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Standing Committee on Environment, Recreation and the Arts - 25/05/98 - Trading in greenhouse gas emissions

CHAIR —Thank you. We have received a submission from you and have authorised its publication. Do you wish to make any changes at this stage?

Dr Craik —No, we do not.

CHAIR —Would you like to make a brief opening statement?

Dr Craik —Yes, I would, thank you. Firstly, the National Farmers Federation welcomes this inquiry into emissions trading. For agriculture, emissions trading is potentially very significant. With the carbon sinks that agriculture can provide we could significantly reduce net emissions. Carbon sinks in agriculture have significant other potential beneficial uses for agriculture.

However the National Farmers Federation needs to understand more clearly how an emissions trading regime would actually operate. We need to ensure that there is a cost effective abatement and sink enhancement regime. It must not detract from the competitiveness of Australian agriculture.

The sorts of concerns that we have are, firstly, the effect of greenhouse on agriculture itself. Secondly, what is the coverage of the emissions that has been included in such a regime? Thirdly, with the sort of information that is available on sequestration, we would want that to be complete and robust. We would certainly want to have scientifically credible information. We would not want any system to provide perverse signals. Here we are talking about taxation considerations. We would not want people not clearing woody weeds for the wrong reasons and we would not want people to be clearing native vegetation to set up a plantation because of the trading arrangements.

Our other concerns are, firstly, that we would not want to see any carbon taxes as well. We do not want to see carbon taxes anyway. We would want to see a full cost benefit study of the regulatory impact of a scheme undertaken before it was introduced and we want industry to be a participant. We would want to see an appropriate lead time before any such regime was put in place and we would like to see a trial. We believe that property rights need to be clearly articulated before a regime is put in place, and that any such scheme must provide for small players, because, of course, we represent farmers and many of them are very small players. Our bottom line is that we have a very positive

outlook towards it, but really we need more information to come to certain conclusions. Thank you.

CHAIR —Thank you very much. You rightly say that you represent a more difficult area of this debate. I have a couple of questions to start with. We seem to have embraced the situation worldwide that there is a need to do something about greenhouse gases and the effect that they are going to have on the atmosphere and the environment. Do you accept the Kyoto Protocol that was put in place, or do you think that we are probably moving too fast in this arena?

Dr Craik —As you are probably aware, some of our constituents are somewhat sceptical about the greenhouse phenomenon, certainly the degree of effect that the greenhouse phenomenon will have on agriculture. There is certainly a fair degree of uncertainty as to what effects those might be. Our view, as a result of the Kyoto Protocol, was that the outcome was a much better outcome than it otherwise might have been, and we welcomed it. Firstly, it was a better outcome than we otherwise might have got out of Kyoto and, secondly, it did pick up the issue of land use change in agriculture. So we saw that as a very positive step, and the fact that it took up the potential of agriculture providing carbon sinks was welcomed.

However we welcomed the fact, too, that the first 12 months or so would be looking at clarifying the methodologies for looking at those carbon sinks. We certainly feel that a lot more work needs to be done in terms of looking at the whole role of vegetation, at different aspects of vegetation, at woody weeds and the role that they play in greenhouse, and there is a need to clarify all those aspects.

CHAIR —One of the major areas in this whole area of emissions trading and the Australian effect, if you could put it that way, is the area of clearing. I have seen figures that have been put forward by different groups about the areas being cleared in Australia. As a former minister in New South Wales I question some of those figures. Do you have any figures, or do you have any discussion on some of those figures that have been put forward about the amount of clearing that is taking place in Australia at the present time?

Dr Craik —You rightly put your finger on the fact that there has been a lot of controversy about the figures that have been produced. The Queensland Department of Primary Industry has done a very detailed satellite evaluation of clearing in Queensland and that has brought the estimated figures down. As I recollect, the figures proposed before were something like 600,000 hectares a year based on permit allocations alone, not actual clearing. As I understand it now, the most recent satellite figure has brought that down to about 260,000 hectares a year of actual clearing. There has been a 20 per cent drop in the last five years or so per year, a 20 per cent drop over a five-year period in the amount of clearing.

