Who will pay for GHG emissions reductions in Australia’s drinking milk market?

As key players in the food supply chain set targets for reducing greenhouse gas (GHG) emissions, Australia’s dairy sector is grappling with how to best transition to lower-emissions production, and how the cost will be borne, Rabobank says in newly-released research.

The report, Who pays for GHG emissions reductions in Australian drinking milk markets?, by the agribusiness banking specialist’s RaboResearch division, says addressing “enteric” (digestive tract) methane production in dairy cattle – particularly through the use of feed additives – has the greatest potential to deliver emissions reductions for the sector. And this will likely come at a cost.

However, the report says, the good news is this additional cost is relatively low for Australia’s drinking milk sector – estimated to total $35.1 million annually, or less than two per cent (2.5 cents per litre) of the retail value of milk. And it could potentially be spread across dairy sector stakeholders – including farmers, processors, retailers and consumers.

While emissions reduced for the sector could be as much as 226,000 tonnes of CO2 annually, or the equivalent of taking approximately 103,000 cars off the road.

Report author, RaboResearch sustainability analyst Anna Drake says the issue of who pays within the value chain, though, will need to be determined before the dairy sector can begin implementing effective emissions reduction practices.

“While progress has been made within the Australian dairy industry on engagement around emissions, the economic realities of putting the most impactful emissions-reduction technologies into practice are yet to be fully addressed,” she says. “With the current lack of market signals to incentivise on-farm reductions, there is an uncertain path towards the best way for the dairy industry to move to a lower-emissions footprint,” she said.

But the relatively low net cost of technologies, like methane-reducing feed additives, indicates this cost burden is not necessarily insurmountable, she said.

Targets

The report says major companies in the dairy supply chain – including retailers and processors – have committed to reducing their GHG emissions by setting targets for both their operational (Scope 1 and 2) emissions, as well as their indirect value-chain (Scope 3) emissions, which are primarily from farm production.

“This is part of a global trend of large dairy companies taking a more comprehensive approach to disclosing and managing emissions associated with their business activities, as part of their broader sustainability strategies,” Ms Drake said.

“In Australia, both major supermarkets have set themselves emissions reductions targets that require them to address the agriculture-related emissions in their value chains. While Dairy Australia, the national industry body, has also set an industry-wide target of reducing GHG emissions intensity by 30 per cent (on the 2015 level) by 2030.”

Dairy footprint

Dairy farm emissions account for approximately three per cent of Australia’s overall national GHG emissions, the report says.

And with 30 per cent of Australian milk production entering the domestic drinking milk market – the Scope 3 emissions reduction targets of local retailers cover a substantial share of dairy production, it says.

“To date, when it comes to GHG emissions, efforts by commercial players within the dairy industry have so far focussed on measurement, reporting and target setting. Research into new technologies and innovations to reduce emissions is also underway, but has typically focused on technical feasibility, rather than economic viability,” Ms Drake said.

Mitigation options

Options for reducing GHG emissions in dairy production can be broadly grouped into two categories – management based and technology/innovation, the report says.

“Management-based options focus on maximising productivity through best practice approaches that can incrementally reduce emissions, particularly on an emissions-intensity basis, meaning fewer emissions per litre of milk produced,” Ms Drake said.

“Even without an explicit focus on emissions, the GHG footprint of dairy farming can benefit from ongoing gains made in productivity through technology improvements and industry research and development. However, in developed countries, these gains tend to level off over time, with further gains becoming increasingly marginal and challenging to achieve.”

In terms of technology and innovation options – which rely on research and development – extensive work is being done to develop viable methods for inhibiting methane production in the rumen of livestock, the report says.

Feed additives

Methane-reducing feed additives are widely considered an important piece of the emissions-reduction puzzle for livestock, Ms Drake said.

“Looking specifically at the feed additive 3-NOP, on the basis of its proven effectiveness and safety, it has been found in independent studies to reduce methane emissions from dairy cattle by around 30 per cent on average without negatively affecting milk production,” she said.

Introducing this additive into dairy productions systems would come at a net cost, the report said, based on current market signals in Australia, in the absence of financial incentives and productivity gains.

“Assuming any technical barriers can be addressed, if 3-NOP were to be used across the full 1.4 billion litres of milk sold annually in Australian supermarkets, the estimated cost would be $35.1 million a year,” Ms Drake said.

Although consumer willingness to pay more for products for their sustainability credentials is generally considered low when it comes to actual purchasing decisions, with the relatively-small premium this cost would represent – less than two per cent on private label milk in the case of 3-NOP – the prospect of passing it on to the consumers could be more feasible, she said.

Where to from here?

Implementing multiple mitigation options – to tackle the different sources of farm emissions – is set to be important in delivering maximum emission reductions for the dairy sector, Ms Drake says.

“Recognising that costs are likely to be faced in order to achieve emission reduction targets raises questions about who pays,” she said. “Discussions within the supply chain about how potential costs might be distributed are still in their early stages.

“The strategy that emerges is unlikely to neatly fall into one bucket. Multiple stakeholders beyond the farmgate have an interest in reducing on-farm emissions from dairy production – including industry, government, processors, retailers and financial institutions.”

“The development potential of cost-sharing models across value-chain stakeholders is yet to be properly explored,” Ms Drake said. “Collaboration looks to play an important role in enabling the resources required to solve the problem of emissions be divided rather than duplicated.”

RaboResearch Disclaimer: Please refer to Australian RaboResearch disclaimer here.

Rabobank Australia & New Zealand Group is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 125 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 37 countries, servicing the needs of approximately 8.4 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 90 branches throughout Australia and New Zealand.