REPORT
February 2024

Green Tax Reform
Final Report

Green Tax Reform

Contents
Preface ............................................................................................................................ 4
Summary......................................................................................................................... 6
1. The Starting Point for a Green Tax Reform .......................................................18
1.1 The Expert Group's Interpretation of the Terms of Reference and the
Guiding Principles of the Danish Climate Act ........................................... 19
1.2 Denmark's Greenhouse Gas Emissions ........................................................ 21
1.2.1 Emissions from agriculture and forestry ..................................................... 26
2. Proposed Models for a CO2-eq Tax .....................................................................30
2.1. The Expert Group's Overarching Considerations ......................................... 30
2.2 Common Features of the Models .................................................................. 33
2.3 Model 1: Cheap Emissions Reductions ......................................................... 41
2.4 Model 2: Partial Handling of Effect on Occupational Structure andConsideration to Carbon Leakage ............................................................ 46
2.5 Model 3: Further Preservation of Existing Occupational Structure andConsideration to Carbon Leakage ............................................................ 52
2.6 Summary of the Three Models ...................................................................... 59
2.7 Sensitivity Analyses....................................................................................... 66
2.8 Dealing with Uncertainty in New Climate Projections .................................... 73
2.9 Structure of Tax and Subsidies after 2030 .................................................... 75
2.10 Compensation ............................................................................................. 76
3. Handling of Other Emissions ................................................................................79
3.1 Rewetting of Carbon-Rich Agricultural Land ................................................. 79
3.1.1 Stronger incentives for increased set-aside through a combination of
tax and subsidy ........................................................................................ 80
3.1.3 Consequences of a tax ............................................................................... 82
3.1.4. Prerequisites ............................................................................................. 82
3.1.5. Current efforts to set-aside and rewet carbon-rich agricultural lands ....... 83
3.1.6. Cost elements ........................................................................................... 84
3.1.7. Impact on nature and the environment ..................................................... 86
3.1.8. Bottlenecks for set-aside ........................................................................... 87
3.2 Regulation of Fertiliser .................................................................................. 88
3.2.1. Advantages and disadvantages of fertiliser regulation .............................. 90
3.3 Forest ............................................................................................................ 93
3.3.1 Recommendations regarding forests ......................................................... 93
3.3.2. Subsidy for afforestation ........................................................................... 94
3.3.3 The framework for forest regulation ........................................................... 97
3.3.4 Follow the development of existing forests ................................................ 98
3.4 Handling of Road Transport and Minor Emission Sources ............................ 98
4. Advantages and Disadvantages of Tax on End Consumption ....................106
Implementation..........................................................................................................120

Page 2Green Tax Reform

5. Implementation .....................................................................................................121
6. Main Characteristics of Current Regulation....................................................130
6.1 International CO2-eq Regulation .................................................................. 130
6.2 Regulation of Non-Energy-Related Greenhouse Gas Emissions from
Agriculture and Forestry......................................................................... 131
6.2.1 Existing nitrogen regulation ...................................................................... 132
6.2.2 The EU's Effort Sharing Regulation .......................................................... 134
6.2.3 EU LULUCF Regulation ............................................................................ 137
6.2.4 The EU's Common Agricultural Policy (CAP) ........................................... 140
6.3 Upcoming EU Plans and Initiatives .............................................................. 142
6.3.1 An ETS for the agriculture and food sector .............................................. 142
6.3.2 New separate emissions trading system - ETS 2 ..................................... 143
6.3.3 Carbon removal certification framework .................................................. 144
6.4 The EU's Common Agricultural Policy (CAP) and the Expert Group's
Models .................................................................................................... 144
Appendices ................................................................................................................146
7.1 Terms of Reference for the Green Tax Reform ........................................... 147
7.2 Other Land Use Objectives ......................................................................... 151
7.3 Elaboration of Emissions from the Agriculture and Forestry Sector ............ 153
7.4 IPCC Guidelines and Rules for the National Emissions Inventory ............... 162
7.5 Technology Catalogue ................................................................................ 168
Overview of technologies .................................................................................. 168
Agricultural sector ............................................................................................. 171
LULUCF sector ................................................................................................. 177
7.6 Regulatory Basis and Data .......................................................................... 181
7.7 ETS in Agriculture and Forestry .................................................................. 187
7.8 Carbon Leakage .......................................................................................... 193
7.9 Environmental Externalities ......................................................................... 203
7.10 Food Security and Calorie Production ...................................................... 209
7.10.1 Food security in the EU .......................................................................... 209
7.10.2 Food safety and security of supply in Denmark ..................................... 210
7.10.3 Calorie production for human consumption in Danish agriculture ......... 211
7.11 Base Deduction ......................................................................................... 214
7.12 Subsidy Scheme for Capacity Reduction in Animal Production ................ 215
7.13 Distribution and Employment .................................................................... 218
7.14 Effects on Land, Capital and Cultivation Value .......................................... 222
7.15 Examples of Typical Farmers and Bankruptcy Risk .................................. 225
7.16 Financial Stability ...................................................................................... 233
7.17 Description of Export Elasticities ............................................................... 234
7.18 Other Model Results ................................................................................. 243

Page 3Green Tax Reform

Preface
The Expert Group for a Green Tax Reform was established in February 2021.
The members of the Expert Group are:
•
•
•
•
•
•

Michael Svarer, Professor at the Department of Economics, Aarhus University,
Chairman
Joan Faurskov Cordtz, Partner at PwC
Susanne Juhl, Chairman and member of the Board
Claus Thustrup Kreiner, Professor at the Department of Economics, Universityof Copenhagen
Peter Birch Sørensen, Professor at the Department of Economics, University of
Copenhagen
Mette Termansen, Professor at the Department of Food and Resource Economics, University of Copenhagen

The Expert Group has been tasked with preparing proposals which organise an appropriate regulation set-up that contributes to reducing greenhouse gas emissions
within the Danish territory. Based on the guiding principles of the Danish Climate
Act, the regulation must, among other things, balance socio-economic efficiency
with the aim of preserving existing business structures and minimising carbon leakage risk.
The Expert Group published the first interim report in February 2022. The report primarily focused on emissions from industry etc., and presented models that contributed to significant reductions in greenhouse gas emissions in various ways.
Based on the first report, a broad majority in the Danish Parliament entered anagreement in June 2022 on a green tax reform that contributed to harmonising thetaxation of greenhouse gas emissions while supporting the development of climatefriendly technologies.
This report primarily focuses on regulation to help reduce biological greenhouse gas
emissions in agriculture.
It's a complicated task. No other country has implemented tax-based regulation of
non-energy-related greenhouse gas emissions from agriculture, and thus, the inspiration to find solutions for agriculture must come from elsewhere. This report presents various proposals for regulating agricultural emissions based on the principles
characterising the political agreement on a green tax reform for the industry etc.
The Danish climate targets set the framework for the report's ambition level. The
Danish Climate Act of 2019 contains a binding target that greenhouse gas emissions from Denmark must be reduced by 70 per cent in 2030 relative to 1990 levels.
In addition, Denmark is committed to the EU to fulfil the so-called Effort Sharing

Page 4

Green Tax Reform

Page 5

Regulation, which sets requirements to reduce emissions from sources not regulated by the EU ETS. Furthermore, the LULUCF Regulation requires Denmark to fulfil specific requirements for reductions in areas such as forestry and cultivation ofagricultural land. The models presented in this report fulfil the reduction requirements defined by the climate targets.
In addition to the members of the Expert Group, Deputy Permanent Secretaries
from Ministry of Taxation, Ministry of Finance, Ministry of Climate, Energy and Utilities, Ministry of Environment, Ministry of Food, Agriculture and Fisheries, and Ministry of Industry, Business and Financial Affairs participated in the discussions. We
have been serviced by a secretariat consisting of officials from the aforementioned
ministries. We thank them for their great dedication and work.
We would also like to take this opportunity to thank the many stakeholders from theDanish business sector and members of the Expert Monitoring Group who havecontributed to our work.
Michael Svarer/Expert Group for a Green Tax Reform, 21 February 2024
The editing was completed on 19 February 2024.
Translation by Denker Media finished April 2024.

Green Tax Reform

Summary
In this final report, the Expert Group for a Green Tax Reform highlights models for amore uniform regulation of greenhouse gas emissions which were not addressed in
the Expert Group's first interim report. Therefore, this report focuses on non-energyrelated emissions from agriculture and forestry, which are expected to account for
approx. 46 per cent of Denmark's total greenhouse gas emissions in 2030 if climate
policy remains unchanged. The report does not present proposals for further regulation of road transport, as the Expert Group operates under the assumption that the
government's proposal to increase the diesel tax will be implemented.
The principles of the Expert Group's work and the balance between the considerations of the Danish Climate Act
In accordance with the terms of reference, the Expert Group's analyses are basedon the guiding principles of the Danish Climate Act, where the requirement for costeffectiveness in climate action is central. In order to achieve cost-effective regulation, the incentive for greenhouse gas reduction must, to the greatest degree possible, be uniform across the entire economy. This can be achieved by imposing a uniform tax on all greenhouse gas emissions (measured as CO2 equivalents reflecting
their Global Warning Potential) and subsidising negative emissions at the same rate.
However, the Danish Climate Act also contains other considerations, including theintention of counteracting significant paradigm shifts in businesses leading to greenhouse gas leakage, where production and the associated emissions move abroad.
According to the Danish Climate Act, the impact of climate policy on social balanceand cohesion, i.e. the distribution of the burden between different groups in society,must also be taken into account, and climate policy must adhere to the principle ofsound public finances.
The Expert Group's analyses show that it is not possible to fully reconcile all these
considerations at the same time through a fully uniform CO2-eq tax on all emissions
from all sectors of society. A fully uniform CO2-eq tax can certainly ensure a fully
cost-effective fulfilment of the Danish Climate Act's target of a 70 per cent reduction
in greenhouse gas emissions from Danish territory in 2030 compared to 1990, but it
will also lead to significant paradigm shifts in businesses with a high risk of greenhouse gas leakage. Political decision-makers must therefore evaluate the various
considerations, which may cause them to refrain from introducing a completely uniform CO2-eq tax on all emissions. Taking this into consideration, the Expert Group's
first interim report on climate regulation of industry etc., in addition to a model with acompletely uniform CO2-eq tax, presented two other models with reduced tax rates
for particularly leakage-prone parts of the industry to illustrate the inevitable politicaltrade-offs between cost-effectiveness and minimising paradigm shifts in businesses
and carbon leakage.
Main characteristics of the Expert Group's proposal for models for climate
regulation of agriculture
In this report, which primarily focuses on reducing greenhouse gas emissions fromagriculture, the Expert Group has again chosen to present three different regulatory

Page 6

Green Tax Reformmodels that emphasise the considerations of the Danish Climate Act and the termsof reference differently. All three models aim to avoid arbitrary discrimination against
agriculture relative to other sectors of the economy. In the Expert Group's model 1,
agriculture is equated with other industries outside of the EU ETS, which implies a
CO2-eq tax of DKK 750 per tonne of CO2-eq in 2030. In the Expert Group's proposal
for model 2, agriculture is equated with the companies within EU ETS, since model 2
taxes agricultural emissions at an effective rate of DKK 375 per tonne of CO2-eq in
2030, while model 3 involves an effective tax rate of DKK 125 per tonne of CO 2-eq
in 2030 on livestock, thus equating animal agriculture with the leakage-prone industrial companies within mineralogy.
The Expert Group's proposal for model 1 emphasises socio-economic cost-effectiveness, but implies a significant reduction in agricultural production, especially incattle farming. The expected decrease in production leads to a relatively high risk ofcarbon leakage. Model 2 emphasises on replacing CO2-eq reductions achieved
through production decline with reductions from measures of a more technologicalnature that reduce carbon leakage, but are costlier in socio-economic terms. Model
3 places even greater emphasis on minimising the decline in production through additional technical effects but involves an even higher socio-economic cost, a significant annual burden on government finances, and greater uncertainty about theachievability of technological reductions.
All three models are designed so that, with a phase-in from 2027, which in combination with initiatives outside the scope of the Expert Group's work are estimated todeliver on the 70 per cent target of the Danish Climate Act and Denmark's climate
commitments in the Effort Sharing Regulation. The models are expected to reduce
CO2-eq emissions in 2030 of around 2.4-3.2 m tonnes from the agriculture and forestry sector. The models are also estimated to provide significant reductions after
2030. Increased afforestation and wetland restoration of carbon-rich agriculturalland (e.g. drained peatlands), which are included in all three models, contribute an
additional 1.2 m tonnes of CO2-eq reduction in 2035 and 2.7 m tonnes annuallyfrom 2045 onwards relative to the effect in 2030.
The models presented should be seen in light of the fact that the estimated reductions necessary for achieving the 70 per cent target in 2030 has been reduced as aresult of the implementation of the revised EU Emissions Trading System Directive,
the political agreement on green aviation and the government's proposal to increase
the diesel tax. Together, these measures are estimated to reduce emissions by approx. 1.1 m tonnes CO2-eq in 2030. Furthermore, a partial correction for the newpeatland maps is estimated to reduce emissions by 2 m tonnes of CO 2-eq in 2030.
The starting point for the Expert Group's calculations in relation to meeting the 70
per cent target in 2030 is thus that the remaining reduction need amounts to approx. 2.5 m tonnes of CO2-eq.
Emissions from agricultural biological processes and farm-related activities
The Expert Group's proposal for tax models for agriculture includes three maingroups of greenhouse gas emissions:1.

2.

Emissions from livestock. Emissions come primarily from cattle and pigs but
also from other livestock, including chickens, ducks, sheep, goats, horses,
deer, lambs, and pheasants.
Emissions from spreading manure and agricultural lime on fields. Here, manure can be regulated either by tax or by restructuring direct agricultural subsidies.

Page 7Green Tax Reform

3.

Emissions from carbon-rich agricultural land.

Livestock is by far the largest source of emissions in agriculture. Therefore, all of theExpert Group's proposed models include an effective tax on emissions from livestock that corresponds to the CO2-eq tax rate in the industry etc. to which agriculture is equated, i.e. DKK 750, 375 or 125 per tonne of CO2-eq depending on thechosen model. Emissions from manure on fields are regulated with a tax or by restructuring the hectare subsidy to a subsidy for reduced fertiliser use, both with amarginal incentive of DKK 750 per tonne of CO2-eq, corresponding to the tax rateon companies in the industry etc. that are currently not regulated under the EU ETS.
The taxation and subsidy rate for reduced manure usage are based on calculationsof the activities on the individual farm. These calculations are made using the emissions factors used in Denmark's official national emissions inventory to the EU andthe UN, which also forms the basis for monitoring Denmark's fulfilment of the Danish
Climate Act's 70 per cent target and EU commitments. The inventory takes the factthat emissions from different types of livestock are different and depend, among
other things, on the type of housing and how fertiliser and slurry are handled in thestables and storage facilities into account. Furthermore, the calculated emissions
are reduced when a company implements measures to reduce emissions from animals and slurry containers etc., if these measures are approved and included in thenational emissions inventory.
In this context, the relevant authorities must contribute to the reduction effect andexpansion of new measures being documented as quickly as possible such thatthese are included in the national emissions inventory. The calculation of the emissions from the individual farm can be based to a considerable extent on informationthat farmers are already obliged to report to the livestock register and in connection
with the nitrogen regulation. Therefore, the Expert Group assesses that it is possible
to implement a tax and subsidy model that takes the differences in emissions fromthe individual sources in agriculture used in Denmark's emissions inventory into account.
Afforestation and set-aside of carbon-rich agricultural land
Carbon removal through afforestation is a measure with a relatively low socio-economic cost. The Expert Group has therefore chosen to include subsidies for afforestation (a negative tax) in all the models. The subsidy is determined based on the
farmer's calculated cost of afforestation. The initiative in the Expert Group's models
is estimated to establish 250,000 hectares of new forest via a subsidy of DKK
92,000 per hectare of forest. This is expected to contribute to reductions of 0.1 m
tonnes of CO2 in 2030, increasing to 2.1 m tonnes of CO2 in 2045. This furthermore
fulfils the government's ambition to establish 250,000 hectares of new forest in Denmark.
As for emissions from carbon-rich agricultural land, all of the Expert Group's models
include a tax of DKK 10 per tonne of CO2-eq from 2030 combined with subsidies forthe costs of wetland restoration of carbon-rich agricultural land. The combination of
taxation and subsidisation should be seen in the light of the fact that the regulation
should increase the incentive to rewet the land, as wetland restoration is the only
thing that approximately eliminates emissions.
The Expert Group's models all only include a low tax on emissions from carbon-richagricultural land. Instead of a high tax, a subsidy is given for wetland restoration inPage 8Green Tax Reform

combination with a low tax, which must be revisited in 2027 with the aim of increasing the tax if there is no prospect of rewetting a total of 37,000/70,000 hectares ofcarbon-rich agricultural land in 2030 and 2032, respectively, including previous projects. The prospect of a higher tax in the future is more credible if it is backed up
now by a decision to introduce a tax on carbon-rich agricultural land from 2030.
Once a tax has been decided on and implemented, it is administratively simpler toraise it in order to reach the raising the rate, if necessary, to reach the target of the
set-aside. The subsidy for wetland restoration combined with the tax is expected toprovide CO2-eq reductions in 2030 of 0.3 m tonnes and reductions in 2032 of 1.0 m
tonnes in 2032.
In addition, all the Expert Group's models include a tax on greenhouse gas emissions from the use of F-gases of DKK 750 per tonne of CO2-eq, corresponding to
the tax rate for companies outside EU ETS. It is expected to contribute 0.1 m tonnesof CO2-eq reductions by 2030.
Not all emissions are included in the tax base
Certain emissions from agricultural field operations are not covered by the Expert
Group's models. Among these are some insignificant emission sources where thereduction effect is not deemed to be commensurate with the administrative burdenof taxation. A more significant source is nitrous oxide emissions from crop residues,
but as these emissions are part of a close and complex interaction with nitrogen
regulation, which is currently under review, they are not included in the models presented here. The Expert Group calls for the regulation of these emissions to be included in a new model for nitrogen regulation. Another source of emissions in crop
production is indirect nitrous oxide emissions from applied fertiliser, which occur via
ammonia evaporation and subsequent deposition of nitrogen, as well as nitrogenleaching and runoff from the field. These emissions are calculated at a national levelby combining a number of factors. The Expert Group does not include these indirectemissions in the tax base, as it is difficult to attribute them to the individual farm in a
way that ensures a direct link between the individual farmer's activity and the national inventory. Overall, approx. 15 per cent of emissions from agriculture and forestry are not covered by the Expert Group's models for the reasons mentioned
above. However, on a national level, the farmer's adjustment to the fertiliser tax on
direct nitrous oxide emissions will contribute to lowering indirect emissions. This effect is included in the Expert Group's calculation of the total greenhouse gas reductions.
Key figures for the models
Key figures for the Expert Group's models are shown in Table 1. The Expert Groupassumes a phase-in from 2027 based on the premise that a political agreement that
follows up on the models presented to achieve the climate targets is reachedquickly.
The "shadow price" in the penultimate column of Table 1 indicates the average socio-economic cost per tonne of CO2-eq reduction. The shadow price measures theloss of economic welfare due to the cost increase of the regulation minus the mostimportant environmental spin-off benefits (besides the benefit of the CO2-eq reduction itself). Specifically, the shadow price is reduced by the health benefits of reduced ammonia evaporation, the recreational value of increased forest areas, andthe reduction in the cost of meeting EU requirements for water quality resulting fromlower nitrogen leaching. The rewetting of carbon-rich agricultural land can also contribute to more and better nature on land and increase the diversity of plant and ani-

