Examination of the effectiveness of a methane tax for livestock

Livestock generate significant amounts of methane, a greenhouse gas 25 times more potent than carbon dioxide for global warming. As the climate crisis intensifies, governments are exploring ways to reduce emissions and slow global warming. One potential solution is to impose a methane tax on livestock owners. This would not only incentivize them to raise livestock sustainably, but it could also reduce the incentive for consumers to buy animal products. Here’s what you need to know about this tax and the potential benefits associated with it.

Why is methane a problem?

Methane is the second most abundant greenhouse gas after carbon dioxide, contributing 17.3% global broadcasts. Yet its destructive power goes beyond that, as methane is at least 28 times stronger than carbon dioxide to trap heat in the atmosphere in 100 years. It is estimated that this gas accounted for 30% of global warming since pre-industrial times.

Livestock is one of the main contributors to methane emissions. Ruminant species have a digestive system that breaks down food by allowing it to ferment. During fermentation, methane is generated in the stomach and it is then released into the atmosphere through belching. About 14% of all human-made greenhouse gas emissions come from livestock, with livestock alone accounting for about 62% sector emissions.




A methane tax for cattle: the example of New Zealand

Given the problems with methane, ideas such as imposing a methane tax on livestock in an effort to reduce emissions are gaining traction. New Zealand – where agriculture represents more than 5% of GDP – recently revealed a plans to tax farmers for methane emissions of the livestock they raise. If the plan materializes, the country would be the first in the world to impose such a tax. Yet some crucial details are still missing from the proposal. Is the tax only on cattle and sheep, or does it apply to all types of livestock? How will the country measure emissions and who will pay the associated costs? Since no such tax has been passed anywhere in the world before, these details should be handled with great caution.

In 2020, methane alone accounted for 44% of national greenhouse gas emissions, making such a tax a priority if the country is to follow its climate agenda and succeed in achieve carbon neutrality by 2050.

But how do you know if the methane tax is an effective way to achieve this goal? To begin with, we need to have a little understanding of demand and supply economic models.

What does a methane tax entail?

The methane tax works similarly to the sales tax; both will eventually decrease the supply of goods as the added cost would discourage production. However, as one can guess, the methane tax does not only affect the producer but also the consumer, since it is very likely that the former will drive up the price of goods in order to pass on some of the additional costs to consumers. .

When discussing a methane tax for livestock, a question is often raised: who between the meat producer and the meat consumer should bear most of the costs that the adoption of such a tax would entail? To answer this, it is necessary to introduce another economic concept – elasticity.

Explain the methane tax through the concept of elasticity

Elasticity refers to the sensitivity of a part to price. For example, if the demand for a product is elastic, the percentage change in quantity demanded will be greater than the percentage change in price whenever there is a change in price and vice versa. When the elasticity of demand is greater than the elasticity of supply, the tax burden of producers will be greater than that of consumers. In other words, since consumers want less of a particular product than producers, the latter have to pay more.

The elasticity is closely related to the efficiency of the tax. Suppose demand is perfectly inelastic, which means that any change in price does not affect the demand for the product. This is a potentially perfect scenario for governments if the primary purpose of the tax is to improve government revenue. However, a perfectly inelastic demand would be a disaster when the policy implemented is the methane tax which aims to reduce emissions by reducing meat consumption. On the contrary, the methane tax is more effective when the demand is elastic because a small increase in the price leads to a large reduction in consumption, limiting the extent of state intervention in the markets.

Thus, the elasticity of demand for meat is one of the components determining the effectiveness of the methane tax. When the elasticity of a product is less than 1, it indicates that the demand for the product is inelastic. The elasticity of food is usually less than 1, because food is a necessity that we certainly consume in our daily lives, regardless of how prices change. Yet there are huge differences between different foods. The elasticity of beef, milk and eggs is 0.75, 0.59 and 0.27 respectively. Therefore, governments need to know which products are subject to the methane tax; given the extremely low elasticity of foods such as eggs, it does not seem advantageous to tax all types of livestock. The New Zealand government should take these differences into account when developing legislation.

In any case, while the above data suggests that the demand for beef is inelastic, its elasticity may be underestimated due to the method by which the elasticity is measured. If measured by comparing the prices of goods before and after inflation or other types of events that affect the whole market rather than a few specific products, the data hides the likelihood of consumers choosing another product like chicken to replace the original product such as beef. when the price of beef goes up. A product with more substitutions has higher elasticity.

As we know, red meats like beef have a much higher carbon footprint than white meats like chicken, knowing that beef weighs an average of 295 kg CO2-eq per kg of protein while chicken has an average of less than 100 kg CO2-eq per kg of protein. Further research on the methane tax will focus in part on the relationship between red meat and white meat. If a strong substitution relationship is found between them, a methane tax on red meat will be justifiable in terms of efficiency.

Benefits of a livestock methane tax

The introduction of a methane tax may incentivize the farming industry to adopt more sustainable methods of raising cows. Although 14% of emissions come from livestock, the way livestock are managed makes a huge difference in the emissions outcome. This is because the amount of methane emissions from livestock is highly dependent on the level of food intake, type of carbohydrates in the diet, food processing and many other variables.

In 2020, a study in Australia showed that methane emissions from cows decreased by 80% after 3% of their diet was replaced with a specific type of algae. Late 2021the United States Department of Agriculture has launched a new program to certify low-carbon beef that has a carbon footprint at least 10% lower than the industry standard benchmark, demonstrating the opportunity to produce sustainable beef.

Conclusion

Many uncertainties remain regarding the methane tax. While this won’t significantly change consumer habits given the inelastic demand for red meat, it might make sense to introduce a moderate methane tax first and watch the market reaction to it. before adopting it on a larger scale.

You might also like: Can we widely adopt a methane tax to reduce greenhouse gases?

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