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A Fonterra Guide
to Climate Change
Facts, Questions and answers
Part two
Foreword
This booklet is the second in our shareholder series - A Fonterra Guide to Climate Change: Facts, Questions and
Answers - which gives you an insight into the latest thinking on climate change and the possible impact on you as
farmers, and out industry as a whole.
The first edition gave you some facts on climate change, the Kyoto Protocol and looked at how the New Zealand
Government might legislate to control greenhouse gas emissions. Since then, we’ve seen a number of policy
developments.
Part two of this series recaps on the research community’s current thinking on climate change, takes you through the
Government’s proposed policy and answers more detailed questions around Fonterra’s position on the policy and what
the industry is doing to help reduce greenhouse gases. It also includes practical advice on what you can do now to
reduce your own farm’s emissions.
The climate change debate will affect all of us. It is my intention to keep you up to date with Fonterra’s view on the
latest developments and whenever possible provide practical ways for you to minimise the impact on your farming
businesses.
Barry Harris
Chairman of Fonterra Sustainability Leadership Team
May 2008
what is climate change? what could climate change mean to new Zealand?
Climate change, or global warming, refers to increases in the average temperature of the Earth’s oceans and the air According to current research, climate change could have a significant impact on our economy, environment and the
near the surface. This warming of the planet is considered by scientists to be caused by increasing levels of greenhouse way we live.
gases in the atmosphere. These trap heat from the sun, acting rather like a glasshouse. Climate scientists expect the In New Zealand, average temperatures are projected to increase about 1°C by the 2030s and about 2 to 3°C by the
Earth’s average temperature will increase by between 1.4 and 5.8°C this century. 2080s. This increase in temperature is predicted to result in:
The main greenhouse gases are: • A 30-50cm rise in sea levels by 2100, which leads to:
• carbon dioxide (CO2) – produced when fossil fuels like coal and oil are used to generate energy. It is absorbed by o Increased coastal erosion
trees, so forests act as a carbon dioxide ‘sink’ o Flooding from storms
o Salinisation of freshwater
• methane (CH4) – produced naturally, as well as from landfill sites, rice fields, wastewater treatment, natural gas
o Drainage problems
and petroleum systems, and by livestock
• More extreme weather events such as severe storms, floods and droughts
• nitrous oxide (N20) – produced by natural processes as well as from agriculture, changes in land use and fossil fuel • More rainfall in the west of New Zealand and less rainfall in the east
combustion. • More heavy rainfall and more westerly winds
Carbon dioxide is by far the largest source of greenhouse gas emissions, accounting for nearly three quarters of total • High risk of severe winds and storms
emissions worldwide. • Fewer frost days in the lower North Island and Southland
• More hot days (25 degrees Celsius and above).
Likely impacts of climate
change for New Zealand
extra heat is kept in the air by
‘greenhouse gases’ produced
from human activity.
some sunlight is bounced
back into space.
some heat is released
into space.
some heat is naturally
kept in by gases in the air
Less heat is able to be like water vapour.
released into space.
source: Ministry for the environment
Two significant reports in the last year have
heightened international awareness of the
potential risks posed by climate change and
provided a sense of urgency for action.
source: Ministry for the environment
what is the new Zealand Government doing
about climate change?
Signed up to the Kyoto Protocol
The Kyoto Protocol is an international legally-binding agreement to reduce
greenhouse gas emissions. New Zealand has committed to reducing its net
emissions of greenhouse gases back to 1990 levels. It has agreed to do
this in 2008 – 2012 or paying the cost for emitting above these levels. The
Government predicts that we will be 21.7 million metric tonnes of carbon
over this level, which comes at a cost of $481.6 million to the New Zealand
economy (based on a carbon price of NZ$25/tonne).
Introduced the Emissions Trading Scheme
To help meet New Zealand’s current and future Kyoto commitments the
Government is setting up an Emissions Trading Scheme (ETS) in New
Zealand. The ETS aims to encourage emissions reductions and is driven by
a government vision that sustainability initiatives, including New Zealand
becoming ‘carbon neutral’, will lead to higher-value export opportunities.
The ETS will:
• Put a dollar value on greenhouse gas emissions (called a carbon price)
• Require participants to monitor, measure and report the emissions they
generate
• Put a total cap on emissions, but let participants to trade for their
allowance to produce emissions.
