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Denmark's carbon tax on agriculture allays fears of a European green backlash
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No country has yet succeeded in implementing a carbon price on agricultural emissions.
Over 20 years ago the then-Labour government of New Zealand proposed a levy on livestock emissions. It’s millions of sheep and cattle are responsible for around half of the country’s emissions, ahead of those from the power generation and transportation sectors. What became known as the “back-door-tax”, or more commonly the “fart-tax”, kicked up such a stink among farmers that the government eventually beat a retreat.
Efforts to put a price on emissions saw a comeback under Jacinda Ardern’s government. Rather than be forced to comply with New Zealand’s ETS (with the inherent uncertainty that presents), a separate proposal was developed that would see farmers who met a minimum threshold pay a levy based on their livestock emissions (see New Zealand's carbon market: The carbon trade you've probably never heard of).
The price would be determined by the government and would reflect the country’s progress in cutting methane emissions by 10% between 2017 and 2030. One proposal for a methane pricing framework set out a levy that would rise from $NZ3.70 (€2.10/ $2.30) per tonne of CO2e in 2025, to around $NZ6 and $NZ12 per tonne of CO2e by 2030. The government also proposed to introduce incentive payments to adopt less carbon intensive technology, while also rewarding farmers for sequestering carbon.
First announced in 2022, the levy was due to come in by the end of 2025. Or at least it was. Ardern’s Labour Party were booted out of government in October 2023, and in the past couple weeks the Conservative Party confirmed suspicions by announcing that the levy would now be canned.
Heavy lies the krone
On the other side of the world, in one small but important country in Europe, things are moving in the opposite direction. Denmark’s coalition government announced this past week that it will introduce the world’s first tax on agricultural emissions in a bid to meet its 2030 climate target. Like New Zealand, Denmark is heavily dependant on farming (its a major pig and dairy exporter), with agriculture responsible for around one-third of the country’s emissions. Do nothing and farming was projected to account for almost half (46%) of Danish emissions by 2030.1
The current government came into power in 2022 and its programme included a commitment to develop a system for pricing emissions from agriculture. The proposed levy, which will start in 2030 at DKr300 (€40 or $43) per tonne of CO2, is expected to rise to DKr750 (€100/$108) per tonne of CO2 by 2035. The tax will be phased in gradually with a 60% basic tax reduction for at least the first two years. The proceeds from the levy will be returned to farmers in the form of a transition support pool to help the sector cut its emissions. Nevertheless, even at the discounted rate, the 2030 carbon levy is 8 times higher than the initial tax proposed in New Zealand.
The so-called “green tripartite” agreement between the Danish government and leading industry, agriculture and environmental groups could not be more different than New Zealand’s experience. At the same time that the levy was announced, the government also introduced a slew of other policy reforms. For example, the state has committed to constructing 250,000 hectares of forest, there will be a subsidy scheme for the storage of biochar produced using pyrolysis, and it will establish a new green fund, among other initiatives to support the agricultural sector transition to more sustainable practices (see Char grilled: Why biochar is the most promising carbon removal technology).
Denmark, like many other European countries, also imposes a separate carbon tax in addition to the EU ETS. Covering 35% of the country’s emissions, the Danish carbon tax was priced at €24.37 per tonne of CO2 in 2023 (the European average is €44.49 per tonne of CO2). It means that Danish heavy emitters face an carbon price exposure of almost €100 per tonne (€24.37 + EUAs ~€70). The proposed 2030 carbon tax is significantly below this level, potentially skewing investment in decarbonisation towards those industries that already bear a high carbon cost.2
Denmark’s dairy and cattle farmers will be hit particularly hard by the levy given their high carbon intensity. Based on the average cow emitting 6 tonnes of CO2 per year, Danish farmers would incur an initial charge (including the 60% deduction) of €96.50 per cow each year, rising to €603 per cow assuming the full force of the tax comes in by 2035 (i.e. with no tax reduction).
A better way of thinking about the cost is on a per kg of protein basis. The carbon footprint of beef is estimated to be 17 kgs of CO2 per 100g of protein. The initial cost will be €0.68 per 100g of protein, rising to €1.7 per 100g of protein in 2035. In contrast, pigs are much more carbon efficient producers of protein, emitting less than 25% of the CO2 per 100g of protein than beef cattle. For pig farmers the cost of the tax will be a €0.16 per 100g of protein at first, rising to €0.4 per 100g of protein in 2035.
Stick or switch
Analysis published in February by the expert advisory group outlined three models based on different price levels for the levy. If emissions are priced at the high end (i.e., DKr750 (€100/$108) per tonne of CO2), cattle and dairy farmers could see their production decline by around 20%, output from arable farmers would drop by 12%, while overall agricultural output would fall 15%.3
This seems overly pessimistic. The carbon price coupled with the government incentives will spur innovation. For example, earlier in the year the Danish government announced that they had set aside around €70 million to finance feed additives that would halt the fermentation process inside the stomachs of cows, preventing the production of methane. The technology could cut methane emissions from cows by 30% by 2030.
Other research also based on DKr750 suggests that the tax would increase the proportion of Danish farms with a negative net income from around 25% at the moment to 45% around 2030. This would force some of farmers, especially small holders on the margin, to consider selling up.
For larger agribusiness, better able to manage the impact of the levy, the opportunities could be substantial, especially if exports can secure a premium for low carbon dairy, beef, and bacon. However, as the recent high court ruling against Danish Crown, Europe’s largest pork producer, for misleading consumers with “climate-controlled pork” makes clear, there is no place for greenwashing (see Better in than out: The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions).
The overall impact of the law - as announced this week - is estimated to result in a 1.8 Mt reduction in CO2 emissions by 2030, with the potential for a 2.6 Mt CO2 decline. Even if the law only achieves an emission reduction of 1.8 Mt CO2, it would close the current expected shortfall in meeting the 2030 climate target by 70%.
The pushback from critics who say that agricultural emissions can’t be taxed directly is that accurately measuring emissions from livestock is very difficult. However, because Danish farmers are obliged to report the number and types of animals that they rear as part of national food security regulations, the administrative hurdle required to calculate methane emissions is though to be minimal.
One potential knock-on effect of the levy is on the production of biomethane in Denmark, one of the most developed markets for biomethane across Europe. In 2022, almost 40% of Denmark’s gas consumption was biomethane and the country is on course for 100% by 2030. In late 2022 oil and gas major Shell agreed to buy Denmark’s Nature Energy, Europe’s largest producer, for €1.9 billion.
Manure is one of the main feedstocks for the biomethane industry alongside municipal waste, crop and forestry residues. If there’s less biomethane available from manure then it could mean more demand for natural gas as well as making it harder for industries to use it to decarbonise (see Biomethane is the killer application Europe needs to decarbonise).
Denmark’s agricultural carbon tax is a massive step forward for carbon pricing. For a continent widely thought to be suffering a green backlash and plagued by agricultural populism, the announcement gives hope that it can be used as a template elsewhere in Europe. This would reduce the risk of carbon leakage (i.e., an increase in carbon intensive farming practices elsewhere in Europe), and give farmers confidence to invest in cutting emissions, without fear that the tax might suffer the same fate as New Zealand’s.
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https://via.ritzau.dk/pressemeddelelse/13927192/regeringen-og-parterne-i-gron-trepart-indgar-historisk-aftale-om-et-gront-danmark
https://taxfoundation.org/data/all/eu/carbon-taxes-in-europe-2023/
https://skm.dk/aktuelt/publikationer/rapporter/groen-skattereform-endelig-afrapportering