Page 9Green Tax Reform

mal species on the land. The benefits of this are difficult to calculate and are not recognised in the shadow prices, which therefore underestimate the environmental
benefits of climate regulation of agriculture.
In model 2, the nominal rate for the livestock tax is maintained at DKK 750 per tonneof CO2-eq, but a base deduction of 50 per cent of the tax payment per animal isgiven, thereby lowering the effective tax rate to DKK 375 per tonne of CO2-eq. On
the margin, however, the farmer must pay DKK 750 per tonne of CO 2-eq for increased emissions per animal. Still, the farmer is simultaneously rewarded with a tax
saving of DKK 750 per tonne of CO2-eq when introducing emissions reducing
measures such as feed additives. This maintains a high incentive to switch to moreclimate-friendly operations, but the base deduction lowers the total tax burden. In
model 3, the nominal rate for the livestock tax and thus the incentive to reduce
emissions per animal is DKK 250 per tonne of CO2-eq, but the base deduction of 50
per cent reduces the average effective tax rate to DKK 125 per tonne of CO 2-eq.
In all three tax models, fertiliser applied to fields is subject to a tax of DKK 750 per
tonne of CO2-eq to maintain a high incentive to reduce fertiliser application at themargin, but in models 2a and 3a the average effective tax rate is halved via an areabased base deduction that is allocated per hectare on the same basis as the hectare subsidy in the EU's common agricultural policy. As an alternative to a fertiliser
tax, models 2b and 3b provide a subsidy of DKK 750 per tonne of CO 2-eq for reduced fertiliser usage if the farmer reduces the fertiliser usage below the applicablenorm in the nitrogen regulation. The subsidy is financed by a reduction of the hectare subsidy for all farmers, regardless of whether they reduce the fertiliser application or not. In this way, part of the agricultural subsidy is converted from passive
support to supporting the climate transition of the agricultural sector. The restructuring is thus revenue-neutral for the state. Compared to the fertiliser tax with a basededuction, the fertiliser reduction subsidy provides slightly fewer CO 2-eq reductions
at a higher shadow price. On the other hand, the subsidy model results in a slightly
smaller decrease in agricultural production than the tax model.
In models 1 and 2, the marginal rate for the livestock tax is sufficiently high to ensure that it is favourable for farms to introduce technical measures such as feed additives and covering of slurry storage facilities, as these measures are expected to
be included in the emissions inventory in 2030. In model 3, the tax rate is too low toensure that farmers adopt these measures. To ensure the necessary CO2-eq reductions, it is therefore a requirement that farms utilise these measures.
Models 2 and 3 include a public subsidy fund every year until 2030 to support the
expansion of the use of biochar produced by pyrolysis. Biochar stored in agriculturalsoil is a way for agriculture to achieve negative emissions through carbon sequestration that can compensate for the inevitable emissions from other agricultural
sources. This is necessary to realise long-term climate goals. The purpose of thesubsidy is to promote the further development and cost reduction of pyrolysis technology so that in the long term it can compete with other technologies on market
terms, supported by effective climate regulation. To ensure that the support has a
climate effect, it is only paid out once it has been documented that the biochar has
been stored in the ground. In model 3, biochar produced by pyrolysis contributes
CO2-eq reductions of 0.8 m tonnes of CO2-eq in 2030. It is uncertain whether suchan upscaling of the pyrolysis capacity can be achieved before 2030, and the development in the area must, therefore, be continuously monitored to assess whether
additional measures will be needed in model 3 to ensure that the 70 per cent target
is met. Environmental approval for the storage of biochar in agricultural land isPage 10Green Tax Reform

Page 11pending, which also contributes to uncertainty about meeting the 70 per cent target,
especially in model 3.
The immediate burden on business in the fifth column of Table 1 shows the burden
placed on agriculture in a hypothetical situation with unchanged behaviour and unchanged market prices and prices of inputs in production. In model 1, the immediate burden on the agricultural sector is estimated to be around DKK 5.9 bn. When abase deduction is introduced in model 2, the burden is reduced to DKK 3.1 bn and
DKK 2.5 bn in models 2a and 2b, respectively. However, fewer CO 2-eq reductions
are achieved. Models 3a and 3b imply an even lower immediate burden of DKK 1.9
bn and DKK 1.3 bn, respectively. With a lower immediate burden of business comesa decline in production. This requires additional subsidies for technological reductions, which increases the socio-economic cost, the shadow price. Furthermore, theuncertainty associated with the reductions increases as a larger contribution is assumed from technologies that are not market-ready today.
The burden on the agricultural sector will be significantly less than the above-mentioned amounts once farms and agricultural sales prices and input prices have adjusted to the tax/subsidy. This is also true when you factor in the value of the production lost when the least profitable farms are closed down as a result of the regulation.
In model 1, the state is estimated to achieve an annual net revenue of approx. DKK
1.2 bn after the sector has adapted to the tax. The proceeds can be returned to theindustry in the form of a subsidy scheme for testing and transition to new climatefriendly agricultural technologies and/or for support for transition to greener methods of production in the form of state compensation for the demolition of livestockbuildings etc. in animal farms that permanently convert to crop production. In model
2, there is a limited loss of state revenue of just over DKK 0.5 bn annually, which will
require financing, while model 3 involves a somewhat larger annual financing requirement of just over DKK 2 bn.
Table 1. The Expert Group's models
Carbon-rich agricultural land

Afforestation

Increase in the funds for set-aside and wetland resCommon ele- toration costs of DKK 9.4 bn Introduction of a tax ofments
DKK 10 per tonne of CO2-eq (increases with low
set-aside)
Regulation

Livestock

Subsidy of DKK 92,000 per Tax of DKK 750 per tonne ofhectareCO2-eqCO2-eq re- Costs andduction 1
revenues

Fertiliser

Biocharby pyrolysis

2030

Tax of
DKK 750
per tonneof CO2-eq

Tax of DKK
750 per tonneof CO2-eq

3.2

Shadow price

Revenue after behavImmediate
ioural reburden
sponse andsubsidym tonnes
Model 1
(Effective tax
rate of DKK
750 per tonneof CO2-eq)

F-gases

DKK bn5.9

1.2

Avg. incl. side
effects

Land value
declineIncl. afforestation

DKK per tonneof CO2-eq

Per cent

150

8.8

Green Tax Reform

Page 12

DKK 750
per tonne
and a basedeductionof 50 percent.

DKK 750 per
tonne and abase deduction of 50 per
cent.

DKK 225m annually publicfunds

DKK 750
per tonne
Model 2band a base(Restructuring deductionof direct agri- of 50 per
cultural subsi- cent.
dies)

Subsidy of
DKK 750 per
reducedtonne of CO2eq financed
by restructuring direct agricultural subsidies

DKK 225m annually publicfunds

DKK 250
per tonne
and a basedeductionof 50 percent.

DKK 750 per
tonne and abase deduction of 50 per
cent.

DKK
1.150 mannually
publicfunds

DKK 250
per tonne
Model 3band a base(Restructuring deductionof direct agri- of 50 per
cultural subsi- cent.
dies)

Subsidy of
DKK 750 per
reducedtonne of CO2eq financed
by restructuring direct agricultural subsidies

Up to
DKK
1,150 Mannually
publicfunds

Model 2a(Effective tax
rate of DKK
375 per tonneof CO2-eq)

Model 3a(Effective tax
rate of DKK
125 per tonneof CO2-eq)

2.8

3.1

-0.5

250

-4.1

2.6

2.5

-0.7

325

-2.8

2.6

1.9

-2.0

475

-7.2

2.4

1.3

-2.1

575

-6.0

Source: 1. Including CO2-eq reduction in 2030 of 0.3 m tonnes from wetland restoration of carbon-rich agricultural land, 0.1 m tonnes from afforestation and 0.1 m
tonnes with higher tax on F-gases.

The risk of bankruptcies in agriculture
The Expert Group has assessed the risk of bankruptcies in agriculture as a result of
the models presented. The bankruptcy risk is highly dependent on the assessed effects on agricultural land values and the value of the industry's buildings and machinery. In the absence of afforestation subsidies, the Expert Group's models are estimated to result in a significant decline in land values, especially in model 1, but theafforestation subsidy helps to keep land values up. In models 2 and 3, the effect ofafforestation is sufficient to protect against a general decline in land values, although
the geographical effects on land values will depend on the specific local opportunities for afforestation.
Other agricultural capital values are expected to decrease in all models, especiallyin model 1, but somewhat less in models 2 and 3. The report's calculations indicatethat the immediate burden on the agricultural sector due to model 1 will increase theaverage bankruptcy risk across full-time farmers by 15 percentage points. In contrast, cattle farms will experience an increase in bankruptcy risk of 25 percentage
points. In model 2, the increase in the risk of bankruptcy among all farms and cattle
farms is estimated to be limited to 4-5 percentage points and 10-11 percentage
points, respectively, whereas the impact of model 3 is so minor that no significant
increase in the risk of bankruptcy is expected. When taking the possibilities forGreen Tax Reform

farms to reduce their costs by adapting to the new regulation and the expected increase in agricultural sales prices into account, the increase in the risk of bankruptcy will be smaller than the figures mentioned. Furthermore, not all farms at riskof bankruptcy will actually go bankrupt.
Effects on food prices, distribution and employment
As mentioned, the burden on the agricultural industry is reduced by the fact that apart of the industry's cost increase can be expected to be passed on in the settlement prices for deliveries to dairies and slaughterhouses, which will lead to a rise in
consumer prices for processed food. However, even in model 1, consumer prices
on Danish dairy and meat products are only expected to increase by just under 4
per cent. After taking into account adjustments in other prices, wages and transfer
incomes, the estimated effects on inequality in the distribution of real disposable income is unaffected measured by the Gini coefficient.
The introduction of a CO2-eq tax on agriculture leads to a permanent decline in employment in agriculture and the food industry of almost 8,000 full-time equivalents inmodel 1, and about half and a quarter of this in model 2 and model 3. Total employment falls by a similar amount in the short term. However, over time, total employment in the economy will rise back towards the starting point as the freed-up labour
moves to other industries.
The Expert Group has also analysed how the presented models affect the economy
in different parts of the country. This was done by calculating how much the loss ofgross value added (GVA) in agriculture represents of the total GVA in 11 different
parts of the country. On average for the whole country, agriculture's loss of GVA
amounts to 0.3 per cent of Denmark's total GVA in model 1, and somewhat less inmodels 2 and 3. In West Jutland, where the economic importance of agriculture isgreatest, the industry's loss of GVA amounts to 1.1 per cent of the region's total
GVA in model 1 and about half of this in model 2. The limited effect reflects the factthat agriculture only makes up a small proportion of the economy even in the partsof the country where the profession is most widespread. The figures do not include
the impact of production in dairies and slaughterhouses. If these ancillary industries
are included, the regional effects may be slightly larger. It should be emphasisedthat these figures do not indicate the net effect on the regions' GVA, as some of theresources released from agriculture will be used and thus create added value elsewhere in the same region in industries with less CO2-eq-intensive production.
Denmark's contribution to the global food supply
The Expert Group has also analysed whether the presented models risk causing asignificant decrease in Denmark's contribution to the global food supply, measured
by the total Danish production of calories for human consumption. The analysis isinevitably subject to great uncertainty, but indicates that in the Expert Group's models, it will be possible to maintain a largely unchanged calorie production in Danish
agriculture. This is because the decline in animal production and the associatedland use for livestock feed production will free up land that can potentially be used
to produce plant-based food for human consumption.
Uncertainty factors
The calculations in the report are subject to considerable uncertainty, partially due
to no other countries having experience with similar climate regulation of agriculture.
The Expert Group has therefore made a number of calculations of the sensitivity of
the reported results to changes in the assumptions about the size of key parameters

Page 13Green Tax Reform

about which there is uncertainty. Among the key parameters are the price elasticities of agricultural exports, which indicate how much foreign demand for Danish agricultural goods falls when their prices rise. With a higher price elasticity, it will be
more difficult to pass on a CO2-eq tax in the prices of Danish agricultural products,
and the tax will therefore have a greater impact on the industry's earnings and production. Conversely, a lower price elasticity will reduce the decline in earnings andoutput.
However, the sensitivity analyses carried out do not cover all dimensions of the uncertainty surrounding the report's calculations, partly because there is uncertainty
about how well the Expert Group's modelling reflects reality. In light of the lack ofexperience with introducing a general CO2-eq tax on agricultural emissions, the Expert Group calls for close and continuous monitoring of whether the development inagricultural emissions and economic conditions correspond to the expected effectsof the CO2-eq regulation decided politically. If this is not the case, the Expert Groupsuggests reassessing the overall taxation of greenhouse gas emissions — not justagriculture — to ensure that the uniform tax structure across sectors is maintained.
A climate tax on end consumption
After the formation of the current government, the Expert Group's terms of reference were expanded to include a request to analyse the pros and cons of imposing
a CO2-eq tax on end consumption. Such a consumption tax would be imposed at
the retail level on the sale of processed foods to the final consumer, regardless ofwhether the product is produced in Denmark or imported from abroad. Food for export, on the other hand, should not be included in the tax base, as the purpose is
only to tax emissions from domestic consumption. The consumption tax rate should
ideally reflect the total amount of greenhouse gases emitted in the production andtransportation of the product throughout the value chain until the product reaches
the final Danish consumer.
In the Danish debate, a climate tax on the end consumption of food has been put
forward as a possible alternative or supplement to a tax on greenhouse gas emissions from Danish agricultural production. One of the advantages of a climate tax at
the consumption stage is that imported and domestically produced goods are taxed
equally, thereby avoiding a deterioration in the competitiveness of Danish agriculture and the resulting risk of greenhouse gas leakage.
Due to this, the Expert Group has analysed the effects of imposing a tax on Danish
consumption of particularly climate-impacting foods, which, in the report's calculations, are limited to beef, pork, and dairy products. For calculation purposes, it is assumed that the three product groups are subject to three different tax rates corresponding to the estimated total global emissions from the consumption of beef, pork
and dairy products delivered from Danish slaughterhouses and dairies, including
emissions from the import of raw materials and semi-finished products for use in
Danish food production.
From a climate perspective, different taxes should be imposed on imported andcomparable domestically produced food products if there is a difference in emissions per unit produced abroad and in Denmark, but the trade policy rules in the EU
and the World Trade Organisation (WTO) require that the same tax is imposed on
imported and comparable domestically produced goods. The Expert Group's calculations therefore assume that imported food products are subject to a tax that reflects the estimated global emissions from Danish production of comparable foodproducts.

