Adaptation of the Danish Farm Sector to a Tax on Greenhouse Gas Emissions

This analysis investigates how a carbon tax of DKK 750 per tonne CO2e may contribute to the transition of the Danish agricultural sector towards more climate friendly activities. The analysis is based on farm-level financial data and calculations of greenhouse gas emissions for about 1,400 Danish farms. The analysis shows that a tax of DKK 750 per tonne of CO2e reduces 2030 emissions by around 45 percent compared to 1990 levels when only existing technical abatement measures are considered. Around half of the reductions are expected to be achieved by negative emissions through increased carbon sequestration and storage. The emissions reduction of 45 percent compared to 1990 levels is, however, not sufficient to meet the sector’s 2030 target of 55-65 percent emissions reductions.

The analysis demonstrates that, after the introduction of a carbon tax, the number of farms with negative net income increases from around 25 percent to 45 percent of all Danish farms. Especially, cattle farms are affected by the tax. Increasing the tax level to DKK 1,500 per tonne CO2e will not lead to a significant increase in the implementation of technical abatement measures, since there are few cost-attractive options available.

These results indicate that existing technical abatement measures will not be sufficient to meet the sector’s 2030 target, and structural changes and innovation will be necessary for the sector’s long-term transition. A higher carbon tax will accelerate these structural changes and innovation. Supplementary policies such as subsidies can be introduced to mitigate the negative effects on farm income. Such policies, however, risk lowering the incentive to mitigate emissions or creating lock-in effects.