The state owned coal miner, Solid Energy, would be entitled to a subsidy on the cost of emissions from its proposed lignite to urea plant worth tens of millions of dollars a year.

Planned changes to the Emissions Trading Scheme (ETS) expand the subsidy regime to now include emissions from new carbon intensive operations. The ETS would no longer protect just existing smokestack industries – it would also underwrite major new polluters.

If the proposed plant to manufacture urea fertiliser from coal goes ahead, it would become the nation’s biggest single industrial emitter of greenhouse gases after the coal-fired Huntly power station – far exceeding the Glenbrook steel mill and the Bluff aluminium smelter.

Solid Energy would qualify for subsidies that could be worth between about $500 million and $1 billion in nominal terms over the first twenty years of the plant’s life if it processed the full two million tonnes of lignite a year that the company’s plans allow for. The value of the subsidy would depend on what level of assistance the plant qualified for, the price of carbon, and the specific design of the plant. Although the rate of subsidy falls at 1.3% a year from its starting point, the total annual cost could easily rise over time if carbon prices rise, and the subsidies continue over an 80-year fade out period.

This is just the subsidy to the plant: the subsidy on urea, from all sources, will also be tens of millions of dollars a year – but this will go to farmers. The fertiliser releases nitrous oxide – a greenhouse gas with over 300 times the power of carbon dioxide as a global warming agent. As the fertiliser is an agricultural emission, there would be no charge under the ETS until 2015. Even then, close to 90% of the emissions would be exempt – a rate that similarly falls at 1.3% a year.

A further environmental impact is from nitrates produced by urea that run off the land and into fresh water systems, fouling these and causing eutrophication of lakes as a result of weed growth. Regulation of this pollution is equally ineffectual and taxpayers are increasingly being called on to fund cleanups. The Government has already promised to fund the bulk of an $82 million plan to reduce damage to the Waikato catchment, and to meet about half the estimated $144 million cost of a Rotorua lakes cleanup.

A third important environmental impact is on the ozone layer. While global efforts to cut the use of CFC’s (chlorofluorocarbons) have been quite successful, nitrous oxide emissions have risen such that it is now the most important ozone-depleting gas. Scientists are concerned that these rising emissions could prevent recovery of the ozone layer.

For all this environmental damage, urea is no more than a discretionary farming input. There are other means of boosting nitrogen levels that do not harm the environment. This is evidenced by organic dairy farmers who use no urea and receive $1/kg more in their milkfat payout from Fonterra.

As a result of recent intensification of dairy production, about 70% of urea sales now go to dairy farms. Additional urea boosts farmer profits but communities end up paying the costs that go with this – through financial subsidies and degradation of the environment.

If the full costs of the environmental damage were met by those who make or use the fertiliser, much less of it would be applied and New Zealand could probably return to relying on the existing plant in Taranaki that supplied all the nation’s urea needs up until the early part of this decade.

Ushering in a new plant with a huge carbon footprint, to make a product that delivers a triple hit on the environment, would be a backwards step for the country in strategic terms. The future belongs to low-carbon farmers who will not be caught by moves afoot to tax the carbon content of goods as they cross foreign borders.

New Zealand’s potential is to become a producer of fully sustainable high value premium foods to the world. Pastoral farmers have the opportunity to use simple and cost-effective techniques to become the nation’s leading source of greenhouse gas abatement. At the same time, they could use this position to help secure a premium producer position that added value to their output.

New Zealand is already 22% above its Kyoto target and expanding the ETS to subsidise emissions from operations that do not yet exist simply digs a deeper hole for New Zealand to extract itself from when carbon budgets begin to bite.