Carbon Pricing: making it work for Manitoba farmers

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1 Carbon Pricing: making it work for Manitoba farmers Summary To address climate change, the Canadian government is putting a price on carbon. The provinces will play a major role too. A badly designed carbon price could do little more than increase costs for farmers. On the other hand, a well-designed carbon price could help farmers be part of the solution in a way that saves them money and even generates new revenue. What do you need to make carbon pricing work for your farm? To help you answer this question, this page describes what we ve heard from farmers beyond Manitoba who already deal with a carbon price. We want to hear from farmers. Please have a look at this page, take our survey, and feel free to get in touch with Sean Goertzen, KAP s climate project coordinator: Cell: Office: sean.goertzen@kap.mb.ca This information below was presented in a webinar for farmers on October 4, You can also download the slideshow summarizing these points. Climate Change People have wide-ranging opinions on climate change. But it s important to understand that this is the problem governments are trying to solve with carbon pricing. Research over the past 30 years has found that the global climate is changing, and it s expected to change substantially over the next several decades and beyond. This will impact people around the world in many ways. On the Prairies, farmers will likely get longer growing seasons, but will also face more floods, droughts, extreme heat, extreme weather, and more precipitation. Research shows that greenhouse gas emissions from human activity are causing these changes to the climate. To reduce these emissions and slow climate change, some governments are putting a price on carbon. Why This Matters to Manitoba Farmers Adapting to climate change will be a major challenge for agriculture over the next several decades.

2 But we understand that people have wide-ranging opinions on climate change. We could debate these opinions all day. Instead, for this discussion, let s focus on a political certainty: o The federal government is putting a nation-wide price on carbon. o And they want each province to design their own system to get to this national price. The Manitoba PC government has committed to developing a made-in-manitoba carbon pricing system. So we know it s going to happen. But there are still many design options on the table. o A poorly designed carbon price could do little more than increase costs for farmers. Or it could leave out farmers completely, bringing them no costs or benefits. o However, a well-designed carbon price could help farmers be part of the solution and generate new revenue while doing it. This page aims to provide the information you need to understand the options and have your say. o This will help KAP advocate for a carbon price that works for farmers. Emissions To understand how carbon pricing works, first we need to look at where emissions come from. Agriculture accounts for about 40% of Manitoba s greenhouse gas emissions. o Per acre and per animal, our emissions are similar to ag in other provinces. But we have fewer high-emitting industries and power plants. This makes ag a larger share of our total emissions compared to other provinces. Over a third of our ag emissions are from crop production: o Mostly from nitrogen fertilizers which release nitrous oxide into the air. A similar portion, over a third, is from livestock: o Most of this is the methane emitted from enteric fermentation (burps and farts); and o Some from manure storage which also emits methane. The remaining quarter is from fuel use in both crop and livestock production. o This includes fuel used to heat barns, operate machinery, and ship crops and livestock to market. Sequestration

3 Crop and pasture lands also sequester carbon and nitrogen in the plants and soil which prevents emissions. Certain practices can increase sequestration. o Zero tillage and rotational grazing are two examples. So in some ways, agriculture is already part of the solution to climate change, and there is the potential to do much more. And carbon pricing could help pay for these solutions. Carbon Pricing: How It Works Carbon pricing is a tool to fight climate change. A carbon price is any system where government requires people or businesses to pay for the greenhouse gases they emit. o ( Carbon is often used as shorthand for greenhouse gases because carbon dioxide is a common greenhouse gas.) This gives people and businesses a greater incentive to reduce their emissions. Rather than government micromanaging, a carbon price lets people and businesses decide how and where to reduce emissions. Supporters of carbon pricing hope that over time, along with other tools and efforts around the world, a carbon price can help us reduce emissions enough to avoid the worst effects of climate change. It s important to understand that this is why the federal government is putting a price on carbon. Risks Carbon pricing comes with risks and opportunities for farmers. We don t yet know what Manitoba s carbon price will look like, so these are just possibilities. Manitoba s carbon price could cover parts of the agricultural supply chain. This could include: o Nitrogen fertilizer manufacturing o Fuels used to heat buildings, operate machinery, and ship crops and livestock. The impact on farmers depends on: o Which inputs the carbon price covers; o How high the carbon price is set;

