Location: Baltic Sea

The Future of Energy Infrastructure Resilience in Europe

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In the wake of Russia’s full-scale invasion of Ukraine, large parts of Europe have experienced skyrocketing energy prices and a threat of power shortages. The need to transition to low-carbon energy systems, driven by sustainability concerns, further adds to the pressure put on the European energy infrastructure. This year’s Energy Talk, organized by Stockholm Institute of Transition Economics, invited four experts to discuss the opportunities and challenges of energy infrastructure resilience in a foreseeable future.

Introduction

Energy infrastructure has an indispensable role in facilitating the functioning of modern society, and it must – today as well as in the future – be resilient enough to withstand various challenges. One of the most important challenges – the green transition: shifting towards economically sustainable growth by decarbonizing energy systems and steering away from fossil fuels – requires energy infrastructure to absorb subsequent shocks. Another, and preeminent challenge, is that, even when directly targeted and partly destroyed as in the ongoing Russian war on Ukraine, energy infrastructure should be withstanding. Additionally, energy infrastructure is increasingly subject to supply chain disruptions, energy costs increase or network congestions. How does our energy infrastructure react to these challenges? How do they affect its ability to facilitate the needs of the green transition? Which regulations/measures should be implemented to facilitate energy infrastructure resilience?

Stockholm Institute of Transition Economics (SITE) invited four speakers to the 2023 annual Energy Talk to discuss the future of Europe’s Energy infrastructure resilience. This brief summarizes the main points from the presentations and discussions.

Energy System Resilience in the Baltics

Ewa Lazarczyk, Associate Professor at Reykjavik University, addressed the question of energy system resilience, focusing on the Baltic States and their dependence on Russia and other neighbors to fulfill their electricity needs.

The Baltic States are not self-sufficient when it comes to electricity consumption. Since 2009, Lithuania has become a net importer of electricity, relying on external sources to fulfill its electricity demand. Similarly, Estonia experienced a shift towards becoming a net importer of electricity around 2019, following the closure of environmentally detrimental oil fueled power plants.

The Baltics are integrated with the Nordic market and are heavily dependent on electricity imports from Finland and Sweden. Additionally, all three Baltic States are part of the BRELL network – a grid linking the electricity systems of Belarus, Russia, Estonia, Latvia, and Lithuania – which provides stability for their electrical networks. As a result, despite the absence of commercial electricity trading between Estonia and Russia, and limited commercial trading between Russia and the other two Baltic states, the power flows between the Baltic States and Russia and Belarus still exist. This creates a noticeable dependency of the Baltics on Russia, and a potential threat, should Russia decide to disconnect the Baltics from BRELL before the planned separation in 2024/2025.

This dependency was put on trial when Russia on May 15th 2022 cut its electricity trade with Europe. On the one hand, the system proved to be relatively resilient as the cut did not lead to any blackouts in the Baltics. On the other hand, price volatility amplified in its main import partner countries, Sweden and Finland, and congestion increased as compared to 2021.

Figure 1. Price volatility in Sweden and Finland before and after the trade cut.

Notes: Sweden is split into four price zones, SE1-SE4. Finland is split into only one price zone. Source: Lazarczyk and Le Coq, 2023.

This increased price volatility and congestion following the Russian halt in electricity trade gives an indication that the Baltics and the Nordics are vulnerable to relatively small supply cuts even at the current demand levels.

In the future, electricity consumption is however expected to increase throughout the region as a result of the electrification of the economy (e.g., by 65 percent in 2050 in the Nordic region). This highlights the need to speed up investments into energy infrastructure of internal energy markets.

In summary; recent events have demonstrated a remarkable resilience of the Baltic State’s electricity system. While the disruption of commercial flows from Russia did have some impact on the region, overall, the outcome was positive. Nonetheless, it is important to note that the region relies heavily on electricity imports, and with increasing demand for power in both the Baltics and the neighboring areas, potential issues with supply security could arise if the demand in the Nordics cannot be met through increased production. The risk of an early disconnection from the BRELL network further amplifies this concern. However, the case of Ukraine – which managed to abruptly disconnect from Russian electricity networks – serves as an example that expediting the process of establishing new connections is feasible, although not risk free.

The Ukrainian Energy Sector and the Immediate Threat from Russia

While the Baltics are facing the effects from the Russian halt in electricity trade and the threat of a potential premature disconnection from BRELL, Ukraine’s energy networks are at the same time experiencing the direct aggression from Russia.

