Denmark’s farmers face $100 tax per cow

Doing negative externalities with my NCEA Level 3 class and we looked at what is happening in Denmark and the chance of this eventuating in New Zealand. Danish farmers are facing a US$100 annual tax per cow for the emissions they generate. This is the first government to introduce a carbon emissions tax on agriculture starting in 2030 – Denmark’s agricultural sector is a major exporter and the biggest source of emissions. Part of the Danish government coalition agreement was geared towards reducing emissions and meeting its climate goals.

Livestock farming has a particularly big impact, accounting for around 12% of global emissions in 2015, according to the United Nations’ Food and Agriculture Organisation. A share of this pollution comes from methane, a potent planet-warming gas produced by cows and some other animals through their burps and manure. The motive for the tax is to get farmers to look at solutions to reduce emissions but the farming body see it as slowing down agriculture’s green investments. Furthermore, with only Denmark announcing this tax the competitiveness of its farmers in the EU is going to be impacted and they would hope for a level playing field with the tax being part of EU legislation. See video below.

So what is the economics in this tax? Agricultural emissions are referred to as a negative externality of production where the marginal social cost (MSC) exceeds marginal private cost (MPC), as in Figure 1. Firms take decisions on the basis of MPC, so the market settles at Q1, rather than at Q*. The shaded area represents the welfare loss for society in this position – i.e. the damage to the environment from a cow’s emissions. This is not reflected in the costs faced by the farmer.

For more on negative externalities view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.