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Green Tax Reform

The Expert Group has assumed that Denmark is obligated to the EU and by theDanish Climate Act to reduce greenhouse gas emissions from Danish territory, including emissions from Danish agricultural production. On this basis, the Expert
Group has investigated the extent to which a CO2-eq tax at the consumption stage
can replace a tax at the production stage as a means of achieving a given reduction
in greenhouse gas emissions from Danish territory. Specifically, the Expert Grouphas compared the effects of a consumption tax of DKK 750 per tonne of CO 2-eq on
the above-mentioned particularly climate-impacting foods with the effects of a CO2eq tax of DKK 750 per tonne in the production stage. For the sake of comparability,
the tax at the production stage does not include emissions from Danish carbon-richagricultural land, as it is hardly accurate to assume that imported food products giverise to similar emissions from foreign carbon-rich agricultural land. The basis for the
analysed tax on domestic agricultural production is thus smaller than the tax base in
the Expert Group's model 1.
Nevertheless, the base for the tax in the production stage is significantly broader
than the base for the consumption tax. This is partly because the consumption tax
only covers part of the total domestic food consumption, but even if the consumption tax was extended to cover all food consumption, the tax in the production stage
would still have a significantly larger base. This is because Danish food production issignificantly larger than Danish food consumption, as Denmark exports a large
share of the food it produces. These factors help to explain why, according to theExpert Group's calculations, the introduction of a consumption tax of DKK 750 per
tonne of CO2-eq on particularly climate-impacting foods would only enable a reduction in the production tax from DKK 750 to around DKK 700 per tonne of CO 2-eq.
A further explanation is that food consumption and the associated greenhouse gas
emissions are relatively insensitive to price increases. In contrast, international competition on the world market means that agricultural exports and associated emissions are significantly more sensitive to price increases due to a climate tax. Last
but not least, a climate tax at the production level gives the individual farm a direct
incentive to reduce emissions, which is not the case with a consumption tax, whichmust necessarily be based on the average emissions from the entire agricultural
sector, over which the individual farmer has little influence.
As a result of these factors, the shadow price of domestic CO 2-eq reductions ismany times higher with a consumption tax than with a production tax, and the
shadow price of reducing global emissions is also much higher with the consumption tax, as it is estimated to provide only a very limited reduction of emissions
abroad. In addition, the introduction of a differentiated climate tax on food is estimated to entail very large administrative challenges for both authorities and industry,
similar to the practical problems that led to the abolition of the previous fat tax. For
this reason, a climate tax on end consumption is not included in the Expert Group's
models.
The fundamental trade-off: Cost-effectiveness versus preservation of thebusiness structure
In summary, the Expert Group's models 1-3 for a production tax in the agricultural
production chain can be seen as a mirror image of the models in the first interim report on a CO2 tax on industry etc. In the first interim report, a lower tax level was followed by higher socio-economic costs (higher shadow prices) and required a larger
reduction contribution from technology. The Expert Group's models in this report,
which focus on agriculture, also limit the impact on the existing business structure

Page 15

Green Tax Reformby reducing the tax level and increasing the share of CO2-eq reductions from technological change. Models that increase the share of technological reductions thus
play a significant role in the Expert Group's consideration of deviating from the strict
cost-effectiveness requirement. The cost of reducing the tax level and increasing
the technological reductions relative to reductions achieved by production cuts is
fewer CO2-eq reductions and higher socio-economic costs, as well as an increased
need for financing. The increase in socio-economic costs and financing needs canbe interpreted as the price of reducing the burden on the agricultural sector and therisk of carbon leakage from agriculture.

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Green Tax Reform

The Starting Point fora Green Tax Reform

1

Page 17Green Tax Reform

1. The Starting Point
for a Green Tax
ReformAfter concluding the Agreement on Green Tax Reform of December 2020, the parties to the agreement agreed in February 2021 on a terms of reference for the Expert Group's work, see Appendix 7.1. The terms of reference state that the Expert
Group will:•Prepare models for uniform CO2-eq regulation, including the design of a more
uniform CO2-eq tax.1•

Develop different scenarios that contribute significantly to the 70 per cent target, taking into account the guiding principles of the Danish Climate Act. The
starting point for the scenarios must be that they deliver the most cost-effective
solution. If there is a deviation from the socioeconomically least costly solution,
reasons must be given.

The terms of reference state that the work of the Expert Group will be divided into
two reports, which together will form a comprehensive analysis. The first report from
6 February 2022 presented proposals for restructuring energy taxes to a more direct tax on CO2 emissions and expanding the tax base to well-defined areas thatwere previously exempt from tax. The first interim report focused on a tax on emissions, carbon removal from industry, heat and electricity production and non-roadtransport. The report also proposed a restructuring of energy taxes on petrol, diesel
and space heating into a CO2 tax.
With this second and final interim report, the Expert Group describes models for amore uniform CO2-eq regulation across the entire economy, including roadtransport and non-energy related emissions from agriculture, taking into account theguiding principles of the Danish Climate Act.
In addition to the Expert Group's original terms of reference, the basis for the current
government states that "The climate tax must ensure implementation of the development track and fulfilment of the binding reduction target for the agriculture and forestry sector of 55-65 per cent in 2030 compared to 1990. The government will ask
the expert committee to present different scenarios for achieving this goal in linewith the recommendations the committee presented in connection with the CO2-eq

1

The term 'CO2-eq' stands for "CO2 equivalents". This covers the fact that agriculture's non-energy-related emissions
consist mainly of the greenhouse gases nitrous oxide (N20) and methane (CH4), which for the sake of comparability
are converted to CO2 equivalents, i.e. to the CO2 emission that has the same climate impact as the emission of thegreenhouse gas in question.

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Green Tax Reform

tax on industry, including consideration of counteracting the relocation of production, including international experience and the possibility of applying a CO 2-eq tax
on end consumption as a possible instrument".
The second report will also assess the advantages and disadvantages of a regulatory solution for the agricultural sector, a subsidy model for EU agricultural support
and a CO2-eq tax for this sector or a combination of these, as well as possible
measures for cost-effective regulation of agriculture that address CO2-eq emissions
and other externalities, including e.g. environment and health.
Contributions to meeting the reduction targets of the Danish Climate Act can takethe form of CO2 emission reductions and negative CO2 emissions, for example, by
capturing and storing CO2 from biomass and biogas, as negative emissions arecounted towards the 70 per cent target on an equal footing with CO 2 reductions. In
order to achieve cost-effective regulation, the incentive for greenhouse gas reduction must, to the greatest degree possible, be uniform across the entire economy.
This could be ensured, for example, by providing a subsidy – a so-called negativetax – for negative CO2 emissions at a rate equivalent to the CO2 tax rate.
In addition, the terms of reference state that, in addition to a uniform CO 2, appropriate compensation and feed-back mechanisms should be identified to support theguiding principles of the Danish Climate Act. Thus, the report analyses the consequences of a number of different measures that can reduce the impact on agriculture, see Section 2.10. Chapter 2 also describes the effects of a CO2-eq tax on employment and income distribution in the areas covered by this report.
Finally, the additional terms of reference state that the Expert Group must, as part ofits final report, "analyse the advantages and disadvantages of imposing a CO2-eq
tax on end consumption". This is described in more detail in Section 4.

1.1 The Expert Group's Interpretation of the Termsof Reference and the Guiding Principles of theDanish Climate Act
In accordance with the terms of reference, the Expert Group's analyses are basedon the guiding principles of the Danish Climate Act.
The requirement for cost-effectiveness in climate action is at the centre of the Danish Climate Act and the terms of reference and is, therefore, the starting point for
the Expert Group's work. Cost-effectiveness means that greenhouse gas reductions
are achieved at the lowest possible socio-economic cost, i.e. with the lowest possible loss of economic welfare for citizens in general in the form of e.g. lower real
wages and transition costs.
A CO2-eq tax gives individual businesses (including farms) and households a direct
incentive to reduce their emissions in the way that is cheapest for them. A key advantage of using the tax instrument is that it exploits the knowledge of companies
and households themselves on how best and cheapest to reduce emissions. This
mobilises valuable knowledge about reduction opportunities that authorities often do
not have. However, to ensure full cost-effectiveness in connection with a CO2-eq tax
on agriculture, it is important that the authorities provide knowledge that enables tax
reductions when agricultural enterprises introduce new practices that reduce theirgreenhouse gas emissions.

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Green Tax Reform

The Danish Climate Act's 70 per cent target relates to CO2-eq emissions from Danish territory. Thus, it is irrelevant whether Danish or foreign companies or consumers are behind the activities that cause the emissions. It only matters whether theemissions take place outside or within Denmark's borders. A fully cost-effective
CO2-eq tax to reduce domestic emissions requires that the tax is the same acrossall activities in all domestic sectors and that negative domestic emissions are subsidised at a rate equal to the tax rate. Such a uniform CO2-eq tax ensures the same
incentive to lower emissions everywhere in the domestic economy, thereby concentrating reduction efforts in areas where they are cheapest.
However, the Danish Climate Act and the terms of reference also mention other important considerations that are not necessarily compatible with the requirement for
full cost-effectiveness, including ensuring cohesion and social balance and limiting
carbon leakage, where production and associated emissions are moved abroad.
Both of these considerations can be challenged by the paradigm shifts in businessthat a uniform CO2-eq tax must be expected to bring about.
The Danish Climate Act and the terms of reference include principles for social balance, including that the costs of meeting the climate target must not be unevenly
distributed across income groups. The report's analyses show that none of the tax
models described increase inequality in income distribution.
The Expert Group's analyses show that the introduction of a uniform CO 2-eq tax tomeet Denmark's climate commitments in the EU and the national climate targets willlead to a decline in domestic Danish agricultural production.
Freed-up labour and capital will eventually enter other parts of the Danish economy.
The adjustment costs of these paradigm shifts in business will be small relative toDenmark's overall economy, but they may be noticeable in some local areas. The
analyses thus reveal an inevitable dilemma between the objective of for cost efficiency and the preservation of existing business structures. Against this background, in Chapter 2, the Expert Group has chosen to present three overall models,
as well as different versions of these, for climate regulation of agriculture that emphasise these considerations differently in order to illustrate the political trade-offs
that must necessarily be made.
According to the Danish Climate Act, Denmark's climate action must be compatible
with sound public finances and the terms of reference require the Expert Group topresent alternative scenarios, at least one of which involves no overall increase intaxes and duties.
Chapter 2 contains a scenario where the revenue from the CO2-eq tax is used forcompensatory subsidies/compensation. Finally, Chapter 2 includes a scenario
where the compensatory measures require additional financing beyond the tax revenue.
The rest of this chapter provides an overview of Denmark's greenhouse gas emissions as well as one of Denmark's national climate targets and international climate
commitments.

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Green Tax Reform

Page 21

1.2 Denmark's Greenhouse Gas Emissions
In 2021, Denmark's total greenhouse gas emissions were 46.2 m tonnes of CO2-eq,
see Climate Status and Outlook 2023. With the climate policy measures adopted so
far and the partial correction for the new map of carbon-rich agricultural land, Denmark's total greenhouse gas emissions are estimated to be approx. 27 m tonnes ofCO2-eq in 2030.
This report mainly deals with non-energy related emissions from agriculture and forestry etc. Climate Status and Outlook 2023 are the basis for the calculations in thereport. With Climate Status and Outlook 2024, which will be published in April 2024,
the inventory and projection of emissions will be updated.
In this report, all greenhouse gas emissions are converted to CO 2-eq, see Box 1.1.
Box 1.1
Greenhouse gases
Greenhouse gases are a term for gases that contribute to the greenhouse effect. When the concentration of greenhouse gases in the atmosphere increases, it causes changes in the greenhouse effect that can cause the Earth's temperatures to rise and change the Earth's climate. Greenhousegases include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and the so-called F-gases(e.g. refrigerants). The gases have different greenhouse effects, but are converted to CO2 equivalents (abbreviated CO2-eq) based on the warming potential of each individual gas (Global Warming
Potential, abbreviated GWP) in a hundred-year perspective in relation to CO2. GWP values are updated on an ongoing basis as new knowledge in the field becomes available. To avoid inconsistencies in the time series of greenhouse gas emissions, IPCC guidelines require the recalculation of theannual greenhouse gas emissions inventories back to 1990 when the GWP values are updated.
All countries that are part of the Paris Agreement have committed to use GWP values over a 100year period based on the IPCC's Fifth Assessment Report (AR5) from 2024 at the latest (i.e. in the2022 inventory). This allows emissions inventories to be compared across countries, increasing theability to check whether each country's climate accounts are credible and well-documented. Thus,
using other GWP values for reporting national emissions inventories would be inconsistent with thereporting requirements of the Paris Agreement.
The Ministry of Climate, Energy and Utilities has since the Climate Status and Outlook 2021 used
AR5, which reduces data breaks in the projection and between the inventory and the projection.
In AR5, methane (CH4) is calculated with a GWP value of 28 and nitrous oxide (N2O) of 265, whichmeans that one tonne of methane contributes 28 times more and one tonne of nitrous oxide 265
times more to the greenhouse effect than one tonne of carbon dioxide (CO2).
In connection with the IPCC's sixth report (AR6), updated GWP values were published. It is not yetplanned when the inventories to the UN will be updated for this. It should be noted that the US Environmental Protection Agency has chosen to use AR6 for scientific reports, but continues to use AR5
for reporting to the UN.

UN Intergovernmental Panel on Climate Change
assessment reports
Greenhouse gases
AR4

AR5

AR6

CO2

1

1

1

CH4 (fossil)

25

28

29.5

CH4 (non-fossil)

25

28

27.2

Green Tax Reform

N2O

Page 22

298

265

273

Non-energy-related emissions from the agriculture and forestry sector are estimatedto be 12.4 m tonnes of CO2-eq in 2030, corresponding to approx. 46 per cent ofDenmark's total emissions in 2030. Estimated emissions of 9.6 m tonnes of CO 2-eq
from road transport and 1.9 m tonnes of CO2-eq from waste and F-gases. In addition, emissions of 6.2 m tonnes of CO2-eq are estimated from industry, non-roadtransport, electricity and heat.
Greenhouse gas emissions from agriculture and forestry are a result of agriculturaland forestry operations, including natural biological processes such as methanefrom livestock digestion processes, nitrous oxide from fertiliser application, and thedecomposition of carbon and nutrients in the soil. The emissions will typically varydepending on natural conditions such as temperature, rainfall and soil conditions.
Existing environmental regulation contributes to lowering non-energy-related greenhouse gas emissions from agriculture and forestry. Therefore, it is relevant to elucidate the interaction between a future regulation of greenhouse gas emissions andthe existing environmental regulation. The main features of the current environmental regulation of agriculture and forestry can be found in Chapter 6. In addition, thecurrent regulation of fertilisers and field management is described in Section 3.2.

Green Tax Reform

Page 23

Green Tax ReformIn the government's Climate Status and Outlook 2023, it was estimated that new climate policy measures would be needed to ensure further greenhouse gas reductions of 5.4 m tonnes of CO2-eq in 2030 to meet the 70 per cent target. Since thepublication of Climate Status and Outlook 2023, the government has presented theimplementation of the revised EU Emissions Trading System Directive, an agreement on green aviation and a proposal for an increase in the diesel tax, which together is estimated to reduce the shortfall to the 70 per cent target to 4.5 m tonnesof CO2-eq in 2030. The reduction deficit in relation to reaching the 70 per cent target in 2030 has been further adjusted down by DKK 2 m tonnes of CO 2-eq as a result of the partial correction for the new map of carbon-rich agricultural land.
The starting point for the Expert Group's calculations is thus that the reduction deficit in relation to meeting the 70 per cent target in 2030 is reduced from 5.4 m to 2.5
m tonnes of CO2-eq relative to the Climate Status and Outlook 2023, see Figure
1.1.
In addition to the 70 per cent target, the government has set a target for Denmark
to be climate neutral by 2045 and for net emissions to be reduced by 110 per centby 2050 compared to 1990.
Figure 1.1 - Total net emissions relative to reduction targets

Source: Climate Status and Outlook 2023

Denmark's total reduction deficit under the EU's Effort Sharing Regulation is estimated to be approx. 11.5 m tonnes of CO2-eq over the period 2021-2030, when thegovernment's proposal for a diesel tax and implementation of the revised EU Emissions Trading System Directive are included.
Denmark's reduction deficit in emissions and removals from agricultural land use
and the forest sector (LULUCF2 commitment) is estimated to be around 7.0 m
tonnes of CO2-eq in the period 2026-2029 and around 1.1 m tonnes CO2-eq in
2030, taking into account the downward adjustment due to the updated map of carbon-rich agricultural land.

2

Land Use, Land-Use Change and Forestry

Page 24Green Tax Reform

Page 25

Agriculture accounts for a large share of Danish greenhouse gas emissions in 2030
relative to the sector's share of the Danish economy, see Figure 1.2. Agriculture andits ancillary industry contribute approx. 2 per cent to Danish prosperity (measured
by gross value added), while the rest of the industry contributes approx. 22 per
cent. Similarly, agriculture and its related industries only account for 3 per cent ofDanish employment, while the rest of industry accounts for 18 per cent of employment. However, by 2030, agricultural emissions will account for 46 per cent of total
emissions, while industry accounts for only 19 per cent.
The high emissions for agriculture should also be seen in the context that otherCO2-eq-intensive industries have already been subject to regulation with the aim of
reducing their emissions by 2030. This applies in particular to industry, which wasaddressed in the first interim report, as well as road transport, which has been regulated through several political agreements, especially the Agreement on the Green
Transition of Road Transport from December 2020.
Figure 1.2. Overview of economic key figures for industry and agriculture

Note: Agriculture is incl. secondary industry (slaughterhouses and dairies), while industry is excl. agriculture and its ancillary industry. For agricultural emissions, thestarting point is the non-energy-related emissions from agriculture and forestry.
Source: The Expert Group's calculations based on data from Statistics Denmark and Climate Status and Outlook 2023, including partial corrections for the
implementation of the revised EU Emissions Trading System Directive, the agreement on green aviation, the proposal to increase the diesel tax, and the new map ofcarbon-rich agricultural land.

