Why do we want to subsidise agriculture again?

It sounds to me like there is some interest in NZ sbusidising its agricultural industries again (eg here and here).

Now, people may be scratching their head even after looking at those links trying to figure out what I’m talking about here.  No-one used the word subsidise after all and NZ has strong cross-party support for free trade.

But excluding agriculture from the ETS is subsidising the industry.  Why?  New Zealand has taken on a liability based on the carbon it produces.  By not charging the carbon producers on this basis the rest of the country is effectively subsidising the agricultural industry – we are being protectionist.

The counter claim is that “other countries aren’t applying charges to their agricultural industries”.  This is the same as saying “other countries are being protectionist and as a result so should we”.

This isn’t the attitude we had in the 80’s when we wanted to lead the world in terms of free trade – why do we have that attitude now?

  • Removing subsidies in the 80s hit farmers in the short term but made us more productive, our produce more competitive and the economy stronger.

    Including agricutlure in the ETS will make us less productive, our produce less competitive and the economy weaker.

    It won’t do anything to help the environment either. The Kyoto protocol is deeply flawed so is any ETS. Having signed up to the former the government has to do something about the latter in a way that damages the economy least.

  • @Homepaddock

    “Removing subsidies in the 80s hit farmers in the short term but made us more productive, our produce more competitive and the economy stronger.

    Including agricutlure in the ETS will make us less productive, our produce less competitive and the economy weaker.”

    Removing a subsidy or adding a tax will do exactly the same thing – as a subsidy is a negative tax. So if removing a subsidy made the industry more productive so would adding a tax.

    The real reason why we wanted to remove subsidies is so the incentive to invest in agriculture was related to the actual social returns from agriculture – in that sense removing subsidies was the way to go.

    With the Kyoto Protocol we said that the nation would pay a liability based on our carbon emissions – it doesn’t matter whether this is flawed, or whether we care about the environment, it is a liability we have to pay.

    As the liability is based on carbon emissions there is now a higher social cost for New Zealand for the production of carbon. We can pay for this liability by charging carbon emitters, or by paying for it with our tax money.

    As a result, if we don’t use a tax on emitters (which is what the ETS effectively is) to pay for our carbon liability we are effectively subsidising the agricultural industry – everyone else will have to pay for a liability that agricultural production is creating.

    Ultimately, this has nothing to do about whether we like the Kyoto Protocol or not – we have agreed to pay a liability and this implies that we have committed to lowering our standard of living. We can do this the most efficient way (by charging carbon emitters) or we can go back to subsidises (by getting the tax payer to pick up the bill).

  • steve

    Its the same as having a transitional assistance of credits to emissions intensive trade exposed industries. If we didn’t sibsidise their carbon obligations those industries could leave NZ and set up elsewhere (with no obligation) causing “carbon leakage” because the emissions still occur. with assistance however those firms have incentives to bring down their emissions as well as remain in NZ.

    In terms of agriculture, the industry is central to our economy so in order to reduce our overall risk, agriculture requires a longer transition period.

    In the ’80s perhaps the transition was too quick, many farmers were hit extremely hard and this transition could have happened slower. In fact if it had we would have been able to compete on a more level playing field with the US and EU, while still providing the right incentives for farms to be more effecient, more intensive etc.

  • “Its the same as having a transitional assistance of credits to emissions intensive trade exposed industries. If we didn’t subsidise their carbon obligations those industries could leave NZ and set up elsewhere”

    This is still protectionism in the same vein. It is exactly like saying that if other countries are subsidising agricultural exports (which many were in the 80s) we should keep doing it.

    I don’t disagree that the transition in the 80s may have been too quick, and perhaps a bit too disorganised.

    BUT, the argument to keeping agriculture out of the ETS is exactly the same as the argument for keeping agricultural subsidises during the 80s – if NZ was so willing to get rid of the subsidises then why aren’t we now? There seems to be a framing issue here.

  • CPW

    You’re just assuming a “subsidy” is bad, Matt. Maybe agricultural output is so elastic that the optimal tax is zero. A flat carbon tax isn’t neccessarily the most efficient.

  • @CPW

    I never actually said that a subsidy was bad – although I suspect that is the way I would come down. My whole post was just saying that excluding agriculture from the ETS IS an effective subsidy.

    I find it weird that some of the same people saying we shouldn’t have (explict) subsidies are also saying we should exclude agriculture from the ETS – there appears to be some sort of disjoint here.

  • Tim

    Let’s not forget the ongoing environmental subsidies we provide to agriculture in the form of polluted waterways, depleted aquifers, deforested bush, etc, which don’t directly come out of the taxpayers’ hip pocket but are nonetheless paid for indirectly by all of us and by future generations, in the form of lost environmental amenity, health problems, reduced tourism dollars, etc…

    I’d love to see someone carefully work out the numbers on what the direct subsidies via ETS exemption will cost NZ taxpayers, per job saved, akin to the studies of the “voluntary export restraints” for Japanese automobile exporters into the USA in the 1980’s… the numbers were huge. They might change the political game here. C’mon, Greens.

    Since our dairy producers are highly “efficient” (the quotation marks allude to the environmental subsidies mentioned above), I suspect the number of jobs lost from full unsubsidised inclusion of agriculture in the ETS would be minimal. It would merely reduce farmer incomes from astronomical to planetary; I can’t see them all upping and leaving the farm tomorrow (except on a quick tractor run to Wellington).

  • Probably the same reason we do here in Indiana USA. At some point long ago grain was too cheap so the farmers started getting a little extra. Then came the death of the small farmer so we just keep giving money to rich farming companies. It’s dumb but that’s how we do it.

  • Tussock

    The ETS subsidy to NZ agriculture has only been roughly calculated, but the numbers floating around are on the Muldoon era scale.

    If these can be substantiated, then the protectionist backlash from Europe and the US will not be far away.

    Government policy has been spineless and shortsighted on this issue. Not only are farmers getting taxpayer dollars to cover their Kyoto costs, but other big polluters are as well.

    The contrast to US and EU farming is obvious. NZ has more dairy cattle than people, and about 10 sheep per head of population. The US has about 300m people and only 9m dairy cows.

  • steve

    @Matt Nolan
    “This is still protectionism in the same vein. It is exactly like saying that if other countries are subsidising agricultural exports (which many were in the 80s) we should keep doing it.

    I don’t disagree that the transition in the 80s may have been too quick, and perhaps a bit too disorganised.

    BUT, the argument to keeping agriculture out of the ETS is exactly the same as the argument for keeping agricultural subsidises during the 80s – if NZ was so willing to get rid of the subsidises then why aren’t we now? There seems to be a framing issue here.”

    Agreed it is protectionism. but maybe our view of transition has changed since the 80’s and a longer transition is now what is desired by society.

  • I found Government policy has been spineless and shortsighted on this issue. Not only are farmers getting taxpayer dollars to cover their Kyoto costs, but other big polluters are as well.

  • @steve

    100% agreed – society might be more willing to take on protectionism now. If this is the case then that is fine for society, I would just prefer it if they would honestly admit that it is protectionism 😉

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