Tag: Climate change

The Determinants of Renewables Investment

Posted on November 13, 2017 | Policy Brief

20171112 Determinants of Renewables Investment 01

On the 24th of October, SITE held the first of its series of Energy Talks, replacing what for one decade had been known as SITE Energy Day. For this first edition, SITE invited Thomas Sterner, Professor of Environmental Economics at the University of Gothenburg to give a presentation under the headline of “Technological Development, Geopolitical and Environmental Issues in our Energy Future”. To comment on the presentation, Leonid Neganov, Minister of Energy of Moscow Region, and Karl Hallding, Senior Research Fellow at the Stockholm Environment Institute (SEI), had been invited. This policy brief reports on the important subjects presented by our guests as well as the discussion that took place during the event.

From climate change concerns to climate change targets

Thomas Sterner began his presentation by addressing the well-known issue of climate change, a constantly current topic.

Different versions of Figure 1 (below) have been used extensively by those discussing climate change over the last decades, most notably by the previous US President Al Gore in his 2006 documentary “An Inconvenient Truth”. It shows the concentration of CO2 (carbon-dioxide) in the atmosphere over the past 400,000 years. There is wide agreement within the scientific community that the emissions of greenhouse gases (GHG), such as CO2, methane and nitrous oxides, have led to the shifting weather patterns and increased temperature over the past century (NASA, 2017).

Figure 1. Level of CO2 in the Atmosphere

Notes: The vertical red line is the Keeling curve, showing how the concentration has changed since 1958. Source: Allmendinger, 2007.

Predicting the impact of these emissions is far from an exact science: the temperature increases are likely to be unevenly spread across the world as shown in Figure 2. Some areas are likely to be particularly afflicted, especially coastal lowlands susceptible to flooding and semi-arid areas where droughts can become more likely. Unless current emission levels start to decrease, we are likely to observe severe results of climate change within 20 years, such as displacement and increased migration in the wake of extreme weather (NIC, 2016). For instance, adverse health effects in China, or decreasing productivity in South-East Asia, have already become apparent due to current increased temperatures (Kan, 2011; Kjellstrom, 2016).

Figure 2. Predicted Temperature Increase

Source: IPCC, 2013.

To tackle this issue and its negative economic impacts, many policy makers have agreed to replace fossil fuels with renewables. Renewables is the collective term of energy sources that have a neutral or negative net-effect of GHG emissions and are extracted through resources that are continuously replenished, e.g. solar, wind and hydro power, and biomass energy.

As the issue of climate change is a global one, the transition to renewables needs to be global too. International climate agreements have hence long been the accepted norm to approach climate change issues. The Paris Agreement is currently the guiding principle, in spite of the announcement of the Trump administration to withdraw the United States. Though instrumental in creating a momentum in the transition to lower levels of GHG emissions, it comes with many flaws. Its goal of a maximum average temperature increase of 2°C might be considered radical given current levels. However, the policy instruments that the target depends on – the Intended Nationally Determined Commitments (INDCs) – shift the responsibility to individual nations and remove the global responsibility. As Thomas Sterner pointed out, the first three words of this acronym remove indeed any binding force, and elementary game theory tells us that it will be hard, not to say unlikely, for all signatories to remain cooperative in achieving the target of 2°C.

Investing in renewables: from political choice to competitive choice

As stated above, investing in renewables is a necessary condition to achieve climate change targets. Indeed, there are some countries that have pushed the development of renewables with the aim to reduce the fossil fuel dependency to a minimum level in a very near future (see Figure 3). However, most of these investments are currently driven by political will. A natural question is whether renewables technologies can be competitive.

It is a fact that costs of renewables have been severely decreased in the last decade (Timmons et al., 2014). However, as Thomas Sterner mentioned, the cost of renewables and of fossil fuels are still very place and time specific and depends on the scale. Investments in renewables are growing and solar and wind power have both seen production capacities increasing markedly yearly over the last years (GWEC, 2016; IEA, 2017a). However, coming from an initial low level, it will take some time before we will be able to rely on them.

Even with massive investments and decreasing generation costs, the intermittent nature of most renewable energies will still impede the competitiveness of renewables. Solar and wind power are the technologies where most of the development has been centred (Frankfurt School-UNEP Centre/BNEF, 2017). They are highly weather dependent and electricity production from these sources cannot be secured all of the time. This makes countries dependent on backup technologies. In some countries, the obvious answers to these challenges have been hydro and nuclear power. Both technologies have their respective drawbacks though.

Figure 3. World’s Top 10 Investors in Renewable Energy in 2016

Notes: New Investments $BN, Growth on 2015. Source: Frankfurt School-UNEP Centre/BNEF, 2017.

