What does Net Zero mean for Agriculture?

The Australian agriculture sector is a significant contributor to Australian employment, income and exports, accounting for 2.5% of total Australian employment, 1.9% of national GDP and 12% of all goods and services exported in 2020.  As a sector, it accounts for 55% of Australian land use (427 million hectares, excluding timber production) and 24% of water extractions (2,746 gigalitres used by agriculture in 2019–20). 

The role played by the agricultural sector in greenhouse gas emissions is becoming better known as climate change moves into mainstream corporate planning.  Globally, agriculture (including forestry and land use change) accounts for around one quarter of total greenhouse gas emissions. In Australia, agriculture accounts for around 13% of national emissions. 

The role of agriculture in emissions is complex, and not well understood.  Firstly, around 42% of all agricultural based emissions come from methane, the vast majority of which is produced by cows and other animals which ferment plant matter in their stomachs.  Other emissions come from fertiliser (both synthetic and manure) and on farm electricity usage. 

The role of methane versus carbon dioxide is an important factor in understanding the impact of agriculture on climate change.  While methane has a high CO2 emissions equivalency, it also has a shorter lifespan. There is extensive literature around the lesser impact of bio derived methane than that released from burning fossil fuels.  In standardising CO2 equivalency, important details are lost.  On face value, there is a growing consensus that agriculture causes less damage to the environment than the numbers would suggest. 

Transition Risk and Physical Risk

There are two types of risks that companies need to understand and actively plan for – transition risk and physical risk.  There is no doubt that physical risk is coming, that 1.5°C is slipping away, and that the most likely outcome is 3.2°C by 2100 according to the UN IPCC. This is an increase from previous “stated policy” outcomes of 2.7°C by 2100.

Research undertaken by Macquarie University has shown that under a 3.0°C scenario, the implications for society are substantial.  The number of heatwaves would jump from three to seven a year and their duration would blow out from seven to 16 days. The number of days hotter than 35 degrees in Sydney, for example, would jump from an average of 3.1 to 11 each year, while in Melbourne the jump would be from 11 to 24. In Darwin, the average number of days hotter than 35 degrees would go from 11 to 265 – essentially, every day would be designated a heat stress day. 

For agriculture, climate change depends both on the level of warming and on how population, consumption, production, technological development, and land management patterns evolve.  Those that have a higher demand for food, feed, and water, more resource- intensive consumption and production, and more limited technological improvements in agriculture yields are at greater risk from water scarcity in drylands, land degradation, and food insecurity.  While developed nations will be hit first, and hardest, transitions from moderate to high risk occur for global warming between 1.8°C and 2.8°C, with high to very high risk occurring between 2.2°C and 2.8°C pathways to 2100. 

There is little doubt that the Australia agricultural sector will be impacted by changes in rainfall patterns, temperature fluctuations and impacts on supply chains due to weather change events more and more over the next 20 years.  Declines in crop yields and suitability is projected under higher temperatures, especially in tropical and semi-tropical regions.  Heat stress will reduce fruit set and speed up development of annual vegetables, resulting in yield losses, impaired product quality, and increasing food loss and waste.  For companies exposed to these revenues, now is the time for physical scenario planning.

While planning for physical change is important, it is also becoming critical to plan for transition risk.  We are entering a period of time where the agricultural sector industry should not discount the possibility of sudden policy responses by Government towards quick wins on rapid carbon reductions - those sectors impacted both by both transition risk and physical risk simultaneously will be hardest hit.  The worst case scenario for agricultural companies is a domestic policy outcome or international target that incorrectly regards the emissions impact from the agricultural sector, and imposes targets which are difficult to meet while industry is simultaneously impacted by weather events and other physical climate change outcomes.  We see the greatest risk of this outcome occurring between 2025 and 2030, as carbon targets become entrenched in domestic policy.

What are the quick wins?

The most effective way to reduce emissions in the agricultural sector is to change, where possible and cost effectively, methods of production employed and the inputs that feed production. Transition plans should consider carefully the options for:

a) Greenpower and zero emission equipment on-farm and in production facilities;

b) Operational and technical efficiency improvements to dilute emissions per unit of output, focussing on both plant, process and animal performance factors; and

c) For crops, focussing on improvements in nitrogen use efficiency; and

d) Improvements in manure handling. 

Beyond this initial window, choices between combustion and alternatively powered engines will be part of the next wave of improvement options.  Strategic watchtowers for post 2025 should also include trends in abatement costs for measures such as animal feed additives, nitrification inhibitors and controlled release fertilisers. 

Setting a Transition Plan

Effectively planning for operations post 2025, and making least regret decisions today, means clearly identifying both transitional and physical climate-related risks and opportunities over the short, medium and longer-term, and understanding their impacts on business, strategy and financial planning.  This is critical for Boards and management of companies both exposed to, and doing business with, supply chains which are facing transitional and physical risks.  In agricultural company boardrooms, there is a need for earnest, honest conversations about the risks and opportunities from climate change, with a clear understanding that neither the policy nor physical environment are static.

Scenario planning is essential.  If climate change moves more quickly, supply chains and production will be impacted. This has implications for current financing levels and arrangements, supply chain concentration and ideal customer mix. By understanding the plausible future operating environments, and mapping the impacts of these scenarios on revenues, costs and financial ratios, agricultural companies can develop clear and consensus driven approaches to short, medium- and longer-term transition strategies.

Considering your ESG priorities or transition plan? Email us and lets continue the conversation.