Climate measures in agriculture

March 26, 2020October 22, 2020

Climate measures in agriculture

The need and opportunities to accelerate the reduction in agricultural greenhouse gas (GHG) emissions have been underlined in a number of recent reports (see, for example, the IPCC Special Report on Climate Change and Land (2018) or the IEEP report Net-Zero Agriculture in 2050: How to Get There (2019)). Following a period from 1990 to 2012 with a steady decrease in EU agricultural emissions amounting to 22% in total, these emissions have begun to increase since then, growing by 4% over the 2012-2017 period.

In this post, I examine the projected trend in agricultural emissions to 2030, drawing on the most recent European Environment Agency (EEA) report on Trends and Projections in Europe 2019 as well as the inventory of policies and measures that Member States have taken or plan to take to reduce these emissions in future. These policies and measures are discussed in the Eionet report Overview of reported national policies and measures on climate change mitigation in Europe in 2019 and collected in the EEA database on climate change policies and measures in Europe (both accessible from the EEA webpage on Policies and Measures).

The projections indicate that Member States do not expect to make further significant reductions in agricultural emissions by 2030. Even with additional measures planned but not yet implemented in 2019, agricultural emissions are expected to fall by less than 5% between 2017 and 2030. Overall emissions are projected to fall by 18% but the EEA assesses that this will not be sufficient to meet the existing 2030 target of a 40% reduction in emissions compared to 1990.

If, in addition, the climate ambition of the European Green Deal is to be realised, further efforts to reduce emissions in the non-agricultural sectors but also in agriculture will be required. However, to properly incentivise, motivate and track progress in the farming sector, I argue that a focus on agricultural emissions alone is misleading and should be supplemented by also considering changes in land use emissions and removals that are under the control of farmers. This will require changes in the way that the EEA presents its inventories as well as rethinking the relationship between emissions in the effort sharing sectors and emissions and removals in the land sector in EU climate policy.

Trends and projections of agricultural emissions

The chart below shows the historical trend in agricultural emissions as reported in the EEA annual inventories as well as projections to 2035 as estimated by the EEA based on Member State projections. The figures are for the EU28 meaning the EU27 Member States plus the United Kingdom. They are based on converting all greenhouse gases (GHGs) to CO₂ equivalents (CO₂e) using equivalence weights based on global warming potential (GWP) values reported in the IPCC’s Fourth Assessment Report (AR4).

Agricultural emissions in the inventory consist almost entirely of the non-CO₂ gases of methane CH₄ and nitrous oxide N₂O (with very minor amounts of CO₂ emissions associated with liming, urea and the use of other carbon-containing fertilisers). These emissions are associated with livestock production (both enteric fermentation and manure management) and the application of fertilisers to agricultural soils (which stimulates the production of nitrous oxide as a by-product of microbial transformations of nitrogen in the soil).

The figures do not take account of carbon sequestration or emissions from agricultural land as these are reported in the IPCC sector Land Use, Land Use Change and Forestry (LULUCF). Changes of CO₂ in agricultural soils due to cultivation particularly of organic soils or the incorporation of crop residues in soils are not attributed to agriculture in the EEA inventories This is also the case where carbon is sequestered in hedges, trees or through rewetting of drained organic soils.

Trends in agricultural emissions are driven primarily by changes in activity data (mainly changes in ruminant livestock numbers (cattle and sheep) and in the volume of organic and chemical nitrogen fertiliser applied. Other factors that play a role over time include changes in livestock feeding regimes, in the management of manure, in rice cultivation as well as changes in emission factors due to technical and productivity improvements in agricultural production.

The graph above shows that there was a particularly sharp fall in agricultural emissions between 1990 and 1993 (of around 12%). It then took twenty years for a further fall of 12% in emissions (from the 1993 base, 10% from the 1990 base) before emissions started increasing again. The sharp reduction between 1990 and 1993 most likely reflects the disruptions caused to agricultural production in the newer EU Member States following the fall of the Berlin Wall in 1989 and the complex transition to a market economy in these countries. It may also be associated with the introduction of the Nitrates Directive in 1991 as cattle numbers fell by 11% and inorganic N use by 14% over that short period.

The fall in agricultural emissions mirrored the fall in EU total emissions over the period (in 2017, total emissions were 22% below 1990 levels). This is shown in the dotted line in the chart above which plots the share of agricultural emissions in the total. This shows a general stability at just under 9% of total emissions over the period 1990-2013, though this had risen to over 10% by 2017.

The chart also shows projections of agricultural emissions under two scenarios – WEM With Existing Measures, and WAM With Additional Measures. The WEM scenario is based on policies and measures existing and adopted when the projections were submitted by Member States in March 2019 under the 2013 mechanism for monitoring and reporting emissions Regulation (EU) No 525/2013 (MMR). The WAM scenario includes in addition policies that were at the planning stage when the projections were submitted.

In the EEA spreadsheet that reports the projections data the various series start at 2015 so there are three years that overlap with the inventory data. Historical emissions in the overlapping years have grown more rapidly than foreseen in the data used in the Member State projections, suggesting that the projections are likely to underestimate the trends in emissions in the two scenarios. These scenarios do not take account of any changes in economic activity expected as a result of the measures taken to prevent the spread of the coronavirus in the first half of 2020.

The projections show that Member States expect a relatively modest reduction in agricultural emissions up to 2030. With additional measures, a further reduction of around 20 Mt CO2e is projected compared to 2017 emissions of 429 Mt CO2e, or a reduction of slightly less than 5%. Economy-wide emissions are expected to fall by 18% over this period, resulting in a rise in the share of agricultural emissions to closer to 12% by 2030.