4 o How much other businesses in the supply chain pass the cost along to farmers (farms that export are global price takers); Opportunities The impact to farmers also depends on: o What opportunities farmers (and others in the supply chain) have to reduce emissions in order to avoid the carbon price; and o What options farmers have to get paid to sequester carbon. Farms that are doing these things are also helping to slow climate change and protect the environment; o And they can strengthen social license by telling consumers how they re protecting the environment. A well-designed carbon price allows farmers to keep costs manageable, increase revenue, and be part of the solution. At this point, we don t know how Manitoba s carbon price will affect farms. Lots of options are on the table and consultations are just starting. So let s see how these risks and opportunities have played out for farmers that already deal with a price on carbon. BC Carbon Tax: How It works There are several ways to put a price on carbon. Cap-and-trade and a carbon tax are the most common forms. BC introduced a carbon tax in 2008 at $10 per tonne of emissions. They raised it gradually to $30 per tonne where it has stayed since It s applied to fuels, including: Gasoline Diesel (light fuel oil) Propane Natural gas 6.67 cents per litre 7.67 cents per litre 4.62 cents per litre 5.70 cents per cubic metre o Each fuel is taxed at the same rate per tonne of emissions: $30. But some fuels pollute more than others, so per litre, the tax rate works out differently for each fuel, as shown above. Carbon taxes tend to be simple. BC collects it the same way as the regular gas tax: o Fuel wholesalers pay the carbon tax to government. They pass this cost on to retailers, who pass it on to consumers and businesses, who see it on their receipt at the pump.

5 BC Carbon Tax: Revenue Neutral BC made its carbon tax revenue-neutral by law: the government must recycle all of the revenue they get from the carbon tax into cutting other taxes. BC has: Cut personal income tax: first two rates by 5% each o Created a new low-income tax credit Cut corporate income tax: from 12% to 11% Cut small business income tax: from 4.5% to 2.5% o Raised the threshold from $400,000 to $500,000 Cut school tax on farmland by half BC Carbon Tax: Farmers Experiences From 2008 to 2014: o Farms with higher energy use were hit harder, including: Greenhouse growers Certain other sectors such as small cow-calf operations o The cost increase was reportedly small for most other farms. At $30 per tonne of emissions, and only covering fuel, regular market volatility has a much bigger impact on most farmers costs than the carbon tax. Starting in 2014, BC introduced a: o Rebate of up to $200 per year for the carbon tax paid on personal vehicle fuel for northern and rural homeowners; an o 80% rebate for greenhouse growers; and a o Full exemption for farm gas and diesel. One of the lessons we can take from BC is that revenue-neutrality (cutting other taxes) is an appealing option to many. But keep in mind that these tax cuts don t target the sectors that are affected most. o And, although exemptions were eventually granted, it took 6 years to get them. And there s no guarantee they will stay. o Later we ll look at other ways to use the revenue raised by a carbon price.

6 Also, when we re drawing lessons from BC s experience, we must remember that agriculture is a smaller part of BC s economy than in Manitoba. Alberta s Performance Standard Since 2007, Alberta has priced carbon using a performance standard. In some ways, it is a mix between a carbon tax and cap-and-trade. It covers power plants and many industrial sectors, including fertilizer manufacturing. Each facility must reduce their emissions a certain amount. For every tonne of emissions they fall short of this target, they must pay the carbon price. They have three options for paying the carbon price: 1. Buy credits from other facilities that have beat their target; 2. Pay into the tech fund, which develops new technologies to reduce emissions; or 3. Buy offset credits from sectors not covered by the carbon price, including farms. Alberta s Offset Market: How It Works Farmers can earn offset credits by taking on projects that reduce emissions. They can sell these credits to facilities that have to pay the carbon price (the third option listed in the previous section). Zero tillage has been used the most. Other project types include managing fertilizer, manure, grazing, feed, biomass, and more. Offset projects must follow strict rules to ensure they achieve real reductions in emissions. Additionality is one of the key rules: farmers must prove they re taking actions that are above the normal course of business. Farmers work with project developer companies that help farmers carry out the projects and bundle many credits together to sell. Until 2012, farmers could apply for early action credits for emissions they reduced prior to the carbon price starting. Alberta Offsets: Farmers Experiences Many farmers applied for the early action credits, but participation in new offset projects has been lower to date. Offsets present farmers with a way to protect the environment and bring in new revenue. But the offset project rules tend to be strict and complex, creating high costs. Some farmers have also said that project developers take a large share of the revenue. This could be due to it being a young market that doesn t yet have a lot of firms competing.

