Applying the polluter pays principle: an emissions trading system for agriculture

AUTHORS: Robin van Dijk, Krystyna Springer, Julia Bognar

Approximately 13.2% of the EU’s total greenhouse gas emissions can be directly attributed to agricultural activity, with estimates climbing even higher when emissions from on-farm energy use are included (EEA 2023). It is therefore necessary to significantly reduce agricultural emissions in order to reach climate neutrality in 2050. Applying the polluter pays principle to this sector offers a valuable policy approach to drive the transition towards a sustainable agri-food system.

According to the 2023 Climate Progress Report, EU agricultural emissions are projected to go down by 1% under existing measures and by 5% with additional measures. Net carbon removals, meanwhile, are expected to fall short of the Regulation on land, land use change and forestry (LULUCF) target of –310 million tonnes of removals by 2030. To deliver on the EU’s commitment to reach climate neutrality in 2050, ambitious emission reductions are required in the agricultural sector. These worrying trends highlight the necessity of exploring new policy instruments that go beyond the EU’s current climate framework to ensure that climate mitigation in agriculture is effective and efficient.

The polluter pays principle is a commonly applied tool to address the problem of negative externalities. Since the environmental and social costs of agricultural GHG emissions are not incorporated into the agri-value chain, applying the polluter pays principle can help reduce the gap between market prices and the actual costs of food commodities. This can enable a fairer distribution of costs among market participants, future generations and ecosystems.

There are various policy instruments categorised as polluter pays policies. These include, for instance, an emissions trading system (ETS), a carbon tax, or subsidy reductions for polluting activities. An emissions trading system is a market-based application of the polluter pays principle. An ETS sets an emissions ceiling on the total amount of GHGs that can be emitted by the operators included in the system. Participants are then required to hand over a certain number of emission allowances, depending on their total GHG emissions. The objective of this policy instrument is to incentivise participants to invest in innovative technologies that reduce their emissions, allowing them to sell remaining allowances to other operators.

The market-based design of an ETS brings some key advantages. An ETS can promote the adoption of low-emission technologies through price signals, while trading offers the flexibility to achieve emission reductions where they occur at the lowest abatement costs. It also generates revenues that can be used to finance additional policies fostering a change in practices. This makes an ETS a compelling policy instrument to evaluate in the context of the EU’s agri-food system.

Against this background, IEEP, Trinomics, Ecologic Institute, Carbon Counts and Umweltbundesamt have conducted a study to examine potential ETS options for agriculture. The study presents five ETS options to apply the polluter pays principle to agricultural GHG emissions. These are the following:

An on-farm ETS for all greenhouse gas emissions: this option includes all greenhouse gas emissions from agriculture in its scope, including net LULUCF emissions from croplands and grasslands. The point of obligation would be all types of farms (arable, livestock, and mixed).
An on-farm ETS for livestock emissions only: this option focuses on selected emissions associated with livestock production, specifically from enteric fermentation and manure management. The point of obligation would be livestock and mixed farms.
An on-farm ETS for peatlands only: this option applies to emissions from drained peatlands utilised for agricultural production. The point of obligation would be farms on such lands.
An upstream ETS: this option focuses on emissions from enteric fermentation (feed production and imports), nitrous oxide emissions from soils (use of fertilisers), and urea application (use of fertilisers). The point of obligation would be for fertiliser and feed producers and importers.
A downstream ETS: this option focuses on emissions from enteric fermentation and manure management. The point of obligation would be for meat and dairy processors.

It is important to consider that these policy options come with key challenges that need to be addressed. There are more than 9 million active farmers in the EU and there are uncertainties associated with measuring agricultural GHG emissions. If the points of obligation were to be placed on a large number of farmers, this would entail a high administrative burden as well as significant costs for monitoring, reporting and verification (MRV). Nevertheless, in all the examined policy options farmers would need to be involved to at least some extentto achieve on-farm emissions reduction. Therefore, the MRV system must balance cost-effectiveness with environmental integrity. In addition, the risk of carbon leakage merits consideration. The study explores potential approaches to mitigate carbon leakage, such as a carbon border adjustment mechanism, free allocation of emission allowances or a renegotiation of trade agreements. However, given that the agri-food sector comes with its unique challenges, the question of carbon leakage deserves elaboration in further research.

Overall, an ETS for agriculture can build upon the EU’s existing policy framework and incentivise farmers to implement agricultural practices that reduce emissions. If an ETS for agriculture was selected as the desired instrument, the strengths and weaknesses of specific policy design need to be carefully weighed. An all-GHG ETS has the broadest scope to incentivise emissions reductions but entails greater administrative complexity and costs. An upstream or downstream option offers the potential to facilitate a whole value-chain approach to addressing agricultural emissions and can incentivise off-farm mitigating actions. However, their effectiveness will strongly depend on the incentives that are passed to farmers for adopting climate-friendly practices. Stakeholder support for an ETS also varies across policy options; the downstream option has received the most positive response in the study’s stakeholder survey, followed by the on-farm and upstream options with neutral to positive support. These design aspects of the various policy options must be considered when formulating an ETS for agriculture.

Should the EU consider moving forward with an ETS for agriculture, certain actions would need to be taken to effectively phase in such a policy instrument. A widespread change in farming practices would require large-scale investments in machinery, equipment, management regimes and training. Transitional financial support could help farmers with the investments necessary to bring them into compliance. In addition, harmonised GHG reporting could help to ensure that farmers have access to context-specific detailed and timely information on cost-effective abatement measures. A Decision Support Platform (DSP) could be integrated into the reporting tool to provide farmers with understandable and practical information on the GHG performance of their farms and help develop an action plan to implement mitigation practices. Such actions can help integrate the ETS for agriculture into the EU’s broader policy mix for climate mitigation.

Photo by Megumi Nachev on Unsplash

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