Yuliya Markuts, Head of the Center of Public Finance and Governance at the Kyiv School of Economics (KSE), and Igor Piddubnyi, Analyst on Energy Sector Damages and Losses and Researcher at the Center for Food and Land Use Research at KSE, both gave insight into the tremendous damages to the Ukrainian energy system from Russian attacks, the short-term solutions to cope with the damage, as well as the long-term implications and reconstruction perspectives.

Since the invasion, about 50 percent of the energy infrastructure has been damaged by shelling. In addition, several power plants are under Russian control or located in Russian occupied territories. As of February 2023, nearly 16 GW of installed capacities of power plants remained in Russian control, equivalent of the peak demand. Apart from the damages to the producing side, transmission and distribution facilities have also been severely affected, as well as oil storage facilities. In April 2023, the damages to Ukraine’s energy infrastructure were estimated to amount to $8.3 billion, almost 6 percent of the total estimated direct damages from the war.

While the damages are massive, the population did not experience complete blackouts, and the Ukrainian energy system did not collapse. This is partly due to diesel-driven generators substituting much of the damaged electricity generation and partly due to a fall in demand of about 30-35 percent in 2022, mainly driven by decreased industry demand.

In the short term, Ukraine is likely to continue to face Russian attacks. Its top energy priorities would thus be to restore damaged facilities and infrastructure like heating and clean water, increase the stocks of fuel, gas, and coal, and to try to liberate occupied areas and facilities. Another vital aspect of the Ukrainian energy infrastructure and its resilience towards the Russian goal of “freezing” the country relates to energy efficiency. Ukraine’s energy efficiency has been relatively low, with the highest rate of electricity losses in Europe, and the numbers are also high for gas supply and district heating. Here, minor changes such as light bulb switching, can have great impacts. Additionally, solar panels – especially those that can also store energy – can help alleviate the acute pressure on the transmission grid. Other vital measures involve continued donations from Ukraine’s partners, sustained efforts from energy workers – at the risk of their lives – and persistent successful deterrence of cyber-attacks currently targeting the country.

Achieving a greener energy system is currently challenging (if not nearly impossible) due to the use of diesel-driven generators, the attacks on the energy system, and the fight for control over nuclear power plants such as Zaporizhzhia, which since March 2022 is under the control of Russian forces. Damages to renewable energy production further exacerbate these difficulties.

Thus, it is crucial to ensure that the planning and reconstruction of Ukraine’s energy sector is done in accordance with the European Green Deal. By 2030, the country should have at least 25 percent renewables in its energy mix, which would require substantial installations of at least 13 GW of wind, solar, small hydro and biogas capacities. In addition, transition entails decommissioning old coal power plants to run on natural or biogas instead of coal.

While this is a tall task, investments targeted to the energy system are not only essential for Ukraine’s population to sustain through the 2023/2024 winter – but also to facilitate the green transition in Europe. The potential for export of biomethane, green hydrogen, and nuclear power from Ukraine to Europe is considerable. As Europe’s biofuel demand is expected to increase by 63 percent while Ukrainian grain exports are still proving to be challenging, biofuel production for export on the European market is a particularly likely future scenario for the Ukrainian energy market.

In summary; the Ukrainian energy sector has done remarkably well, considering the impact of the damages from the Russian aggression. As Ukrainian short-term energy priorities lie in facilitating quick and efficient responses to infrastructural damages, current measures may not be particularly environmentally friendly. However, the longer-term reconstruction of Ukraine’s energy sector has great potential for being in line with the green transition objectives.

Energy System’s Resilience in the Green Transition

Mikael Toll, Senior Advisor at Ramboll Management Consulting highlighted the importance of infrastructure resilience. He emphasized the significance of the Energy Trilemma in achieving a successful transition to greener energy systems. This trilemma implies balancing between energy security, environmental sustainability, and affordability, all representing societal goals. Focusing on the energy security aspect of this trilemma, he stressed that energy infrastructure should be part of a more holistic approach to the problem. It is essential to establish resilient supply chains and implement efficient management procedures to prevent and mitigate the negative consequences of disruptions. It entails ensuring the performant infrastructure and supply, but also fostering well-functioning markets, putting in place state-governed crisis management mechanisms, and cooperation with other states. By combining these elements, one can enhance preparedness both in normal times and during crises.

Sweden as an Example

Sweden has since long been increasing its share of renewables in the energy mix, as depicted in Figure 2. This suggests that it is relatively well-prepared to the needs of the green transition. However, electricity demand is expected to increase by 100 percent in the coming years, driven by increased electrification of the industry and transport sectors, adding pressure to Sweden’s electricity system. The need for more investments in several energy systems is tangible, and investment opportunities are numerous. However, political decisions concerning the energy system in Sweden tend to be short-sighted, even though energy infrastructures have a long lifespan – often well over 50 years. As a result, investment risks are often high and change character over time, which creates a lack of infrastructure investment. Other challenges to Sweden’s energy resilience include limited acceptance of new energy infrastructure among the public, time-consuming approval processes, and a lack of thorough impact assessment.

