CLAIMS an emissions trading scheme will have negligible impacts on agriculture are wildly optimistic, says MICK KEOGH

What will be the impact of Australia's emission trading scheme on agriculture?

Not much, based on the results of economic modelling the Federal Treasury released last week.

According to the Treasurer, this modelling was "the most complex, comprehensive and rigorous analysis of its kind ever undertaken in Australia".

Its conclusions were that the ETS would have a minimal impact on the economy, that either a 5 per cent or a 25 per cent cut in greenhouse emissions by 2020 would cost about the same, and that Australian industries would become more, rather than less, competitive with the ETS.

For agriculture, the modelling projected continued growth, with annual output for the livestock and grains industries virtually doubling from 2008 to 2050.

The ETS is projected to reduce output from the sheep and cattle industries by between 6 and 12 per cent compared to what it would otherwise have been, and to actually increase output from the dairy and grains industries by between 4 and 8 per cent, compared to what it would be without the ETS.

In contrast, some preliminary modelling released by the Australian Farm Institute projects the ETS will have a very significant impact on farm businesses.

The modelling suggests an ETS would immediately reduce farm cash margins by between 3 and 9 per cent in 2016 if agriculture remains a non-participant in the ETS, and by between 3 and 25 per cent if farms are required to participate in the ETS and pay for just 10 per cent of the emission permits they will require.

If agriculture was required to pay for all emission permits, livestock farm cash incomes would decline by more than 100 per cent.

How could two sets of modelling get such different results?

The answer lies in the assumptions underlying the modelling. Looking in detail at the modelling assumptions, and in particular those used in the Treasury work, it becomes clearer why the differences in results have arisen.

Firstly, our modelling assumed other nations would not have an ETS involving their agriculture sector operational before 2030.

In contrast, the Treasury modelling assumes (in two scenarios) that all nations have a comprehensive ETS in place by 2013, and in another two scenarios that all developed nations will implement an ETS in 2010, and developing nations will mostly be involved by 2020.

Time will ultimately reveal which of these assumptions is correct, but most observers would agree the chances of all developed nations having an ETS by 2010 look pretty remote at present and the chances of developing nations agreeing to implement strong restraints on their greenhouse emissions look even more remote.

A second set of assumptions under the Treasury modelling is that Australia will be able to purchase large volumes of international greenhouse credits or convert large areas of agricultural land into carbon sink forests to reduce the cost of reducing emissions.

In one scenario, almost 40 million hectares of extra forests will be grown, and modelling by ABARE indicates that the bulk of that will be on productive, high-rainfall grazing land on the western slopes of the Great Dividing Range, in NSW and southern Queensland, and the Monaro region in southern NSW.

Our modelling made no assumptions about emission mitigation arising from the conversion of high-rainfall farm land to permanent carbon sink forests, noting only that if that did occur it would constrain future agricultural output by creating new competition for land and water.

A third difference in that the Treasury modelling seems to assume that after the ETS is implemented, the average annual growth in returns from agricultural production will be 4-5 per cent, compounding for all the years from 2010 to 2050.

This is not spelled out in the Treasury report, but is referred to in the modelling of carbon sink forests carried out by ABARE for Treasury.

If this is the assumption used in the Treasury modelling, it implies that annual agricultural output growth will have to be double what is has been historically over the last 20 years, once the ETS is implemented.

In contrast, our modelling assumes historical rates of growth in Australian agriculture will be maintained until 2030, although noting that to sustain such growth with the ETS will require significant new investment in agricultural research and development.

In summary, it seems the Treasury arrives at its conclusions by making three key assumptions, namely that:

The ETS will result in agricultural output actually accelerating (even though the ETS will impose new costs on farm businesses).

Most of Australian emission reduction can be achieved through purchasing inexpensive international emission credits or converting high-rainfall farmland to forestry.

Most other nations will also have an ETS in place almost immediately.

While some might argue the Australian Farm Institute assumptions are a bit pessimistic, even the most ardent supporter of an ETS would have to agree the Treasury modelling assumptions of future agricultural growth seem to be wildly and heroically optimistic.