Pricing GHG emissions in agriculture: Accounting for trade and fairness for effective climate policy

Abstract

Although agriculture is a significant source of greenhouse gas emissions, the sector remains outside the scope of greenhouse gas (GHG) pricing policies in the EU. To align the future food system with the transition to net-zero emissions, two key questions arise: To what extent can tax policies help achieve this transition in a fair and effective way? And, would it be preferable to levy a GHG tax on the production or the consumption side? We employ an EU agro-economic model to compare supply and demand-side GHG taxes, quantifying their environmental impact as well as their effects on the EU competitiveness. We find that supply-side pricing in agriculture exhibits leakage rates of over 40 % and leaves EU producers at a competitive disadvantage; on the other hand, demand-side measures level the playing field in the Single Market and generate positive leakage as they boost the exports of (greener) EU producers. However, increased exports from the EU imply that emission reduction is rather limited domestically. Focussing on four countries – Spain, France, Romania, and Poland – we explore the distributional impacts of demand-side pricing measures using household-level microsimulation. We show that, when demand is kept constant, these reforms are regressive without complementary measures. Designing a VAT reform as a Feebate and equal-per-capita revenue recycling address vertical equity concerns and produce welfare gains for the majority of the population, while the top 20–30 % of meat consumers experience welfare losses. Overall, findings suggest that price-based measures can help align agriculture with climate goals, while trade and distributional aspects should be reflected in policy design to ensure an effective and equitable transition.