• Entitle participants who are involved in activities that absorb greenhouse
gases, such as forestry, to earn emissions credits and sell these on the
emissions trading market. Agreed timing for agriculture’s entry to the ETS
So, for example, the ETS will put a dollar value on the greenhouse gas The date when sectors enter the ETS depends on how ready they are for trading, and the likely cost to the economy.
emissions from dairy farms. The dairy industry will then need to pay for Industries are due to enter the scheme:
those emissions with one emissions unit for every tonne of greenhouse gas
Forestry January 2008
produced.
Stationary energy January 2010
It can acquire units by:
Industrial process emissions January 2010
1. An allocation from the government
Liquid fossil fuels (mainly transport) January 2011
2. Public tender
Agriculture, waste and all other emissions January 2013
3. Creating a carbon sink, such as a forest
New Zealand is the first country in the world to include agricultural greenhouse gases in its emissions trading policy.
4. Purchasing emissions units from other participants in the New Zealand
The later entry for agriculture recognises this and the fact that we still need to overcome significant barriers before we
market; or on the world market (that have been generated by savings in
can fully participate in the scheme. These barriers include:
other countries).
• Being able to estimate and monitor emissions at an individual farm level
The Government will allocate a pool of emissions units (which they are calling
• Having the right technology available to reduce agricultural greenhouse gases
“free allocations”) to agriculture, when it enters the scheme in 2013, for
methane and nitrous oxide greenhouse gases emitted on farm. These will • Having existing technology such as nitrification inhibitors, internationally recognised.
be the equivalent to 90 per cent of agriculture’s methane and nitrous oxide The draft ETS legislation makes fertiliser companies and meat and dairy processors responsible for reporting on-
emissions in 2005 and will be phased out by 2030. farm emissions and purchasing units or offsetting their emissions. The Government believes this will reduce the total
The Government also proposes to allocate emission units to industrial number of participants and simplify administration of the scheme. The legislation does have the flexibility to set the
manufacturers that will experience “trade exposure” from a price of carbon obligation at the individual farm level if considered practicable.
being introduced in New Zealand ahead of other countries. This is to ensure The Government will in all likelihood pass the ETS legislation later this year. During 2008-2012 (the first commitment
they don’t become less competitive in the international market. The pool period under the Kyoto Protocol), final decisions will be made on more detailed design features.
will be equal to 90 per cent all of the ‘trade exposed’ companies 2005
emissions, but how the pool is allocated to individual companies is yet to be
determined.
what is Fonterra’s position on the emissions trading scheme? what will emissions trading cost on the farm?
We think emissions trading is the best of the regulatory and price measures outlined in the Government’s 2006 The estimated costs of emissions trading on farm will vary considerably if there is a breakthrough in technology to
consultation documents on climate change. Emissions trading is more flexible than trying to control emissions reduce methane and nitrous oxide greenhouse gases. The costs will also be impacted by how many emissions credits
through the Resource Management Act and has the potential to link to international measures. agriculture receives from the Government, how long we receive these for and how they are eventually reduced or
However, we have indicated to Government that New Zealand farmers should not be exposed to a price on emissions phased out. This is something we are discussing with the Government.
until there are methods available to report and reduce on-farm emissions, or our competitors have been exposed to However under the current ETS design, we have calculated that all farmers will begin to feel the effects of carbon
an equal carbon cost. pricing from 2010 onwards. That’s when stationary energy (the electricity, coal and gas used both on farm and in
New Zealand is currently the first country in the world to include agricultural greenhouse gases in an emissions Fonterra’s manufacturing business) will come into the scheme. This is followed by liquid fossil fuels in 2011. We
trading scheme. This exposes the New Zealand dairy sector to an emissions price well before our competitors. This estimate these gases will cost Fonterrs and its farmers around 3 cents per kilogram (kg) of milksolids by 2011.
is despite our world best-practice status. If we do apply a carbon charge to agricultural greenhouse gases first, our When agriculture enters the ETS in 2013, the estimate cost will increase to 10 cents per kg of milksolids and rise to
industry’s competitiveness may end up significantly compromised, allowing other less efficient producers in other around 30 cents in 2030 as the Government’s allocated credits are phased out.
countries to fill the gap in global supply. Based on the current milk production forecasts and assuming a carbon price of $25 per tonne of CO2, this could
Fonterra also recommends some other changes to the BIll to ensure New Zealand’s climate change response is equate to around a $500 million a year cost to the dairy industry by 2030.
environmentally and economically sustainable.
