least cost to the national economy and

adopt measures that are cost-effective and do not impose

an unreasonable burden on the Exchequer”

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Treatment of agricultural emissions

internationally

• Voluntary incentive schemes

• United States, EU countries

• Inclusion in compliance offset schemes

• California’s mandatory cap-and-trade, offsets can amount to 8% of

the allowance, including agricultural projects in US, Canada and

Mexico

• Australia 2011 Clean Energy Bill, those liable can cover up to 5% of

their obligations with domestic agricultural and forestry credits

certified by the Carbon Farming Initiative

• Canada: included ‘cropland management’ under KP Article 3.4

• US: land use offsets were proposed in failed Waxman-Markey cap-

and-trade bill

• Voluntary offset scheme operate in various EU countries

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Treatment of agricultural emissions

internationally

• Inclusion in carbon levy/cap-and-trade scheme

• New Zealand had proposed in include agriculture in its ETS from

Jan 2015, with compliance obligations set at processor and

fertiliser supplier level

• Withdrew the proposal in 2013

• The Government indicated biological emissions from agriculture will

only incur surrender obligations if there are technologies available

to reduce these emissions and its international competitors are

taking sufficient action on their emissions. Agricultural producers

are still required to report on their emissions.

• Vigorously pursuing research on mitigation options in the livestock

sector

• However, NZ does not face a binding cost on excess emissions as

Ireland does.

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CAP policy instruments post 2014

• Pillar 1 greening measures

• Require crop diversification on larger tillage farms

• Require Ecological Focus Areas on larger tillage farms

• Maintain permanent pasture area at national level

• Cross compliance GAEC 4-6 address soil carbon maintenance

• Pillar 2 Ireland’s Rural Development Programme

• Encouragement to organic farming

• Investment grants

• Measures under GLAS agri-environment scheme

• Beef Data and Genomics Programme

• Knowledge development and transfer

• Other

• Roll-out of the Carbon Navigator

• No indicators or targets set for desired GHG reduction

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Competing incentives affecting land use

• Returns to agriculture, forestry and bioenergy uses of land

in Ireland heavily influenced by public policies

• Agricultural land use supported by direct payments (SFP/BFP),

LFA/ANC payments, and REPS/AEOS/GLAS payments

• Discouragement to forestry significantly reduced by the ability to

stack SFP entitlements 2005-2014 and by payment of BFP to land

afforested since 2009, but some negative incentives remains

• Incentive structure could change in future even in

absence of climate policy

• Design and size of CAP budget after 2020

• Impact of possible trade agreements (Doha, TTIP)

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If farmer rents out land for grazing only, average rent per hectare in recent

years has varied between €250-350 depending on region, source: SCSI 2014

Cost of carbon emissions not included

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If farmer rents out land for grazing only, average rent per hectare in recent

years has varied between €250-350 depending on region, source: SCSI 2014

Cost of carbon emissions not included

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Investment performance of afforestation with

alternative superseded agricultural enterprises.

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Source: Breen, Clancy, Ryan and Wallace, 2010

Forestry (with grants) shows positive return relative to alternative

agricultural uses of that land, yet planting rates remain low

Annual state and private afforestation,

1922-2013

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Source: Ireland’s Forests, Annual Statistics 2014

Planting rates

falling, despite

eligibility for

SFP since 2005

Planting rates

falling, despite

eligibility for

SFP since 2005

Assumptions 80% Sitka spruce Yield class 16, 20% beech Yield class 6 GPC 3 grant and premia rates, fencing grant excluded Preferential tax treatment (income from sales of timber exempt from tax) not taken into account 40 year planting cycle Carbon sequestration rates assumed averaged over cycle Sitka spruce 3.6tC/ha, beech 2.4tC/ha (Byrne and Black, 2003)

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If we assume that state support for private forestry is justified solely

because of the carbon sequestered, the level of support seems more

than adequate. But forestry still competes on an unlevel playing field

because carbon emissions from alternative enterprises are not priced

Some conclusions

• Increased agricultural output should be encouraged,

provided all costs are fully accounted for.

• Other sectors in the non-ETS sector pay a carbon tax

(fuel, heating)

• Carbon values of forestry sequestration and bioenergy

are, at least implicitly, recognised….

• … but carbon emissions from agricultural production are

given a free pass, despite the evidence of significant

abatement opportunities at negative cost to farmers

• In the context of a constraining ceiling for non-ETS

emissions, this is neither efficient nor sustainable

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But jobs and carbon leakage?

• Jobs

• Pricing biological carbon emissions on the same basis as carbon

emissions in other sectors of Irish economy would encourage a

reallocation not a loss of jobs

• Revenue raised stays in the country, unlike purchase of carbon

permits from abroad

• Carbon leakage and competition

• Potentially to third countries or to EU countries where agriculture

has lower tax rate or remains untaxed – unlevel playing field

• Hugely desirable to get commitment for level playing field on

carbon pricing for agriculture throughout EU

• How to address unfair import competition will become clearer after

we see shape of Paris COP 2015 deal

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The bottom line

• For the incentive effects of a carbon charge to be effective,

farmers need to get credit for the changes that they make

• A challenge for inventory acounting to capture relevant reductions

• If Ireland were the only country in the EU, or the world, to

properly price its biological carbon emissions, this would put

Irish agriculture at a large competitive disadvantage

• Possible solution is to proceed with introducing carbon charge

system but to introduce charge initially at a low rate until critical

mass of countries has caught up

• Under cap-and-trade system, existing emissions could be

grandfathered and charge applied to marginal quantities

• Acting first would be a credible supplement to Origin Green

claim that Ireland is world leader in sustainable agriculture

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Plus €2

climate

charge

Picture credit: Lisa Alber http://lisaalber.com/books/novel-research/

Incentivising change… longer term

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