Hydro power requires a geography that allows for dams, which in turn change the nature markedly around them and may not be available during drought periods. Nuclear energy has surrounding safety aspects that most recently came to light with the 2011 Fukushima Daaiichi nuclear disaster, leading Germany to decide to shut down all of its 17 reactors by 2022 (25 % of the country’s electricity production). Moreover, it may also be technically difficult to have nuclear as a backup technology given the associated ramping and start-up constraints.

Two further remarks on the intermittency problem can be made. First, this problem is likely to become more severe when policymakers push for large-scale electrification (c.f. EU Energy Roadmap established in 2011). For example, the full electrification of transport or heating sector will drive up the demand for and consumption of electricity. As this happens, the need for something to secure constant energy access will increase.

Second, only the development of technologies that allow electricity storage could solve this issue permanently. However, the current technological progress regarding batteries’ capacity cannot yet offer the solution (J. Dizard, 2017).

Oil price, a reference price

Another important aspect stressed by Thomas Sterner was to take into account the significant role of fossil fuel prices. Although identifying an optimal oil price for a fossil-free future is not a straightforward procedure, as discussed during the event.

The high price of oil during the late 00s and early 10s stimulated the development of alternative technologies. As awareness of climate change and its effects increased among policy makers and the general public, there was a momentum to push for the development of renewables.

As investments in renewables went up, so did investments in another less green technology: hydraulic fracturing, or fracking. In the 10 years between 2005 and 2015, the United States alone saw the extraction of shale gas and oil to increase six-fold. (EIA, 2016) In part to maintain a market share, OPEC countries exceeded their own set production limits and oil prices tumbled from around $100 per barrel to around $50 (Economist, 2014).

With roughly three years behind us of somewhat stable and low oil prices, the question is what the implications of this are. It makes it more difficult to phase out fossil fuels as demand for them goes up, depressing efforts put into the research and deployment of renewables. Energy efficiency also becomes less important, driving up waste and stopping investments in energy conservation.

On the other hand, with low oil prices, investments in the fossil-fuels industry are also less likely to take place. Keeping resources in the ground becomes more palatable as profit margins are pushed down. This, in turn, is likely to have a positive effect on environment by decreasing the level of GHG emissions.

The invited guests, Leonid Neganov and Karl Hallding spoke more in depth about two central countries that contribute in shaping global environmental policy.

The local conditions, Russia and China examples

As the world’s fourth largest supplier of primary energy and the largest supplier of natural gas to the EU (IEA, 2017b), Russia presents an interesting case to observe as a country supplying fossil fuels. Leonid Neganov, Minister of Energy of Moscow Region, commented on the current policy direction of the country. He explained that non-renewable, GHG emitting energy sources make up a majority, roughly 60% of the Russian energy balance. The rest is provided by more or less equal shares of nuclear and hydro power. New renewable technologies make up a miniscule share of an estimate 0.2% of the current total.

According to Neganov, in the coming 20 years, we should not expect to see too much of a change. Though total output is expected to increase, the share of GHG-neutral energy will remain more or less constant, though the share of renewables are set to increase to 3% according to the current drafts of Russian energy policy. A more pronounced transition to other energy sources are more likely in a longer perspective towards 2050, even though circumstances may naturally change over the coming decades.

Other available information also points to that Russia has decided to tackle the shift in consumption of its major market in Europe by widening its geographic reach. Massive infrastructure investments, such as the Altai and TurkStream gas pipelines, will enable Russia to more easily reach markets that are currently beyond any practical reach.

With the Altai pipeline, Russia will be able to provide China with natural gas at a much greater level than before. China being by far the largest producer of coal sees an opportunity to shift away from the consumption of a resource that during winters causes its major cities to periodically become enveloped in clouds of smog and at the same time also decrease its GHG emissions. The environmental benefits of natural gas as opposed to coal should not be exaggerated though. Thomas Sterner pointed out that methane, the main compound of natural gas, is a considerably more potent GHG than CO2. A total leakage of an estimated 1% negates the environmental benefits, he said.

Karl Hallding, Senior Research Fellow at SEI, particularly stressed the need to look at China. It is the supplier of half of the world’s coal, extraction levels remain high. (BP, 2017) Domestic consumption is decreasing but consumption of Chinese coal is, however, more likely to shift geographic location rather than to be left in the ground, said Hallding. Through massive infrastructure investments, such as the New Silk Road, and in energy production in Sub-Saharan Africa, China spreads its influence (IEA, 2016). By exporting emissions, the impact at the global level will not change.