Targets for reducing greenhouse gas emissions should be linked to a sector’s ability to do so The Estimated Direct Costs of the ETS
We believe each sector should have its own target for reducing greenhouse gases, relating to the technology it has
2011 2013 2030 2030
available to do so. These targets should also be linked to similar international standards and obligations.
cents per 0 cents per 0 cents per estimated $00
For example, those sectors that can easily reduce their emissions without compromising growth should receive more kg/milk solids kg/milk solids kg/milk solids million annual
aggressive targets than sectors, such as agriculture, which have no ways to reduce farm emissions other than by cost to industry
cutting production. As technology is developed, these targets can be made tougher.
The true costs of the scheme need to be recognised
As it stands at the moment, Fonterra would be legally liable for all your animal related emissions, despite having no
The Climate Change Amendment Bill underestimates the real costs of the ETS. Fonterra and shareholders alone could
control over emissions on individual farms.
face annual greenhouse gas emissions liability of around $500 million per year by 2030. This impact on the dairy
If the responsibility is shifted to farms, Fonterra will continue to help ease the administrative burden. We will gather
sector would reduce New Zealand’s economic activity by $2.7 billion per year.
the on-farm emissions data from suppliers, submit total emissions’ returns annually and trade to acquire units on
Provide incentives for the development of technology behalf of our farmers. We’ll be liable for processing the information provided by each farm. But farmers, would be
liable for any financial costs associated with the emissions generated on farm.
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 emissions. We believe the Government should provide an incentive
for investing in such technology.
How is Fonterra’s supply chain likely to be impacted by the emissions
trading scheme?
Good emissions practice on farm should be rewarded Our manufacturing operations will need to report emissions of greenhouse gases and surrender equivalent emissions
We also believe it makes sense for farmers to be responsible for their own on-farm emissions and receive credit for units. We already monitor emissions of carbon dioxide and report these internally. We have also set up a simulated
actions taken to reduce them. In the ETS’s current design, the responsibility for these emissions sits with Fonterra emissions trading scheme between our manufacturing sites, so we already have systems in place to monitor and report
– simply to reduce the administrative burden of bringing agriculture into the scheme. The Government suggests we emissions.
can then average the cost of emissions and pass the cost on to farmers. The first direct cost impact will be when stationary energy (coal, gas
However, we believe farmers who take steps to reduce their emissions should be rewarded for doing so and those and electricity) used in manufacturing enters the ETS in 2010.
who do not, should bear their true cost. The best way to do this is to make individual farmers responsible for their If we meet the trade exposure test, Fonterra will be eligible to
on-farm emissions in the legislation. receive some of the pool of allocated credits.
Allow flexibility for future emissions intensity approach The liquid fossil fuel (diesel) used by our milk transport fleet will have
associated emissions liabilities from 2011. As the policy stands, the
The ETS needs to maintain flexibility to move to an emissions intensity based approach in the future, which provides
cost of this will be passed on to Fonterra and farmers through the
targets to reduce unit of output greenhouse gas emissions (ie per kilogram of milksolids on-farm and per kilogram
fuel suppliers.
of product from manufacturing). We believe this approach is better aligned with consumer interest in the carbon
footprint of products. We have made significant savings in energy usage and created
efficiencies in our milk collection system, which have jointly
It also provides the flexibility for us to change our approach if the majority of other offshore climate change schemes
contributed to our reduction in carbon dioxide emissions. However,
are intensity based or if the policy after the Kyoto Protocol is intensity based.
under the proposed ETS we will need to make additional reductions
in emissions.
are there any other parts of the climate
methane emissions.
change policy that may affect my farm or
Fonterra? The next stage of the research will focus on the development of a range of cost-effective and practical tools that can
be used on-farm to reduce methane emissions.