My understanding of New South Wales is that some of the figures that were

proposed were based on back-of-an-envelope calculations and the odd phone call. They became some of those accepted statements that suddenly get into the lexicon. Again, my understanding is that it is more like 20,000 to 50,000 a year—and more at the 20,000 hectares end. So, again, that is one of the areas that we have real concerns about. We want to see precise figures because there seem to have been some statements made based on pretty rubbery calculations. It is our understanding now that the technology is available through satellite.

CHAIR —So in the interests of Australia, really, we need to encourage the state departments to get those figures accurate?

Dr Craik —Most certainly we do. We are likely to have a lot more beneficial outcome to discussions on this issue of land clearing if at least all of the statistics agree as the starting point of the argument. It seems to me that a lot of the argument today has been based on the fact that none of us can really agree on what the actual statistics are, and we suggest quite different actions, depending on what those statistics might be, particularly when you look at the highest and lowest estimates.

CHAIR —You quite rightly say that some of the critical areas here are the measurements of sequestration and emissions. On the sequestration side, there is some work apparently available on the sequestration of carbon by plants—trees, in particular—that might be grown on farms. Do you have any knowledge of that work? I ask most people this to try and tease out of them whether they have read anything in particular. Have you got any information on the work that might have been done as to getting the accuracy of some of the sequestration, and over what period, and when it would be likely to start to turn around, and for how long it locks up the carbon?

Dr Craik —No, I could not give you any particularly detailed information. The places where I understand most detailed information has been investigated are through the Queensland Department of Primary Industry—I understand there are a few researchers there who have done quite a bit of work—and the CSIRO. I cannot precisely remember the names. Anwen might be able to remember the names of the people.

Ms Lovett —Dr Graham Farquhar at ANU has also done quite a lot of work in this area. He has been involved in the methodology for the land use change in the forestry sector. That is our understanding of the information today.

CHAIR —So it seems that a lot more work needs to be done worldwide probably.

Ms Lovett —Probably worldwide, but in Australia in particular, because we have a lot to gain and potentially a lot to lose if we do not make sure we get the science right in the land use change in forestry and agriculture sectors, a lot more work needs to be done. There are still a lot of uncertainties attributed to a lot of the numbers coming out.


CHAIR —In the areas of agriculture where would you see your areas of opportunity, I suppose, where you could benefit out of a trading scheme such as this?

Dr Craik —We would clearly see the areas as farmers being involved in emission credits by planting plantations. We would see that as the big area potentially for farmers. Not only would plantations have CO2 beneficial effects but also, if appropriately sited, in terms of their own production and their own productivity, there would be benefits. So we would see that as a major area but, given the relatively small nature of many of the players, it may be necessary for farmers to form cooperatives or some kind of aggregation so that the transaction cost per individual farmer did not end up being in a way counterproductive.

CHAIR —Let us say we get very enthusiastic about growing trees to sequestrate carbon. Is there a conflict there with agriculture and the land available?

Dr Craik —I think it is possible. I suspect that a lot is going to depend on the nature of the trading regime that is set up, the taxation arrangements and the benefits that individual farmers see for their own farm.

CHAIR —One issue that fascinates me quite a bit is that farming is often accused of creating emissions. Probably in some small way the machinery used in agriculture causes some of it but the one that comes to the fore is the flatulence of animals. How do we gauge how much is being produced and how, if possible, it can be reduced?

Dr Craik —I do not think individual gauges are the way to go! It seems to me that this is another area that is not beyond the wit of scientists to come up with ways of measuring. I used to work with someone who worked on dung beetles and he needed fresh cow dung for his dung beetles and he found a way to go and collect it quite efficiently.

CHAIR —Use a big broad shovel.

