By Alex Duncan*
Leaving aside labour reforms, over the last 40 years, Labour governments have created and deepened markets that have benefited the economy.
In 1986, the Lange government broke ground by creating a market for rights to commercially-caught fish. This is known as the Quota Management regime (QMS). Despite detractors, the QMS has reduced economic waste that arises from excessive fishing effort in fisheries with no fences. The QMS also provided a platform for Maori to be compensated for past ills. This was achieved through the Sealord Agreement. Maori now have a majority (and growing) stake in New Zealand fisheries.
The QMS wasn’t perfect when it was established. For example, limited knowledge of orange roughy and hoki stocks at the time resulted in over-estimations of biomass, thereby reducing fishing volumes. But the valuable stake the fishing industry now had in the QMS resulted in the sector supporting lower quotas. New Zealand remains at the forefront in using markets to assist sustainable fishing. Australia and other countries now emulate the QMS.
The Clark government in 2001 passed legislation that removed the statutory monopoly of the NZ Dairy Board for almost all dairy exports. Fonterra emerged as the owner of most of the operations of the Dairy Board. Under Labour, New Zealand’s largest export sector became subject to market competition at the farm gate. Competitors now account for more than 20% of milk collections strengthening incentives for Fonterra to continually improve its business. The co-operative responded by lifting the performance of its core ingredients business, including the ground-breaking Global Dairy Trade auction introduced in 2008. But Fonterra’s desire to invest heavily offshore ended badly. The co-operative has returned to prioritising activities that enhance the value of New Zealand milk.
New Zealand again faces another knotty problem - the vexed issue of how to tackle agriculture’s contribution to greenhouse gas emissions. This problem is also amenable to market solutions.
New Zealand is about 60% more emissions-efficient than the global average, including milk production, processing and transport. World welfare would therefore be enhanced if New Zealand produced more milk and higher-emitting dairy countries produced less. But the rest of the world won’t buy this. New Zealand too is obliged to reduce greenhouse emissions from its agricultural sectors.
So how can New Zealand lower agricultural emissions while minimising the reduction in its citizens’ welfare?
If any administration can solve this problem, past experience suggests that the current Labour Government is up to it. Unencumbered by minority parties, the Ardern government has an opportunity to again turn its hand to using markets to address this challenge.
Over the last few years, technology has enhanced the ability to measure emissions on a farm-by-farm basis. Since October, Fonterra farmers have been receiving unique Greenhouse Gas (GHG) emissions profiles for their farms. This is the first time such a tool has been introduced in New Zealand at scale. The reports provided by Fonterra disclose indicators such as the estimated level of biological methane and nitrous oxide emissions per hectare, and the amount of emissions per kilogram of milk solids.
This is a pretty good basis for establishing a benchmark for quantifying GHG emissions on farms across the whole pastoral sector. A first step would be to cap national total pastoral GHG emissions, which is made easier because dairy appears to be close to ‘peak cow’.
Farmers currently do not directly bear the cost of GHG emissions. But they could be made to do so through a surcharge on farmgate prices. Alternatively, farmers could obtain a quota for GHG emissions that they would either purchase or be given.
The same choices were faced leading up to the QMS in 1986. Some commentators at that time argued that fishers should not receive their right to catch fish for no cost. Instead they should pay a ‘tax’ on fish landed in order to reduce catch (the equivalent of a farmer incurring a GHG surcharge on farmgate prices). Regardless of the rights and wrongs, vessel operators would have fiercely resisted an initiative that resulted in a significant value loss. The QMS would never have flown.
Any attempt to do likewise for agriculture emissions risks the same fate. Farmers will be strongly motivated to delay or neuter the provisions that relate to agriculture in the Zero Carbon Act.
In contrast, farmers could receive GHG quotas for no cost that matched existing emissions for each farm, akin to the QMS. This would motivate farmers to economise their use of GHG emissions. GHG quotas could be bought or sold as their farming systems or land uses change. The resulting impetus for farmers to reduce emissions intensity would dwarf outcomes from regulations, including cumbersome input-focused ‘farm plans’ that will never fit individual circumstances.
Of course, the main goal is still to reduce GHG emissions generated by agriculture. Under a GHG tradable emissions regime the government would be a potential buyer of GHG rights, which would spread the cost of its international obligations across all citizens. Alternatively, or in addition, the allocation of GHG emissions could be reduced gradually over time, perhaps by 1% or 2% per year. This would result in farmers as well as the wider community sharing the cost.
Obviously more work and discussion is needed as the provisions of the Zero Carbon Act loom closer. A regime along the lines outlined will not be perfect. But evidence from previous innovations supports a conclusion that markets can improve as they age. And Labour could boast another market success.
Alex Duncan is a consulting economist. As Manager of the Economics Unit of the NZ Fishing Industry Board, Alex was heavily involved in the design and advocacy of what became the QMS in 1986. He was also a member of the Ministerial Review of the Fisheries Act in 1991. While a Corporate Finance Partner of Arthur Andersen, he was an advisor to the CEOs of both co-operatives that merged to establish Fonterra in 2001. He was a senior executive of Fonterra from 2002 to 2015. Early in 2007 he initiated the establishment of a dairy auction now known as GDT. He also guided the design and implementation of Fonterra’s capital structure changes that took effect in 2012.