References

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Green Transition: Adapting Markets and Policies

Posted on December 15, 2014 | Policy Brief

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This policy brief summarizes the discussion at the 8th annual SITE Energy Day conference, devoted to market adaptations and policies necessary to address the green transition. Recent energy trends with ever more green energy-mixes will have consequences for the functioning of related markets as well as implications for appropriate policy responses. New financial solutions, technological developments, international cooperation, and national policy initiatives in both developing and developed countries are examples of adaptations to this transition process. To discuss these issues, the conference brought together a group of distinguished experts from the energy industry, policy community and academia.

In December 2014, world leaders have gathered in Peru (Lima) for the 20th annual meeting of the United Nations Framework Convention on Climate Change. This convention has as an objective to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” (see UNFCCC’s webpage). Even though the agreement to reduce emissions to a sustainable level may take years to be negotiated, at least 195 countries have ratified the UFCCC convention. The willingness to reduce environmentally harmful emissions has led to many countries changing their energy profile to include more green energy, a process that is often referred to as “green transition”.

It may be worth mentioning that the label “green transition” consists of two conceptual components. “Green” refers to the ability to generate environmentally friendly energy, which has become a key challenge for our society. Indeed, a majority of people now recognize the pressing need to cut pollution in the face of climate change and environmental degradation. The wording “transition” acknowledges that a shift toward a greener energy mix seems unavoidable, but this shift may not occur immediately or uniformly around the globe. The required time for change is long and the shift itself may not be smooth. To put it differently, the green transition has had and will continue to have wide-ranging consequences for businesses, governments, and the international community.

As a result, there is a need to carefully address the potential implications for the existing energy and related markets and market players, and for government policies, as well as new markets and new policies triggered by the green transition. These topics were the focus of the 8th SITE Energy Day, a half-day conference held at the Stockholm School of Economics on December 2, 2014.

Green Transition and the Energy Markets

The first panel focused on how energy markets have responded to green transition and how they may react in the future. Speakers from electricity companies, regulatory bodies and think tanks discussed how the green transition may affect the use of traditional financial instruments by energy companies; the choice of economically viable technology for producing green energy; and the way markets could be integrated to increase the efficiency of green energy.

As green transition almost always introduces more intermittent production, it is likely that market uncertainty will increase. This is one of the reasons why traditional financial instruments may not be fully adequate. The first speaker Laurent Cheval, Head of Nordic and Fuel Origination in the business division Asset Optimization & Trading at Vattenfall discussed this issue extensively. Energy companies face substantial financial risks since both prices and quantities may be highly volatile. To mitigate these risks, market participants may use an array of financial products. In mature energy markets, the products are fairly standardized. However, more complex and tailor-made financial products are required to face the ongoing changes in the sector. For example, the increased share of renewable energy combined with more interconnected markets create specific market risks. To hedge against risks associated with weather changes, future fuel costs, interest rates and so on, more and more energy providers trade customized derivatives “over-the-counter” (OTC) rather than through a centrally-cleared exchange. Another example is the development of decentralized power production and the rise of the “Prosumer” who simultaneously produces and consumes power. So far, the relevant regulation is underdeveloped and there is an additional demand for innovative financial solutions. Large energy companies such as Vattenfall are for instance offering a range of financial hedging solutions combined with actual physical handling and delivery of energy products.

Green transition should in the long run lead to a domination of environment friendly energy. However it is important that only economically viable technologies subsist. It is therefore necessary to assess the cost of producing green energy. Lars Andersson, Head of Wind Power Unit at the Swedish Energy Agency, reported on an extensive study done by the Agency on this issue. Over the last five years, the production cost of wind power has fallen consistently and capacity usage has increased. This dramatic change in the wind power industry likely implies that the existing subsidies for building wind power plants gradually will be phased out. It is unclear how the industry will react to these cuts in subsidies. Furthermore, according to Andersson, wind production faces at least two challenges. Without developing the capabilities for energy storage, electricity markets will face more energy imbalances as the share of wind power increases. Additionally, the support from the local communities is needed to ensure an expansion of wind power. Addressing these issues requires the development of new regulation and defining a common goal which may promote cooperation between stakeholders.

Ultimately the green transition will end when and if the green energies are largely adopted around the globe. One way to accelerate this green transition may be to coordinate action and development of governmental policies. Martin Ådahl, Chefsekonom at Centerpartiet, and Daniel Engström, Programchef Miljö och Klimat at Fores, presented the current state of the international climate policy and discussed the benefits of linking carbon emission rights markets. Because of conflicting interests, the likelihood of reaching an agreement within the current United Nations climate negotiations is rather small.