Green Tax Reform

Page 26

1.2.1 Emissions from agriculture and forestry
Non-energy-related emissions from agriculture and forestry amounted to 11.8 m
tonnes of CO2-eq in 2021, corresponding to 27 per cent of Denmark's total emissions. The total non-energy-related emissions from the two sectors are estimated tobe 12.4 m tonnes of CO2-eq in 2030, including the partial correction for the newmap of carbon-rich agricultural land, corresponding to 46 per cent of Denmark's total emissions in 2030.
In general, these emissions can be divided into three categories: emissions from animal production, emissions from crop production and emissions from land use (LULUCF), including afforestation. In 2030, animal production is expected to accountfor 52 per cent of the total emissions from the agriculture and forestry sector, see
Table 1.1. Crop production is expected to account for almost 29 per cent. Emissions from land use, which mainly originate from drained carbon-rich agriculturalland, are estimated to account for almost 19 per cent. The largest single emission
sources are emissions from dairy cattle and from carbon-rich soil. It should be notedthat removals and emissions from forests have a large influence on the sector's total
emissions, but that net removals from forests in 2030, see Table 1.1, are estimatedto be 0. The individual emission sources are summarised in Appendix 7.3.
This report considers emissions from the sectors totalling 10.6 m tonnes of CO 2-eq,
see Table 1.1. This corresponds to approx. 85 per cent of all emissions from the agricultural and LULUCF sectors.
Table 1.1. Emission sources in agriculture and forestry

The agricultural
sectorm tonnesof CO2eq, 2030

Share of emissions from agriculture and forestry in 2030,
per cent

Total livestock

6.5

52.3

Dairy cows

3.1

24.7

✓

Other cattle

1.5

11.7

✓

Pigs

1.6

13.0

✓

Poultry

0.0

0.2

✓

Other livestock

0.2

1.7

✓

Indirect emissions
from livestock

0.1

0.7

Grazing

0.0

0.2

Total crop production

3.6

29.0

Artificial and organic fertilisers

1.7

13.8

Agricultural lime

0.2

1.8

✓

Urea

0.0

0.0

✓

Included in the Expert
Group's models(✓)/indirectly included
(*)

✓
*

✓

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Page 27

Indirect nitrous oxide emissions fromfields

0.6

4.7

Burning of fields

0.0

0.0

Mineralisation

0.0

0.3

Cultivation of carbon-rich agricultural
land

0.2

1.7

Crop residues

0.9

7.2

Biomass

0.2

1.9

Carbon pool in mineral soils

-0.3

-2.5

Total land use

2.3

18.6

Carbon pool in carbon-rich agricultural
land

1.9

15.7

✓

Forest

0.0

0.0

✓

Harvested wood
products

-0.2

-1.9

*

Buildings

0.3

2.3

Wetlands

0.3

2.5

Total emissions

12.4

100

Emissions directly subject toregulation in the Expert
Group's models

10.6

85.1

Total emissions

12.4

100

LULUCF
sector-agricultural sector of this

10.2

81.9

-

of which LULUCF sector

2.2

18.1

*

✓

Note: Other livestock includes pheasants, ducks, mink, sheep, goats, horses, deer, lambs and ostriches. 0.0 does
not mean that there are no emissions. There are just less than two decimal places. The total does not add up due torounding.
Source: Climate Status and Outlook 2023, incl. partial correction for the implementation of the revised EU Emissions
Trading System Directive, agreement on green aviation, proposal for an increase in the diesel tax, and the new mapof carbon-rich agricultural land.

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Green Tax Reform

Proposed Models for aCO2-eq Tax

2Page 29Green Tax Reform

2. Proposed Models
for a CO2-eq Tax
The terms of reference for the Expert Group's final report set out a number of factors that the Expert Group must include in its modelling of CO2-eq reduction, see
Appendix 7.1.
The Expert Group must, among other things, "prepare models for uniform CO2-eq
regulation, including the design of a more uniform CO2-eq tax". In addition, it isstated that the second interim report must "highlight models for a more uniform
CO2-eq regulation of all covered emissions."
The wording of the terms of reference means that the current regulation of CO 2 fromenergy consumption must be expanded to include greenhouse gas emissions fromlivestock and field operations in agriculture. Regulation with a tax on agricultural
greenhouse gas emissions will constitute a new and independent tax on non-energy-related agricultural emissions, see Chapter 5. There is no necessary correlation between the tax rate on these emissions and the rates on energy-related emissions. However, the consideration of uniform CO2-eq regulation of all covered emissions means that the Expert Group's regulation models for agriculture are based on
the existing tax levels and the existing differentiation of rates in industry, etc. The
models for agriculture thus use tax rates corresponding to those decided in connection with the Agreement on Green Tax Reform for Industry etc., i.e. DKK 750, 375
and 125 per tonne of CO2-eq in 2030. In addition, the models are calibrated to meetthe 70 per cent target in 2030, the EU's Effort Sharing Regulation and the LULUCF
Regulation.

2.1. The Expert Group's Overarching Considerations
Consideration for socioeconomics
The damaging effect of CO2-eq emissions is the same regardless of where the emissions occur, and thus a socio-economically cost-effective regulation would meanthat all CO2-eq emissions are taxed at the same rate. Targets such as the 70 per
cent target or EU obligations are met at the lowest socio-economic cost by applying
the same national tax rate to all CO2-eq emissions.3
A uniform CO2-eq tax across sectors of the economy provides the socio-economically cheapest CO2-eq reductions, as all branches of production will have a uniform
incentive to reduce CO2-eq emissions up to the point where the cost of further reductions exceeds the tax. If a CO2-eq tax with differentiated rates is introduced,

3

See the Expert Group's first interim report for more detail.

Page 30

Green Tax Reformwhere the CO2-eq tax is higher for some emission sources than others, the companies subject to the highest tax rates will implement CO2-eq reductions, which are
more expensive than reductions in the companies that have the lowest tax rates. In
this situation, the average price of the CO2-eq reduction will be higher than if allemissions were taxed at the same rate.
Considering special conditions in individual sectors will, therefore, increase the socio-economic costs of achieving a given reduction target, see Figure 2.1. The cost
increases for the other sectors will be higher than the savings for the sector(s) thatreceive a relaxation.
Figure 2.1 Balance between the Danish Climate Act's guiding principles

In addition to greenhouse gas emissions, agricultural production has a number ofother externalities, including on the environment and health. The externalities arelargely linked to the same agricultural activities that give rise to CO 2-eq emissions.
This means that when regulations are implemented that reduce greenhouse gas
emissions, they also have a positive effect on other environmental concerns and/or
public health. These positive side effects will reduce the socio-economic costs ofgreenhouse gas regulation. For this reason, shadow prices with side effects are reported for each of the models presented.
Consideration of existing occupational structure
A CO2-eq tax can affect the business structure in agriculture. The introduction of a
CO2-eq tax may lead to declines in production for more CO2-eq-intensive agricultural production and thereby change the existing business structure through the closure or relocation of agricultural activity. Thus, the Danish agricultural industry will
have more activity in less CO2-eq-emitting branches of production. As a result, there
may be a desire to consider the preservation of existing occupational structures bylimiting structural changes. This can be achieved, for example, by either lowering

Page 31Green Tax Reformthe tax rate or by striving for CO2-eq reductions through technological solutions that
do not affect production but instead reduce emissions per unit produced and thus
also the burden on the individual farm. This can be achieved by increasing thefarmer's incentive to use technological means, e.g. through subsidies or requirements to use certain technologies. However, such tools are socio-economicallymore expensive to use than a tax.
Consideration for carbon leakage
For products that are produced in competition with foreign manufacturers, the introduction or increase of a national CO2-eq tax can lead to a weakening of the competitiveness of Danish manufacturers. If some or all of the production of a given productis moved abroad, reductions in CO2-eq emissions in Denmark will lead to increased
emissions abroad (called leakage). Appendix 7.8 elaborates on the Expert Group's
analysis of leakage in agriculture.
The risk of leakage gives rise to a trade-off between the cost-effectiveness ofachieving national reductions and the need to reduce global emissions overall. This
includes whether to introduce relaxations for businesses with CO2-eq-intensive production that are also exposed to international competition.
It should be noted that leakage can only occur if other countries have the opportunity to increase their emissions. Countries with a binding obligation to reduce
emissions, e.g. through EU commitments, cannot allow their emissions to increase
as a consequence of Danish climate policy, unless they over-fulfil their commitments. Conversely, countries that do not have binding commitments can allow theiremissions to increase, and it is therefore crucial which countries are expected totake over Danish production, see Appendix 7.8.
Concrete models for agriculture
This section presents three different designs of the tax system for non-energy related greenhouse gases in agriculture. The three models reflect different weightingsof the consideration of socio-economically low costs versus the consideration of existing business structure in agriculture and limited leakage.
The models lay the foundation for the longer-term tax and subsidy architecture formeeting climate targets after 2030. Thus, it is expected that in the long term, themodels will lead to CO2-eq reductions that are twice as large as the 2030 effect as aresult of e.g. afforestation.
In addition, the three models show different pathways to reach the 70 per cent target and the obligations of the EU's Effort Sharing Regulation and LULUCF regulation. The weight of different considerations that the three models represent is ultimately a political choice.
All models are based on the assumption that a socio-economically appropriate regulation of CO2-eq emissions entails a uniform tax across sectors. It also means thata change in climate ambition should be reflected by changing the tax level uniformly
across sectors.
As in the first interim report, the Expert Group assesses that it is not possible to finda model that satisfactorily fulfils the objective of the most cost-effective fulfilment of
the 70 per cent target via uniform tax models while at the same time meeting otherguiding principles in the Danish Climate Act. This is because CO2-eq reductions
from uniform tax models largely come from structural effects (decline and relocation

Page 32

Green Tax Reformof production) from cattle farms in particular, which entail a significant burden on theindustry and a relatively high risk of carbon leakage.
The Expert Group's models are calibrated so that, with a phase-in from 2027, they
are estimated to meet the 70 per cent target in 2030 and Denmark's EU obligationsin the Effort Sharing Regulation and the LULUCF Regulation. There are extensive
administrative tasks associated with implementing a new tax system for agriculture.
It is a prerequisite to be able to phase in the Expert Group's models in 2027 so thata political decision is made relatively quickly on which regulation is desired in orderto fulfil the 70 per cent-target in 2030 and Denmark's obligations under the EU's Effort Sharing Regulation and the LULUCF Regulation. A later phasing-in would meanthat the models presented would not necessarily fulfil the obligations, and further
regulation would be required.

2.2 Common Features of the Models
The work of the Expert Group includes the largest emission sources where there is a
close correlation between agricultural and forestry production activities and nationalemissions.
Broadly speaking, there are three groups of emissions which the Expert Group's
models tax or where direct agricultural subsidies are reallocated. These are emissions from:
1.

2.
3.

Emissions from livestock. Emissions come primarily from cattle and pigs but
also from other livestock, including chickens, pheasants, ducks, sheep, goats,horses, deer, lambs and ostriches.
Emissions from spreading manure and agricultural lime on fields. Here, manure
can be regulated either by tax or by restructuring direct agricultural subsidies.
Emissions from carbon-rich agricultural land.

In addition to the model of the tax structure in agriculture, all models include an expansion of the public funding for the rewetting of carbon-rich agricultural land, an increased subsidy for removal of CO2 through afforestation and a harmonisation of thecurrent tax on F-gases to the agreed level from Agreement on the Green Tax Reform for Industry etc. The common features are explained in more detail in Box 2.1.
Box 2.1
Common feature in all models
1) A fee of DKK 10 per tonne of CO2-eq on emissions from carbon-rich agricultural land, combinedwith compensation and cost coverage of wetland restoration, corresponding to a shadow price ofapprox. DKK 570 per tonne of CO2-eq, see Section 3.1. The proposal is estimated to contribute reductions of 0.3 m tonnes of CO2-eq in 2030, increasing to 1.0 m tonnes of CO2-eq in 2032. The Expert Group suggests increasing the tax at a revisit in 2027 if the withdrawal rate does not match theassumptions in this report.
2) Subsidies for afforestation of DKK 92,000 per hectare, corresponding to approx. DKK 460 per
tonne of CO2-eq, which is estimated to contribute reductions of 0.1 m tonnes of CO2 in 2030, increasing to 2.1 m tonnes of CO2 in 2045 by establishing 250,000 hectares of new forest, see Section 3.3.

Page 33

Green Tax Reform3) Harmonisation of the tax on F-gases to DKK 750 per tonne of CO2-eq, so that the tax follows theCO2-eq tax agreed as part of the Agreement on Green Tax Reform for Industry etc., see Section 3.4.
It is estimated to deliver reductions of 0.1 m tonnes of CO2-eq in 2030.
The joint proposals are estimated to collectively deliver reductions equivalent to approx. 0.5 m
tonnes of CO2-eq in 2030.
In relation to the fulfilment of the EU obligations in the Effort Sharing Regulation and the LULUCF
Regulation, all models assume the use of LULUCF credits in the period 2021-2025 and up to 8 m
ETS allowance cancellations over the entire period 2021-2030 for compliance in the Effort Sharing
Regulation. In addition, it is assumed that any overachievement of the Effort Sharing Regulation isused to achieving the LULUCF commitments. The LULUCF credits and ETS allowance cancellations do not contribute to the achievement of national targets of the Danish Climate Act, see Section
6.2.
All tax rates are in 2022 prices. It is assumed that the CO2-eq tax will be phased in gradually from2027 to 2030, and that the taxes will also be indexed to price developments on an ongoing basis sothat they are not eroded by inflation. Finally, the shadow prices of the models are calculated including
so-called side effects, i.e. including the recreational value of forests and effects on ammonia emissions and nitrogen leaching, both of which are particularly linked to agricultural fertiliser use, see Appendix 7.9.
Note: 1) This assumes that the use of LULUCF credits is prioritised before the use of ETS allowance cancellations.
Finally, it is assumed that the flexibility mechanisms are used chronologically, i.e. as soon as and if they can fulfil areduction need that is not covered by domestic reductions.

Regulation of fertiliser in primary models
The Expert Group's models 2 and 3 include two variants of regulating emissions
from fertiliser applied to fields. One option is a tax on fertiliser usage with a base deduction per hectare of agricultural land. The second option is a restructuring of direct agricultural subsidies so that fewer hectare subsidies are granted, and thefunds released are used for subsidies for reduced fertiliser usage.
The forms of regulation give different weight to the considerations in the Danish Climate Act. Overall, a fertiliser tax with a base deduction will be the most cost-effective approach to reducing CO2-eq emissions in general, as the tax provides a uniform incentive to both reduce fertiliser usage for a given crop and to change thecrop composition. The base deduction in the tax model partially compensates forthe tax payment and mitigates the decline in land value.
A subsidy for reduced fertiliser use will only provide an incentive to reduce fertiliser
usage on a given crop, but not an incentive for crop rotation, as the subsidy is given
in relation to the existing crop-specific fertiliser norms. Depending on the possibilities for substitution between crop types, this can reduce the greenhouse gas reduction efficiency of the tax model. The subsidy relieves the effect on the farmer's contribution margin, as no tax is paid on the fertiliser that continues to be used. Conversely, the subsidy is fully financed by a reduction in the hectare subsidy, which results in a reduction in the gross margin for all farmers.
As the funding is not dependent on fertiliser consumption but on the farmer's area, it
implies a redistribution between farmers in relation to the tax. As with the tax burden, the combination of subsidies and financing via a reduced hectare subsidy leads
to a structural effect in the form of a reduction in production and a reduction in land
values. In the Expert Group's calculations, the restructuring of agricultural subsidies
has a smaller structural effect (smaller decline in production), but a slightly larger

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Green Tax Reform

decline in land values. The difference in the land value effect depends on the specific assumptions about crop substitution and the effect on cropping intensity of taxing versus restructuring direct agricultural subsidies.
For this reason, two variants will be included in models 2 and 3:a) Fertiliser tax of DKK 750 per tonne of CO2-eq with a base deduction per hectare of agricultural land of DKK 200, which corresponds to 50 per cent of theaverage immediate tax payment for fertiliser per hectare.
b) Restructuring of the direct agricultural subsidy to a subsidy for reduced fertiliser
usage of DKK 750 per tonne of CO2-eq.
In the fertiliser regulation models, the rate does not differ between model 2 andmodel 3, as a lower tax or subsidy rate for fertiliser usage will largely lead to lower
other effects (including technical effects and activity effects), and to a lesser extent
reduce structural effects. As shown in Table 2.1, the decrease in production in models 1 and 2 is more than twice as large for cattle and pig production relative to crop
production. Therefore, in order to maintain the existing occupational structure andminimise the risk of carbon leakage, the rate for livestock should be further reduced
before the rate for crop production is reduced. Due to the relatively low structural effects in crop production compared to livestock production, it is assessed that alower tax/subsidy rate cannot be justified by maintaining the existing business structure and minimising the risk of carbon leakage in agriculture. For that reason, thetax/subsidy rate is the same in models 2 and 3.
Section 3.2 elaborates on the advantages and disadvantages of options a and b,
how fertiliser can be regulated and the connection to existing fertiliser regulation.
As an alternative to a tax on fertilisers or a restructuring of direct agricultural subsidies to support reduced fertiliser usage, it may be possible to consider lowering nitrogen norms by a fixed percentage, see the nitrogen regulation from before 2015. 4
The norms are introduced in Box 2.2 and are currently set in such a way that farmers are able to fertilise to the average private-economically optimal level. In practice,a reduction in norms will mean that farmers will have fewer opportunities to use fertilisers. Olsen and Ørum (2023)5 argue, among other things, that a reduction in nitrogen standards can be a safer instrument for achieving a specific reduction target
than a tax or restructuring of direct agricultural subsidies. Conversely, a lowering of
nitrogen standards will create an uneven CO2-eq regulation, as it does not take into
account the individual farmer's reduction cost, thereby increasing socio-economic
costs and uncertainty about the CO2-eq price. Furthermore, reduced norms arelikely to result in a different burden on the agricultural sector, shadow price and distribution between farmers than a tax on fertilisers or a restructuring of direct agricultural subsidies.
If the effect of a tax on fertiliser usage of DKK 750 per tonne of CO 2-eq were instead
to be achieved through a norm reduction, this would correspond to approx. 7 per

4

The reduced nitrogen norm was decided to be repealed with the political agreement on a Food and Agriculture
Package of 22 December 2015.

