Is natural capital best for nitrogen leaching limits?

Not just the quantity, but the quality of water for farming is also under scrutiny right now. Dr Dan Marsh from Waikato University’s Department of Economics has studied various systems for allocating nitrogen leaching limits to farmers, and questions whether the Natural Capital Approach, currently proposed by some regions, is the right way to go.

dr dan marsh primary magazineThe idea of farming within environmental limits has attracted a lot of attention in recent months. Some of the debate has been around the allocation and setting of nitrogen leaching limits; limits on the amount of nitrogen that can be allowed to leach from a farm or catchment into rivers or lakes.

The recent environment court decision on the Horizon’s Proposed One Plan (POP) has put the spotlight on the Natural Capital Approach (NCA) which allocates nitrogen leaching rights at a flat rate per hectare that varies with land use class (LUC).I believe we need an open debate about the pros and cons of alternative systems including the NCA approach. This debate needs to start with a clear understanding of what the allocation systems are trying to achieve and should make full use of the lessons of experience. A good place to begin to understand some of these is Tom Tietenberg’s book Emissions Trading.

The natural capital approach has some merit as a compromise between a ‘grandparenting’ approach that recognises existing activities but rewards those who currently leach the most nitrogen, and a ‘polluter-pays’ approach that would reward those who currently leach the least. The NCA approach was proposed for the Horizons region and survived a lengthy consultation process and scrutiny in the Environment Court, but should it be applied in other regions? The NCA is but one of many allocation systems – so which one is best? The answer to this question depends partly on what allocation is attempting to achieve and partly on whether nitrogen trading is allowed – as I will explain below.

I was very pleased to hear that the Court believes that a nitrogen trading scheme ‘has some merit’ and should be considered by way of a Plan Change in the future. The vital thing about trading is that it can allow nitrogen leaching to be reduced at least cost – and that has to be good for farmers and for the whole country. If the cost of trading is kept low and trading is encouraged, we can then achieve appropriate land use and the best economic outcomes for the region and for the country as a whole – no matter what allocation system is put in place.

But choosing the best allocation system is still vitally important because it will determine who wins and who loses and most importantly, whether farmers and local communities broadly support the regulatory regime or will do their level best to find a way around it. For that reason, the best allocation system may be the one that farmers and local communities think is fairest. 

The natural capital approach has some merits but there is nothing especially ‘natural’ about it. Appendix 6 of Horizons Farm Strategies for Contaminant Management report states that: “The Nitrogen (N) loss limit is defined as the amount of N lost by leaching from the soil growing a legume based pasture fixing N biological, under optimum pastoral management…, before the introduction of additional technologies...”

This strikes me as an essentially arbitrary system for allocating leaching limits and one that does not take a holistic view of sustainability. According to the OECD, “Sustainability occurs when development does not erode, but rather maintains or enhances environmental [natural], economic, social and human capital”. The trouble with the NCA approach is that it bases allocations on one aspect of natural capital while ignoring economic, social and human capital. It gives two farms on identical soils identical allocations while ignoring the fact that one might be totally undeveloped and the other might have spent millions on a dairy conversion (economic capital), and in building up human resources to run it (social and human capital). This is a much more serious problem if trading is not allowed and so businesses are stuck with their initial allocations.

As we choose between alternative allocation systems let’s make sure that we draw fully on the lessons of experience, both overseas and in New Zealand. Motu Economic and Public Policy Research have been carefully assessing the case for nutrient trading in the Lake Rotorua catchment for several years and provide an excellent resource on alternative allocation systems on their website

There is nothing especially natural about the NCA approach. It ignores past use and allocates leaching rights according to a very narrow subset of natural capital rather than being based on a broader sustainable approach to natural, economic and social capital. These shortcomings may perhaps be overlooked if stakeholders support the approach and consider it to be broadly fair. But before we look at extending the NCA approach, let’s have an open debate about the alternatives and make good use of the lessons of experience.

 This story originally appeared in Primary magazine.

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