The Government released the New Zealand Energy Strategy in October
2007 and adopted a target for switching 90 percent of New Zealand’s We are also looking at tools for reducing nitrous oxide production.There is the potential to reduce nitrous oxide
total electricity to renewable electricity generation by 2025. To achieve emissions from urine through the use of stand-off pads and maize supplementation.
this, the Government is imposing a 10-year ban on new electricity
generated from fossil fuels (coal, gas, oil), as long as it doesn’t greatly
what has Fonterra been doing within its business to lower emissions?
affect the country’s security of electricity supply. As a substantial We already monitor carbon dioxide emissions at our manufacturing sites and use them to simulate an emissions
national grid upgrade will be required to cope with a greater load of trading system between sites. The Carbon Account compiles information about each site’s quarterly carbon dioxide
renewable energy, this is likely to further increase the cost of electricity emissions and places a hypothetical dollar value on them. It is one of the ways Fonterra is preparing for an emissions
for Fonterra or if the upgrade is not undertaken it could have an affect trading environment, while also raising employee
on the security of our electricity supply. awareness about energy use and the associated carbon
dioxide emissions from our manufacturing sites. Specific Energy Consumption
The climate change policy is also encouraging the planting of forests 12
through the Afforestation Grant Scheme (AGS). Under the AGS, farmers can receive a government grant for planting new As a result, our manufacturing sites have made
GJ/ tonne (Therm & Elect)
significant savings in energy use and carbon dioxide 10 10.81 10.47
forests on previously unforested land. The participants will own the new forests and earn income from the timber, while 9.72
9.47 9.18
the Government will retain the sink credits and take responsibility for meeting all harvesting and deforestation liabilities. emissions in recent years. Our 2005/06 energy savings 8
made up 82 per cent of the savings of 1.8 peta joules
6
How do animal emissions occur? (PJ) by all New Zealand businesses in that period. In
4
Microbes in the rumen of the cow digest the pasture, provide energy for the cow and produce carbon dioxide and 2007/08 we have increased those energy savings to 2.5
hydrogen as a result. A group of micro-organisms, called methanogens, convert carbon dioxide and hydrogen to peta joules (PJ) of energy each year – which equates to 2
methane, which is burped out by the cow. Between 5-8 per cent of food energy consumed is not converted to a form 215,000 tonnes of carbon dioxide annually. 0
F04 F05 F06 F07 F08
usable to the cow and is lost as methane. An agreement with Toll New Zealand to make rail the
YEAR
Nitrogen contained in pasture consumed by the cow, which is not absorbed in milk or meat, is excreted in the urine and main method of transportation in the Waikato, and a
faeces of the cow and converted by soil microbes to another potent greenhouse gas, nitrous oxide. Nitrogen fertilisers are primary method in the Hawkes Bay, Manawatu and
a further source of nitrous oxide emissions. Wairarapa has also contributed to a reduction of more
than 9,000 tonnes of transport related carbon emissions.
Methane and nitrous oxide are both more potent greenhouse gases than carbon dioxide. Under the Kyoto Protocol, each
This complements other initiatives, such as the use of new technology to pre-concentrate milk at our Tuamarina and
of these gases is converted to carbon dioxide equivalents with 1kg of methane equivalent in global warming potential to
Culverden sites, and a new real-time scheduling and dispatch system for our tanker fleet.
21kg carbon dioxide, and 1kg nitrous oxide equivalent to 310kg of carbon dioxide.
We’re also carrying out a carbon footprint analysis of our main products, which will show the amount of greenhouse
what work has been done to develop tools to reduce animal emissions? gas emitted in the entire lifecycle of our products. We will then pinpoint areas where reductions can be made.
The agricultural industry is investing heavily in climate change research, particularly through the Pastoral Greenhouse Gas The work will cover the three distinct parts of Fonterra’s ‘cow to customer’ supply chain:
Research Consortium (PGgRC), which Fonterra currently chairs. • ‘On-farm’ will cover inputs and outputs related to the production of milk from the farming operation up until it
The PGgRC is recognised internationally as having the leaves the on-farm milk vat.
most comprehensive programme to find ways to reduce
agricultural-based emissions of methane and nitrous oxide.
Methane from livestock mainly comes from micro-organisms
called methanogens in the rumen. Research is focused
on reducing the role of methanogens without reducing
rumen function and animal productivity. This could be
done through changing diets, using enzymes or vaccines to
lower methanogens’ effectiveness and identifying genes in
animals that reduce methane emissions.
