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Dairying costs revisited

Jamie Ball at the NBR has a few responses from Mike Joy, one of the authors of the study I criticised in last week’s Insights, in the Herald, as well as here at The Sandpit.

Here’s the table from their study tabulating their main costs:

Table 3 from Foote, Joy and Death, 2015, "New Zealand Dairy Farming: Milking our environment for all its worth"

Table 3 from Foote, Joy and Death, 2015, “New Zealand Dairy Farming: Milking our environment for all its [sic] worth”

I’d noted the following issues:

  1. Removing nitrate from drinking water is a cost that may obtain sometime in future but most sites are not now in breach. While if nitrate leaching continues unabated there will be some cleanup costs in some lakes, rivers, and aquifers in future, it is a mistake to present those as present costs. Abatement mechanisms are already rolling out, including the Taupo nutrient management system, tech developments, and voluntary accords.
  2. Soil compaction should never be included as an external cost because it’s a cost to the owner of the land.
  3. GHG costs are estimated against a baseline where not only does NZ cease having dairy cows on those paddocks but also doesn’t replace them with other animals AND other countries don’t increase their milk production; this doesn’t really help us in policy assessment.
  4. Costs to the clean-green image are unreliable where we have little sense of the relevant margins – we don’t know what it would take to substantially affect that image, nor do we have any sense of whether foreigners surveyed about it would seriously change their consumption. Further, if image costs matter, mightn’t we also worry about false image costs provided by studies with inflated costings?

Joy comments (my paraphrase):

  1. The water clean-up costs aren’t based solely on drinking water; they’re based on bringing rivers and lakes up to happy-fish standards.
  2. The greenhouse gas costs could have used a net measure based on dairy over and above likely alternative pastoral uses, but it would have been a lot of work to figure that out.
  3. Accepts the argument that soil compaction shouldn’t have been included, but it is one of the things for which they had data. And somebody may have to bear that cost sometime.
  4. Papers that highlight potential future costs help save the clean green image in the long term.

I will admit error in one bit: I had read Table 3, copied above, as indicating that the costs were for bringing polluted water up to drinking water standards. The line item says “Removing nitrate from drinking water.” I suspect the table could have been better labelled.

I left the comment below at The NBR:

Perhaps Dr. Joy can help me out here on the one substantive bit he thinks I got wrong: on nitrogen cleanup.

At Table 3, Dr. Joy lists the costs of “Removing nitrate from drinking water”, based on “National water surpassing nitrate drinking water standards from dairy leaching annually” as being between $1.784 billion and $10.705 billion, with a footnote saying these are based on the average nitrate leaching rate from dairying land.

This could perhaps then be the source of confusion if the costs tallied in Table 3 actually reflect a mix of bringing some water up to potable standards, and other water up to “good enough for fish” standards.

But in that same section, he notes that the costs are not currently real because clean-up has not been started in most cases because environmental standards have not yet been breached, with note that if a future government imposes a tighter standard, it will be harder to meet that future standard. They write: “Despite this, costs may become a reality in the future if further degradation requires mitigation or if New Zealander’s [sic] decide they would like higher environmental standards.”

Whether the tallied cost is cost of bringing water up to a drinking water standard sometime in future, or of bringing rivers up to a happy-fish standard sometime in future, the costs seem far more based on breaches that may happen in future than on sites where there are current breaches – though it is not clear from the paper what proportion of costs would be for clean up of sites currently in breach and what proportion of costs would potentially be incurred in future.

I note also that it remains entirely possible that, for some streams, the appropriate benchmark cost will not be “clean up to a happy fish” standard but rather the loss in use value of a river where it is most efficiently allowed to be in breach.

I’ll elaborate a bit more on the last point. In economics, all costs are opportunity costs. Suppose that you’re in a car accident and the panel-beaters tell you it would cost $200,000 to fix your $50,000 car, you wouldn’t call that a $200,000 cost even if it would cost $200,000 to fix the damage. Sometimes, fixing the damage is not worthwhile.

Similarly, there are two ways of looking at the cost of pollution for a waterway. You could tally up the cost of remediating it to an adequate standard, or you could count the lost value that was provided by the river because nitrate levels mean there are no longer fish in it. Suppose that it would cost $200 million to remediate some stream to an adequate standard, but the stream only provided $50 million in use value in fishing, recreation, and biodiversity. Is the cost of pollution $200 million or $50 million? It’s the latter: you don’t spend $200 million to provide $50 million in value, just like you don’t spend $200,000 to fix up a $50,000 car.

Where a lot of the high end costs on nitrate seem based on potential breaches of future standards rather than current damage, we have to account for mitigation activities already in place and we have to recognise that it just might not be worth remediating each and every stream – it depends on the actual value that that stream provides.

I do think it would be good for environmental policy to think harder about nutrient management. I’m less convinced that scary big-big numbers are the way to get there. We oughtn’t confuse our monsterometers with our frog-exaggerators.

About Eric Crampton (88 Articles)
I'm Head of Research with the New Zealand Initiative.

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