Integrating agriculture into carbon pricing

In this working paper we examine whether it would be possible and reasonable to integrate the agricultural sector into CO2 pricing. CO2 pricing has been practiced in Europe for years. The EU Emissions Trading System (ETS) regulates emissions from approximately 12,000 large-scale plants in the energy and energy-intensive industries, as well as emissions from intra-European aviation. The ETS thus comprises almost half of Europe's greenhouse gas emissions. The politically defined mitigation targets are achieved in the ETS area (albeit with the participation of various other climate policy instruments), whereas they have so far been missed in the non-ETS area. In Autumn 2019, the German federal government presented a climate protection law that provides a comprehensive set of measures. One of the most important measures here is the inclusion of fossil heating and fuel in emissions trading. Initially, only a nationally-based trading system is planned for these sectors, and CO2 prices are to be kept low in the initial phase. The long-term effect of this system change can, however, be considerable: approximately 85 percent of Germa-ny's greenhouse gas emissions will soon be included in emission trading. This means that emissions can be gradually reduced along an initially agreed upon reduction path without the policymakers constantly having to fight for new decisions. Besides certain emissions from industrial processes, emission trading then only misses the areas of agriculture and land use. Against this background, it is the aim of this working paper to comprehensively examine whether these areas could also be integrated. First, based on economic theory and political experience, we show that the advantages of CO2 pricing compared to other climate policy options are the following: (1) Emission reduction targets are achieved along the politically-determined savings path. (2) All companies and all consumers are supplied with scarcity signals via prices, so that all people constantly participate in the “reduction and innovation competition”. (3) Emission reductions ultimately take place where they cause the lowest economic costs. (4) The system is based on market principles and is therefore particularly well-connected to a globally coordinated climate mitigation policy. However, two major challenges can be derived from the theoretical discussion, which can make it more difficult to integrate agriculture and land use into emissions trading: (1) Agricultural emissions come from many diffuse sources. It is therefore not easy to find starting points for climate mitigation measures that can be administered legally and with reasonable effort. (2) Agricultural and forestry products are traded internationally on a large scale. CO2 pricing in Europe can therefore lead to emissions-intensive production branches being relocated to third countries and thus lead to higher greenhouse gas emissions elsewhere (leakage effects). Theoretically, the best policy concept would be to use the “individual greenhouse gas balance” of each individual farm (i.e., an aggregate of all farm emissions minus the long-term carbon seques-tration on its land) as a control parameter. In practice, however, it is not possible to determine the data required for the many farms in a justifiable and reasonable manner. Therefore, in the further course of the article we will investigate how the different groups of greenhouse gases (nitrous oxide, methane, carbon dioxide) could be integrated into CO2 pricing.