5

Olsen, J. V., & Ørum, J. E., (2023) ”Kort notat vedrørende mulige averse effekter af et tilskud til reducereret kvælstofanvendelse” (Brief note on possible averse effects of a subsidy for reduced nitrogen use), Department of Foodand Resource Economics

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Green Tax Reform

cent.6 It should also be noted that farmers do not use their fertiliser quotas in full. If it
is assumed that this reduced use will also take place after the introduction of a norm
reduction, it is estimated with considerable uncertainty that farmers will not use approx. 10 per cent of the total fertiliser quotas. If reduced nitrogen norms are to be
used as an alternative way to reduce fertiliser use, the consequences of this would
need to be investigated further.
Box 2.2
The fertiliser quota
A farmer's fertiliser quota is the sum of the nitrogen norms for the farmer's fields. The norms are an
estimate of the amount of nitrogen that gives the farmer's economically optimal crop yield at the fertiliser level, where the income from the extra yield can just about pay for the extra cost of the nitrogen
fertiliser. The norms are estimated by averaging the optimal fertiliser application across farms. The
norms are set by a committee led by Aarhus University, with participation from SEGES, the University of Copenhagen (Department of Food and Resource Economics) and the Ministry of Food, Agriculture and Fisheries of Denmark, and constitute a central element of the existing nitrogen regulation.
The actual average fertiliser usage by farmers is below the norm. This is because the norm is set as
an average of the economically optimal use and sets an upper limit on fertiliser usage. This meansthat some farmers have an economic optimum for their fertiliser usage that is below average and will,
therefore, use less fertiliser than the norm allows. The average fertiliser usage indicates a large
spread.

The Expert Group has chosen not to include crop management measures in thepresented tax models as the CO2-eq reduction by absorption in the soil's carbon
stock is decreasing and reversible7, see Appendix 7.5, and closely linked to the effect of nitrogen regulation. It is therefore recommended that CO 2-eq emissions areincluded in the new nitrogen regulation currently being prepared. Consider subsidising field management measures to increase the removal of CO2-eq in fields andachieve a climate effect by 2030. Subsidies for field management measures are included as a possible adjustment screw in Section 2.8 and are estimated to provide
a CO2-eq reduction of 0.2 m tonnes in 2030 with a marginal shadow price of DKK
700 per tonne of CO2-eq in 2030. As the effect is diminishing, the CO2-eq reduction
is estimated to be 0.1 m tonnes in 2045 if cultivation practices are maintained.
Overview of the models
An overview of the impacts of the models is shown in Table 2.1, including the models' impacts on CO2-eq emissions in 2030, tax rates, revenue impacts (immediate
and after behavioural response) and socio-economic costs, pass-through to consumer prices and change in land values. The individual models and the results arefurther detailed in the separate sections. Box 2.3 provides an overview of the mainconcepts for understanding the model results both in the table and in the review of

6

The calculation is based on the average of farmers' total fertiliser quotas for the period 2021-23 (approx. 380 m
tonnes of N per year) and the reduced fertiliser use assumed in IFRO's calculations of the effect of a tax.

7

The build-up of carbon will continue until a new equilibrium is reached in the soil carbon stock that corresponds tothe new cultivation practices. Carbon storage in arable farming is reversible, which means that if there is a change incultivation practices towards a lower input of organic matter, carbon storage will gradually decrease. This will lead toCO2-eq emissions. To avoid this, it is thus necessary to maintain a given cultivation practice.

Page 36Green Tax Reform

Page 37

the other chapters. In most cases, the modelling results are calculated in the general equilibrium model GreenREFORM 8, which is briefly described in Box 2.4.
The three models have different impacts on revenue. Only model 1 entails a net revenue that can be used for e.g. support for transition to greener methods of production or alternatively for support for the dismantling of existing production capacity.
Models 2 and 3 requires additional financing due to, among other things, the introduction of a base deduction that significantly reduces tax revenue. In addition, thelower CO2-eq reductions in these models imply an increasing need to achieve technological reductions via carbon removal through deployment of biochar by pyrolysis
in order to meet targets, which also contributes to the financing needs in models 2
and 3.
The 3 models show different paths to reach the 70 per cent target. Together, the tax
models form an area of conflicting considerations to a certain extent. In this way, it
will ultimately be a political choice how the different considerations are weighted andhow the architecture of a CO2 tax system is arranged.
Table 2.1. Overview of the impact of the models in 2030
Tax rate in 2030 CO2-eq reduction

Production
volumes andvalue
Ferti2030 Of
Of
DeDeliser(2045 which which crease creas(base)
struc- other in pro- e indeductural efducprotion,effects2) tion, to- ducper
fects
tal
tion
cent)
(of
value,
which
total
cattle)Costs, revenue and price passthroughLivestock(base
deduction,
per
cent)

Immediateburden3)

DKK per tonne ofCO2-eqModel 1
(Effective
tax rate of
DKK 750
per tonne ofCO2-eq)Model 2a(Effective
tax rate of
DKK 375
per tonne ofCO2-eq)Model 2b(Restructuring of direct8

m tonnes

Per cent

Revenuefromtax

Revenue after behavioural
responseandsubsidy4)

Shadow
price1)
Increase Avg.
in dairyincl.
and meat side efproductfects
prices6)

Per cent

DKK bn

DKK
pertonne ofCO2-eqChangein landvalues5)
Excl./incl.
subsidy
for afforestation

Per cent

750
(0)

750
(0)

3.2
(5,9)

1,6
(0,9)

1.5

15.0

9.8

5.9

3.0

1.2

4

150 -16,8/-8,8

750
(50)

750
(50)

2.8
(5.5)

1.0
(0.5)

1.9

8.9

5.8

3.1

1.5

-0.5

2

250

-6.2/4.1

750
(50)

750
(subsidy)

2.6
(5.3)

0.7
(0.5)

1.9

6.0

4.2

2.5

1.4

-0.7

2

325

-8.4/2.8

Impact assessments for the tax on livestock, fertiliser, and liming are fully calculated in GreenREFORM, as are thetechnology requirements in models 3a and 3b. For subsidies for afforestation and the restructuring of direct agricultural subsidies to reduced fertiliser usage, the shadow prices for these measures are based on partial estimates outside the model. The proposed regulations of carbon-rich agricultural land, F-gases and biochar by pyrolysis are calculated outside the model.

Green Tax Reform

agricultural
subsidies)
Model 3a(Effective
tax rate of
DKK 125
per tonne ofCO2-eq)Model 3b(Restructuring of direct
agricultural
subsidies)

Page 38250(50) /
125 (0)

750
(50)

2.6
(5.3)

0.6
(0.3)

2.0,

5.6

3.5

1.9

1.0

-2.0

1

475

-3.8/7.2250(50) /
125 (0)750(subsidy)

2.4
(5.1)

0.3
(0.2)

2.0

2.6

1.9

1.3

0.9

-2.1

1

575

-5.5/6.0

Note: Rates and shadow prices are rounded to the nearest DKK 25 per tonne of CO2-eq. Totals may differ from the sum due to rounding. Rates are shown in 2022
prices, and revenue effects are shown in 2023 levels. It is assumed that the taxes are continuously indexed with the general price level. The calculations include a tax onpigs, cattle and poultry. The CO2-eq reduction from poultry is rounded to 0.0 m tonnes and is therefore not included in tables. Other animals (sheep, horses, etc.)
account for less than 2 per cent of agricultural emissions and are therefore set to zero for calculation purposes.
1) The socio-economic costs are measured in factor prices. The calculations of the socioeconomics and shadow prices do not include improvements in terms of trade
and thus do not include gains from price effects that occur at the expense of other countries. The reduction in externalities in the form of environmental and healtheffects and the benefits from reforestation are included in the socio-economic costs. It is impossible to calculate the socio-economics of an unspecified subsidy fund forconversion/investment aid for new technologies.
2) Other effects cover technical effects (reductions that do not affect the scope of production, but reduce emissions per unit produced, e.g. via feed additives for cattle,
biochar by pyrolysis, etc.) and activity effects (e.g. change from agricultural land to forest) and rewetting of carbon-rich agricultural land.
3) The immediate burden is defined as the impact of a tax change on CO2-eq-emitting companies before the companies start to change their behaviour. It is basicallycalculated as the product of the company's CO2-eq emissions and the tax increase. The immediate burden includes the realised technology costs for the technology
requirements for feed additives and tent covering with floating layers in models 3a and 3b. The costs are associated with uncertainty due to low technological maturity.
4) In the calculation of the revenue according to behaviour and subsidies, the government expenses associated with subsidies for forests, carbon-rich agricultural landand biochar by pyrolysis are included. It should be noted that a total of DKK 9.4 bn extra has been allocated for the rewetting of carbon-rich agricultural land. The funds
are calculated here equally distributed between 2025-2032, when the set-aside is expected to occur.
5) The land value changes are excl. effect from set-aside and wetland restoration of carbon-rich agricultural land. The effect from subsidies for afforestation is under theassumption that land converted to forest has an average cultivation value compared to agricultural land in rotation.
6) The average price increase from dairy and slaughterhouse products is calculated as the price changes on the Danish dairy and slaughterhouse food deliveries toDanish households in 2030 weighted by the households' expected consumption of these foods in 2030 before they have adjusted their consumption to the tax.
Source: Own calculations

Box 2.3
Key terms in connection with model calculations
Most calculations in the report are based on the GreenREFORM model. This is described in moredetail in Box 2.4.
The immediate burden is defined as the impact of a tax change on CO2-eq-emitting companies
before the companies start to change their behaviour. It is calculated as the product of the company's CO2-eq emissions and the tax increase.
Revenue after behavioural response is defined as the revenue effect of a tax change, taking into
account changes in behaviour and the effect of the tax change on other government revenue andexpenditure. It is this revenue that can be allocated to, for example, tax reductions and financing
subsidies. In other contexts, revenue after behavioural response is called the impact on government
finances and revenue after statics effects and behavioural response.
The socio-economic cost indicates the value of the welfare loss experienced by society as a resultof increased taxation and subsidies. The socio-economic cost per tonne of CO2-eq is also called the
shadow price. A distinction is made between the average shadow price, which covers the total socio-economic cost per tonne of reduced CO2-eq, and the marginal shadow price, which covers thesocio-economic cost of reducing one more tonne of CO2-eq. The calculations of the socioeconomics and shadow prices do not include improvements in terms of trade and thus do not include gains
from price effects that occur at the expense of other countries. The reduction in externalities in theform of environmental and health effects and the benefits from reforestation are included in the socio-economic costs.

Green Tax Reform

When a CO2-eq tax is introduced, the CO2-eq reductions can be calculated in two types of reductions: structural effects and other affects.
Structural effects (alternatively paradigm shifts in businesses) cover reductions from changes in
production or relocation and possible cross-border trade. This happens because a tax increase
makes Danish companies less competitive relative to foreign companies and therefore forces themto reduce or relocate their production or because CO2-eq-intensive products become more expensive relative to CO2-eq-light products, causing consumers to shift their consumption towards CO2eq-light products. Large structural effects will usually indicate a significant risk of carbon leakage.
Other effects cover technical effects (reductions that do not affect the scope of production but reduce emissions per unit produced, as a result of e.g. feed additives for cattle, storage technologies,
biochar by pyrolysis, etc.) and activity effects (e.g. change from agricultural land to forest or set-aside
and wetland restoration of carbon-rich agricultural land).
Land value decline covers the land value effects of a given tax model, where there will be changes
in the coverage contribution on the land, which leads to changes in land use and valuation of theland as a result of the land changing to the best economic alternative after a tax reform (e.g. fallowing, wet land restoration of carbon-rich agricultural land or afforestation).
Change of activity: Covers change in type of activity, e.g. change between animal types, change inland use, etc., without production decline and decrease in quantity without a decrease in production,such as optimisation and change to crop type with less fertiliser consumption, but unchanged
amount of crop production.
Degree of price pass-through covers how much of the immediate burden is estimated to bepassed on in higher (consumer) prices.
The various concepts and calculation methods, including the potential for agriculture to transition toless CO2-eq-intensive production, which form the basis of the modelling calculations, are further
elaborated in documentation notes and sensitivity analyses. In addition, there are a number of uncertainties that are addressed in Section 3.5.

Box 2.4
Brief description of GreenREFORM
Most impact assessments of the models are made in GreenREFORM, which is a general environmental and climate economic equilibrium model that can assess the environmental and climate effects of economic activity, as well as the economic effects of environmental and climate policy initiatives. The model has been developed by the DREAM model group in collaboration with researchers
from the University of Copenhagen, Aarhus University and DTU.
GreenREFORM consists of a main model and a number of sub-models describing sectors of particular importance for climate and environment. Sub-models have been created for the waste, energy,
agriculture and transport sectors, as well as for technological transition elements.
The main model is a general equilibrium model describing Denmark's overall economic activity andcombining results from the sub-models. GreenREFORM has a high level of detail in the description of
production in the economy in terms of industry breakdown and detailed assumptions about market
conditions etc. In the main model, the production and consumption of energy is described explicitly
in physical quantities distributed across 27 energy products with associated emissions of 14 greenhouse gases.
GreenREFORM's agricultural model consists of 11 agricultural industries representing different
branches of agricultural production. Separate production functions are used for animal and vegetable agriculture, respectively. To capture the interdependence between production branches, an explicit modelling of non-market production and consumption of livestock manure, roughage and bedding within agriculture has been added. Land is added as a production factor for crop agriculture,

Page 39Green Tax Reformand non-energy emissions from agriculture are linked to the different inputs that give rise to the emissions. In addition, the relationship between agriculture and LULUCF emissions has been modelled
through a model for LULUCF emissions, where agricultural land use is included as an input factor.
The Expert Group has further qualified the GreenREFORM model, where, for example, the assessment of export elasticities is based on recent empirical economic literature. The Expert Group's version of GreenREFORM and a more detailed description of GreenREFORM and the modelling of agriculture can be found on the GreenREFORM website (https://dreamgruppen.dk//groenreform/ekspertgruppe-for-groen-skattereform-2024).
The GreenREFORM model is thus used to quantify the expected effects of the different models, andas with all economic models, there is uncertainty associated with the model's results. Section 2.7
presents and discusses sensitivity analyses of, among other things, the export elasticities used.

Page 40

Green Tax Reform

Page 41

2.3 Model 1: Cheap Emissions Reductions
As mentioned, model 1 is a socio-economically cheap model, where the reductions
are achieved with a uniform tax of DKK 750 per tonne of CO2-eq, corresponding to
the tax in the part of the industry that are currently not regulated under the EU ETS.
Model 1 introduces a tax of DKK 750 per tonne of CO2-eq on emissions from livestockand fertiliser usage. The model fulfils both the 70 per cent target and the EU obligations in the Effort Sharing Regulation and the LULUCF Regulation, see Table 2.2
In the model, all emissions from agriculture are subject to the same tax. This provides
the cheapest reductions within agriculture and for society as a whole. The other models will lead to higher socio-economic costs of regulating emissions from agriculture.
The counterpart is that in this model, there are large structural effects in the form ofa decline in animal production in particular, and that these effects entail a risk of carbon leakage. The model involves a shift in activity from animal feed production to othercrop production, which in itself does not impact the CO2-eq emissions, which instead
primarily arise from the reduction in livestock production. This shift in production is
not estimated to significantly affect the overall supply of calories to the world market
from Denmark, see Appendix 7.10.
Production, employment and consumer price
The model implies a decrease in agricultural production of 15 per cent, driven mainly
by a decrease in cattle and pig production of 20.2 per cent and 17.7 per cent respectively. The decline in production will decrease employment in the food and agricultureindustry by around 8,000 full-time employees in 2030. This corresponds to a decrease of approx. 10.2 per cent of those employed in agriculture and the food industry
in 2030. The decline in employment is offset in 2030 by an increase in other industries
with less greenhouse gas-intensive production. At the same time, the lower production means that consumer prices for goods from Danish slaughterhouses and dairies
increase by an average of just under 4 per cent, see Table 2.4.
Table 2.2 Main results of model 1
Model 1 Cheapest emissions reductions: 750 per tonne corresponds to tax level in industry etc. not subject to ETS.
CO2-eq reductions

2030(2045)

Costs and revenues, 2030

3.2 (5.9) m Immediate
tonnes tax burden

Share fromstructural reductions (cattle)

52 (301)) Revenue fromper cent tax

Share fromother reductions

Revenue after
behavioural
48 per centresponse andsubsidy

Subsidies fornegative

0.1 m
tonnes
(2.1)

Shadow prices, change in production, change in employment
and change in land values, 2030

Average shadow
DKK 5.9 bn price (incl. side
effects)
Decrease in proDKK 3.0 bn
duction, total

DKK 1.2 bn

Change in employment, total

Change in land
values, excl. /incl.