Are planned measures sufficient to reach existing 2030 targets?

The EU as a whole is currently committed to reducing its emissions by 40% compared to 1990 by 2030. EU climate policy has three legs each with separate targets: the Emissions Trading Scheme (ETS) for the power sector, large industrial plants and aviation inside the European Economic Area; effort-sharing in the non-ETS sector which includes transport, buildings, agriculture and waste; and a ‘no debit’ rule in the land use, land use change and forestry (LULUCF) sector meaning that emissions cannot exceed removals. If this sector creates net emissions, these need to be compensated by using allowances from the effort sharing sectors.

As the cap-and-trade system under the Emissions Trading Scheme guarantees that 2030 targets will be met (even though the most recent projections suggest that existing and additional measures are still not sufficient to meet the target), the main uncertainty in reaching the overall EU target is progress in the non-ETS sector. Member States have individual national targets under the 2018 Effort Sharing Regulation. Together, these are intended to achieve a 30% reduction in non-ETS emissions by 2030 compared to the 2005 base year.

There are two parallel reporting procedures that allow us to track whether Member State initiatives are likely to be sufficient to meet this target. In addition to the projections submitted biannually since 2015 under the MMR previously mentioned and which are collated and published by the EEA, Member States are also developing their National Energy and Climate Plans (NECPs). These are mandated under the Governance of the Energy Union and Climate Action Regulation (EU) 2018/1999. They represent the framework within which Member States have to plan, in an integrated manner, their climate and energy objectives, targets, policies and measures.

NECP projections

Each NECP contains a list of planned measures and stated ambitions for national GHG emissions reductions. Countries must develop their NECPs on a rolling basis, with an update half-way through the implementation period. NECPs for the first period 2021 to 2030 should ensure that the Union’s 2030 targets for GHG emissions reductions, renewable energy, energy efficiency and electricity interconnection are met.

The plans are developed on an iterative basis between the Commission and the Member States. Member States first submit a draft NECP. The Commission reviews the draft plans and can issue recommendations for increased ambition to Member States if it assesses that they are not doing enough. For the share of energy from renewable sources and for energy efficiency, where there are EU-wide targets but no specific national targets, a set of objective criteria are set out in Annexes to the Governance Regulation on which the Commission can make its assessment. For GHG emissions reduction targets, the relevant benchmarks are the effort-sharing targets for each Member State.

Member States are expected to take these recommendations into account when submitting their final plans. The Commission can also make recommendations if at any point in time a Member State is falling off track in delivering its targets asking them to take additional measures to bring them back in line.

Member States were required to submit their first draft NECP by 31 December 2018. The Commission returned these drafts with its recommendations in June 2019. The Commission assessed that the overall GHG reduction for the Union as a result of these plans would be in line with the -40% emissions reduction target for 2030 compared to 1990.

For the effort sharing sectors, it concluded that the planned measures in the draft NECPs showed that the EU could achieve a 28% reduction in emissions in non-ETS sectors. It thus sought additional measures to fill the remaining 2 percentage point gap in the final NECPs. Although the final NECPs were due to be delivered by 31 December 2019, the Commission’s NECP web page shows that, as of 18 March 2020, many major players such as Germany, France and Spain had yet to do so.

In making its assessment, the Commission relied on Member States’ own projections of the emissions reductions associated with additional measures (where this information was provided) or else the emissions reductions associated with implementing existing measures. The Commission assessment does not assess whether the measures outlined in the NECPs are capable of delivering the reductions that Member States have pencilled in to their projections.

In principle, such Quality Check/Quality Assurance should be carried out at an earlier stage. It is clear that, despite the detailed guidance available from the EEA, most Member States are struggling to provide the relevant information. This becomes clearer when the information on agricultural mitigation strategies is examined later.

EEA MMR projections

Based on the MMR projections submitted in March 2019, the EEA concludes that accounting for planned additional measures the EU27 and UK together expect to reach emission reductions totalling 36% by 2030 (compared with 1990 levels). The EEA explains that the differences with the NECP projections are due to differences in the additional measures assumed as well as differences in the way missing data are interpolated.

The EEA estimates that for the EU27 and UK together effort sharing emissions could decrease to a level 27% below that of 2005 by 2030 with additional measures. Similar to the Commission’s finding based on the draft NECPs, it concludes that a more focused effort will be necessary to reach the existing 30% reduction target.

In a further briefing on these trends earlier this month which is based on updated emissions trends to 2018, the EEA noted that non-ETS emissions had fallen by 11% between 2005 and 2018 and indeed were below the corresponding target level for the period 2013-2020. However, the pace of reduction must dramatically increase in order to reach the 2030 target, as shown in the following chart.

Source: EEA. **National action across all sectors needed to reach greenhouse gas Effort Sharing targets,** https://www.eea.europa.eu/themes/climate/trends-and-projections-in-europe/national-action-across-all-sectors/national-action-across-all-sectors

“Today – more than halfway through the 2005-2030 period – the total reduction achieved so far in the Effort Sharing sectors represents only one third of the reduction needed by 2030 to achieve the target of a 30% reduction compared with 2005 in these sectors. From 2018 onwards, the annual rate of emission reductions at EU level needs to nearly double to achieve the cuts foreseen under the Effort Sharing Regulation”, according to the EEA.

