Chief Economist's Corner: A greener agricultural country

As far back as October 2021, the Danish parliament entered into a historic green transition agreement for Danish agriculture. But it is not until now that concrete proposals have been tabled on how the agricultural sector is to contribute to reducing Denmark’s greenhouse gas emissions by 70% in 2030.

The proposals can be found in the expert group’s report on a green tax reform – the final reporting was presented a few weeks ago. Not surprisingly, the group recommends the introduction of an agricultural CO2e tax to be phased in gradually from 2027. This means that Denmark will be one of the first countries in the world to impose a tax on emissions in the agricultural sector. At present, only New Zealand has plans to do something along the same lines but with effect from 2025.

The agricultural CO2e tax proposal follows closely on the heels of the CO2 tax for the industrial sector adopted in 2022 and to be phased in gradually from 2025. And the reason why it’s not surprising that the same model is recommended for the agricultural sector is that a tax on production has been considered the best way to reduce any negative side effects, such as pollution, since 1920 when British economist Arthur Cecil Pigou highlighted the problem in his main work, The Economics of Welfare.

Challenges of a CO2e tax 

The problem in a globalised world in 2024 is obviously that, unless all other countries do the same, a tax may threaten companies’ competitiveness, perhaps to such an extent that they choose to shift production to other markets. This is called leakage, and there is even a risk that pollution at a global level will increase if production is relocated to countries with lower environmental requirements than in Denmark.

Moreover, the tax will to some extent be passed on to consumers through higher prices. This could give rise to considerable popular opposition if basic consumer goods are affected. An obvious example is France, where the government’s decision to introduce new green taxes on petrol and diesel a few years back led to fierce protests from the Yellow Jackets.

These are relevant arguments, and the expert group has presented three models, which in different ways combine a tax on greenhouse gas emissions with deductibility options and subsidies applicable to the agricultural sector. While the model that is clearly the best for the climate will hit the sector the hardest and lead to the sharpest price increases on Danish-produced meat, the opposite applies to the model with the least effect on the climate. It is now up to the politicians to decide which of the three models proposed by the expert group should form the basis for the coming green tax reform in the agricultural sector.

Environmental and economic impact

It is key, though, that something is done about the greenhouse gas emissions and to turbocharge the green transition. Not only in Denmark, but globally. Because it’s urgent. 2023 set a global heat record with the warmest ever January.

In a recent analysis, the IMF showed that the goal to limit global warming to 1.5-2 degrees Celsius and reach net zero in 2050 requires a 25-50% reduction in CO2 and other greenhouse gas emissions by 2030 with 2019 as baseline. And let’s not forget that only around 80% of this can be achieved through existing technologies. The rest requires technologies that are either under development or have not yet been invented.

But this is far from the only challenge to making the green transition a success. The IMF believes that the net-zero goal will require an increase in low-carbon investments from around USD 900bn in 2020 to a whopping USD 5,000bn annually in 2030. In comparison, the global GDP rose by exactly USD 5,000bn last year. Broadly speaking, a large share of the world’s expected GDP growth should be earmarked to ensure the survival of our planet throughout the rest of the 2020s!

On top of this, green investments – not least in the poorer emerging markets and developing countries – will increasingly have to be financed by the private sector. A huge task that has just become harder and harder with skyrocketing interest rates.

With all these challenges and growing geopolitical tensions in mind, it is all the more important that the international community is united in the struggle to save the climate. Against this background, Danish contributions may prove important, given Denmark’s solid soft power as a green role model. So who knows, perhaps other countries will soon follow suit with CO2e taxes in the agricultural sector.