7 Many offset markets face similar challenges. However, there are changes coming to Alberta s system that could raise the price of offsets and make them more attractive for farmers. Alberta s New Carbon Tax So Alberta is making a bunch of changes; the biggest one is a new carbon tax coming in o Just like BC s carbon tax, it will rise to $30 per tonne (by 2018) and will apply to fossil fuels. o Farm gas and diesel will be exempt from the carbon tax, but natural gas and propane will not be exempt. Cap and Trade So we ve looked at a carbon tax and a hybrid system. Now let s look at cap and trade. Let s look at how cap and trade works: o Government sets a cap on the total emissions. o Businesses must buy allowances to cover their emissions. o Businesses with high emissions can buy extra allowances from businesses that reduced their emissions and have more allowances than they need. (This is the trade.) o So businesses that can reduce emissions for the lowest cost do the heavy lifting, and they re rewarding by selling their extra allowances. This is the advantage of cap and trade. But overall, carbon taxes, cap and trade, and hybrids are just different ways to put a price on carbon and achieve the same result. o Offset markets are more common with cap and trade, but it s possible to use them with a carbon tax as well. Cap and Trade: Where It s Used The European Union has had cap and trade since California started in 2012, Quebec the year after, and Ontario is starting in The California and Quebec systems cover power plants, industry, and fuel distributors. o Just like BC s carbon tax, the covered sectors pass costs along to farmers.

8 o At about $16 per tonne of emissions, most farms likely haven t felt much impact. But this price is set to rise over time. These systems also include an offset market, similar to Alberta s. California and Quebec have a single linked market for trading allowances and offset credits. For example, a farm in Quebec can sell offset credits to a power plant in California. Ontario s system will cover the same sectors and will join the linked market next year. Revenue Recycling Revenue recycling refers to how government uses the money raised by the carbon price. We looked at BC which puts it all into cutting other taxes. Other places, including California, Quebec, and Ontario, recycle the revenue into further efforts to reduce emissions. For example, Ontario plans to help food processors adopt new technology, help farmers retrofit grain dryers, research carbon sequestration on farms, and protect soil health. Recycling the revenue in this way can help farmers reduce emissions and avoid the carbon price altogether. Manitoba Coal Tax and Ban Manitoba does not yet have a broad carbon price, but it does have a narrow one. In 2012, Manitoba introduced a tax on coal used by power plants and industry. In 2014, the province also banned coal for space and water heating. (A ban is not a carbon price, but it s relevant.) The province used the money raised from the coal tax to offer grants for 50% of the cost, up to $50,000, to help expand biomass production and use. Some farms participated; many switched to natural gas which had recently dropped in price. So we ve already dealt with a carbon price in Manitoba. We can learn from this experience to make the new system work for farmers. Government Plans The federal government wants to set a minimum nation-wide price, starting at $10 per tonne in 2018, ramping up to $50 by o They want the provinces design their own systems to get to this price.

9 o Provinces that already have carbon pricing will get to keep their systems, with some adjustments. Here in Manitoba, our premier has ruled out cap and trade, so we re looking at either a carbon tax or a hybrid system. o The province has also committed to bringing in ALUS (Alternative Land Use Services), and there s potential for ALUS to work together with the carbon price to help farmers reduce emissions. So, there are still lots of options on the table. Let s talk about how Manitoba s carbon price could bring farmers in as part of the solution in a way that works well for their business. Have Your Say: Take Our Survey We want to hear from farmers. Please take our survey and feel free to get in touch with: Sean Goertzen Climate Project Coordinator Keystone Agricultural Producers Cell: Office: sean.goertzen@kap.mb.ca Page published on October 5, 2016