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Global emissions to increase from New Zealand ETS

Media Release

08 May 2008

Global emissions to increase from New Zealand ETS

The world's greenhouse gas emissions could potentially increase along with the revenues of offshore dairy competitors, if New Zealand's proposed Emission Trading Scheme (ETS) is not changed.

This was the view put forward today by Fonterra's Chief Executive Officer, Andrew Ferrier, at the presentation of Fonterra's submission to the Finance and Expenditure Select Committee.

"New Zealand is one of the most greenhouse gas efficient dairy producers in the world.

"If we have more constraints put on existing dairy production or growth of our production in New Zealand, other countries will fill the supply gap. These other countries are likely to be less carbon efficient than us and so more emissions would be pumped into the atmosphere as a result.

"Not only does this defeat the purpose of the ETS, but it comes at a real cost to New Zealand's number one industry - which flows on to a national economic impact of around $2.7 billion."

Mr Ferrier told the committee that Fonterra totally supported New Zealand's efforts to reduce the world's greenhouse gas emissions and described the ETS as a pragmatic solution to the country's Kyoto Protocol commitments.

"However, given New Zealand is leading the world with this policy, we need to ensure the detail is driving the right behaviour to reduce emissions at every level.

"And for farmers, this means giving them the ability to manage their own farm's emissions and be rewarded for doing so."

Mr Ferrier acknowledged the Government's decision to extend the timeframes for allocated credit support to trade exposed businesses, such as agriculture, was constructive. This will allow New Zealand more time to see what emissions constraints other competing markets may introduce.

But he added that shifting out the timeframes did not change the inherent problems in the principles of the scheme.

"Farmers and Fonterra will start paying the costs of energy and transport emissions at the same time as everyone else. We're happy to do so because we have the ability to reduce these emissions, and we have been since Fonterra's inception."

"But, along with the rest of the world we're still a long way off finding a way to reduce the methane emitted from animals. Without this solution, the industry can not reduce animal emissions on the farm. It makes sense that we only include these gases in the scheme when we have the ability to reduce them."

"The New Zealand agricultural industry is leading the way in this research and Fonterra is driving it with a considerable investment. We will not be taking our foot off the pedal."

Summary of Key Points

Fonterra has tabled following major changes, amongst others, to the Emissions Trading Scheme to guard against leakage and drive the right behaviours from farmers and businesses:

1. Allow flexibility for future emissions intensity approach

* Currently the policy does not allow New Zealand to, in the future, set targets for reducing the 'intensity' of greenhouse gas emissions for an individual product or unit of output.

* An emission intensity approach allows growth to occur, while still providing a strong incentive to reduce emissions.

* Given New Zealand agriculture operates at an 'emissions intensity' best practice, it will also avoid 'leakage', or lost demand being supplied by other less efficient producers.

* Fonterra believes the Government should reconsider an emissions intensity approach, or provide the flexibility in the scheme to move to 'emissions intensity targets' should the majority of other countries do so. This allows New Zealand to join other schemes beyond the Kyoto Protocol.

2. Set targets for emission reductions based on a sector's ability to do so

* No one in the world has found an internationally-recognised solution to reduce methane emissions.

* While some tools, such as nitrification inhibitors, have shown some potential for reducing nitrous oxide, they are not internationally recognised or applicable in all New Zealand's farming regions.

* Fonterra believes the Government should set reduction targets for individual industries based on the technology they have available to reduce emissions.

3. Farmers who reduce their emissions should be rewarded

* In the ETS's current design, manufacturers take responsibility for emissions produced on the farm. It is the intention that the manufacturer will pass this cost on to the farmer, rather like a flat tax.

* However, we believe that farmers should be rewarded for the actions taken to reduce their own farm emissions.

* Fonterra believes by making farmers responsible for their emissions, there will be more of an incentive to reduce their own farm's emissions.

4. Investment in technology to reduce greenhouse gases should be rewarded

* The ETS relies upon the development of technology that will help reduce methane and nitrous oxide emissions, which account for more than half of New Zealand's total greenhouse gas emissions.

* The development of this technology also presents a commercial opportunity for New Zealand globally.

* Fonterra believes the Government should provide credits for the considerable investment being made in this research and development.

5. Cautiously consider and manage the costs of this policy

* Agriculture will feel the impact of the Emission Trading Scheme from 2010 with the entry of stationary energy, followed by liquid fossil fuels in 2011. This will cost Fonterra and its farmers around $30.8 million per annum in 2010, rising to $134 million in 2013.

* By 2030, when methane (gas from belching animals) and nitrous oxide (gas largely from fertiliser use) are included in the scheme and agriculture's allocated credits have been phased out, the annual impact on Fonterra farmers will be around $500 million which would reduce New Zealand economic activity by around $2.7 billion per annum.

* Fonterra believes the Government should review the economic impact of the policy on businesses to ensure the true costs of the scheme are managed in the policy's design.

- Ends -

About Fonterra

* Fonterra is the world's largest dairy exporter and the fifth largest dairy company in the world, with annual turnover of NZ$14 billion.

* As New Zealand's largest and truly multinational business, Fonterra trades in 140 countries.

* Our portfolio includes dairy ingredients, liquid and powdered milks, cultured foods and yoghurts, butter, cheese and specialty foodservices products.

* Our brands include Anchor, Anlene, Anmum, Fresh n' Fruity, Mainland, Peters & Brownes, Tip Top, Chesdale and Bega.

ENDS

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