Figure 2. Total supplied energy in Sweden, 1970-2020.

Source: Swedish Energy Agency, 2022.

Further, the current geopolitical context creates an increased need to consider external threats – such as energy system disruptions resulting from the Russian war on Ukraine – and increased dependency on China as a key supplier of metals and batteries required for electrification. It is also important to realize that external influence may affect not only physical infrastructure but also domestic decision-making processes. This calls for more energy and political security alongside the green transition, in combination with higher readiness against security threats and a reassessment of global value chains.

In summary; to successfully move into a greener future, it is necessary to invest in energy systems and infrastructure based on a careful multi-dimensional analysis and with the support of long-sighted political decisions. At the same time, we must push investments that also consider the security threats from and dependencies on global actors.

Conclusion

This year’s Energy Talk provided an opportunity to hear from leading experts on the current situation of Europe’s energy resilience. It outlined the key challenges of the green transition in the current geopolitical and economic context. Greener solutions for Europe’s energy system will require tremendous physical efforts and investments but also political will and public understanding. There are, however, immense benefits to be realized if the associated risks are not overlooked.

On behalf of the Stockholm Institute of Transition Economics, we would like to thank Ewa Lazarczyk, Yuliya Markuts, Igor Piddubnyi and Mikael Toll for participating in this year’s Energy Talk. The presentations from the webinar can be seen here.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Addressing the Covid-19 Pandemic: Vaccination Efforts in Free Network Countries

COVID-19 mask and vaccine bottle representing vaccination efforts

COVID-19 vaccination efforts are now starting in several countries around the globe and many believe that this is the way out of the pandemic crisis. The Stockholm Institute of Transition Economics (SITE) in collaboration with the FREE Network is delighted to invite you to a webinar to share insights and knowledge about how countries in Eastern Europe and around the Baltics are handling the vaccination efforts against the COVID-19 crisis.

How Are Countries in Eastern Europe, Around the Baltic Sea, and in the Caucasus Managing Vaccination Efforts?

With the pandemic still ongoing around the world and in many cases having entered both a second and third wave of infections and deaths—vaccination is urgently needed. Since the first vaccines against COVID-19 were approved, governments around the world are now pushing forward with the vaccination efforts – all with different strategies and methods. How are countries in Eastern Europe, around the Baltic Sea region and in the Caucasus region managing vaccination efforts in their countries and what are the key factors of success and failure? How different are the strategies?

Since the FREE Network includes research and policy institutes in Belarus (BEROC)Latvia (BICEPS)Russia (CEFIR at NES)Poland (CenEA)Georgia (ISET PI)Ukraine (KSE) and Sweden (SITE) the upcoming webinar will provide a comprehensive regional perspective on the vaccination efforts of different strategies implemented in these countries. Furthermore, the webinar will also shed light on how people have responded to vaccination offers; how other countries are being portrayed in the national media; and what the current discussions focus on.

The webinar is part of a series of online discussions aiming to provide a regional overview updates as well as in-depth analysis of specific topics related to the COVID-19 pandemic.

Join the webinar, learn more about the vaccination efforts in FREE Network countries and ask questions directly to distinguished panelists and experts:

Speakers

  • Iurii Ganychenko, Senior researcher at Kyiv School of Economics (KSE/Ukraine)
  • Jesper Roine, Professor at the Stockholm Institute of Transition Economics (SITE/ Sweden)
  • Lev Lvovskiy, Senior Research Fellow at the Belarusian Economic Research and Outreach Center (BEROC/ Belarus)
  • Michal MyckDirector of the Centre for Economic Analysis (CenEA/ Poland)
  • Natalya Volchkova, Director of the Centre for Economic and Financial Research at New Economic School (CEFIR at NES/ Russia)
  • Pavlo Kovtonyuk, Head of Health Economics Center at Kyiv School of Economics (KSE/Ukraine)
  • Sergejs Gubins, Research Fellow at the Baltic International Centre for Economic Policy Studies (BICEPS/ Latvia)
  • Yaroslava V. Babych, Lead Economist at ISET Policy Institute (ISET PI/ Georgia)

Chair/Moderator

  • Torbjörn Becker, Director of the Stockholm Institute of Transition Economics (SITE)

Register here

RSVP Date: Thursday, February 11, 2021, 10:00am – 12:00pm (CET, Sweden)

Location: Online. A link to the webinar will be sent to you 4-5 hours ahead of the start of the webinar.

Registration: Will remain open until the start of the webinar.