Dr Craik —And a large garbage bin, following cattle. I think it is possible but the question really becomes: how can you efficiently and cost effectively reduce that flatulence? My understanding is that Australian cattle have the highest rate of flatulence in the world. I suspect it is largely due to the fact that a lot of them are free range and not kept in enclosed establishments, and it is a function of diet now. Clearly, we can change diets in feedlots effectively. I do not subscribe to this suggestion that vaccinations for the Australian cattle herd is a practical proposition—or at least I remain to be convinced that it is a practical proposition or a cost effective proposition. For free-range cattle, it is not clear to me how that might be overcome in a cost effective way. But, again, I am sure if the will is there, the scientific inquiry will follow it. It is clearly an area that we need to look at more closely and there needs to be more scientific investigation into it.

Mr ROBERT BROWN —There appears to be a lot of legitimate, informed and

genuine attention given to the possibility that Australia might in the future husband native animals more extensively and effectively. Is it possible then that this concern we have just been discussing about exotic animals may encourage farmers to look at these other options as well?

Dr Craik —I suppose it is. I would not have thought at this stage that this particular issue was driving that to any particular degree. I suppose it is. I think generally there is a greater move to look at native fauna and flora in terms of Australian agriculture. I guess I would be a bit surprised, but Bob might have some more comments on that.

Mr Douglas —I would have thought—at least in part at the present time—one of the restrictions on husbandry of native animals would come from some state government legislation rather than anything to do with the greenhouse or whatever. I used to be a farmer in New South Wales and I remember that suggestions of cultivating kangaroos for meat and skin were not looked on favourably by the bureaucracy at that time. I think there may be those kinds of impediments which would have to be looked at.

Mr ROBERT BROWN —I have another unrelated question. I know that in the process of farmers working out their income and cost, and then determining what might be identified as, say, a net taxable income, there has always been a lot of conjecture about that. When we hear that the average income for farmers, say, in a drought year in a certain area was $3,500, people say, `How can anyone live on that?' Is it possible that, as a result of the very real and continuing costs that the farming community incurs—which of course must be offset against any revenue that accrues to them—the bottom line figure may encourage them during bad periods to take advantage of any credits that might be available to them as a result of developing sinks by re-forestation? In the longer term, for that and other reasons, is it possible that this particular approach to the possible sale of credits, and so on, may bring about a significant re-forestation of a lot of those denuded parts of the Australian farming environment?

Dr Craik —I think it is possible, depending on the trading regime that ultimately is established. There is no doubt that many Australian farm businesses are becoming much more diversified to take account of cycles in commodity prices and this could be another aspect of that increasing diversification. I understand though that there is some experience in New Zealand that where there has been a lot more encouragement of forestry activity on farms one of the unintended consequences has been an accelerated reduction in rural communities as larger plantations take over from other kinds of agriculture. It is hard to say whether that would occur in Australia because we are looking at different kinds of geography. If the trading regime was right, I could see the involvement of farmers in the establishment of sinks as another bow, as it were, in their diversification activities, and, again, of course, as a consequence, the contribution to revegetation.

Mr Douglas —I think that if, as a result of such a regime coming in, farmers decided that farm forestry was possible they would definitely take it on, particularly in

times when they have depressed prices. Just on a point of clarification, the published figures that you hear about farmers' income being $2,500 and $3,500 are seldom anything to do with taxable income. It is their actual cash income less their cash expenses. So it is the amount of cash that they have received and is not taxable income per se.

Mr ROBERT BROWN —Right. I would imagine that, for farmers who are use their acreage or hectares for plantation of forests, the amount of management and supervision would be less. You could then have more absentee type ownership of those traditional farming areas, and a greater evacuation of them and a bigger drift to the urban areas.

Dr Craik —I think that is possible. There is clearly an establishment time and a moderately high labour content. I imagine that is correct over time. I think that is the experience in New Zealand.

