What does the Paris Agreement mean for Australian agriculture?
This edition of the Agribusiness Bulletin explores what is in store for Australian grains in lieu of the Special Report on Global Warming in October 2018 released by The United Nations Intergovernmental Panel on Climate Change (IPCC)
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The Paris Agreement
The United Nations Intergovernmental Panel on Climate Change (IPCC) released its Special Report on Global Warming in October 2018. The report investigated what it would take to achieve the ambitious Paris Agreement target of limiting global warming to 1.5°C and what the consequences would be if it were missed.
The report delivered a number of sobering conclusions. Chief among these was that the 1.5°C target is possible, but would require deep emissions reductions, including global emissions in 2030 to be 45% below 2010 levels and reach net zero by 2050. These drastic cuts would require "rapid, far-reaching and unprecedented changes in all aspects of society". Agribusiness would be no exception.
Therefore, to understand what a 1.5°C future would look like for Australian agriculture, Deloitte Access Economics has undertaken economic modelling of this carbon transition facing Australian agriculture in the context of the global economy.
Table 1.1 Global emissions reduction targets
Source: Deloitte based on IPCC estimates
This modelling used a global Computable General Equilibrium (CGE) model to simulate the impact of the emission reduction changes in and across 140 countries, including Australia. The model uses the GTAP 9 (2011) database, which incorporates CO2 and non-CO2 (e.g. methane) emissions by sectors and factors (land and capital) in included countries.
The assumption through which emissions reductions targets are achieved is a world price on carbon. The carbon price acts as a quantity tax on emissions generators, which would ultimately be passed on to consumers in the form of higher prices for goods and services.
Because of the stringent requirements of the Paris Agreement targets, the carbon price rises rapidly. In a modelled 1.5°C scenario the carbon price is projected to reach $127 per tonne in 2030 before climbing to $6,682 per tonne in 2050.
The emission reduction targets are also achieved through economy-wide improvements in emissions intensity, with fewer greenhouse gasses generated per unit of output. This is an assumption in the model. For the livestock sector, emissions intensity is assumed to fall by an average of 6.7% per annum, with grains reducing emissions intensity by 3.2%. These rates are considerably higher than the 1% to 1.5% averaged in the last two decades, reflecting the stringent requirements of the Paris Agreement targets.
Importantly, the modelling assumes global action on climate change. It does not factor in the impacts of inaction which is a different modelling scenario.
Brakes applied in livestock production
The chart below shows the results of modelling and highlights that, in a carbon constrained world, overall growth in Australian agricultural output is expected to slow in line with the Australian economy as a whole.
Chart 1.1 Annual growth rates, historical and projected growth rates, 1.5°C scenario
Note: historical growth rate refers to 20 years to 2017-18
Source: Deloitte Access Economics Regional General Equilibrium Model; ABARES, Agricultural commodity statistics 2018; ABS 5206 – Australian National Accounts: National Income, Expenditure and Product
The chart shows that livestock industries would be the most affected under a strict 1.5°C scenario, with growth slowing from an average of 2.5% per annum, to 0.2% per annum. This comes as no surprise – the enteric fermentation of pasture grazing is an intense source of methane emissions for the sector.
The reason for the slowing growth is that the introduction of a rapidly rising carbon tax dramatically increases the cost of production for Australia’s livestock industries on the whole. For some producers that cannot adapt practices to reduce emissions, this high carbon price would likely result in industry exits with their productive inputs being redistributed to other sectors less affected by the carbon tax.
Against the grain
In contrast to the rest of the agricultural sector (and most other industries), growth in the Australian grains industry is projected to be higher in a carbon constrained world than in recent history. Over the past 20 years, output in the grains sector has increased by 1.4% per annum. Our modelling shows the average growth rate between 2020 and 2050 at 2.4%. There are three main reasons for this.
The first is the supply response to rising global demand for low emissions sources of food. A global price on carbon causes a global shift in consumer demand away from carbon intensive goods and services. For food and agricultural products, this first means consumers substitute livestock products with more plant based goods such as those produced from grains.
Secondly, there is a shift in consumption away from emissions intensive grains (such as rice) which causes a significant increase in demand for other cereals including staples of Australian cropping — wheat, barley and oats. Global rice production is estimated to account for at least 2.5% of current global emissions1 because it generates significant quantities of methane and nitrous oxide, greenhouse gases that are respectively around 30 and 280 times as potent as carbon dioxide.2 A carbon tax would drastically increase the cost of rice production, driving demand to other cereals. For the rest of the world, this impact would be significant, as rice accounts for around 30% of global cereal production. In Australia, only 2% of cereal production is rice.
Thirdly, the world is assumed to rapidly reduce its dependence on fossil fuels by adopting electric vehicles and other technologies to meet the Paris Agreement targets. Because little rice is grown in Australia, most cropping emissions (~95%) are generated from combustion engines. Abating these emissions sources is considered easier than for non-combustion sources. The Australian cropping industry is therefore able to reduce its carbon footprint more quickly than other grain producing countries and other agricultural sectors.
As it reduces its reliance on fossil fuels with relative speed, the Australian grains industry quickly approaches net zero emissions. This, combined with a rapidly rising carbon price makes Australian grains increasingly price competitive on the global food market and this consequently drives demand higher.
Naturally, however, a drastic transition such as this will add to production costs, and production on marginal land will be squeezed. However, the strength of international demand provides the Australian grains industry with a strong incentive to increase output. Grains use of land labour and capital are projected to rise. The most significant of these is land, which becomes increasingly available as growth in livestock production slows. In 2019, grain production accounts for around 25% of land use. By 2050, this is projected to expand to around 33%.
Chart 1.2 Share of land resources utilised by Australia’s grains and livestock industries, 1.5 degree scenario
The modelling scenario suggests that Australia’s grains industry is in a strong position to capitalise on a global shift to a low carbon environment. Global demand for grains is expected to strengthen and, should Australia be able reduce its fossil fuel emission, it has the potential to increase supply of low emissions cereals. Reducing the industry’s reliance on fossil fuels must be a primary future objective.
Decarbonisation of Australia’s livestock production systems must also be a priority for our agricultural sector. Productivity growth is expected to continue to deliver significant reductions in emissions intensity. However large-scale, industry-wide changes would ultimately be required of the Australian livestock to achieve the Paris Agreement targets.
Recognising its impact and the likely consequences, Australia’s cattle and sheep industries have begun to investigate pathways to carbon neutrality.3 If it is able to successfully reduce its contribution to global warming, the opportunities for Australian livestock would be significant. Global protein demand is expected to remain strong and international competition in low emissions meat production would, at least initially, be limited.
Abating emissions in Australia’s grains and livestock industries will not be easy. Becoming carbon neutral will require rapid, far-reaching and unprecedented changes in production systems and supply chains.
Nathan Smith - Associate Director, Deloitte Access Economics
Jack Mullumby - Senior Analyst, Financial Advisory
1. Kritee, K et al, High nitrous oxide fluxes from rice indicate the need to manage water for both long- and short-term climate impacts (2018), <https://www.pnas.org/content/115/39/9720#ref-8>
2. UN IPCC, Fifth Assessment Report (2014), <https://www.ipcc.ch/report/ar5/syr/>
3. Meat & Livestock Australia Limited (2018), B.CCH.7714 – Greenhouse Gas mitigation potential of the Australian red meat production and processing sectors
Published: March 2019