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Denmark introduces tax on farm emissions

By: Kajsa Pira

The Danish government is proposing a climate tax on livestock emissions. Farmers will pay 16 euros per ton of CO2e in 2030, with the rate increasing to 40 euros by 2035.

Agriculture will be the largest emitter of greenhouse gases in Denmark by 2030, if no more action is taken. In 2021 the government appointed an expert group with the task of providing guidance for a green tax reform that can help to achieve their set climate target of reducing CO2e by 70 percent. In February, the group published a report showing how emissions from farming could be reduced.

The expert group presented models with three different tariffs for a climate tax. They are DKK 125, DKK 375 and DKK 750 (roughly 17 euro, 50 euro and 100 euro) per tonne of CO2e emitted (table 1).

All three models are designed to be phased in from 2027 and deliver on the 2030 climate target. The models are expected to reduce CO2e emissions in 2030 of around 2.4–3.2 million tonnes from the agriculture and forestry sector.

The model with a tax of DKK 750 has the greatest immediate effect on Danish greenhouse gas emissions. According to the calculations it will provide a reduction of 3.2 million tonnes of CO2. But between 20 and 44 percent of the saved emissions are likely to occur abroad instead, when production increases in other countries, in a process known as leakage.

With a leakage of 44 percent, the global climate will only be spared 1.8 million tonnes of CO2. And thus the climate effect of the other two models may end up being higher. With the lowest tax rate, the leakage is only between 3.5 and 12 percent.

Calculating leakage is not straightforward. Assumptions need to be made about trade flows, the relative climate efficiency of production in other countries and the level of ambition of climate policies implemented in other countries. For instance if Danish dairy production moves to another EU country, that country is still covered by the Emission Sharing Regulation. This means that increased agricultural emissions would need to be offset by reduced emissions in other sectors, such as traffic. However if production moves to countries outside the EU with less ambitious climate targets, emissions will likely increase.

There is also an economic consideration. Because the high tax provides an income for the state treasury of DKK 1.2 billion (160 million euro) per year. The other models combine a lower tax with subsidies and are therefore an expense for the state. The model with the lowest leakage effect costs the state DKK 2.1 billion (280 million euro) per year.

This proposal is based on relatively detailed data, much of which Danish farmers already report today. It includes the number of livestock, hectares of organic soils, barn type and the amount of manure spread on the fields. For example, there are 13 different categories for cattle, based on weight class, breed, and purpose. To calculate the tax, they have a designated emission factor. Similarly, there are emission factors for different types of livestock housing.

In the model with the medium tax rate, the tax on livestock emissions is the same as in the high tax model. However, in practice, the tax is halved through a deduction based on livestock type and numbers. This design incentivises emissions-reducing measures such as feed additives, as the farmer will be rewarded with a tax saving of DKK 750 per tonne of CO2e reduced. Conversely, the farmer must pay DKK 750 per tonne of CO2e for increased emissions per animal. This approach maintains a strong incentive to adopt more climate-friendly practices while reducing the overall tax burden through the base deduction.

In the low-tax model, the nominal tax is set at DKK 250. As in the previous model, the effective tax is halved to DKK 125 through a similar deduction. While incentives are still provided for climate measures, they are not as strong because the compensation is lower.

For fertiliser emissions, the two lower-tax models include two variants. The first variant, similar to the livestock model, sets a nominal tax rate of DKK 750 or DKK 250. However a deduction based on area is set at a level so the average farmer receives a deduction equal to half of the original tax. This creates incentives to switch to crops that require less fertiliser. In the second variant, there is no tax. Instead, area-based direct payments are transformed into a subsidy for reduced fertiliser use, equivalent to DKK 750 per tonne of CO2e. This restructuring is thus revenue-neutral for the state. This variant is estimated to give slightly lower emission reductions but also result in a lower loss of production.

The two low-tax models also include a governmental fund to support the annual expansion of biochar use, produced by pyrolysis, until 2030. Biochar is not currently used in Denmark, and the expert group expresses some doubts about the feasibility of scaling up this technology quickly enough.

All the models include a tax of 10 DDK on cultivated organic soils. That is combined with a subsidy for rewetting these soils, with the long-term target of completely ceasing cultivation on organic soils. For this to be achieved, the expert group believes that there may be a need to gradually adjust the tax upwards.

Another common factor is the inclusion of subsidies for afforestation, in line with the Danish government’s ambition to establish 250,000 hectares of new forest.

The choice between models is primarily a trade-off between economic efficiency and how large the structural transformations one is prepared to accept.

The high-tax model implies a fall in agricultural production of 15 percent, which is mainly driven by a fall in cattle and pig production of 20.2 percent and 17.7 percent respectively. Supermarket prices for dairy and meat are expected to rise, though not by more than 4 percent under the high-tax model. And around 8,000 jobs will be lost, mainly in the livestock industry. That is around ten percent of the current workforce in the sector. However, the expert group does not see this as a great concern, “over time, total employment in the economy will rise back towards the starting point as the freed-up labour moves to other industries”.

The expert group has also considered a trading system with emission quotas. However, they believe that fluctuating prices would create significant uncertainty for the industry, potentially reducing the incentives to invest in climate-friendly technologies. They therefore prefer a fixed tax rate that remains stable for several years. They also acknowledge the ongoing discussions about an EU-wide quota system for agricultural emissions. They emphasise that, even though they do not propose a specific Danish quota system in the report, this should “not be perceived as a distancing from a possible future pan-European quota system for agriculture”.

The group was also tasked to investigate the effects of a consumer tax. One of the advantages of a climate tax in the consumption phase is that imported and domestically produced goods are taxed equally, thereby avoiding a deterioration in the competitiveness of Danish agriculture and the resulting risk of greenhouse gas leakage. However, since so much of the Danish production goes for export, a consumer tax only would only have a marginal effect on Denmark’s territorial emissions – the core focus for this report.

During the spring, the proposal was negotiated by the government and the parties in the Green Tripartite, which includes the farmer’s union, the largest environmental organisation, the local governments association, the employers’ organisation, and two trade unions. On June 24, just before this article went to press, they announced that they had reached an agreement.

According to the agreement, a CO₂ e-tax will be introduced on emissions from livestock. The tax will start at DKK 300 per tonne of CO₂ e in 2030, increasing to DKK 750 per tonne of CO₂ e in 2035, with a floor deduction of 60%. This means the effective tax will be DKK 120 (roughly 16 euros) per ton of CO₂ e in 2030, rising to DKK 300 (roughly 40 euros) per ton of CO₂ e in 2035. Additionally, a subsidy for reduced fertilizer use of DKK 750 per tonne of CO₂ e will be introduced in 2028 by restructuring direct agricultural support.

Using the terminology of the proposal, they have chosen to introduce a version of Model 3b from 2030 and gradually transition to something more like Model 2b over five years. The ambitions for withdrawing carbon-rich soils and afforestation are the same as in the proposal. There is also a subsidy scheme for biochar totaling just over DKK 10 billion, which will start in 2027 and run until 2045.

Overall, the measures in the agreement are expected to reduce Danish emissions by 1.8 million tons of CO₂ e in 2030, with a potential reduction of up to 2.6 million tons.

The parties are now urging lawmakers to approve the deal, which should be reviewed and adopted after the summer holidays. Since no other country has implemented tax-based regulation of non-energy-related greenhouse gas emissions from agriculture, this development warrants close attention.

The report:
The agreement (in Danish):


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