During the 2005-2018 period agriculture contributed just 1% of the emissions reduction, a mere 2 Mt CO₂e of the 309 Mt CO₂e reduction. Most of the projected reductions in the coming period up to 2030 are also expected in the transport, buildings and industry sectors. As the following chart illustrates, agriculture remains the sector where countries foresee only minimal change in emissions over the next decade. In the next section, the measures taken and planned by Member States are analysed further.

Source: EEA National action across all sectors needed to reach greenhouse gas Effort Sharing targets, 2020. Notes: WEM ‘with existing measures’ projections: WAM ‘with additional measures’ projections.

Agricultural mitigation policies and measures

As part of the biannual MMR reporting, Member States are asked to report on the existing and additional policies and measures they are taking within each sector using a standard template. The EEA has created a database of the reported policies and measures based on the 2019 submissions. This allows an overview of what Member States are doing or planning to do to reduce agricultural emissions although the current standard of reporting leaves a lot to be desired as discussed later.

Gaps in reported measures

The EEA’s own status update states that the number of reported agricultural policies and measures showed a relatively larger increase between 2017 and 2019 compared to other sectors. According to its analysis, Member States in 2019 reported 212 policies and measures having effects on agricultural GHG emissions. Most (72%) were implemented in response to the EU’s Common Agricultural Policy. The most reported objectives are reduction of fertiliser/manure use on cropland (38% of all agricultural policies and measures) and improved animal waste management systems (30% of all agricultural policies and measures). However, in my extraction of the reported agriculture measures in this spreadsheet I could only identify 148 measures. The spreadsheet also includes the brief description of each measure provided by the Member State as well as the specific agricultural objective or objectives it addresses.

Of these 212 measures identified by the EEA in 2019, 55 are planned policies or measures by 12 Member States targeting additional GHG reductions from agriculture. These measures most commonly aim at improving cropland management (19 measures), reducing fertiliser use and manure application on cropland (15 measures), and improving livestock management (10 measures). Policies and measures reported are often related to the implementation of European policies such as the Common Agricultural Policy, the Nitrates Directive and the Renewable Energy Directive.

However, this catalogue of measures should come with a strong health warning, even apart from the apparent discrepancy in the total number of agriculture policies and measures just noted. This is partly because countries report policies and measures at different levels of aggregation. For example, Austria reports just one measure “This measure summarises the implementation of the programme for rural development 2014-2020 and the implementation of the Common agricultural policy (CAP). Herein measures such as improved feeding of pigs and poultry, covering of manure storage, low-loss application of manure and biogas slurry, promotion of organic farming, reduced usage of mineral fertiliser and promotion of grazing are summarised”. Other countries would report each of these as separate individual measures.

More disconcerting is that there are clear gaps in what Member States report. For example, all Member States have put in place support for organic farming. Some countries report this as a GHG mitigation measure, many don’t. Ireland lists just one agricultural mitigation measure – the use of nitrification and urease inhibitors in conjunction with nitrogen fertilizers under its agri-environment-climate scheme GLAS. But its National Mitigation Plan published in 2017 and which was the relevant planning document in March 2019 when the MMR report was submitted lists many more initiatives in its agricultural chapter. I suspect there are similar gaps for other countries.

Absence of quantification of measures

The way in which policies and measures are reported would be less significant if they were associated with clear quantitative targets. Ideally, one would like to see a specified reduction target for a sector consistent with a Member State’s overall targets, and then a series of individual policy measures with associated emissions reductions which, when summed together, would add up to the reduction target. The MMR reporting template encourages Member States to provide this information, but very few do. According to the EEA, only 18% of single measures affecting the agricultural sector have at least one quantitative estimate on expected emission savings. And the information that is provided does not seem very reliable, despite the QC/QA process it undertakes.

For example, take that Irish planned measure (listed as planned in early 2019 but also listed as implemented in 2018) to encourage the use of nitrification and urease inhibitors. Ireland reports that this measure will lead to a reduction in CO₂e emissions of 187,240 tonnes in 2020, 187,340 tonnes in 2025 and 187,470 tonnes in 2030. The adoption curve of this innovation by farmers implicit in these figures does not seem credible. But Ireland at least has attempted some quantification and remains very much the exception.

The technical difficulties in estimating the impact of specific mitigation measures should not be underestimated. However, without information on the expected emissions reductions that can be achieved with different measures, and an estimate of the cost of each measure, it will not be possible for Member States to prioritise and choose between different measures nor to undertake meaningful policy evaluation.

Many Member States will have available Marginal Abatement Cost Curves (MACCs) showing various possible interventions and their abatement potential at different economic prices which could be used as the basis for developing these policy impacts. There is a very helpful review of the lessons learned in the development of agricultural MACCs in various EU countries in this 2018 paper by Eory et al in the Journal of Cleaner Production (open access version here). We are clearly a long way from this desirable state in agricultural mitigation policy.

Additional measures in the Farm to Fork Strategy

The Commission’s proposal for a Farm to Fork Strategy as part of the European Green Deal (now delayed at least to the end of April by the measures taken to control the spread of the coronavirus) will have some implications for future agricultural emissions mitigation potential but how important it will be remains to be seen. Some clues are available from the latest (13 March 2020) draft of the Strategy published by politico.eu under preparation in the Commission but it is important to remember that this is still a document under development and further changes can be expected.