The Covid-19 Pandemic and Its Implications for Gender Equality

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The Forum for Research on Gender Economics (FROGEE) organizes an online workshop focused on the COVID-19 implications for gender equality, with the focus on the labor market and entrepreneurship. It is the next in the series of online events focused on the economic perspectives on gender equality.

Gender Inequality During a Pandemic

The COVID-19 pandemic affects gender equality in multiple ways, ranging from the implications of the lockdowns on household work distribution to the deeper economic damage to the sectors which disproportionately employ women. These effects might be especially damaging for the countries with limited resources to support their locked economies.

Keynote Speaker and Representatives of the FREE Network

The webinar will start with the keynote presentation of “COVID-19 Inequality Project” from Dr. Teodora Boneva (University of Zurich). To continue the discussion, the representatives of the FREE Network from Armenia, Belarus, Georgia, Latvia, Poland, Russia, Sweden and Ukraine will present the brief overviews of the situation in their respective countries.

The workshop will be organized as part of the Forum for Research on Gender Economics (FROGEE) supported by the Swedish International Development Cooperation Agency (Sida). It is the next in the series of online events focused on the economic perspective on gender inequality. The event is aimed at providing a platform for discussion among academics and policy makers on issues related to broad consequences of socio-economic inequalities.

Program

Register here

About Forum for Research on Gender Economics (FROGEE)

FROGEE initiative is part of the Stockholm Institute of Transition Economics (SITE) umbrella. The aim of the FROGEE initiative is to contribute to the discussion on gender inequality, with a specific focus on the region of Central and Eastern Europe. By highlighting different dimensions of gender inequality and its consequences for socio-economic development, FROGEE aims at bringing the issue of gender equality to the focus of both the general public and policy makers. The project is supported by the Swedish International Development Cooperation Agency (Sida).

Addressing the Covid-19 Pandemic in Eastern Europe: Policy Responses Across FREE Network Countries

An image of a woman sitting in a public transport with a COVID-19 protection mask on the face representing the Covid-19 pandemic in Eastern Europe

The FREE Network is delighted to invite you to a webinar to share insights and knowledge about how countries around the Baltic Sea, in Eastern Europe and the Caucasus have fared in the Covid-19 pandemic.

The Covid-19 pandemic is affecting everyone around the globe and leaves none of us untouched. However, much of the focus in international media has been on the most affected countries and richer countries in East Asia, the European Union and the United States with less attention given to countries around the Baltic Sea, in Eastern Europe and the Caucasus. Since the FREE Network includes research and policy institutes in Belarus (BEROC), Latvia (BICEPS), Russia (CEFIR@NES), Poland (CenEA), Georgia (ISET), Ukraine (KSE) and Sweden (SITE), we are uniquely placed to provide a comprehensive regional perspective on the pandemic with examples of very different strategies implemented in the countries concerned.

Many of the countries in Eastern Europe and the Baltic region differ from Western Europe in terms of successfully limiting infections and deaths resulting from the pandemic so far. At the same time, the situation in Russia has worsened rapidly over the last few weeks, despite a lockdown having been imposed. The fatality rate and the number of infections have also been high in Sweden, where, in contrast to other Baltic countries, only relatively lenient restrictions have been imposed on the population. In the same vein, the Belarusian government has taken few, mild measures in response to the pandemic, but the mortality rate seems to have remained rather low.

This webinar will provide a first overview of how countries in the region have fared in the pandemic and allow for a better understanding of what governments have done, how people have responded, how other countries are being portrayed in the national media, and what the current discussions focus on.

Speakers

  • 🇸🇪 Jesper Roine, Professor at the Stockholm Institute of Transition Economics (SITE / Sweden)
  • 🇱🇻 Sergejs Gubins, Research Fellow at the Baltic International Centre for Economic Policy Studies (BICEPS / Latvia)
  • 🇷🇺 Natalia Volchkova, Director of the Centre for Economic and Financial Research at New Economic School (CEFIR@NES / Russia)
  • 🇬🇪 Yaroslava V. Babych, Lead Economist at ISET Policy Institute (ISET / Georgia)
  • 🇺🇦 Tymofiy Mylovanov, President at the Kyiv School of Economics (KSE / Ukraine)
  • 🇧🇾 Lev Lvovskiy, Senior Research Fellow at the Belarusian Economic Research and Outreach Center (BEROC / Belarus)
  • 🇵🇱 Michal Myck, Director of the Centre for Economic Analysis (CenEA / Poland)

Chair/Moderator

  • Torbjörn Becker, Director of the Stockholm Institute of Transition Economics (SITE / Sweden)

The webinar opens a series of online discussions aiming to provide a regional overview, updates as well as in-depth analysis of specific topics related to the Covid-19 pandemic. Follow-up webinars will focus on such topics as regional differentiation within countries, effects on the environment, the gender dimension of the pandemic, and the analytical aspects of Covid-19 statistics.