Mr Douglas —In New Zealand, I believe that plantation of forests is about the only tax advantage game left in town. As a result, there have been huge plantings of commercial forests to the stage where whole districts, I am informed, are going from agriculture to forestry and, as a result, whole communities are basically having major structural problems. Suddenly, there is no work on the farms, and abattoirs and freezing works are closing down because there is no longer any livestock coming through. So it appears that, as with anything else, if you do not get your balance right, it can have major social effects.

Mr ROBERT BROWN —Are you aware of any particular recent studies that you might be able to advise us of that deal with those particular aspects?

CHAIR —It could be false economics in the long term?

Dr Craik —It could be, yes. We could certainly look at that and provide information to the committee.

Mr Douglas —If I cannot get you a study, because it may be confidential to the New Zealand government, I would certainly be able to give you the name of the person who did it and you may be able to talk to them.

Mr BILLSON —Dr Craik, thank you for a new defence in our lack of exercise. We can say that activity leads to higher greenhouse emissions using your free-range cattle argument! I note that the creation of credits is a key focus. Could you give me a response to an alternative way of looking at plantations as a sequestration measure. It is to do with a deduction off emissions from a large emitter—that is, rather than create something you can trade on the open market, a large emitter would go and develop relationships with people making the plantations. They would then have the task of verification and of factoring that into their accounting for their emissions at the end of the day. Is that an

alternative approach that may have some appeal?

Dr Craik —I think so, particularly in terms of our constituents. I think they would not be averse to approaches from large emitters who were keen to engage them in the development of plantations where the credit actually went to the emitter, as long as there was something in it as well for the farmer.

Mr BILLSON —The thinking being that the aggregation exercise would then be a task—

Dr Craik —For the emitter.

Mr BILLSON —For the person who was the large emitter.

Dr Craik —Rather than for the farmer. Yes, I think that is quite possible. I have yet to see a farmer who is not prepared to take advantage of an offer where they could see something in it for them.

Mr BILLSON —The follow-on to that is the ownership structure. In Victoria we put in place the forestry rights framework where someone else can own the crop—the growth—separately from the land. Is that an idea you think investors would need to see in place before they entered into a relationship with a land-holder—that they had title to either the emissions credits or to the trees themselves?

Dr Craik —As I understand it, unless there is a contractual arrangement between the emitter and the land-holder, the trees are actually the land-holder's property. So that would need to be developed in the contractual arrangements, but I do not see why there could not be arrangements developed where the emitter had the contract for both the emission—the credit—and the trees themselves, if that were agreed by the land-holder.

Mr BILLSON —The statute in Victoria creates the trees as a chattel; you can transact the trees in isolation from the land.

CHAIR —The trees only belong to the land-holder on freehold property, don't they? On leasehold property they do not.

Dr Craik —I do not know.

Mr Douglas —I think it would depend on the terms of the individual lease, but I think a lot of leases—

CHAIR —I think you will find that with leasehold in New South Wales the trees belong to the state.


Dr Craik —Is that right? My understanding is that even in Queensland they belong to the land, but we would need to check that up. I guess it would depend on whatever arrangements are in place in each state.

CHAIR —I think what Bruce is getting at is that there could be a need to investigate that.

Dr Craik —Very definitely, yes.

Mr BILLSON —Particularly in Western Australia, for instance, where the wholesale acquisition of real estate was something that was resisted by the local communities where it was offshore ownership, and this is a way of getting around that. The other point is one of public investment. I am interested in your reaction to an argument that goes: if the government were more forthcoming with land care resources—Natural Heritage Trust resources—for improved land management plantation and those sorts of things, the public dividend of that sort of investment made available to land-holders through a range of schemes would be the sequestration values, and the land-holder would benefit from improved land management practices and the productivity benefits that come from that. Is that an idea that you guys have had some thoughts about?

Dr Craik —No, I cannot say that we have had any particular thoughts about it. Yes, if public money were used as opposed to private money, you are looking at a different scenario, and that would be something we would have to look at a bit more closely.

Mr BILLSON —It might be an argument for more investment of that kind.

Dr Craik —That is right.