Specifically, as far as food production is concerned, the Strategy is expected to increase the level of ambition to reduce significantly the use and risk of chemical pesticides, as well as the use of fertilisers and antibiotics. It is also expected to push for an expansion in the area under organic agriculture. To promote efforts to encourage carbon sequestration, it is likely to propose an “EU carbon farming manual” to quantify emission reductions and carbon removals in farms and forestry system as the basis for payments (e.g. under CAP support) and for labelling.

Additional initiatives will be proposed on the food consumption side, including measures to reduce the environmental impact of the food processing and retail sectors, reducing food waste and labelling to nudge consumers into making more sustainable food choices. Environmental NGOs are pressing for the inclusion of further initiatives to reduce meat consumption and production.

A number of these measures would indeed help to reduce agricultural emissions. Reduced nitrogen fertiliser use would help to limit N₂O emissions and, depending on how it was implemented, along with an increased area under organic farming, could have an indirect effect on ruminant livestock numbers. Improving the robustness of carbon accounting on farms could open the way for additional market-based incentive policies whether financed by the CAP or by the private sector.

Successful implementation will require these targets and measures to be fully integrated into national CAP Strategic Plans. It is reported that the Strategy will encourage Member States to set ambitious targets and to put in place reporting arrangements on the delivery of the objectives of the Strategy. For this to happen, the Strategy will need to strengthen the governance arrangements for the preparation and approval of national CAP Strategic Plans.

Conclusions

The minimal reduction in EU agricultural emissions that has taken place in recent years (if measured with 2005 as the starting date) and the limited reduction foreseen in Member State projections raise many questions. It is generally acknowledged that agricultural emissions cannot be reduced to zero, but what would be an appropriate target? What is the scope for reducing emissions by adopting different agricultural practices or techniques or can emissions only be reduced by reducing activity levels? If activity levels are reduced in Europe, what is the impact on global emissions?

Agricultural emissions are predominantly non-CO₂ gases. Does the current metric of aggregating different gases to CO₂ equivalents using the Global Warming Potential (GWP100) accurately reflect the impact of agricultural emissions on global temperature, given the different characteristics of short-lived gases such as methane and long-lived gases such as CO₂ and N₂O in the atmosphere? The answer to this question will influence the priority given to reducing emissions from ruminant livestock.

The biannual review of the policies and measures reported by Member States to reduce agricultural emissions under the MMR remains deeply problematic, even if the 2019 review was the third time the exercise was undertaken. The data reported are incomplete, both with regards to the coverage of measures and their quantification. Where data are reported, they are not always accurate or reliable. As emissions reduction targets become more stringent, it is in the interests of Member States themselves to improve the quality of this reporting. The information sought is the necessary basis for designing the most cost-effective pathways for emissions reductions when establishing the climate action elements in CAP Strategic Plans.

Despite the limited reduction projected for agricultural emissions up to 2030, a number of national farm organisations (for example, in Denmark and the UK) as well as various food firms (notably concentrated in the dairy sector, see chart below) have announced their intention to have net-zero emissions by or before 2050. Given that agricultural emissions cannot be reduced to zero, these commitments assume that agricultural emissions will be offset by carbon sequestration in sinks or displacement of fossil fuel emissions in other sectors.

Official EU policy is only partly supportive of these initiatives. The idea of offsetting carbon dioxide emissions by land-based removals remains controversial although it is fully congruent with the Paris Agreement. This sets out the objective of “a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century” in order to achieve the long-term temperature goal of holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

Suspicion that carbon sequestered in natural sinks is highly uncertain, difficult to measure, may not be permanent and can be used to justify less ambitious targets to reduce fossil fuel emissions influenced the design of the 2030 Climate and Energy Framework. Fungibility between net sink removals in the LULUCF sector and emissions in the effort-sharing sector (including agriculture) is severely limited for these reasons (the linkages between the two policy regimes are explained in my blog post here). The various arguments are reflected in the responses to the Commission’s 2015 public consultation on addressing greenhouse gas emissions from agriculture and LULUCF in the context of the 2030 EU climate and energy framework and in the subsequent impact assessment.

While a refusal to allow fossil fuel emissions to be offset by LULUCF credits can be justified, this is not the case for agricultural emissions which, as we have seen, cannot be reduced to zero. Furthermore, for a farmer making decisions on how best to manage his or her land, a sharp distinction between agricultural emissions and land-based removals does not make sense. These activities are so closely linked together that the appropriate signal to farmers should be a combined target.

This is recognised in the way the Scottish government presents its emissions inventory, which reports net emissions from ‘agriculture and related land use’. In addition to emissions from livestock and agricultural soils, this includes net emissions from cropland, grassland along with net emissions from land converted to cropland and grassland. It also includes energy emissions from stationary combustion sources and off-road machinery.

In the Scottish approach, forestry removals are reported separately in a forestry sector that is kept separate from agriculture and related land use. It includes changes in net emissions resulting from afforestation, deforestation and harvested wood products. The basis for Scotland’s approach is discussed in this paper ‘The true extent of agriculture’s contribution to national greenhouse gas emissions’ by Bell et al, 2014.

My key conclusion is that it does not make sense to evaluate the efforts made by the farming sector to tackle climate change by looking solely at the trend in agricultural emissions without taking into account at the same time its contribution to carbon removals (as in Scotland and Ireland, when reporting agricultural emissions, on-farm energy use should also be included). While LULUCF emissions and removals are fully integrated into the EU’s climate policy from next year, the signals and incentives given to farmers are not coherent.