Date: Thursday, May 28th, 15.00-16:30 CET

Location: Zoom webinar, link to be provided for registered participants

RSVP: The number of participants for the webinar is limited, therefore we invite to register as soon as possible, but no later than May 25, 23:59 CET.

Registration link: Please click here to register.

Tax Meat to Save the Baltic Sea

Portion of meat placed on a wooden pallet representing idea of tax meat to save the Baltic Sea

In a world of perfect markets, where prices are “right”, consumers’ choice should, with few exceptions, be limited only by their budget constraints. But in the case of agricultural products, the “right” prices are not in place. One reason is that producers in this sector do not bear the costs for the externalities they generate. Focusing on the case of the Baltic Sea, this brief provides some insights into why livestock producers are, by and large, exempted from environmental policies, and raises the question whether something should be done about it.

An Italian expression describes the attempt to juggle too many projects or attain too many goals at once, with the tacit implication that something is bound to fail. “Avere troppa carne al fuoco“: literally, to have too much meat on the grill. This, in a metaphorical but also quite literal sense, is the dominant impression left by some summer reading about the situation of the Baltic Sea.

The Baltic Sea is home to the world’s largest anthropogenic “dead zone”. The main culprit is the unsustainable livestock production in the region, generating externalities (i.e., costs that economic actors impose on others without paying a price for it) that short-circuit the functioning of the markets, creating a case for regulatory intervention. The concept of externalities is today most famously related to the issue of carbon dioxide emissions and climate change, felt by many as the most pressing challenge mankind has to deal with at present. In recent years, a lot of brain power has been spent on this, but there is more to environmental degradation and climate change than just CO2 and rising temperatures. A very conspicuous example is literally under our eyes, in the water body that lies between our lands. What should we do about it?

A Layman Understanding of the Background

For at least three decades, eutrophication (i.e., nutrient accumulation) and hypoxia (i.e., oxygen depletion) in the Baltic Sea has triggered and boosted each other in a vicious cycle. The nutrients discharged in the water fertilize the ocean floor resulting in an excess algal bloom. This underwater forest consumes oxygen, thus altering the balance between chemical elements in the water, so that even more nutrients are released and the cycle continues (for further references, see [16, 19, 21]). Beyond the algae and the decreased transparency of the water, these deep changes in the sea environment start to make them noticed in fish stocks depletion, but can more generally become devastating to both the marine and terrestrial ecosystems. Moreover, according to researchers, these conditions are going to increase the sensitivity of the area to the global climatic changes expected in the near future. This is seriously threatening a large part of economic activities in the whole catchment of the sea, an area of 22,500,000 km2 over nine countries with 85 million inhabitants.

Since 1974, all sources of pollution around the sea have been subject to a single convention, the Helsinki Convention, signed by the then seven Baltic coastal states. The Helsinki Commission, or HELCOM, is the governing body of the Convention, whose present Contracting Parties are Denmark, Estonia, the European Community, Finland, Germany, Latvia, Lithuania, Poland, Russia and Sweden. For over three decades, HELCOM has monitored the situation. Alarming reports have followed one upon the other, together with policy recommendations to the contracting parties.

As stated on its website, “the work of HELCOM has led to improvements in various fields, but further work is still needed [… and] the remaining challenges are more difficult than earlier obstacles”. Reductions in emissions achieved so far are low hanging fruits, concerning major point sources, such as larger cities’ sewage treatment plants and industrial wastewater outlets. Due to both technical and socio-economic obstacles, achieving further reductions will be a tougher task. This is because it is now time to address diffuse sources of nutrients such as run-off from over-fertilized agricultural lands. Nevertheless, according to numerous studies (among others, [19, 23]), a substantial reduction of the nutrient load discharged into the sea appears necessary in order to reduce further damage; all the more, so given that it takes many decades for the sea to recover. The question is hence whether more stringent policy instruments might be needed.

