How climate change policy helps farmers
Drought is ravaging the land. Large swaths of eastern Australia are experiencing some of the worst seasons on record. Frosts have wiped out large areas of crops in Western Australia, southern New South Wales and Victoria. Hail has beaten crops into the ground in Queensland.
The government is scrambling to be seen to be doing something meaningful for farmers, particularly in Queensland where traditional National voters are looking to desert in favour of minor parties, such as One Nation and Katter’s Australian Party. In some coastal seats in the state, Labor is also doing well. Hence the scene is set for the champion of the short-term, former agriculture minister Barnaby Joyce, to weave his web of utterances that join the drought, energy and climate scepticism into an electoral defence.
At the same time, the climate change debate proceeds at a crawl without any meaningful policy regarding the risk of increased drought and other weather events. This week a report, released by the Intergovernmental Panel on Climate Change (IPCC), declared that in order to keep warming within a relatively safe 1.5 degrees Celsius, global emissions will need to be cut by 45 per cent by 2030. Coal power will need to be phased out by 2050. The world has just 12 years, according to the IPCC, to avoid a climate change catastrophe. The deputy prime minister, Michael McCormack, rejected the IPCC’s call for transition from coal, saying “some sort of report” won’t stop Australia using up its coal resources. Renewable energy, and the opportunities it offers regional Australia, is still being used as a political pawn.
On drought, a policy vacuum has stretched out since the Abbott government. Relief arrangements are ad hoc, and the biggest losers in terms of impact have been the farmers and dependent regional communities. When they were the nation’s leaders, both Tony Abbott and Joyce refused to mention drought and climate change in the same sentence. In fact, they saw climate change as a derogatory term that should be used only to belt the Labor Party and conjure in people’s minds Julia Gillard’s “great big tax on everything”.
But gripped once more by devastating drought, we face a question: Do we just rerun the adhocery, or develop a more business-like strategy that embraces the human-induced costs of climate change, stewardship of the land and a strategy that also flows through to local communities? In other words, we can wake up to what’s really happening, or we can follow the lemming-like behaviour of Joyce and his ilk.
The difference in this drought is that many farmers have finally realised they will be some of the main victims of climate change in Australia. Scientists agree. Last year, the Moree Plains Shire Council area, the richest agriculture production local government area in Australia, experienced 55 consecutive days where the maximum temperature was above 35 degrees. Crops can’t survive those conditions.
Those who work on the land also now see the opportunities, in a policy sense, that open up for them if their leadership recognises climate change – from climate change mitigation technologies to renewable energy. Moving from denial to acceptance could be the door to the future.
So, what can the government actually do to have a meaningful impact on farmers trying to outlast the drought? From a farmer’s perspective, a drought is a severe income deficit triggered by an exceptional weather event. It is not a dry spell. It is a prolonged period of having real costs to bear in the face of no or greatly reduced income. The reality of climate change is that droughts will occur more often, as well as other extreme weather events or “natural disasters”. Even the most agnostic farmer would agree that we must attempt to address the risks involved.
In my view, the most practical assistance the government could offer farmers would be to play a leadership role in reducing the cost of multi-peril insurance (MPI). This is, in its rawest sense, a form of income protection for farmers when natural disasters occur – one not dissimilar to income protection on a home loan, where the risk of personal income catastrophe is covered by an insurance premium.
In the farmer’s case, there are many variations on the theme, but the intent is to have the farmer in a position where financially they are able to absorb the “disaster” and fund the next year’s operation without severely jeopardising their equity position. Essentially, to tread water during a catastrophe so they can swim when conditions return to normal.
The concept of MPI is not new. It exists internationally, in some form or another, in about 20 countries. In the United States, the federal government plays a significant role in a financial and regulatory sense.