The research carried out so far has:
• identified potential replacements for methanogens in
the rumen
• found possible ways of using vaccines
• confirmed that some types of feed could lead to lower
emissions
• confirmed there is a genetic link in animals that affects
• Forestry owners
• Clean Development Mechanism Projects, which is where a developed country can offset their emissions by helping
another developing country to reduce their emissions
• Other participants in the New Zealand market or countries signed up to the Kyoto Protocol who have extra carbon
credits.
what factors cause animal emissions to fluctuate?
PGgRC research indicates that there is a correlation between the genetics of the animal and the emissions it releases.
Research into this link is ongoing.
Another factor is feed consumption the more food consumed, the higher the emissions. If highly productive animals
can be identified, this will result in more of milk being produced from less cows. This will lower the amount of
maintenance feed required and, ultimately, reduce emissions from the herd.
what is the status of research into the use of nitrification inhibitors?
Nitrification inhibitors can increase productivity while lowering nitrous oxide emissions. Trials have shown 30-70 per
cent reductions in nitrous oxide production through the use of inhibitors and they also have been shown to improve
pasture productivity by between 15-20 per cent under the best conditions.
However there are some questions remaining around their effectiveness in different soil types and conditions. Research
is continuing, and scientists will soon be able to state which regions and conditions nitrification inhibitors will be most
effective in. The results, once available, will be included in the updated version of OVERSEER.
Nitrification inhibitors must achieve international recognition before they can be counted as a tool for reducing New
Zealand’s agricultural emissions. Negotiations are continuing on getting credit for their use.
Fonterra has said that improving animal productivity can reduce methane
• ‘Processing’ will include the transportation of milk from the on-farm milk vat and the complete manufacturing emissions for a set volume of milk. How does this work?
process, including packing and storage at the factory site, through to the product loaded onto transport for Research has suggested that improving productivity will result in fewer emissions for a set volume of milk production
delivery. (also referred to as lower emissions intensity). Methane emissions arise from the feed consumed by the animal for
normal body maintenance, growth or milk production. So the more feed consumed the greater the quantity of
• ‘Distribution’ will include measuring the transportation of the product from the manufacturing site, to the
methane emitted. Producing the same volume of milk with fewer animals means that less feed is needed for body
warehouse, and its shipping to key destinations internationally.
maintenance, but the same amount of feed is needed for milk production. Therefore less feed in total is required to
produce the same volume of milk, resulting in lower methane emissions.
How will emissions be measured under the new Zealand ets?
Measuring emissions of individual animals requires that they be fitted with methane measuring devices. This is Increase productivity per animal
expensive and impractical. Instead, New Zealand’s agricultural emissions are estimated at a national level. Factors such ddMi Milk yield (kg/d) cH (kg/d) % cH associated with cH/milk (g/kg)
as animal population, live weight, production levels and feed intake are used to form an aggregate view of national Maintenace Production
agricultural emissions. 7.9 12 206 51 49 17.2
At this point, the ETS doesn’t include a method for estimating emission levels on farm. Possible options include: 10.5 20 272 39 61 13.6
• to assign a set level, either per unit of output (milksolids) or per cow, or 11.7 24 305 34 66 12.7
• use of a detailed model which accounts for the difference in farm systems, the associated difference in emissions
Source: O’Hare et al. (2003)
that this brings, and the efforts of individual farmers to reduce their on-farm emissions through available tools.
While the assigning of liability on a ‘per unit of output’ basis is cheaper, it does not recognise or reward the efforts of if the dairy system is carbon in (pasture) and carbon out (milk), shouldn’t it
individual farmers who are working to reduce their emissions. be carbon neutral?
On-farm factors which are likely to affect the emissions of individual farms include animal productivity, use of fertiliser Carbon is absorbed into the pasture from atmospheric carbon dioxide with approximately 75 per cent released back
(particularly nitrogen), and the use of any reduction tools or offsetting practices such as forest planting. into the atmosphere from plant respiration and decomposition. The remaining carbon in plant material is consumed by
the animal and provides the energy needed for its maintenance and milk production. The carbon in faeces, urine and
what actions can be used to offset emissions or gain credits
Today practical mitigation tools for the agriculture industry are limited. The two main ways in which emissions can be
reduced are through milking more from less cows or by limiting fertiliser use.
