Livestock generate significant amounts of methane, a greenhouse gas that is 25 times more potent than carbon dioxide in warming the planet. As the climate crisis intensifies, governments are studying ways to cut emissions and slow down global warming. One of the potential solutions is to impose a methane tax on cattle owners. This would not only pressure them to raise livestock in a sustainable manner but it could also lower consumers’ incentive to purchase animal products. Here’s what you need to know about this tax and the potential benefits related to it.
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Why is Methane An Issue?
Methane is the second most abundant greenhouse gas after carbon dioxide, contributing 17.3% of global emissions. Yet, its destructive power goes beyond that, as methane is at least 28 times stronger than carbon dioxide at trapping heat in the atmosphere within 100 years. According to estimates, this gas has accounted for 30% of global warming since pre-industrial times.
Livestock is one of the largest contributors to methane emissions. Ruminant species have a digestive system that decomposes food by letting it ferment. During fermentation, methane generates in the stomach and it is subsequently released into the atmosphere through belching. About 14% of all human-made greenhouse gas emissions come from animal husbandry, with cattle alone accounting for about 62% of the sector’s emissions.
A Methane Tax on Cattle: The Example of New Zealand
Given the issues related to methane, ideas like imposing a methane tax on livestock in a bid to reduce emissions are gaining traction. New Zealand – where agriculture accounts for more than 5% of the GDP – has recently revealed a plan to tax farmers for the methane emissions from the livestock that they keep. If the plan comes to fruition, the country would be the first in the world to impose such a tax. Yet, some crucial details are still missing in the proposal. Is the tax only on cattle and sheep, or does it apply to all types of livestock? How will the country measure the emissions and who will pay for the associated costs? Since no such tax has been adopted anywhere in the world before, these details must be addressed with great caution.
In 2020, methane alone accounted for a staggering 44% of national greenhouse gas emissions, making such a tax a priority if the country wants to keep up with its climate agenda and succeed in reaching carbon neutrality by 2050.
But how do we know if the methane tax is an efficient way to achieve this goal? To begin with, we must have a little understanding of the economic models of demand and supply.
What Does A Methane Tax Entail?
The methane tax functions in a way similar to the sales tax; both will eventually decrease the supply of goods as the additional cost would discourage production. Yet, as we can guess, the methane tax does not only affect the producer but also the consumer, since it is very likely that the first will raise the price of goods in a bid to pass on some of the additional costs to consumers.
When discussing a methane tax on cattle, a question is often raised: Who between the producer and the consumer of meat should bear most of the costs that the adoption of such tax would generate? To answer this, it is necessary to introduce another economic concept – elasticity.
Explaining the Methane Tax Through the Concept of Elasticity
Elasticity refers to the sensibility of a party towards the price. For example, if the demand for a product is elastic, the percentage change in quantity demanded will be larger than the percentage change in price whenever there is a change in the price and vice versa. When demand elasticity is greater than supply elasticity, 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 need to pay more.
Elasticity is deeply related to the efficiency of the tax. Suppose that demand is perfectly inelastic, meaning that any change in the price does not affect demand for the product. This is a potentially perfect scenario for governments if the main objective of the tax is to improve government revenue. Yet, perfectly inelastic demand would be a catastrophe when the policy implemented is the methane tax which aims to reduce emissions by lowering the consumption of meat. On the contrary, the methane tax is more efficient when demand is elastic because a small increase in price leads to a large reduction in consumption, limiting the scale of government intervention in the markets.
Hence, the elasticity of the demand for meat is one of the components determining the efficiency of the methane tax. When the elasticity of a product is below 1, it indicates that the demand for the product is inelastic. The elasticity of food is usually below 1 because food is a necessity that we certainly consume in our daily lives regardless of price change. Yet, there are huge discrepancies between different foods. The elasticity of beef, milk, and eggs are 0.75, 0.59, and 0.27 respectively. Consequently, governments shall be aware of the products that are subject to the methane tax; given the extremely low elasticity of foods such as eggs, it does not seem advantageous to tax every kind of livestock. The Government of New Zealand should take these differences into account when drafting 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 it is measured by comparing prices of goods before and after inflation or other kinds of events that affect the entire market rather than a few specific products, the data dissimulates the likelihood that consumers will choose another product like chicken to substitute the original product like beef when the price of beef goes up. A product with more substitutions has a higher elasticity.
As we know, red meats like beef have a much higher carbon footprint than white meat like chicken, considering that beef has an average of 295 kg CO2-eq per kg of protein whereas chicken has an average below 100 kg CO2-eq per kg of protein. Further research regarding the methane tax shall partly focus on the relation 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 Methane Tax on Cattle
Introducing a methane tax may provide an incentive for the agricultural industry to adopt methods that are more sustainable to raise cows. Although 14% of emissions come from livestock, how livestock is managed makes a huge difference in the outcome of emissions. Indeed, the amount of methane emissions from cattle highly depends on the level of feed intake, type of carbohydrate in the diet, feed processing, and many other variables.
In 2020, a study in Australia showed that methane emissions of cows decreased 80% after 3% of their diet had been replaced with a specific type of seaweed. In late 2021, the United States Department of Agriculture launched a new program to grant certification for low-carbon beef that has a carbon footprint at least 10% lower than the industry’s standard baseline, demonstrating the possibility of producing sustainable beef.
Conclusion
There are still many uncertainties about the methane tax. While it might not significantly change consumption patterns given the inelastic demand for red meat, it could be a good idea to first introduce a moderate methane tax and observe the market’s reaction toward it before adopting it on a wider scale.
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