Fulfilment of climate goals
incl. decided actions

70 per cent target

124 per centFulfilling the EU's
Effort Sharing
Regulation

100 per cent

Delivering on EU
LULUCF commit-8,000 full-timements (budget
employees3)
target 2026(-10.2 per cent)2029/point target
2030)

100 per cent

DKK 150 per
tonne

15 per cent-16.8/-8.8 percentGreen Tax Reform

emissions2)
2030 (2045)

Page 42subsidies for afforestation

Note: See Table 2.1.
1) Share from structural reduction from cattle indicates that 30 per cent of the 2030 emissions of 3.2 m tonnes of CO2-eq comes from a reduction in cattle production.
2) Subsidies for forestry.
3) Total employment decline in agriculture and related industries. The decline in employment is offset in 2030 by an increase in other industries with less greenhousegas-intensive production.
Source: Own calculations

Composition of greenhouse gas reductions
The 15 per cent reduction in production means that more than half (52 per cent) of
the total reduction in greenhouse gas emissions comes from structural effects. Of
this, 30 per cent of the total reduction comes from structural effects from cattle production. The high structural effects are due to the economically viable technologicalreductions being limited, see Appendix 7.5. This shows that at a tax level of DKK
750 per tonne of CO2-eq, it is estimated that only the potential effects from the technologies feed additives and tent covering with floating layers will come into play.
The average shadow price for model 1 is equal to DKK 150 per tonne of CO 2-eq.
Compared to other areas, such as transport and industry, these are cheaper reductions as measured by the shadow price. This is partly due that reductions fromstructural effects typically having low socio-economic costs.
Land value decline and compensation
The lower production and production value also mean that the value of agriculturalland falls. The isolated effect of the tax is a decrease of 16.8 per cent. The Expert
Group's proposal for a subsidy for afforestation of DKK 92,000 per hectare stimulates
the demand for land and increases the production value. Both effects increase thevalue of land and thereby act as partial compensation for the existing farmers. Overall,however, there is still a decrease in land prices of 8.8 per cent. Subsidies for afforestation also have a positive CO2 effect on the net absorption from forests, which islimited to 0.1 m tonnes by 2030. By 2045, the contribution grows to 2.1 m tonnes ofCO2. Finally, the subsidy for afforestation means that the goal of establishing 250,000
hectares of forest is expected to be realised.
The tax imposes an immediate burden on agriculture (i.e. the cost of the tax withunchanged production) of DKK 5.9 bn. After shifts in production etc., the tax is expected to generate revenue of DKK 3.0 bn. If subsidies for afforestation and rewettingof carbon-rich agricultural land are taken into account, there is still a revenue of DKK
1.2 bn that can be returned to farmers.
It is fundamentally difficult within the existing tax system to return the revenue in atargeted way to the branches of agriculture that are hit hardest by the CO2-eq tax.
These companies will typically not have a correspondingly large tax payment compared to the burden from the CO2-eq tax. In addition, a large proportion of farmers
are on a business tax scheme, which includes not paying corporate tax, for example. Compared to the first interim report, it has thus been decided not to reverse therevenue from a reduction in corporation tax.
In model 1, it is instead assumed that the net revenue of DKK 1.2 bn are returned tothe industry as a subsidy for capacity closure, see Section 2.10, or conversion/investment aid for new technologies. The Expert Group has not further specified thesubsidy scheme. The design will need to ensure that the subsidy schemes do notcounteract the CO2-eq reductions from the tax in 2030 and in the longer term.
Therefore, the subsidy should, as a starting point, be designed as a temporary subsidy as with the Agreement on Green Tax Reform for Industry etc.

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Breakdown of the total effects on farm types
As cattle production is the most CO2-eq-intensive part of agriculture, the adjustments are greatest for this type of farming. Conversely, the adjustments are theleast in scope in crop production, see Table 2.3.
Table 2.3. Model 1: Change in production volumes and value, 2030
Model

Crop

CattlePigs

Overall

Decrease in production, per cent

7.9

20.2

17.7

15.0

Decrease in production value,
per cent

7.6

8.7

13.6

9.8

Source: Own calculations

The changes in the scope of production give rise to reductions in greenhouse gas
emissions (structural effects). For cattle production, the structural effects correspond to 22 per cent of non-energy-related emissions, where the structural effects
for pig production correspond to 20 per cent of non-energy-related emissions. For
crop production, the structural effect is significantly lower and amounts to 9 per centof the non-energy-related emissions of crop farming, see Figure 2.2.
The technological reductions are also greatest for cattle production, where they account for 18 per cent of the non-energy-related emissions. This is because feed additives become profitable to use at a tax level of DKK 750 per tonne of CO 2-eq. For
pig production, there are also technical effects on 12 per cent of non-energy-related
emissions. This reduction is related to the fact that in this branch of production,technical measures related to slurry handling will also be profitable. The technical effects are significantly lower for crop farming, amounting to 2 per cent, as there arefewer possibilities for technical conversion.

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Figure 2.2 Model 1 – Share of structural and technical effects in relation to non-energy-related emissions
Pct. of emissions
Structural effects (per cent)100

Mio. tonnes of CO2eq
Technical effect (per cent)Absolute reduction (Right axis)

80

2,0

1,5

60
1,0
40
0,5

20

Tax

ForestPeatlandF-gases

Pigs

Cattle

0,0

Crops

0

Negative tax (subsidy)

Note: The green diamonds are the reduction in emissions in m tonnes (right axis). The columns cover the proportion of the tax category's basis that is reduced (left axis).
Source: Own calculations.

The tax burden on the agricultural sector and the resulting structural effects depend
to a large extent on the level of emissions relative to the value added. For cattle production in particular, the immediate burden on business is high both in absoluteterms and relative to value added measured by GVA. The immediate load accounts
for just over 100 per cent of the GVA in this branch of production. For both crop and
pig production, the immediate burden on business is around 25 per cent of GVA,
see Figure 2.3.
The burden of the CO2-eq tax increases after the behavioural response of crop producers as a share of the tax on livestock is passed on in higher fertiliser prices andreduced feed prices, thus affecting the earnings of crop producers. Similarly, theburden on crop producers decreases significantly as a result of the afforestation
subsidy, which reduces the decline in land values, see Appendix 7.14.
In general, the split between livestock and crop production does not correspond to
the split between farms with animal production and farms with crop production, as
livestock producers own significant amounts of land used for feed and fertiliser application. The split considers each farm type in isolation and does not include thesecompositional effects. In Appendix 7.15, examples of typical farmers for livestock
producers are shown where average hectare ownership is included.

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Figure 2.3 Model 1 - Burden incl. change in land value in DKK m and in relation to GVA

Per cent

DKK mio.
Burden in million DKK (left axis)
Burden related to GVA (right axis)

4.000

Including structural effects (left axis)

125

3.200

100

2.400

75

1.600

50

800

25

0
-800

0
ImmediateburdenAfter
After forest incl.
behaviouralland value
response incl.
changeland valuechangeImmediateburden

Crops

After
behavioural
response

ImmediateburdenCattleAfterbehavioural
response

-25

Pigs

Note: For crop farming, the burden after behavioural response is calculated based on changes in land value (stated as annuity) and capital loss. For cattle and pigs, theburden is reported in 2030. The burden of the CO2-eq tax increases after the behavioural response of crop farming, as a proportion of the tax on livestock, is transferred
into higher fertiliser prices and reduced feed prices, thus affecting the earnings for plant farming. GVA is calculated including the value of non-market deliveries (livestock
manure, bedding and roughage). It should be noted that manufacturers do not have to pay tax for the share of production that is (fully or partially) closed. This meansthat the burden for the closed part of the production is not included in the burden after the behavioural response (the dark blue part of the columns). This may give riseto the belief that there is a greater opportunity to reduce tax payments by, for example, reorganising production or using technical measures than is actually the case.
Therefore, the column after the behavioural response is also illustrated with "incl. structural effect” (the light blue part of the column), which should draw attention to theimmediate burden for the part of the production that closed.
Source: Own calculations.

Consumer prices and price pass-throughThe behavioural changes that lead to lower production mean that it is possible tosell the reduced volume at a higher price. The prices of products from slaughterhouses and dairies are estimated to increase by 1.6 per cent for the product groups
with the lowest price increase and up to 10 per cent for the product groups with thehighest price increase, see Table 2.4.
Table 2.4. Model 1: Average price increases for goods from slaughterhouses anddairies, 2030

Averageprice increase, percent.

Cattle slaughterhouse

Pig slaughterhouse

Dairy

Overall

Dairy

10.0

1.6

4.6

3.7

4.6

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Price increases,
DKK1)Page 46

500 grams of minced
beef

500 grams ofminced pork

1 litre of
milk

4.5

0.6

0.6

1 litre of
milk-

Note: Calculations are based on price increases from the food industry for private consumption. It should be notedthat the price increases are the average price increases for cattle slaughterhouses, pig slaughterhouses and dairies,
which is why the table assumes that the products are affected by the average increase of the industries. Please notethat the immediate prices are stylistic examples. 1) It is assumed that 500 grams of minced beef, 500 grams ofminced pork and 1 litre of milk cost DKK 45, DKK 35 and DKK 13 respectively, including VAT.
Source: Own calculations.

The price increases mean that consumers bear some of the immediate burden. Of
the total immediate burden in the model of DKK 5.9 bn, an average of 56 per cent isestimated to be passed on in higher consumer prices.
There is a stickiness in the adjustment of the capital stock in agriculture when a tax
is introduced. This means that even if the tax comes into force in 2027 and isphased in towards 2030, it will be a few years before the capital equipment needs tobe renewed. The stickiness implies that the tax's full effects on the production adjustment (structural effects) will correspondingly occur on the other side of 2030 as
the capital stock is worn out and needs to be renewed.

2.4 Model 2: Partial Handling of Effect on Occupational Structure and Consideration to Carbon
Leakage
Model 2 maintains the marginal incentive for CO2-eq reductions included in model 1,
while attempting to preserve the existing occupational structure and reduce the riskof carbon leakage in agriculture to a greater extent than model 1. In addition, themodel places greater emphasis on technological solutions.
In this model, the starting point is therefore a lower effective tax rate. In model 2a, thetax on livestock and fertiliser usage is DKK 750 per tonne of CO 2-eq with a base deduction per animal and per hectare of on average 50 per cent of the immediate tax
payment. The effective tax rate is thus approx. DKK 375 per tonne of CO2-eq and thetax level in agriculture is thus equated with the level from the industry's EU ETS fromthe Agreement on Green Tax Reform for Industry etc. Model 2 meets both the 70 per
cent target and the EU obligations in the Effort Sharing Regulation and the LULUCF
Regulation.
Base deduction in tax on greenhouse gas emissions from livestock and fertilisers
Model 2a is based on a marginal rate of DKK 750 with an effective tax rate of approximately DKK 375 per tonne of CO2-eq for emissions from livestock and fertiliser.
A tax system with a CO2-eq tax and a base deduction will provide an incentive at themargin to use technological solutions (e.g. more climate-optimised barns, feed additives, etc.). At the same time, the base deduction will limit the increase in production
costs.
1) In model 2a with a tax on greenhouse gas emissions from fertiliser, it is proposed to introduce a base deduction per hectare of agricultural land of DKK

0.6

Green Tax Reform

200, which corresponds to 50 per cent of the average tax payment for fertiliser
per hectare. This gives an effective tax rate of DKK 375 per tonne of CO 2-eq.
2) In the tax on livestock, a base deduction per animal is proposed so that it
amounts to an average of 50 per cent of the tax payment for a given farm. This
gives an effective tax rate of DKK 375 per tonne of CO2-eq. The base deduction
is organised according to the same criteria that are included in the tax without abase deduction and is varied across animal types, see Appendix 7.6. For example, dairy cows receive a base deduction that is higher than the deduction forbeef cattle.
The Expert Group's use of a base deduction is based on an assessment that it provides a better incentive structure for the industry to switch to less CO 2-eq-intensive
production compared to a model with a simple lower tax rate without a base deduction, where the immediate tax payment is the same. Appendix 7.11 compares a modelwith a base deduction and higher marginal tax with a model with a reduced rate without a base deduction. The result is that CO2-eq reductions increase and the structuraleffect and burden decrease by combining a tax of DKK 750 per tonne of CO2-eq witha base deduction instead of a reduced tax of DKK 375 per tonne of CO 2-eq.
To comply with EU state aid rules, the base deductions are designed to correspondto 50 per cent of the average direct tax payment for fertiliser usage per hectare andper unit of livestock respectively. This should be seen in light of the fact that the basedeductions could be considered a tax relief that constitutes state aid. According to
EU state aid rules, such state aid may not exceed 80 per cent of the actual tax payment. An authorisation will also require that the Commission finds that the other conditions for approving state aid are met. It is thus expected that the base deductions,
including the specific size of the base deductions, will need to be discussed with theEuropean Commission and may also require the Commission's formal authorisation
under the state aid rules. The Expert Group's choice of the size of the base deduction
is based on an assessment that at a base deduction in the tax of 50 per cent of theimmediate tax burden, the majority of the individual husbandries are estimated toachieve a relief of less than 80 per cent of the immediate tax payment (before thebase deduction). It should be noted that the Expert Group proposes that the basedeductions are designed in such a way that the individual farmer can never obtain abase deduction such that the relief exceeds the mentioned 80 per cent of the immediate tax payment.
Production, employment and consumer price
Model 2a implies a decrease in agricultural production of 8.9 per cent, i.e. the decline
in production is about one third lower than in model 1. The decrease in cattle and pig
production is 11.4 per cent (compared to 20.2 per cent in model 1) and 11.0 per cent(compared to 17.7 per cent in model 1), respectively. The structural effect on livestock production is thus significantly reduced. The decline in employment is 4,800
full-time employees (compared to 8,000 in model 1) in agriculture and the food industry in 2030, see Table 2.5. This corresponds to a decrease of 6.1 per cent of theemployed in 2030. As in model 1, the decline in employment will be offset in 2030 by
an increase in other industries with less CO2-eq-intensive production. Like the otherstructural effects in this animal production, the consumer price increase is approximately halved compared to model 1, so that consumer prices for goods from Danish
slaughterhouses and dairies increase by an average of 2 per cent, see Table 2.7.

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Table 2.5. Main results of model 2aModel 2a - Partial preservation of the existing occupational structure and consideration to carbon leakage: Tax on livestock of DKK 750 per tonne and base deduction, corresponding to an effective tax rate of DKK 375 per tonne
CO2-eq reductions

Costs and revenues, 2030

2030
(2045)

2.8 (5.5) m t

Immediatetax burden

Share fromstructural reductions (cattle)

35 (191)) per Revenue fromcent tax

Share of otherreductions

Revenue after
behavioural re65 per centsponse andsubsidy

Subsidies fornegative emissions in 2030
(2045)2

0.3 m tonnes(2.3)

Shadow prices, change inFulfilment of climate goals
production, change in emincl. decided actions
ployment and change in land
values, 2030
Average
70 per centshadow price
DKK 250 per
target
DKK 3.1 bn
113 per cent(after side eftonne
fects)
Fulfilling the
Decrease inEU's Effort
DKK 1.5 bn production, to8.9 per cent
100 per cent
Sharing Regutal
lationDelivering on
EU LULUCF-4,800 full-time commitments
Change in emDKK -0.5 bn
employees (budget target
100 per centployment, total(-6.1 per cent)20262029/point target 2030)
Change in land
values, excl.
-6.2/4.1 per/incl. subsidies
centfor afforestation

Note: See Table 2.1.
1) Share from structural reductions from cattle indicates that 19 per cent of the 2030 reductions of 2.8 m tonnes of CO2-eq come from a reduction in cattle production.
2) Forest uptake is 0.1 (2.1) m tonnes and biochar by pyrolysis is 0.2 (0.2) million tonnes in 2030 (2045).
Source: Own calculations

Composition of greenhouse gas reductions
The reduction in production of 8.9 per cent means that in this model, 35 per cent(compared to 52 per cent in model 1) of the total greenhouse gas reduction comesfrom structural effects. It should be noted that because the marginal tax rate in thismodel is also DKK 750 per tonne of CO2-eq, the same technologies as in model 1
are used in this model, i.e. feed additives and tent covering with floating layers. A
higher marginal tax rate combined with a base deduction ensures that the ratio between structural effects and technical effects is reduced compared to a proportionaltax rate with the same revenue.
The total socio-economic costs measured by the average shadow price are DKK
250 per tonne of CO2-eq in this model compared to DKK 150 per tonne in model 1.
However, these are still relatively cheap reductions in terms of socio-economic
costs.
Reductions due to new technology
There is a lower reduction in CO2-eq emissions due to the lower effective tax compared to model 1. This means that additional measures must be taken to meet the 70
per cent target.
The Expert Group notes that the use of biochar made through pyrolysis is potentiallya technology with great potential in the long term. Therefore, the Expert Group suggests that the technology should be supported in this model. Model 2 contains subsidy funds for negative emissions from biochar by pyrolysis, e.g. in the form of support