Under the ETS, Government credit for tools that reduce greenhouse gases, such as nitrification inhibitors and stand-
off pads, depends on international recognition which hasn’t happened yet. So credits will need to be bought from:
0
And the remainder is contained in leaves eaten by the cow. So rather than being stored in the pasture, carbon is
milk products is also eventually released
Sources of methane (CH4) in grazing ruminants cycled around from the atmosphere, into the plant, and back to the atmosphere in a continuous process.
back to the atmosphere as carbon dioxide.
(The following table illustrates the working of carbon fluxes, the movement of carbon in and out of the atmosphere
However, a small portion of the carbon in
CH4 and carbon sinks -- reservoirs that take in and store more carbon, i.e., carbon sequestration, than they release.)
pasture is released not as carbon dioxide
(CO2), but as methane (CH4) which arises
can planting trees in small areas, and along riparian margins, be counted
when feed is digested.
to offset emissions?
Methane is a greenhouse gas that has
Trees can only be counted towards the offsetting of emissions, under Kyoto, if they are in an area of greater than one
over 20 times the heat trapping ability
CH4 CH4 hectare, which is at least 30 metres wide, and were planted after 1990.
of carbon dioxide. Therefore the carbon
balance of the dairy farm system may be
neutral but the problem is that the dairy
cow changes a small proportion of carbon
into something that has a greater impact
Carbon fluxes and Sinks/ha in a grazed pasture
on the atmosphere – leaving the total
0 tonnes c/annum 0 tonnes c/annum
dairy system in the red. Typically 5-8% of energy in food is lost as enteric methane.
from atmosphere from atmosphere
what about the carbon
stored in my soil?
Soils store large amounts of carbon. However, since the Kyoto Protocol compares everything back to a base year Gross photosynthesis Plant respiration
(1990), the issue for New Zealand is whether the amount of carbon stored under pastoral soils is higher or lower than
the base year. If we have increases in soil carbon, then we are effectively removing it from the atmosphere and we will
get credit for it. But if soil carbon declines, we are effectively releasing it back into the atmosphere and will therefore
incur a liability. net photosynthesis
There is a lot of uncertainty in this country as to whether pastoral soils are gaining or losing carbon. We’re working tonnes c/annum
under the assumption that pastoral soils are not doing either and have opted not to account for carbon changes under 10 tonnes C to atmosphere
soil as part of our Kyoto commitment.
So New Zealand won’t gain any credit for increases in pastoral soil carbon, but we also won’t incur liabilities associated
with decreases. Research is continuing to improve our understanding of soil carbon dynamics, which includes Plant shoots Plant senescence
investigating the potential for a new product, bio-char, to boost the quantity of carbon stored in pastoral soils. & roots
5 tonnes C 5 tonnes C
why doesn’t the carbon absorbed by pasture plants on dairy farms count
as part of the farm emissions balance?
Plants absorb carbon dioxide from the atmosphere during photosynthesis -- capturing carbon and energy in plant
material. However, half the carbon absorbed is released back into the atmosphere through plant respiration. A further Fonterra has been encouraging the Government to retain the flexibility to recognise riparian planting for its carbon-
quarter of the carbon absorbed is released back to the atmosphere via the decomposition of plant and root material. absorbing benefits. The first Kyoto commitment period (2008-2012) is underway, but there is an opportunity for New
Zealand to negotiate for riparian plantings to be included after this.
what is Fonterra doing to support its shareholders in this area?
Fonterra is maintaining a close dialogue with the Government as policy is developed. We are committed to working
together so that any government policy is practical, cost effective and well designed for both our farmers and New
Zealand as a whole.
We will continue to keep you, as shareholders, informed about the climate change debate, ways of reducing
greenhouse gas emissions and policy decisions as they arise, through articles in Farmlink and on Fencepost, and
through contact with shareholders at conferences and other events.
For more information contact.
Fonterra co-operative Group Limited Ph 0 000
Private Bag 0, auckland Fax 0 00
Fonterra centre, Princes street
auckland, new Zealand www.fonterra.com
This booklet is printed using
vegetable inks on FSC mixed
source certified recycled paper.
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