The EEA must continue to report EU emissions inventories and trends and projections to the UNFCCC in the format prescribed. However, for the purpose of tracking progress within the EU it should prepare a supplemental set of accounts along the lines of the Scottish approach that integrate agriculture and related land use. In countries where woodlands and new tree planting takes place on agricultural land, consideration might be given to including this under the ‘agriculture and related land use’ heading rather than forestry. This would both facilitate more credible target-setting for the agriculture sector as well as describe more accurately the efforts being made by the farming sector to address climate change. Focussing solely on agricultural emissions is simply misleading and will demotivate farmers who are also required to help in stabilising the climate.

At the same time, in the context of the greater climate ambition set out in the European Green Deal and the Farm to Fork Strategy and more stringent 2030 targets, there is a need to re-open the 2018 agreement on the treatment of LULUCF emissions and removals. There may be a case to discount LULUCF removals to take into account their lack of permanence and the uncertainty of measurement. However, once that decision is made, there should be no artificial limit on the amount of removals from ‘related land use’ that can be transferred to the effort-sharing sectors where they should be reported combined with agricultural emissions as recommended above.

This post was written by Alan Matthews

Picture credit: PxHere CC Public Domain

Update 22 October 2020: The disruption caused by the transition to market economies in the newer EU Member States has been added as a possible cause of the sharp fall in emissions between 1990 and 1993.

May 5, 2019May 10, 2019

Climate policy in agriculture and carbon leakage

Efforts to reduce greenhouse gas emissions in a single country will usually lead to increased emissions in other countries – a phenomenon called carbon leakage (for simplicity, I will use the term carbon leakage although the same outcome also applies to other greenhouse gases). Various mechanisms contribute to this effect:

If climate policy increases production costs, this will reduce the competitiveness of domestic production relative to countries without or with a laxer climate policy. Consumers will shift their purchasing to the cheaper imported alternatives. The effect will be that some emissions-producing production will shift to third countries with the laxer climate policy – the competitiveness channel.
If climate policy in a single country reduces consumption of fossil fuels (for example, through a carbon levy), this will lower the world market price of fossil fuels a little, which will encourage increased consumption in third countries – the fossil fuel channel.
The institutional design of carbon policy can also influence carbon leakage. For example, the operation of the EU Emissions Trading System (ETS) has meant that if one EU country through effective climate policy reduces its demand for allowances, the price of allowances will fall sufficiently to ensure that these allowances are used in other EU countries, contributing to high leakage. The recent reform of Phase 4 of the ETS will help to reduce this leakage rate. Conversely, the fact that all EU countries have national reduction targets in the non-ETS sector will help to reduce carbon leakage. To the extent that signatories to the Paris Climate Agreement in their nationally-determined contributions (NDCs) have set a ceiling on future emissions, this will also help to reduce carbon leakage – the policy design channel.
Climate policy can have an incentive effect on the willingness of third countries to also increase their mitigation efforts, which may be either negative or positive. There could be a negative incentive effect if more ambitious reduction targets in the EU lead other countries to sit back and take it easier. Or the incentive effect could be positive if other countries are inspired or obliged (for example, by inserting climate clauses in trade agreements) to also increase their level of ambition – the incentive channel.
Finally, carbon leakage can be influenced by technology spillovers. If the EU adopts an ambitious climate target this will incentivise and speed up the development of low- or zero-emissions technologies. Once developed, these technologies can then be used by other countries to reduce their emissions in turn – the technology spillover channel.

The importance of these leakage effects can be measured using an indicator called the leakage rate. The leakage rate expresses how much of a reduction in domestic emissions is replaced by emissions in third countries. If climate policy reduces domestic emissions by 10 tonnes of carbon dioxide equivalent (CO2eq) and emissions increase by 3 tonnes CO2eq in third countries, the leakage rate is 30%. How big the leakage rate is will depend on factors such as the openness of the economy, the policy instrument used to reduce emissions, and the extent of the reduction ambition.

Leakage rates will differ across sectors. High leakage rates will be associated with sectors:

with a higher emissions intensity per euro of output or gross value added because these sectors will experience a greater increase in production costs, other things equal;
which are more exposed to international competition making it easier to substitute domestic production by imports, thus making it more difficult to pass through a higher carbon cost to consumers;
which have fewer technological options to switch to lower-emissions technologies;
and where the emissions intensity of production in third countries is higher than for domestic production.

In this post I examine the phenomenon of carbon leakage in the agricultural sector as a result of climate policy, review some estimates of its size and discuss its significance for agriculture’s role in climate mitigation policy.

Danish Environmental Economics Council study 2019

A recent study by the Danish Environmental Economic Council attempts to calculate the size of leakage effects by sector for the Danish economy, taking into account the specific design of EU climate policy.

For the technically minded, the calculations were done with a modified version of the GTAP-E model. One important extension was to include emissions of methane and nitrous oxide as well as carbon dioxide in order to be able to include agriculture in the calculations. The model was also adjusted to take account of EU climate policy instruments including the ETS and national non-ETS sector targets as well as emissions ceilings in other countries arising from the Paris Agreement.

Scenarios. The study first calculates an economy-wide leakage rate by applying a uniform levy of DKK 100 on each tonne of COeq emitted by households, the public sector and economic sectors. For agricultural emissions, the levy is calculated on the basis of average emissions from crop and animal production. In the case of animal production it is assumed that emissions reductions can only take place through a reduction in activity. To the extent that this proves too extreme and emissions can be reduced through a change in inputs, the fall in production and thus the leakage rate in this simulation will be overstated.