According to researchers at HELCOM, eutrophication of the Baltic Sea is due to the excess of nitrogen and phosphorus loads coming from land-based sources. About 75% of nitrogen and 52% of phosphorus come from agriculture and the livestock sector. In particular, the main reason for the sharp increase in nutrient loads during the last 50 years is the intensification and rationalization process. This was partly stimulated by the EU Common Agricultural Policy in its early phase, with a geographic separation between crop and animal production [6, 9, 10]. On the one hand, animal farms grew ever bigger, in the order of tens of thousands of animals for cattle, hundreds of thousands for swine and millions for chicken farms. These giant facilities produce way more manure than what could be absorbed by crop production in their vicinity. Cheap fodder to these extremely dense animal populations is produced on large scale crop fields elsewhere, too far away for transport of manure to be feasible and instead using high-yield chemical fertilizers. This way, the nutrient surplus is multiplied at both locations; it leaks through the ground or in the waterways from the big heaps of manure that cannot be properly stored or disposed of, and it leaks from the over-fertilized fields (shocking case studies are reported by HELCOM [11]).

However, a different type of agriculture exists in the area known as Ecological Recycling Agriculture (ERA). This is based on more traditional methods and means that farms have a lower animal density and use the manure as fertilizer in an integrated production of crop to be used for animal feed. In this way, ERA manages to better close the cycle of nutrients with very little dispersion to the environment. Scenarios simulations [12] show that, expanding the presence of ERA from the negligible shares it currently accounts for (between zero and a few percentage points, varying by sector and country) would contribute considerably to solving the problem. The nitrogen surplus discharged into the sea yearly could decrease by as much as 61% if all agricultural production in Poland and the Baltic states were converted to the standard of the best ERA facilities currently operating (the Swedish ones), without affecting the current volumes of crop and animal products. However, this is not likely to happen spontaneously, precisely because of the externalities discussed above. As long as the external costs are unaccounted for and ignored, scale economies push in the direction of concentration and intensification, which is the current development path of the sector.

A Difficult Question

Zooming out from the Baltic Sea and looking at the bigger picture, one starts to wonder why the agricultural sector is so seldom a part of environmental policy or even the debate. Recent research has raised awareness about the contribution of the agriculture and livestock sector to climate change [5, 8, 14, 17]. Beyond nitrogen and phosphorus, the expansion of livestock farming is behind the rising emissions of methane. It is the next most common greenhouse gas after CO2 and responsible for 19% of global warming from human activities. This is more than the share of all transportation in the world combined [18].

A new American Economic Review paper [13] provides a broad picture of the sources of air pollution in the American economy, for the first time computed separately by sector and industry, and with the purpose of incorporating externalities into national accounts. Crop production and livestock production stand out among the five industries with the largest gross external damage (GED), defined as the dollar value of emissions from sources within the industry. In fact, the agricultural sector has the highest GED to value added ratio.

However, greenhouse gases are not the only externality generated by livestock production. The animals’ living conditions under modern farming methods favor the emergence of infections and new diseases that reach much further than through direct consumption of related products, as the recent E. coli episode in Europe brought to attention. The generalized use of antibiotics in animal feed, legal and widespread in some countries [3], constitutes an even bigger health threat. This is because it has the potential of generating antibiotic-resistant mutations of bacteria against which we would be completely defenseless should they pass to humans.

Moreover, the public has from an animal-rights and ethics perspective become increasingly concerned about the animals’ living conditions. 77% of respondents to the Eurobarometer 2005 believe that the welfare-protection of farm animals in their country needs to be improved. 96% of American respondents to the Gallup 2003 survey say that animals deserve legal protection, and 76% say that animal welfare is more important than low meat prices. Additionally, a comparable share advocates passing strict laws concerning the treatment of farmed animals.

In rich countries, the increased share of meat in the diet, which has been stimulated by decreasing relative prices, constitutes according to some medical research a health hazard in itself. In developing countries, raising livestock is an inefficient and expensive converter of fossil fuels into calories for human consumption. In addition, fodder production often displaces other important land uses such as forests.

It is easy to rationalize the absence of these issues from the policy agenda. It is not just a matter of powerful lobbies. The ownership structure and size composition make the agricultural sector so heterogeneous that the challenges in regulating it can easily be imagined. Adding to this, is the special role of food in culture, the “local” products so often linked to national identity, the romantic idea of the land nourishing its people, and of course the strategic role of being food self-sufficient [7]. In the past, the latter was linked to wars and famines. Perhaps, even in our projections about the future, self-reliance in food production still plays an important role in the perspective of global climate changes and accordingly limited or modified trade flows. However, we cannot afford to grant this sector a special status and ignore all the social costs it generates. Can we learn anything from current research on how all these externalities should be addressed?

Policy Tools

In the terminology of Baumol and Oates’ classic book on environmental policy, instruments can be categorized as “command and control”. For example, explicit regulation of standards and technologies with associated prohibitions and sanctions; information provision, that then lets the power in the hands of the consumers; and price-based instruments, in the form of taxes, subsidies or trading schemes. These can be imposed on inputs or output, with different implications [4].