Mr McDOUGALL —Dr Craik, you have said that permits should not be auctioned and must be available for business expansion. Why do you say that they should not be auctioned?

Dr Craik —I guess it is our view that in the initial handing out of it they should not be auctioned. We believe it would discriminate against the smaller players in the system if they were auctioned initially and we believe that, to do that in the initial round, they should be handed out according to the current level of emissions. After that the market becomes a trading market.

Mr McDOUGALL —So you would hand them out free to the existing emitters first. Then would you auction, or simply price them out for the future?

Dr Craik —I do not know that we have looked at that in particular detail.


Mr Douglas —From there on, basically the market takes over: it is whatever people negotiate between themselves as to whether they decide either to buy or to sell additional quota.

Mr McDOUGALL —I know we have discussed this a fair bit this morning, but something that bothers me—taking the electricity industry, which seems to be the big emitter, the growth one, that we can find at the moment—is how far we can take the idea of constructing sinks purely as a method of resolving the problem of them emitting. I know we have talked this morning briefly about the economic viability of that and how far that can go, but can we really go on planting sinks for ever and a day? Where are we at the end of the day? And what do we plant? Do we plant native trees that have got no commercial value? Is that a valuable sink? What have we got out of that? Or do we start planting exotics that have not normally existed in areas?

Dr Craik —Some of those are questions that we need to look at more closely. I am not sure that the information is there, in many cases, to answer the questions. The creation of sinks should not detract from the pursuit of more efficient energy production. Frankly, both of those activities go hand in hand. One of our concerns has been that, in resolving that 10 per cent gap—between the additional 18 per cent emissions that the Greenhouse Challenge will bring Australia's emissions down to and the eight per cent that was agreed to at Kyoto—agriculture by itself is not going to be expected to pick that up. There is no doubt that all industries and the whole community need to be party to this exercise to reduce emissions, if that is the track that this country is going down.

Mr McDOUGALL —One of the things that is bothering me is that obviously we are looking at how we might set up a structure and a trading regime within Australia, but anything that might be set up in the future is going to have to work hand in hand with an international regime, in order to make it work effectively. Some of the evidence that is coming out is suggesting to me that, when you end up with big international players in the game, their overall objective is going to be either to buy permits to enable them to emit their greenhouse gases or else to do trade-offs between their own organisations around the world—which may in the long term achieve their end target but not gain anything for Australia in the way of benefit in getting our targets down. How do we then structure to account for that?

Dr Craik —I do not have the answers. Again, those are the sorts of questions that need to be looked at before we leap into these things. We are positive about the possibilities in it but we have real concerns about how it is going to operate. From our perspective, we do not want to see farmers left at the end of the line in this—as they are on some other issues.

Mr McDOUGALL —The New South Wales government, I think it was, suggested that we should be waiting to about 2005 before we get ourselves going.


CHAIR —That was Victoria.

Mr McDOUGALL —Sorry, it was Victoria that suggested we should wait. Obviously, the energy industry thinks we should start tomorrow. Where are we going to get this information from to put all this together?

Dr Craik —We do not think it should start tomorrow, because we think the information in relation to agriculture is seriously deficient. However, we do think that more funding for DPIE, CSIRO, ANU and the Bureau of Resource Sciences would help. Those organisations ought to be looking at the sorts of information that we need. As that information comes to light, we need to be made aware of it. We feel that right now, even though we have a positive view of the thing, we are not really in a position to make a decision such that we can go back to our constituents and say, `This is how it is going to operate. What do you think?'

Mr McDOUGALL —When would you be in that position, do you think?

Dr Craik —We need some information on some of the issues that we have raised already. What are their property rights going to be? What precisely is involved in terms of crops and sequestration? What is the trading regime? What is the tax regime? What gases are involved? All those things are issues that we would like to have much more information on. The error bars on some of that information are probably much narrower than they are at the moment.