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for the storage of biochar produced by pyrolysis in agricultural land, which is estimated to entail a CO2-eq reduction of 0.2 m tonnes of CO2-eq in 2030. However,there are significant uncertainties associated with the effect estimate for biochar bypyrolysis, see Appendix 7.5. In addition, the environmental and agronomic conditions
resulting from the production and use of biochar by pyrolysis, as well as the storageof biochar in agricultural soil, have yet to be determined. The Expert Group notes that
it is important in relation to the long-term goal of climate neutrality in 2045 that initiatives are initiated that can result in negative CO2-eq emissions.
It should be noted that when new technological solutions, such as feed additives andbiochar by pyrolysis, are to be included in the national emissions inventory, it requires
documentation of the reduction effect and activity data (distribution and operating
conditions), see Appendix 7.5. For biochar by pyrolysis, sufficient evidence is expected to be available by 2026. It should also be noted that environmental approval
for storing biochar in agricultural land to achieve 0.2 m tonnes of CO 2-eq in 2030 ispending.
Land value decline and compensation
The lower production and production value in this model, as in model 1, means thatthe price of agricultural land declines. The isolated effect of the tax is a decrease of
6.2 per cent compared to a decrease of 16.8 per cent in model 1. In this model, theExpert Group's proposal of a subsidy for afforestation of DKK 92,000 per hectare ismore than sufficient to keep land values from decreasing, which increase by 4.1 percent with the combination of a CO2-eq tax and a subsidy for afforestation. Existing
farmers are thus more than compensated for the decline in land values as a result of
the tax.
The introduction of a base deduction corresponding to approx. 50 per cent of theimmediate tax payment compensates farmers for part of the tax. It means that theimmediate burden (i.e. the cost of the tax with unchanged production) is DKK 3.1 bncompared to DKK 5.9 bn in model 1. After shifts in production etc., the tax is expected
to generate revenue of DKK 1.5 bn. Taking into account subsidies for afforestation
and rewetting of carbon-rich agricultural land, as well as subsidies for biochar by pyrolysis, the model implies a deficit on public finances of DKK 0.5 bn. Compensation
via the base deduction in the tax, subsidies for afforestation, subsidies for rewettingof carbon-rich agricultural land and subsidies for biochar by pyrolysis thus take up
more than the full revenue from the tax.
Breakdown of the total effects on farm types
Cattle and pig production face roughly the same percentage reduction in productionof around 11 per cent in this model. As in model 1, the structural effects are greatest in animal production, see Table 2.6.
Table 2.6. Model 2a: Change in production volumes and value, 2030
Model

Crop

CattlePigs

Overall

Decrease in production, per cent

4.8

11.4

11.0

8.9

Decrease in production value,
per cent

4.5

4.9

8.4

5.8

Source: Own calculations

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The changes in the volume of production give rise to reductions in CO 2-eq emissions (structural effects). As in model 1, the structural effects' share of non-energyrelated emissions corresponds to the share by which production is reduced for livestock farms. For both cattle and pig production, the structural effect is 13 per centof non-energy-related emissions. For crop production, the structural effect is alsosignificantly lower, accounting for 6 per cent of non-energy-related emissions, see
Figure 2.4.
As in model 1, the technological reductions are greatest for cattle production andslightly less for pig production. For both farm types, the technical reduction is of thesame order of magnitude as in model 1, as the same technologies are profitable inboth models. For crop farming, there are limited technical effects, as in model 1.
Figure 2.4 Model 2a – Share of structural and technical effects in relation to non-energy related emissions
Mio. tonnes of CO2eq

Per cent of emissions
Structural effects (per cent)100

Technical effect (per cent)Absolute reduction (Right axis)

80

2,0
1,5

60
1,0
40
0,5

20

Tax

Biochar by pyrolysis

ForestPeatlandF-gases

Pigs

Cattle

0,0

Crop

0

Negative tax (subsidy)

Note: The green diamonds are the reduction in emissions in m tonnes (right axis). The columns cover the proportion of the tax category's basis that is reduced (left axis).
Source: Own calculations.

The immediate burden on business is roughly halved for all three types of farms
compared to model 1. The immediate burden on cattle production is large in thismodel as well, corresponding to more than half of GVA. For both crop and pig production, the immediate burden on business is around 13 per cent of GVA, see Figure 2.5.
Unlike in model 1, the burden of the CO2-eq tax by behavioural response for crop
farming is largely unchanged compared to the immediate effect. This is because thereduction in the number of livestock is more limited in this model and the effect on
fertiliser prices and feed prices is therefore also more limited in this model. This alsomeans that the combined burden after the behavioural response and afforestation
subsidies is negative for crop producers, i.e. the effect of afforestation subsidies on

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land values has more value for crop producers on average than the cost of the CO 2eq regulation.
In general, the split between livestock and crop production does not correspond to
the split between farms with animal production and farms with crop production, as
livestock producers own significant amounts of land used for feed and fertiliser application. The split considers each farm type in isolation and does not include thesecompositional effects.
Figure 2.5 Model 2a - Burden incl. change in land value in DKK m and in relation to GVA

DKK mio.

Per cent

4.000
3.200

125
Burden in million DKK (left axis)
Burden related to GVA (right axis)

Including structural effects (left axis)

100

2.400

75

1.600

50

800

25

0

0

-800

-25
ImmediateburdenAfter
After forest
behavioural incl. changes
response incl. in land valuechanges inland value
Crops

ImmediateburdenAfterbehavioural
response

ImmediateburdenCattleAfterbehavioural
response

Pigs

Note: For crop farming, the burden after the behavioural response is calculated based on changes in land value (stated as annuity) and capital loss. For cattle and pigs,
the burden is reported in 2030. The burden of the CO2-eq tax increases after the behavioural response of crop farming, as a proportion of the tax on livestock, istransferred into higher fertiliser prices and reduced feed prices, thus affecting the earnings for plant farming. GVA is calculated including the value of non-market
deliveries (livestock manure, bedding and roughage). It should be noted that manufacturers do not have to pay tax for the share of production that is (fully or partially)closed. This means that the burden for the closed part of the production is not included in the burden after the behavioural response (the dark blue part of the columns).
This may give rise to the belief that there is a greater opportunity to reduce tax payments by, for example, reorganising production or using technical measures than is
actually the case. Therefore, the column after the behavioural response is also illustrated with "incl. structural effect” (the light blue part of the column), which shoulddraw attention to the immediate burden for the part of the production that closed.
Source: Own calculations.

Consumer prices and price pass-throughAs in model 1, the lower production means that it is possible to sell the reduced volume at a higher price for Danish-produced goods. Since the volume reduction issmaller in this model than in model 1, the price increases are correspondingly lower.
The prices of goods from Danish slaughterhouses and dairies are estimated to increase by 1.0 per cent for product groups with the lowest price increase to 5.1 percent for product groups with the highest price increase, see Table 2.7.

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Table 2.7. Model 2a: Average price increases for goods from slaughterhouses
and dairies, 2030
Cattle slaughterhouse

Pig slaughterhouse

Dairy

Overall

Dairy

5.1

1.0

2.3

2.0

2.3

500 grams of minced

500 grams of minced

1 litre of

1 litre of

beef

pork

milk

milk

2.3

0.3

0.3

Average priceincrease, per
cent.

Price increases
on Danish-produced goods,

-

DKK1)
Note: Calculations are based on price increases from the food industry for private consumption. It should be notedthat the price increases are the average price increases for cattle slaughterhouses, pig slaughterhouses and dairies,
which is why the table assumes that the products are affected by the average increase of the industries. Please notethat the immediate prices are stylistic examples. 1) It is assumed that 500 grams of minced beef, 500 grams ofminced pork and 1 litre of milk cost DKK 45, DKK 35 and DKK 13 respectively, including VAT.
Source: Own calculations.

The price increases mean that consumers bear some of the immediate burden. Of
the total immediate burden in the model of DKK 3.1 bn, an average of 53 per cent isestimated to be passed on in higher consumer prices.
Restructuring of direct agricultural subsidies
This model also includes a variant (model 2b) where no tax is levied on fertilisers. Instead, the direct agricultural subsidies are being redesigned to support reduced fertiliser usage.
As with the tax model, the combination of a subsidy for reducing fertiliser usage andfinancing via reduced hectare subsidies leads to a structural effect in the form of areduction in production and a reduction in land values. In the Expert Group's calculations, the restructuring of agricultural subsidies has a smaller structural effect(smaller decline in production), but a slightly larger decline in land values. The difference in the effect on land values depends on the specific assumptions about crop
substitution and the effect on cropping intensity of a tax versus restructuring direct
agricultural subsidies. A more detailed review of the advantages and disadvantagesof taxes and subsidies for reduced fertiliser usage can be found in Section 3.2.

2.5 Model 3: Further Preservation of Existing Occupational Structure and Consideration to Carbon
Leakage
In model 3, further consideration is given to preserving the existing occupational
structure and minimising the risk of carbon leakage in agriculture. The tax on livestock
is reduced to DKK 125 per tonne of CO2-eq. The tax level on emissions from livestockis thus equated with the level from the industry's mineralogical processes etc. from
Agreement on Green Tax Reform for Industry etc. As in model 2, a rate of DKK 125
per tonne of CO2-eq can be achieved by either having a marginal tax rate of DKK 250
per tonne of CO2-eq and a base deduction of on average 50 per cent of the tax payment, or by reducing the tax to DKK 125 per tonne of CO 2-eq. At this tax level, theDKK 0.3

Green Tax Reform

effects of the two models are largely similar because there are limited technical substitution options in the cost range of DKK 125 to 250 per tonne of CO 2-eq reduction.
However, the Expert Group suggests continuing to use the combination of a higher
marginal tax rate of DKK 250 per tonne of CO2-eq and a 50 per cent base deductionin the tax payment, as this can accelerate the use and development of new technicalsolutions.
Emissions from fertiliser usage are regulated as in model 2. In model 3a, there is a tax
rate of DKK 750 per tonne and a base deduction of 50 per cent of the average tax
burden, corresponding to DKK 200 per hectare. In addition, as in model 2 there is amodel 3b where direct agricultural subsidies are restructured so that they are used
to support reduced fertiliser usage.
Production, employment and consumer price
Model 3a implies a decrease in agricultural production of 5.6 per cent. The decline inproduction is one third of the decline in model 1 and two thirds of the decline in model
2a. The decrease in cattle and pig production is 6.5 per cent (compared to 11.4 percent in model 2a) and 6.6 per cent (compared to 11.0 per cent in model 1), respectively. The structural effect on animal production is thus significantly reduced compared to both model 1 and model 2a. The decline in employment is approximately
3,000 full-time employees (compared to 4,800 in model 2a) in agriculture and thefood industry in 2030, see Table 2.8. This corresponds to a decrease of 3.8 per centof the employed in 2030. As in the other models, the decline in employment will be
offset in 2030 by an increase in other industries with less greenhouse gas-intensive
production. Like the other structural effects in animal production, the consumer priceincrease is approximately halved compared to model 2a so that consumer prices forgoods from Danish slaughterhouses and dairies increase by an average of 1 per cent,see Table 2.10.

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Table 2.8. Main results of model 3aModel 3a – Further preservation of the existing occupational structure and consideration to carbon leakage: Tax on livestock at either a rate of DKK 125 per tonne or DKK 250 per tonne and base deduction, corresponding to an effective tax
rate of DKK 125 per tonne
CO2-eq reductions

Costs and revenues, 2030

2030 (2045)

2.6 (5.3) Immediatem tonnes tax burden

Share fromstructural reductions(cattle)24 (121)) Revenue fromper cent tax

Share ofother reductions

Revenue after
76 per behavioural recent sponse andsubsidy

Subsidies fornegativeemissions in
2030(2045)2)

0.9 m
tonnes
(2.9)

Shadow prices, change in pro- Fulfilment of climate goals
duction, change in employincl. decided actions
ment and change in land values, 2030
Average
70 per cent target
shadow price
DKK 475 per
DKK 1.9 bn
106 per cent(after side eftonne
fects)
Fulfilling the EU's
Decrease inEffort Sharing RegDKK 1.0 bn production, to5.6 per cent
100 per centulationtal

DKK -2.0 bn

Change in employment, total-3,050 full-time
employees(-3.8 per cent)

Change in land
values, excl.
/incl. subsidies
for afforestation-3.8/7.2 per
cent

Delivering on EU
LULUCF commitments (budget target 20262029/point target
2030)

92/100 per
cent

Note: See Table 2.1.
1) Share from structural reduction from cattle indicates that 12 per cent of the 2030 emissions of 2.6 m tonnes of CO2-eq stem from production decline in cattle
production.
2) Uptake from forestry amounts to 0.1 (2.1) m tonnes and biochar by pyrolysis amounts to 0.8 (0.8) m tonnes in 2030 (2045).
Source: Own calculations

Composition of greenhouse gas reductions
The reduction in production of 5.6 per cent means that the structural effects' shareof the total greenhouse gas reduction in this model is 24 per cent (compared to 35
per cent in model 2a). At the same time, the total CO2-eq reduction as a result of
the tax is approx. 0.8 m tonnes lower than in model 2a. This means that there is aneed to achieve CO2-eq-increasing effect from technological means. The technicaleffect of 75 per cent of the total reductions cannot be achieved through cost-effective measures, but is instead based on a combination of requirements and subsidies.
The socio-economic costs measured by the average shadow price are DKK 475 per
tonne of CO2-eq in this model compared to DKK 250 per tonne in model 2 and DKK
150 per tonne in model 1. The significant increase is due to the fact that technological measures used to achieve the overall reductions in this model are expensive
compared to reductions achieved by a tax.

Requirements for selected technologies
A tax on emissions from livestock production of DKK 125 per tonne implies that the
tax in itself does not provide sufficient incentive for the use of feed additives and tent
covering with floating layers. In model 2, these technologies contribute reductions of
0.5 m-0.7 m tonnes of CO2-eq in 2030 across the two variants of model 2.

Green Tax ReformTo achieve the stated emission reduction objectives, model 3 incorporates a requirement for farmers to use feed additives and tent covering with floating layers or similarstorage technologies. A requirement to use a given technology implies that the technologies must be fully utilised, even if the tax levels alone are not sufficient to ensure
this. It will lead to higher socio-economic costs than an equivalent model without requirements and a higher burden on affected professions, as it forces farmers to use
a specific technology, even if the price exceeds the tax savings arising from a reduction in greenhouse gases.
An alternative option would be to create a subsidy scheme for the technologies inquestion. It is to be expected that the implementation of subsidy schemes will resultin a lesser usage of the technologies than the incorporation requirements, resulting
in the climate impact from subsidies is likely being lower than the full technical potential. With a voluntary model based on subsidies, there is uncertainty associated withthe expected utilisation of the funds. Conversely, as mentioned above, the burden on
the agricultural sector is less with a subsidy scheme than with a requirement.
Subsidy schemes for these technologies could be funded by EU agricultural subsidies, see Section 6.4. Requirements can only be financed by EU funds for up to 24
months after a new and more far-reaching national requirement has entered into force
compared to existing EU requirements. Support for investment in tent coverings withfloating layers will need to be prioritised before a national requirement is implemented.
The Expert Group's choice of requirements in model 3 is based on an overall assessment, where more emphasis is placed on the fact that the requirement provides
greater certainty for a given CO2-eq reduction level. This is in light of the fact thatthe technologies in question provide a very significant share of the total reduction inemissions from livestock production, which is not provided by a tax level of DKK 125
per tonne of CO2-eq.
Subsidies for biochar by pyrolysis
The model assumes that technical effects from the use of biochar of 0.8 m tonnes ofCO2-eq will be generated in 2030 if the model is to meet the 70 per cent target. It
should be noted that model 3 assumes that approx. 30 per cent of CO2-eq reductionsin 2030 will come from biochar by pyrolysis.
Pyrolysis is a technology with great potential in the long term, which is why the Expert Group suggests promoting the technology as much as possible, subject to outstanding environmental authorisations. However, the reduction effect of pyrolysis issubject to considerable uncertainty, and the environmental conditions resulting frompyrolysis production and ploughing biochar into agricultural land have yet to be determined. Up to 50 20 MW pyrolysis plants will need to be commissioned as soon as
possible to achieve 0.8 m tonnes of CO2-eq reductions by 2030.
The Expert Group suggests that a re-visit be carried out in 2027 to assess the development in the use of biochar by pyrolysis. If the development at this point in time
is not expected to lead to a reduction of 0.8 m tonnes of CO2-eq in 2030, the Expert Group recommends that the lacking reductions are alternatively achieved
through increased tax rates. Alternatively, implementing a norm reduction in nitrogen regulation that reduces nitrous oxide emissions from livestock manure andcommercial fertiliser may be considered. Due to positive environmental and healtheffects, this regulation is expected to have relatively low socio-economic costs and,as with a tax increase, the effect is more certain than the roll-out of new technology.