Results. The simulation shows that for the economy as a whole a reduction of 4.5 million tonnes CO2eq would be offset by an increase in emissions in other EU countries equal to 2.3 million tonnes CO2eq with roughly unchanged emissions in third countries, resulting in an overall leakage rate of 52%. The leakage rate is due to the substitution of production in countries outside Denmark for Danish production as well as the fact that the emissions intensity of non-Danish production is on average higher.

The story for Danish agriculture is somewhat different. Here the leakage rate is calculated to be 75% as against 52% for the economy as a whole. This higher leakage rate is due to three factors.

First, consumption of food products both in Denmark and elsewhere is relatively insensitive to changes in prices and income, so a reduction in Danish production results in a similar corresponding increase in imports.

Second, there is a relatively larger fall in Danish agricultural production because of the limited ability to reduce emissions by altering input use through technological substitution.

Third, because further increases in agricultural production in other EU countries is assumed to be limited by each country’s national non-ETS sector targets, most of this increase in production will come from third countries outside the EU. Crop production in Denmark is estimated to be a little more emissions-intensive than in the rest of the EU, while animal production is a little less emissions-intensive. The emissions intensity of crop production in third countries outside the EU is estimated to be roughly similar to Denmark, while the emissions intensity of animal production is calculated to be twice as high. Because much of the reduction in Danish agriculture takes place in animal production, the leakage due to the substitution of production in Denmark by imports from third countries outside the EU is further exacerbated by the higher emissions intensity of imported products. 31 percentage points of the leakage rate of 75% is due to the lower carbon efficiency of imported agricultural products.

An annex in an accompanying document note (p. 74, only in Danish) provides a decomposition of this leakage rate, distinguishing between direct and indirect effects. The direct effect represents the change in agricultural emissions in other countries compared to the change in emissions from the agricultural sector in Denmark. This is calculated to be 122 kg CO2eq increase in agricultural emissions in other countries for every reduction of 100 kg CO2eq agricultural emissions in Denmark.

This leakage rate of 112% is reduced to 75% because of indirect or general equilibrium effects. The release of production factors from Danish agriculture, by altering the relative prices of land, labour and capital, will lead to further changes in the production structure of the Danish non-agricultural sector which will, in this case, lead to a further reduction in emissions in Denmark. A similar restructuring of non-agricultural production will also take place in other countries as resources are pulled into their agricultural sectors. By reducing non-agricultural emissions this general equilibrium effect offsets some of the increased emissions from agriculture in other countries.

A sensitivity analysis shows that the leakage rate for the agricultural sector would be greatly reduced (more than halved) if the Paris Agreement were to result in binding national ceilings in many third countries outside the EU (the simulation assumes binding targets for all countries except the large economies of China, India, Russia and US). However, there will be scepticism around the binding nature of the Paris Agreement NDCs until they have begun to show their worth.

There is one important qualification to these results. The study assumes that Denmark is the only country that implements a climate policy, by implementing a levy on CO2eq emissions of DKK 100 per tonne. Other EU countries are assumed to have binding non-ETS sector targets such that their emissions cannot increase. This limits their ability to increase production in response to lower production in Denmark, but there is no attempt made to model similar climate policies in other EU countries as in Denmark. Coordinated action by a group of countries to limit GHG emissions would reduce the leakage rate for any one of them, unless the supply response in third countries is perfectly elastic which will not be the case.

We cannot be sure how the non-ETS climate targets in other EU countries will specifically affect agricultural production, as there are no national targets for reductions in agricultural emissions in EU climate policy. However, to the extent that EU climate policy leads to adjustments in agricultural production across the EU and not just in an individual Member State, the leakage rate for that Member State will be reduced.

ECAMPA 2 2016 study

These Danish results can be compared to the leakage rates estimated in the ECAMPA 2 study conducted by the Joint Research Centre (JRC) for the European Commission shown in the figure below. Some important differences between the two studies should be noted. The Danish study is based on a computable general equilibrium model, GTAP, while the JRC study is based on a partial equilibrium model, CAPRI. The JRC study adopts specific mitigation targets for agriculture and models the appropriate levy rate endogenously. The Danish study chooses a levy rate which leads to a relatively low reduction in agricultural emissions (-5% compared to the 15-25% reductions assessed in the JRC study). The JRC study includes some mitigation technologies for animal agriculture, in contrast to the Danish study which links emissions to the level of output solely. Finally, the JRC study simulates mitigation reductions in all EU countries simultaneously, while the Danish study only considers national reductions in Denmark. It is probable that the emissions intensities assumed for crop and animal production both in EU and non-EU countries also differ as different databases are used.

Several scenarios were evaluated in the ECAMPA 2 study.

Three scenarios (HET15, HET20 and HET25) which have a compulsory mitigation target for EU agriculture of 15%, 20% and 25%, respectively, distributed across Member States according to cost effectiveness and assuming restricted potential of mitigation technologies.
Two scenarios (SUB80V_15, SUB80V_20) which have a compulsory mitigation target for EU agriculture of 15% and 20%, respectively, distributed across Member States according to cost effectiveness, assuming restricted potential of mitigation technologies and with an 80% subsidy for the voluntary adoption of mitigation technologies.
One scenario (SUB80V_20TD) with a 20% mitigation target, an 80% subsidy for the voluntary adoption of mitigation technologies and ‘unrestricted’ potential of the mitigation technologies (i.e. more rapid technological development).
One scenario (SUB80O_20) with a 20% mitigation target and an 80% subsidy for the mandatory adoption of selected mitigation technologies and for the voluntary adoption of the remaining technologies.
One scenario (SUB80V_noT) with no specific mitigation target for EU agriculture but with an 80% subsidy for the voluntary adoption of mitigation technologies.