Briefly mentioned in the Abbott government’s 2015 Agricultural Competitiveness White Paper – as if the mere mention was sufficient to tick the box – meaningful policy development around MPI and drought policy generally has since stalled. At the time, it was perceived as expensive and Abbott was not of a mind to examine ways of reducing costs to the farm sector that had any odour of climate change. To him, the whole thing was crap. The National Farmers’ Federation was ambivalent, as usual, and applied zero pressure on government to flesh out any policy development, preferring to treat drought and other extreme climate events as normal weather fluctuations. Like Abbott, they refused to recognise climate change and the potential risks to their constituency, thus staying joined at the hip with some of the rural dullards in the government.
But there has been a lack of leadership at the political and agri-political level since at least 2013, following the destruction of the carbon market and mitigation incentives. No one has taken the lead to convene a meeting with farmers, government, the banks and the insurance industry to flesh out ways a natural disaster or climate strategy could be developed with a view to encouraging farmers to protect themselves. No initiatives were taken to investigate ways of reducing premiums to encourage uptake or any other options being placed on the table.
For example, if banks could see an income flow that would meet the variable costs of running a farm business after a drought or natural disaster, how would they view their risk ratios on existing and new loans? Would they be interested in being part of a climate change mitigation strategy by actually reducing interest risk margins to those who participated in such a scheme? What impact would that have on either the premium structure of the product directly or indirectly through the cash flow impact on the business? Following the damning recommendations of the banking royal commission, it would be an opportunity for the finance houses to be proactive in relation to their farming clients.
Similarly, what strategies could the insurance industry bring to the table in reducing premium profiles as the size of the insurance pool increased?
And what role could the government play in terms of taxation policy and other incentives? For example, a 200 per cent taxation deduction for the premium could effectively reduce the cost of cover by up to 2 per cent when any severe losses are negated by the claim profile.
What if a lower premium was available to those who agree to address land stewardship and climate change mitigation strategies as part of the contract?
For example, if a farm business costs $1 million to operate, the current MPI premium is about 8 per cent, hence an insurance premium of $80,000 to insure against losses. In a year of total income loss, the business would receive $1 million. In a year where income of $500,000 was received, $500,000 would be covered by the policy. In a normal year, where the business earns more than $1 million, that is, where the business covers its costs of operation, no insurance claim would be received. Essentially, a base income is established.
These products are already on the market but are largely considered too expensive. But what if there were incentives that could encourage farmers to participate?
For example, if the 8 per cent premium was reduced to 6 per cent by involvement of all the players, what impact would that have? My guess is that the level of involvement would increase dramatically, particularly if climate change incentives were developed as part of the strategy.
Let’s look at this another way. Scott Morrison says his government has committed $2 billion to address the current drought. If the $2 billion had been used to reduce premiums from 8 to 6 per cent – with the balance being met by the farmers themselves – the income insured would be nearly $100 billion.
Across the nation, the total gross receipts from agriculture is $58 billion. Given the entire country is unlikely to suffer the same natural calamity in the same year, the benefits are obvious. A government contribution of much less than $2 billion would achieve a better, fairer outcome than its existing hodgepodge policy.
Beyond this, the acceptance of climate change by farmers’ groups would give them greater leverage for assistance. The logic would shift to an argument where farmers were dealing with a set of circumstances outside the normal parameters of their business to a number of “perils” exacerbated by human activity regarding emissions.
On October 26, the prime minister will hold a drought summit. Much of the focus will be on the political ramifications if the drought continues, rather than the need for long-term policy initiatives to engage with the future. To do this in any meaningful way will require an admission from Morrison that the Coalition under Abbott and Malcolm Turnbull has played a short-term political game that goes back to 2010.
The question is whether the latest prime minister takes the country to another level or just reruns the old movie. The answer could have lasting ramifications for the future of food production in Australia, and maybe for Morrison himself.
We know that special envoy Joyce will take the instant gratification path. Scott Morrison may not.
I await my invitation to the summit.
This article was first published in the print edition of The Saturday Paper on Oct 13, 2018 as "Wake up and smell the looming disaster". Subscribe here.