The relatively high-level standards of EU environmental legislation (legally stipulated maximum livestock density per hectare, requirements of minimum manure storage capacity, ban on winter manure spreading) is effectively enforced in some countries. In the newer members states, on the other hand, issues have been reported [15] in the form of incomplete translation of EU legislation into the national regulations and ineffective enforcing, significant examples of unlawful practices by foreign companies (e.g. Danish companies in Poland and Lithuania) and limited public access to environmental information. When it comes to non-EU members in the Baltic Sea area, these problems are scaled up, with very large animal farms, lack of many important environmental regulations (no limits on livestock density, capacity of manure storage or ammonia emissions from stored and utilized manure, too generous limits for amount of manure allowed, etc.) and an insufficient environmental information system.

Information undoubtedly plays an important role, but to rely on consumers’ pressure might not be sufficient to solve this type of issues. Consumers are not famously a very effective pressure group, because of organizational issues and the classic collective action problems. Direct regulation of activities is certainly necessary, especially when it comes to the most important rules of the game for producers. However, the heterogeneity of the sector creates a trade-off between environmental precision and transaction costs of implementation and control in practice. For example, the damage of nitrate leaching depends on the type of soil; the policy measure is precise when it restricts leaching losses on sites that have specific characteristics. However, the costs of enforcing measures only at these sites are high. Alternatively, curbing nitrate use in general has low transaction cost, but because it will also affect sites without problems of nitrate in the groundwater, it also has low precision. This may be considered unfair or illegitimate [24].

Another limit of this approach is the lack of flexibility: once a particular practice becomes forbidden, it is likely that some other behavior emerges from the creativity of the actors involved that was not foreseen by the norm but could potentially present the same problems as the forbidden one. This will happen as long as the private incentives of the actors are not aligned with the policy goal.

Often the best way to curb a particular activity that, as in this case, has a number of unwanted side effects, is not to ban it but to put a price on it. As in the case made for CO2, a market based approach could also in this area offer the advantage of being cost-effective and at the same time stimulate creative new solutions, e.g. new technologies for manure processing. Therefore, one immediate questions concerns why the agriculture sector is not included in the European emission trading scheme (ETS)?

The European Union launched already in 2005 its version of a cap and trade scheme, covering some 11,000 power stations and industrial plants in 30 countries. As from 2013, the scope of the European ETS will be extended to include more sectors such as aviation, but not agriculture or livestock. The main limitation of ETS is that it does not address spatial concentration problems. When emissions have an immediate effect on the local environment, permit trading does not guarantee the achievement of targets at each location. On the contrary, the possibility of trading emission permits combined with economies of scale might lead to the emergence of emission hotspots, sites with highly concentrated amounts of pollutants locally affecting the environment and the population. A proposed variation is a scheme for tradable concentration permits, either for manure [20] or for animal production [2]. A concentration permit is defined as the permission to deposit a quantity of pollutants at a specific location. The permits can then enter a trading system, but the use of the right remains linked to the site. Some authors believe that in practice, such systems generate high transaction costs and cannot achieve cost-effectiveness.

An input tax, for example on chemical fertilizers or imported fodder, or a direct tax on emissions would only affect the balance between domestic production and imports from countries that do not have the same regulation. Moreover, as discussed above, emissions are far from being the only problem. An alternative, as argued by Wirsenius, Hedenus and Mohlin at the Chalmers University of Technology and University of Gothenburg [22] is an output tax, i.e. a tax on meat consumption, on the grounds that costs of monitoring emissions are high, there are limited options for reducing emissions apart from output reduction, and the possibility for output substitution in the consumption basket are substantial. Moreover, a tax on consumption would avoid international competition from products that are not produced with the same standards.

A meat tax has shortly appeared in the public debate, for example in the Netherlands and in Sweden, but it has failed to gain much popularity so far. Meat consumption in the area has increased considerably in recent years –between 30% in Germany and 160% in Denmark since 1960 – and relative prices have fallen. By a combination of price and income effects, it has become a norm to eat meat every day, or even at every meal. It must be recognized, though, that while each single policy instrument discussed above has its shortcomings, because of the many interrelated aspects of the problem, a reduction in output, perhaps through a consumption tax, would address in a more comprehensive way all the different externalities related to meat production. After all, maybe there is just too much meat on our grills.