The leakage rate for the various scenarios as calculated for the year 2030 is shown in the figure above. For the scenarios without subsidies, the leakage rate increases with the ambition of the mitigation target. With higher mitigation targets, more of the emissions reduction takes place by reducing production.

Using subsidies to offset most of the cost of adopting mitigation technologies reduces the leakage rate considerably because now EU farmers mitigate more emissions via the use of technologies rather than by reducing production. Indeed, subsidising the adoption of mitigation technologies alone could even lead to a negative leakage rate (scenario SUB80V_noT, shown as SUB80_noT in the figure) because some assumed mitigation technologies (e.g. breeding programmes) have a positive effect on production efficiency, leading to production increases and the replacement of non-EU production with a higher emissions intensity by EU production exported.

The ECAMPA 2 study also reviews how the leakage rate is affected by assumptions regarding the rate of improvement of emissions intensities in non-EU countries. The assumption behind the leakage rates reported above is that emissions intensities in non-EU countries would continue to grow at their trend rate. This is facilitated by the technology spillover mechanism identified at the outset of this post. If there were no further improvement in emissions intensities in non-EU countries, then not surprisingly the leakage rate would increase by between 9 and 15 percentage points depending on the ambition level of the mitigation target. Most of the emission leakage happens because of trade in meat products (this aspect is further elaborated in this 2016 paper by Barreiro-Hurle and others from the JRC team).

These studies come to very different conclusions regarding the size of the leakage rate (I am not aware of other studies that specifically calculate leakage rates for agriculture but please email me if I have overlooked one). The lower rates in the ECAMPA 2 study may reflect different assumptions regarding the relative emissions intensity of EU and non-EU production, the fact that it includes some emissions-reducing technology options for animal agriculture, or the fact that it assumes a coordinated effort by all EU countries together rather than by one country alone. Generally, leakage rates calculated for specific sectors are in the range 5%-30% in the economic literature, so these studies support the view that leakage rates are likely to be higher in agriculture than in other sectors.

These studies assume that efforts are made to reduce emissions from agricultural production. Some argue instead that the focus should be on reducing consumption of emissions-intensive foods and particularly red meat. Consumers are urged to adopt vegetarian or vegan diets or at least to eat less meat in order to reduce their climate footprint, and some suggest a tax on meat consumption to accelerate this trend.

Reduced meat consumption from its current high levels in the EU would help to lower emissions from the food system (and would also contribute to improved health outcomes). But also here there will be a carbon leakage effect so that reduced emissions in the EU will be partially offset by increased emissions outside the EU. This will be due to the fossil fuel channel identified at the outset although now initiated by a reduction in meat consumption rather than fossil fuel use.

Reduced meat consumption in the EU will lead either to lower imports or increased meat exports, and in either case will tend to lower world market prices. These lower world market prices will give an incentive to increase meat consumption in non-EU countries, thus partially offsetting the reduction in emissions within the EU.

A recent paper (Zech and Schneider 2019) quantifies this effect and calculates that 43% of the reduction in greenhouse gas emissions inside the EU would be offset by emissions leakage. They calculate that increased EU net exports would in fact offset 70% of the demand reduction. But because these increased EU net exports would in part offset some non-EU production which has a higher emissions intensity, the overall leakage rate is reduced to 43%.

Conclusions

If we are only interested in reducing emissions on the national territory, then the phenomenon of carbon leakage is irrelevant as we are not interested in what happens to emissions in the rest of the world. If, however, we want to lower global emissions as well as national emissions, then it makes sense to take leakage rates into account when designing national climate policy. All other things equal, sectors with a relatively higher leakage rate should be treated more leniently either when setting domestic emission reduction targets by sector or when implementing national climate policy instruments such as a carbon levy or in setting regulatory standards.

A more lenient approach for agriculture but not exemption. As we have seen, the limited evidence suggests that EU agriculture has a higher leakage rate than other sectors, which would support a more lenient approach to agricultural emissions when determining national climate policies in the EU. However, a more lenient approach is not the same as exempting the agricultural sector from making a contribution to emissions reduction.

First, although the leakage rate may be high, there is no empirical evidence that it is greater than 100% so there is still a reduction in global emissions as well as in national emissions when agricultural emissions are reduced. This is an important finding, as it is sometimes argued that reducing agricultural emissions in Europe will lead to an increase in global emissions because of the higher emissions intensity of production outside Europe. At least in the studies reviewed in this post, this is not the case (although the Danish study found a leakage rate of 112% if only the direct effects comparing the change in agricultural emissions alone inside and outside Denmark are considered).

Second, exempting sensitive sectors completely can be very expensive. This is because the burden of emissions reduction is increased on the non-sensitive sectors where the cheapest reductions have already taken place, while one foregoes relatively cheap reduction possibilities in the sensitive sectors.

Third, reducing emissions from agricultural production has other positive benefits for society, notably from a reduction in ammonia emissions (leading to improved air quality) and a reduction in nitrate emissions (leading to improved water quality). The Danish Environmental Economics Council report notes that, in the Danish case, one would achieve must of the optimal reduction in agricultural GHG emissions simply by living up to the targets for reduced nitrogen leaching from agriculture. If co-benefits are considered when assessing agricultural mitigation potential, they should also be considered for all relevant alternatives.