However, Ådahl and Engström suggested that the focus should instead be on reaching agreements between big polluter countries that contribute the lion’s share of global emissions. Indeed, regional emission trading schemes already exist in the EU, the US and China, the three regions which together account for over 50 percent of global emissions. One potential shortcoming of this suggestion is that it may not be enough to stabilize greenhouse gas concentrations in the atmosphere. Thereby, Ådahl and Engström discussed the possibility to link current cap-and-trade markets, as a first step toward an international system with a more formal global agreement. Linking cap-and-trade markets has many benefits, especially in the form of efficiency gains. However, emission caps vary across countries and regions because of different political goals or priorities. When markets are linked, difference in abatement costs (or allowance prices) would lead to a flow of allowances and emissions from countries/regions with low abatement cost to countries with higher ones. Thereby prices would be equalized, benefiting entities with cheaper allowances. To avoid opportunistic behavior, countries would first have to agree ex ante on an exchange rate between different countries’ emission rights. Second, a clear regulatory framework is required. Both Ådahl and Engström emphasized the need of an international organization devoted to climate economics. Such an institutional body could not only regulate the links between cap-and-trade markets, but also provide concrete solutions and technical models to improve on the market design.

Environmental Policies: International Experience

The second panel focused on how governments may promote green transition. Anna Pegels, Senior Researcher at the German Development Institute (DIE), reviewed green policy initiatives in developing countries. Pegels argued based on evidence from e.g. India and South Africa that it is possible to combine substantial growth with green energy. This is good news since emerging countries are among the highest polluters. However, to change a country’s energy profile, governments need to intervene and develop new industrial policies.

Governments can set long-term goals, which are supported by short- and mid-term targets. However, given the large profits that are at stake, officials may likely be subject to the risk of capture and corruption. To limit such risks, Pegel emphasized the need to introduce competition in the energy sector as a whole. Subsidized feed-in tariffs for renewable energy for example should be only a first step, to reach a certain scale of production. But the technology is mature enough that producers should be able to bear some additional risk in their current activity. This should increase the scope for competition. Finally, it is essential that governments continuously engage in policy revision cycles and learn from other countries’ experiences.

Benjamin Sovacool, Professor of Business and Social Sciences at Aarhus University and Director of the Danish Centre for Energy Technologies, talked about the process of low carbon transition in the Nordic region. In spite of large investments into renewable energy, fossil fuels still dominate the consumption in the Nordic countries and considerable measures need to be taken in the decades ahead to make the transition to a greener energy mix. Sovacool highlighted four areas which could help reduce the carbon footprint of the Nordic countries: renewable energy, increased energy efficiency of buildings, transportation, and carbon capture and storage (CCS). In order to be successful, the green transition has to bring about a systemic change engaging actors across the economy, particularly including end-users. There should also be a focus on additional technological progress. Finally, Sovacool noted that a rapid emission reduction such as the one planned in the Nordic countries is unlikely to be followed on a global scale in the near future due to a lack of political feasibility.

Conclusion

The green transition is expected to have a profound impact on the functioning and structure of energy markets as well as the policies that facilitates this transition.

There is an ongoing process of decentralization in the energy sector, with the rise of “prosumer” market places that alter market dynamics. Moreover, market uncertainty is increasing due to more intermittent production (due to renewables) and a stronger interconnectedness between energy markets. It is likely that energy imbalances will be a major concern and that more and more energy trade will take place on real time markets (as opposed to e.g. on the day-ahead market). As markets’ linking becomes stronger, the interdependence between markets in terms of energy type and geographical location will be intensified. The need for coordination and international cooperation will be even more pressing. The uncertainty regarding the development of international cooperation, but also regarding national policy changes, may however disrupt energy markets. Measures such as withdrawing existing subsidies must be handled in a gradual and strategic manner so as not to discourage investment. A key issue for governments is to have a credible green policy in the long-term. Such credibility will also depend on the level of involvement of different actors in the green transition, including the necessity to have a multilevel engagement of the end-users.

References

  • Energimyndigheten, (2014), Produktionskostnads-bedömning för Vindkraft i Sverige, ER 2014:16
  • Pegels, A. (Ed.). (2014), Green industrial policy in emerging countries, Vol. 34, Routledge
  • Rutqvist, J., Engström, A.and Ådahl, M., A Bretton Woods for the Climate. Fores, 2010
  • SITE 8th Energy Day, http://www.hhs.se/en/about-us/calendar/site-external-events/2014/site-energy-day/
  • UNFCCC, (n.d). First steps to a safer future: Introducing The United Nations Framework Convention on Climate Change, http://unfccc.int/essential_background/convention/items/6036.php [8 December 2014]

Tax Meat to Save the Baltic Sea

Posted on September 12, 2011 | Policy Brief

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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