Recommended Further Readings

  • [1] ”Slaktkropparnas kvalitet i ekologisk uppfödning”. Technical report, Ekokött, 2006.
  • [2] J. Alkan-Olsson. Sustainable Water Management: Organization, Participation, Influence, Economy., volume 5, chapter Alternative economic instruments of control. VASTRA, Gothenburg University, 2004.
  • [3] Mary D. Barton. “Antibiotic use in animal feed and its impact on human health”. Nutrition Research Reviews, 13:279–299, 2000.
  • [4] W.J. Baumol and W.E. Oates. The theory of environmental policy. Cambridge Univ Pr, 1988.
  • [5] J. Bellarby, B. Foereid, and A. Hastings. Cool Farming: Climate impacts of agriculture and mitigation potential. Greenpeace International, 2008.
  • [6] M. Brandt and H. Ejhed. Trk transport-retention-källfördelning. Belastning på havet. Naturvårdsverket Rapport, 5247, 2002.
  • [7] F. Braudel, S. Reynolds, and S. Reynolds. The structures of everyday life: The limits of the possible. Harper & Row, Publ., 1981.
  • [8] A. Golub, B. Henderson, and T. Hertel. Ghg mitigation policies in livestock sectors: Competitiveness, emission leakage and food security. In Agricultural and Applied Economics Association 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania. Agricultural and Applied Economics Association, 2011.
  • [9] A. Granstedt. Increasing the efficiency of plant nutrient recycling within the agricultural system as a way of reducing the load to the environment–experience from Sweden and Finland. Agriculture, ecosystems & environment, 80(1-2):169–185, 2000.
  • [10] A. Granstedt and M. Larsson. “Sustainable governance of the agriculture and the Baltic Sea – agricultural reforms”, food production and curbed eutrophication. Ecological Economics, 69:1943–1951, 2010.
  • [11] HELCOM. “Balthazar project 2009-2010: Reducing nutrient loading from large scale animal farming in Russia”. Technical report, 2010.
  • [12] M. Larsson and A. Granstedt. “Sustainable governance of the agriculture and the Baltic Sea–agricultural reforms, food production and curbed eutrophication”. Ecological Economics, 69(10):1943–1951, 2010.
  • [13] Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus. “Environmental accounting for pollution in the United States economy”. American Economic Review, 101:1649–1675, 2011.
  • [14] T. Nauclér and P.A. Enkvist. “Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve”. McKinsey & Company, pages 26–31, 2009.
  • [15] J. Skorupski. “Report on industrial swine and cattle farming in the Baltic Sea catchment area”. Technical report, Coalition Clean Baltic, 2006.
  • [16] B. Smith, A. Aasa, R. Ahas, T. Blenckner, T.V. Callaghan, J. Chazal, C. Humborg, A.M. Jönsson, S. Kellomäki, A. Kull, et al. “Climate-related change in terrestrial and freshwater ecosystems”. Assessment of Climate Change for the Baltic Sea Basin, pages 221–308, 2008.
  • [17] P. Smith, D. Martino, Z. Cai, D. Gwary, H. Janzen, P. Kumar, B. McCarl, S. Ogle, F. OMara, C. Rice, et al. “Greenhouse gas mitigation in agriculture”. Philosophical Transactions of the Royal Society of London, Series B: Biological Sciences, 363(1492):789–813, 2008.
  • [18] H. Steinfeld, P. Gerber, T. Wassenaar, V. Castel, M. Rosales, and C. de Haan. “Livestock’s long shadow: environmental issues and options”. 2006.
  • [19] E. Vahtera, D.J. Conley, B.G. Gustafsson, H. Kuosa, H. Pitkänen, O.P. Savchuk, T. Tamminen, M. Viitasalo, M. Voss, N. Wasmund, et al. “Internal ecosystem feedbacks enhance nitrogen-fixing cyanobacteria blooms and complicate management in the Baltic Sea”. AMBIO: A journal of the Human Environment, 36(2):186–194, 2007.
  • [20] B. Van der Straeten, J. Buysse, S. Nolte, L. Lauwers, D. Claeys, and G. Van Huylenbroeck. “Markets of concentration permits: The case of manure policy”. Ecological Economics, 2011.
  • [21] H. von Storch and A. Omstedt. “The BALTEX Assessment of Climate Change for the Baltic Sea basin, chapter Introduction and summary”. Berlin, Germany: Springer., 2008.
  • [22] S. Wirsenius, F. Hedenus, and K. Mohlin. “Greenhouse gas taxes on animal food products: rationale, tax scheme and climate mitigation effects”. Climatic Change, pages 1–26, 2010.
  • [23] F. Wulff, O.P. Savchuk, A. Sokolov, C. Humborg, and C.M. Mörth. “Management options and effects on a marine ecosystem: assessing the future of the Baltic”. AMBIO: A Journal of the Human Environment, 36(2):243–249, 2007.
  • [24] O. Oenema. “Governmental policies and measures regulating nitrogen and phosphorus from animal manure in European agriculture”. Journal of Animal Science, 2004.

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