On the emission and distributional effects of a CO2eq-tax on agricultural goods—The case of Germany

Abstract

We analyze how a potential CO₂eq-tax on the most emission-intensive agricultural goods in Germany affects CO₂eq-emissions and the income distribution.Based on data from the German survey of income and expenditure, we use a linear approximated Exact Affine Stone Index demand system to estimate own-price and cross-price elasticities for meat, dairy goods and eggs. These elasticities allow us to obtain demand changes and thus emission reductions following the introduction of a CO₂eq-weighted carbon tax based on the social cost of carbon. We find that it can reduce annual agricultural emissions in Germany by more than 15.3 MtCO₂eq or about 22.5%. The tax generates an annual revenue of more than 8.2 billion EUR. Since the carbon tax is regressive, we consider the distributional effects of a per capita lump-sum compensation scheme. We show that this “fee and dividend” approach has a slightly progressive effect on the distribution of income.