CHAIR —Couldn't this be dynamic, though? Couldn't we set up a process? The generation industry has grown and it is relatively easily monitored at the present time, and that could be the start of an emissions trading scheme. Then, as we get knowledge of the other areas, we could bring them into it. There is not just your industry: there are others as well.

Dr Craik —It is quite possible that it could be a gradual thing and something that evolves. I suspect that is probably both desirable and necessary, frankly. If we wait until we have perfect information on a lot of these issues, we will never start. That is quite likely but, with whatever we have to start with, a trial of it before we actually get going would be very valuable and would bring out a lot of issues that would need to be resolved down the track. We would want to be clear that, with whatever was started, agriculture did not again end up in some way disadvantaged by a scheme that started off as a reciprocal thing.

Mr MOSSFIELD —I have a couple of questions about the role of governments in emission regulations. You say in your submissions that costs could be better contained with less government regulation of the emission trading system.

Dr Craik —Yes.

Mr MOSSFIELD —In a market based emission trading system, what do you see as the role of governments? Do you see the trading system being administered by the state or by national government? Do you see any role for local government?

Dr Craik —Good question. Do you have any thoughts on that, Bob?

Mr Douglas —To start with, the first role of government is actually to define what the rights are, to set up property rights in those tradeable units—be they water, CO2 or whatever—and to set out the rights that go with owning one of those units, and the sanctions if you do not do the appropriate thing by what the government has set up. But the actual trading of the units themselves can probably be well left to the market, as long as an efficient market is developed. On the other hand, if it is going to be a fairly thinly traded market, there may be a role for government in providing information or setting up some form of formal exchange.

The other role for government is, of course, continued monitoring. As time goes by there will undoubtedly be a need to adjust any form of trade or quota up or down because not every greenhouse gas emission—in this case—will be caught within the scope of the emission quotas. There will be all kinds of things. For example, the gas fires of Canberra on a cold morning will presumably not be caught up in an individual quota, although the AGL may have a quota. So you would expect that there would be continued monitoring and finetuning of the policy to make sure that it worked.

Mr MOSSFIELD —Do you see local government involved at all in the monitoring or regulation?

Dr Craik —They could be involved in monitoring, I would have thought, quite effectively.

Mr BILLSON —In terms of herds of various species, if under the initial arrangements a permit were allocated to the peak commodity body for a herd of 200,000 head of X, that would be fine, unless the herd significantly increased or decreased in size. Would it be unreasonable to ask the peak commodity body to get the extra emissions credits, or is that something on which you would go back to the main players in that sector? I am interested to see how you would work that sort of idea through.

Dr Craik —Yes. We were discussing this morning the issue of whether the agricultural bodies could take a role in this. I do not think NFF itself would, because we are not set up that way, but the commodity councils might do it. It is something we would need to talk to them about. Or some of the more commercial structures within our federation might do that.

I think it is an interesting issue that we are going to have to sound our members out on. It may be more appropriate at state levels, just because they are closer directly to

the action, or the state commodity councils. That might be the way to go. I think that is something we need to look at to see how that might work. It is not out of the question, but I think it is something we would need to look at.

Mr BILLSON —There has been an attempt to explore a similar type of idea with the motor vehicle. Does every car have to have a Kyoto compliant sticker on its windscreen or you get pulled over by the gas police? These sorts of things were in our minds.

The thing I would be interested in your thoughts on is how we equalise the trading environment for annexure 1 countries versus non-annexure 1 countries. Does aluminium that comes in from Malaysia need to have a greenhouse gas credit permit stuck on it when it enters a climate change compliant country or what? Given your interest in this area and other fronts, I would be interested to know what your thoughts are on that.

Dr Craik —We have not actually discussed that particularly in the NFF, I would have to say. It is not something that we have given a lot of thought to at this stage. I do not know. We have not really considered that one at all, I would have to say, not in an NFF sense.

CHAIR —Thank you very much for giving evidence. It is very valuable evidence to this inquiry, and we may well come back to you for clarification from time to time, if you do not mind.

Dr Craik —I would be more than happy to.


[9.43 a.m.]