Kyoto: Putting a price on dairy conversions

At the moment, world dairy prices are high and timber prices are low. This is helping to drive a trend to convert land used for forestry to dairy farms - putting increased strain on the environment through effluent runoff and vastly higher water use. Dairy conversions - and the fact that our farmers seem constitutionally incapable of cleaning up after themselves - are one of the factors driving the increasing pollution of our rivers and streams. They also result in increased greenhouse emissions, converting a sink to a source. And this is going to cost us.

Previously the government has kept the figures under wraps, but according to cabinet papers obtained by the Herald, it will be enough to add approximately 32 megatonnes of CO₂-equivalent to our existing Kyoto overflow, effectively doubling it. If we purchase credits on the international market, this will cost us an extra NZ$ 300 million, and possibly more if carbon prices increase.

What can be done about this? A big incentive for conversions is the prospect of a deforestation liability for forest owners who fail to replant after cutting down their trees. The government has said they will cover a land use change of up to 10% of our forest area on 1990 levels, but beyond that they may devolve liability to landowners. This has created a perverse incentive to deforest now to avoid the bill later. Clearly something has to change: either the government has to remove the cap, or it has to impose the liability ASAP to ensure that those converting land pay the full cost of their activities. From the phrasing of the above, it should be clear that I favour the latter. While the cap is a perverse incentive, the underlying problem is the market - and it will only be solved by internalising the externality of carbon pollution and ensuring that the private cost of deforestation is equal to the social cost. Unfortunately, this may be unpopular with the farming and forestry sectors, and to work it would also require payments to those converting land in the other direction, so I expect the government to display its usual craven cheapness and take the easy but stupid option. But I hope to be pleasantly surprised.

Another option is to give in to the forestry owner's capital strike and devolve carbon credits to them. As I've said here, I think this would be an insane policy - either scientifically bogus or an invitation to corporate fraud - but no doubt some boondoggle could be worked out if we were to use internal carbon trading in place of the carbon tax.

A third option is to work with local government to limit new dairy farms. Environment Waikato had the right idea here with introducing resource consents for intensive farming and "cap and trade" for nitrogen runoff around Lake Taupo - but that would be unpopular with farmers, and would take some time to feed back through the market to affect the deforestation rate.

All of these options will be heavily resisted by the business and farming sectors, who are rabidly opposed to taking any action to reduce greenhouse emissions. But if the government doesn't act now, we will all end up paying for it later - either explicitly in the form of carbon credits or indirectly in the form of more droughts. And while the latter is a form of "polluter pays", its one I think we'd all rather avoid.