Finally, EU Member States must weigh up the effects of carbon leakage against their economic interests. Countries that fail to meet their non-ETS targets from domestic emission reductions must purchase emission allowances from other Member States or face a Commission fine. Where the production that is lost is worth less in terms of profit than the cost of buying additional emission units Member States have an economic incentive to accept the loss of production. If emission obligations are not devolved this cost is borne by taxpayers as a fiscal cost.

Addressing leakage effects. The other approach that Member States can adopt is to attempt to reduce the leakage rate. Here there are five approaches.

Global coverage of emission reductions. Leakage can only occur if production can move off-shore in response to the introduction of national climate policy measures. Leakage can be avoided or reduced if the main competitor countries have also signed up to binding emission limits. Thus it should be a priority for EU policy to strengthen the commitment to strict implementation of pledges to limit and reduce emissions under the Paris Agreement. The access offered to the EU market when entering into free trade agreements with third countries should be used to this end.

Encourage innovation on less emission-intensive technologies. Carbon leakage arises when production is reduced in order to meet emissions reduction targets. One reason for the high leakage rate in agriculture is the lack of relatively cheap low-emission alternatives particularly but not only in animal agriculture. Innovation to develop low-cost technologies that can help to lower emissions without reducing production should be a priority.

Border carbon adjustments. Border carbon adjustments can neutralise leakage effects that occur through trade though not with 100% effectiveness. Perfectly targeted CO2eq import taxes (or some equivalent mechanism that would require importers to purchase a corresponding amount of emissions allowances) would be based on the precise CO2eq footprint of each individual imported good, including indirect emissions from relevant inputs into its production, while any CO2eq levies paid would be rebated for exports. Practical systems will of necessity be blunter, for example, by only levying or rebating the emissions directly associated with the good’s production. However, although widely proposed, no country has yet adopted them, either due to the practical difficulties involved or because of legal uncertainty whether they are compatible with WTO trade rules.

Free allocation of allowances based on benchmarks. This is the approach used in the EU Emissions Trading System to avoid carbon leakage for manufacturing industry. While normally the allowances that manufacturing firms must acquire to be able to emit greenhouse gases are auctioned, free allowances are given to industries on the Carbon Leakage List as defined under the relevant legislation.

In the past, industries (defined at the NACE 4-digit level or sometimes lower) were added to the Leakage List if they could show they fulfilled certain criteria related to openness and emissions intensity. Either the direct and indirect costs of acquiring allowances (at a price assumed to be €30 per allowance) increased production costs by at least 5% of gross value added and trade intensity (calculated as the value of imports plus exports over annual turnover plus imports) is over 10%, or direct and indirect costs increased production costs by at least 30%; or trade intensity is over 30%. The proportion of free allowances in the total is capped at 43%; if the demand for free allowances exceeds the cap, then the allocation of free allowances to individual industries on the Leakage List is proportionately reduced.

In the amendments to the ETS legislation adopted last year (Phase 4), the criteria to be added to the Leakage List are amended to showing that an industry exceeds a specific threshold resulting from the product of multiplying their intensity of trade with third countries by their emission intensity, measured in kgCO2 divided by their gross value added (in euros). Where this product exceeds 0.2, an industry will be deemed to be at risk of carbon leakage and will be eligible for up to 100% free allowances. Where this product exceeds 0.15, an industry can receive up to 30% free allowances. The free allowances allocated are based on each firm’s output based on benchmarks derived from the 10% most efficient installations. One estimate is that manufacturing sectors on the Carbon Leakage List currently account for 97% of EU industrial emissions, and this might decrease to 90% under the new criteria (EPRS 2018). Most food processing industries are included on the Carbon Leakage List. In lobbying around the post-2020 ETS (Phase 4), COPA-COGECA along with FoodDrinkEurope and the Primary Food Processors associations stressed the importance of continuing free allowances to these sectors.

Revenue recycling. This is yet another way to reduce carbon leakage rates but is only relevant if a carbon levy is an instrument used to reduce agricultural emissions. The revenue yield from a carbon levy on agriculture would be returned to the agricultural sector. This could be done in various ways, for example, as a top-up to a farmer’s basic payment, or to subsidise the adoption of emissions-reducing technologies. The impact of the latter approach in reducing leakage rates is clearly shown in the ECAMPA 2 study.

In summary, carbon leakage complicates the design of climate policy to reduce agricultural emissions. Agriculture appears to be a sector vulnerable to relatively high leakage rates. This argues in favour of a more lenient approach to reducing agricultural emissions to the extent that Member States take account of the effect of their policies on global emissions and not only emissions on their national territory.

However, given that special treatment to any one sector raises the overall cost of the transition to a net-zero emissions economy by 2050, it is important that Member States simultaneously pursue ways of reducing carbon leakage in agriculture using one or several of the instruments just discussed. To the extent that leakage rates in agriculture can be brought more into line with those in the other economic sectors in the non-ETS sector, the case for special treatment is reduced. The need for a continuous evaluation of leakage rates across a wider range of EU economies is clear.

Update 7 May 2019: The post was edited to make clear that the overall leakage rate of 75% for Danish agriculture calculated in the Danish study included general equilibrium effects. If only direct effects comparing the the change in agricultural emissions inside and outside Denmark are considered, the leakage rate is calculated to be 112% – h/t LJ.

This post was written by Alan Matthews