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Land values and compensation
The reduced CO2-eq tax means that the effect of the tax on the land values is also
lower than in the other models. The isolated effect of the tax is a decrease of 3.8 per
cent, compared to a decrease of 16.8 per cent and 6.2 per cent in model 1 and model
2a, respectively. The Expert Group's proposal for a subsidy for afforestation of DKK
92,000 per hectare leads in this model with relatively limited changes in agricultural
production to a somewhat larger increase in demand for land than the decrease indemand for land resulting from the reduced tax. Therefore, when a CO 2-eq tax andsubsidies for afforestation are combined, the land values will increase by 7.2 per cent.
Existing farmers are thus more than compensated for the decline in land values as aresult of the tax.
The effective tax rate of DKK 125 per tonne of CO2-eq on emissions from livestock,compared to DKK 375 per tonne in model 2, reduces the immediate burden (i.e., thecost of the tax at unchanged production) for agriculture as a whole compared tomodel 2. It is primarily livestock producers who experience this difference between
the two models. The immediate burden in model 3a is DKK 1.9 bn compared to DKK
3.1 bn in model 2a and DKK 5.9 bn in model 1. After shifts in production etc., the tax
is expected to generate revenue of DKK 1.0 bn. Taking into account subsidies forforestry and rewetting of carbon-rich agricultural land and the increased subsidy forbiochar by pyrolysis, the model implies a deficit in public finances of DKK 2.0 bn.
Compensation via a base deduction and a reduced tax rate for livestock, as well as
via subsidies for forests and rewetting of carbon-rich agricultural land, as well as subsidies for biochar by pyrolysis, thus take up more than the full revenue from the tax.
Breakdown of the total effects on farm types
The reduction of the tax on cattle and pig production compared to model 2 meansthat the fall in production is reduced to 6.5 per cent (compared to 11.4 per cent inmodel 2) and 6.6 per cent (compared to 11.0 per cent in model 2) for cattle and pig
production, respectively. The lower reduction for livestock farms also leads to alower reduction for plant farms, even though the tax for that type of farm is unchanged. The decline in production for crop farms is 3.8 per cent (compared to 4.8
per cent in model 2), see Table 2.9.
Table 2.9. Model 3a: Change in production volumes and value, 2030
Model

Crop

CattlePigs

Overall

Decrease in production, per cent

3.8

6.5

6.6

5.6

Decrease in production value,
per cent

2.9

2.8

5.0

3.5

Source: Own calculations

The changes in the scope of production give rise to reductions in greenhouse gas
emissions (structural effects). As in model 2, the structural effects' share of non-energy-related emissions corresponds to the share by which production is reduced forlivestock farms. For both cattle and pig production, the structural effect is 7 per centof non-energy-related emissions. For crop production, the structural effect is only
slightly lower than in model 2, accounting for 5 per cent of non-energy-related emissions, see Figure 2.6.

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Figure 2.6 Model 3a – Share of structural and technical effects in relation to non-energy related emissions
Mio. tonnes of CO2eq

Per cent of emissions
Structural effects (per cent)100

Technical effect (per cent)Absolute reduction (Right axis)

80

2,0
1,5

60
1,0
40
0,5

20

Tax

Biochar by pyrolysis

ForestPeatlandF-gases

Pigs

Cattle

0,0

Crop

0

Negative tax (subsidy)

Note: The green diamonds are the reduction in emissions in m tonnes (right axis). The columns cover the proportion of the tax category's basis that is reduced (left axis).
Source: Own calculations.

The lower tax on emissions from livestock also reduces the technical effects, even if
requirements for feed additives and tent coverings with floating layers are introduced. This is due to the fact that the incentive for further feed conversions etc. is
reduced.
The immediate burden on the agricultural sector is approximately halved for cattle
and pig production compared to model 2, amounting to 25 per cent of GVA and 6 percent of GVA, respectively. The immediate burden for crop producers is unchanged
compared to model 2 and amounts to 13 per cent of GVA, see Figure 2.7.

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Figure 2.7 Model 3a – Burden incl. change in land value in DKK m and in relation to GVA
Burden in million DKK (left axis)

Including structural effects (left axis)

Burden related to GVA (right axis)

Per cent

DKK mio.
4.000

125

3.200

100

2.400

75

1.600

50

800

25

0

0

-800

-25
ImmediateburdenAfter
After forest
behavioural incl. changes
response incl. in land valuechanges inland value
Crops

ImmediateburdenAfterbehavioural
response

CattleImmediateburdenAfterbehavioural
response

Pigs

Note: For crop farming, the burden after the behavioural response is calculated based on changes in land value (stated as annuity) and capital loss. For cattle and pigs, theburden is reported in 2030. The burden of the CO2-eq tax increases after the behavioural response of crop farming, as a proportion of the tax on livestock, is transferred
into higher fertiliser prices and reduced feed prices, thus affecting the earnings for plant farming. GVA is calculated including the value of non-market deliveries (livestock
manure, bedding and roughage). It should be noted that manufacturers do not have to pay tax for the share of production that is (fully or partially) closed. This means thatthe burden for the closed part of the production is not included in the burden after the behavioural response (the dark blue part of the columns). This may give rise to thebelief that there is a greater opportunity to reduce tax payments by, for example, reorganising production or using technical measures than is actually the case. Therefore,
the column after the behavioural response is also illustrated with "incl. structural effect” (the light blue part of the column), which should draw attention to the immediateburden for the part of the production that closed.
Source: Own calculations

The burden of the CO2-eq tax after the behavioural response and afforestation subsidies is negative for crop farming, as in model 2, i.e. the effect on land values of theafforestation subsidy has more value for crop farmers on average than the cost of
the CO2-eq regulation. For pig production, the burden on business after the behavioural response is reduced to 2.7 per cent of GVA (compared to 6.0 per cent inmodel 2). The burden on business for cattle producers is still higher than for theother types of farms and amounts to 10.8 per cent of GVA (compared to 22.5 percent in model 2).
In general, the split between livestock and crop production does not correspond to
the split between farms with animal production and farms with crop production, as
livestock producers own significant amounts of land used for feed and fertiliser application. The split considers each farm type in isolation and does not include thesecompositional effects.

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Consumer prices and price pass-throughSince there is only a limited reduction in production in model 3, the opportunities tosell the reduced volume at a higher price are limited. The prices of Danish-produced
goods from slaughterhouses and dairies are estimated to increase by 0.6 per centfor product groups with the lowest price increase to 2.8 per cent for product groups
with the highest price increase, see Table 2.10.
Table 2.10. Model 2a: Average price increases for goods from slaughterhouses
and dairies, 2030

Average priceincrease, per
cent.

Price increases, DKK1)

Cattle slaughterhouse

Pig slaughterhouse

Dairy

Overall

Dairy

2.8

0.6

1.2

1.1

1.2

500 grams ofminced beef

500 grams ofminced pork

1 litre of milk

DKK 1.4

DKK 0.2

DKK 0.2

1 litre of milk-

Note: Calculations are based on price increases from the food industry for private consumption. It should be notedthat the price increases are the average price increases for cattle slaughterhouses, pig slaughterhouses and dairies,
which is why the table assumes that the products are affected by the average increase of the industries. Please notethat the immediate prices are stylistic examples. 1) It is assumed that 500 grams of minced beef, 500 grams ofminced pork and 1 litre of milk cost DKK 45, DKK 35 and DKK 13 respectively, including VAT.
Source: Own calculations.

As with the other models, the price increases mean that consumers bear some of
the immediate burden. Of the total immediate burden in the model of DKK 1.9 bn,
an average of 49 per cent is estimated to be passed on in higher consumer prices.

2.6 Summary of the Three Models
As with the first interim report, the Expert Group's analyses show that it is not possible
to design a CO2-eq tax model that fully meets the starting point of the most costeffective reductions of CO2-eq emissions from agriculture and forestry and the guiding
considerations in the Danish Climate Act and the terms of reference. Taxes on CO 2eq emissions in production imply both an incentive to reorganise production so thatthe total CO2-eq emissions from a given production are reduced, and a relative priceincrease for products that are CO2-eq-intensive.
The three models presented take different considerations into account, such as preserving the existing occupational structure in agriculture and minimising the risk ofcarbon leakage in agriculture. Model 1 equates the tax rate in the agricultural andforestry sector with the rate from the non-ETS sector of industry, where model 2
equates the tax rate with the rate from the EU ETS of industry, and model 3 equates
the tax rate with the rate from mineralogical processes etc. All models imply that
CO2-eq emissions are regulated more uniformly in Denmark than is the case today.
Balancing structural effects against other considerations
The results of the three models show that the CO2-eq-intensive types of farms reduce
production volume as a result of the increasing costs of a CO2-eq tax. Cattle production is reduced by between 20.2 per cent (in model 1) and 6.5 per cent (in model 3).
The corresponding reductions in crop production are 7.9 per cent and 3.8 per cent.
If you want to minimise structural effects and thereby reduce distributional effects and

DKK 0.2

Green Tax Reformthe risk of bankruptcy, it will have a number of costs in other dimensions. The Expert
Group has highlighted a number of factors that should be taken into account when
considering the choice of model. These conditions are described below.
Socio-economic costs
Lower structural effects mean that it is necessary to achieve the emission reductions
by other means. These will typically be technical measures. A low tax reduces thelikelihood of a new greenhouse gas-saving technology becoming competitive. Thismeans that the emissions reduction through technical measures is more expensive
than if the reduction was achieved through a tax. It will also require either a requirement/mandate for the technology to be utilised or a subsidy for the introduction of thetechnology. In the three models, this shift from reductions through a tax to reductionsof a technical nature means that the average socio-economic price increases fromDKK 150 per tonne of CO2-eq in model 1 (with greater structural effects) to DKK 475
per tonne of CO2-eq in model 3 (with the lowest structural effects).
Uncertainty with meeting targets
A higher emphasis on a new technology leads to an increased risk of not meeting thetargets as the uncertainty regarding the implementation and development of the technology has a greater impact on the overall emissions reduction. This can be illustrated
by the fact that emissions reduction from biochar by pyrolysis is not necessary to meetthe 70 per cent target and the EU's Effort Sharing target in model 1, while reduction
from pyrolysis accounts for about 30 per cent of the total reduction in model 3.
Public finances
The financing cost for the public sector increases in models that seek to reduce structural effects. This is partly due to a change in effort sharing between farmers andsociety through compensation measures for farmers, such as a base deduction or
subsidies for forestry (which keeps land values under control). However, as mentioned, this is also because increased use of technology to achieve the reductions will
typically be associated with public subsidies. The effect on public finances is an improvement of the balance by DKK 1.2 bn in 2030 in model 1 and a deterioration of
the balance by DKK 2.0 bn in 2030 in model 3. The surplus in model 1 means that
there is room to compensate for the losses in agriculture, but the deficit in model 3means that the reduction target cannot be achieved without additional funding withthe given design of the model.
Environment and health
There is a close correlation between the effect on greenhouse gas reduction due toreduced production and the emission of ammonia and nitrogen. Different models of
the change in agricultural production have therefore various environmental and health
implications. The Expert Group has calculated the societal value of the environmental,
health and recreational improvements resulting from each of the three models. Model
1, which has the largest structural effects, entails a socio-economic gain of DKK 770
m as a result of the effect on the environment, health and recreation. Model 3a (fertiliser tax) has a socio-economic benefit of DKK 490 m on environment, health andrecreation. An overview of the effects of the various models is shown in Table 2.11

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Table 2.11. Socio-economic value of environmental effects (DKK m in 2030)
Model

NitrogenAmmonia

Recreation

Total

Model 1

480

100

200

770

Model 2a

380

60

200

630

Model 2b

200

40

200

430

Model 3a

260

40

200

490

Model 3b

170

20

200

380

Note: Totals may not add up due to rounding

Organic production
There are two opposing effects from the models on organic production. Organic
producers are less CO2-eq-intensive relative to conventional producers, which encourages more organic production. Conversely, conventional producers have more
options for technical conversion than organic producers, which encourages moreconventional production. Whether there will be more or less organic production will
depend on which effect dominates. On this basis, it is not immediately possible toassess the overall impact on organic production.
Animal welfare
The Expert Group has not specifically considered the impact of the models on animal welfare. However, it should be noted that the tax can, for example, incentivise
increased exports of calves and piglets. It is also noted that the tax provides an incentive to invest in barns that may have lower animal welfare.
Food security
It is not expected that a CO2-eq tax in isolation will reduce food security in Denmarkin any of the models shown, see Appendix 7.10. A pure tax of DKK 750 per tonne ofCO2-eq is estimated to result in a decrease in Danish food production for humanconsumption of 2-4 per cent, corresponding to a total loss of 225 bn-500 bn calories (kcal). The very limited decrease in food production for human consumption,
despite the large decline in animal production, is due to an expected shift in activity
from feed production to other crop production.
Consumer prices
A CO2-eq tax will increase agricultural costs, which is partly passed on to consumers through increased consumer food prices. Model 1, which has the largest priceincreases, implies price increases for products from cattle production of 10 per
cent, from dairy production of 4.6 per cent, while pig products are expected to increase by 1.6 per cent. The corresponding price increases in model 3a with the lowest structural effects are 2.8 per cent for beef, 1.2 per cent for dairy products and
0.6 per cent for pork, see Table 2.12. The price increases for selected products areshown in Table 2.13.

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Table 2.12. Average price increases on goods from slaughterhouses and dairies,
per cent
Model 1Model 2aModel 2bModel 3aModel 3bCattleslaughterhouse

10.0

5.1

4.3

2.8

2.0

Pig
slaughterhouse

1.6

1.0

0.7

0.6

0.3

Dairy

4.6

2.3

2.0

1.2

0.9

Note: Calculations are based on price increases from the food industry for private consumption. It is assumed that
products are affected by the average price increases for cattle slaughterhouses, pig slaughterhouses and dairies.
Source: Own calculations.

Table 2.13. Price increases on selected Danish-produced products, DKK
Model 1Model 2aModel 2bModel 3aModel 3b500 gramsof minced
beef

4.5

2.3

1.9

1.3

0.9

500 gramsof minced
pork

0.6

0.3

0.3

0.2

0.1

1 litre of
milk

0.6

0.3

0.3

0.2

0.1

Note: See note to Table 2.12. It is assumed that 500 grams of minced beef, 500 grams of minced pork and 1 litre ofmilk cost DKK 45, DKK 35 and DKK 13, respectively, including VAT.
Source: Own calculations.

Income distribution
The overall conclusion from the analysis of the effect on income distribution is thatnone of the Expert Group's models have an effect on income distribution as
measured by the Gini coefficient.
There are three main effects that drive the changes in real disposable income in thethree models. It is noted that all effects are small in the models. The first effect is the
direct price effect on agricultural goods, which tends to reduce real disposable
income. The second effect is the indirect effect on prices in other sectors due to thelower labour demand in the agricultural sector. This negatively affects labour costs
in other companies and leads to a reduction in other prices. In isolation, it increases
the real disposable wage. The third effect comes via a slightly lower wage
development due to lower demand in the agricultural sector. The lower wage
development is also accompanied by a lower adjustment of transfer incomes. This
reduces the real disposable income for benefit recipients.
Overall, real disposable income is reduced in all models, as the lower wage
development dominates the effect of price changes, see Section 7.13. However, thedrop in income is limited in all models.
Geographical distribution
Primary agriculture's share of total GVA is limited both for the country as a whole,where it accounts for 2 per cent of total GVA, and by geographical area. Agriculture

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has the largest share of GVA in West Jutland, accounting for 4.5 per cent of the area's GVA. This is followed by Bornholm, where the share of the island's total GVA is
3.8 per cent. For all other areas, the GVA share is below 3 per cent.
With a relatively low starting point in all geographical areas, the changes in a given
area's GVA resulting from the introduction of a CO2-eq tax on agriculture will be limited. In model 1, where the structural effects are greatest, it is only in West Jutlandthat the reduction in GVA exceeds 1 per cent. In model 3, where the structural effect is lowest, the effect on GVA is 0.5 per cent. It should be noted that the measured GVA decreases are gross decreases, as they do not take into account the increase in employment in other sectors. It should also be noted that the measured
decreases in GVA do not consider the decrease in GVA in the food industry, which,in isolation, means that the GVA decreases are underestimated.
Figure 2.8 Decline in GVA across regions due to production decline in primary agriculture, per cent.

Per cent

Per cent
Model 1Model 2aModel 3a

3,0

3,0

2,5

2,5

2,0

2,0

1,5

1,5

1,0

1,0

0,5

0,5

0,0

0,0

Note: The figure shows the estimated decline in gross value added (GVA) across regions for each of the Expert Group's main models. The figure does not take into
account any change in GVA due to production decline in the secondary industry.
Source: Own calculations.

Bankruptcy risk
The three models for reducing greenhouse gas emissions in agriculture mean thatthe contribution margin of agriculture is reduced, which in isolation implies a decline
in land value. Furthermore, the structural changes lead to a capital loss on buildings
and machinery for farmers. The loss of value of land, buildings and machinery can
hit agriculture harder than other sectors because farms are typically run as sole
proprietorships. Therefore, the losses are more concentrated than if the farms had
been run in a company form.
Therefore, the combination of capital loss and a reduction in future profit margins
can increase the risk of bankruptcy for many farmers. The Expert Group has
endeavoured to assess how the three models affect the risk of bankruptcy inagriculture, see Appendix 7.15.

Green Tax Reform

As a starting point, 6 per cent of the total turnover in agriculture is estimated tocome from the category "farms at high risk of bankruptcy", corresponding to approx.
360 farms. Table 2.14 shows an estimate of the proportion of turnover in agriculturethat immediately moves into the category of farms at high risk of bankruptcy in eachof the models presented.

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Table 2.14. Immediate changes in bankruptcy threat, in per cent of revenue
Model 1Model 2aModel 2bModel 3aModel 3b

Crops

6

1

0

-1

-1

Cattle

25

11

10

1

1

Pigs

12

2

2

0

0

Other
livestock

7

0

0

0

-1

Mixed

1

0

0

0

0

Full-timeoverall

15

5

4

0

0

Note: The table shows the share of turnover in the individual types of farms that are assessed to be severely
threatened by bankruptcy. The calculations for changes in the threat of bankruptcy take into account the immediate
capital income effect of the introduction of the CO 2-eq tax and technological reduction options. Adjustment is thus
not taken into account.
Source: Own calculations based on SEGES accounting data

Table 2.15. The main results from the model calculations, 2030 effects
Occupational burden after
adjustment

Revenueafter behavioural
responseand subsidy

Of whichother effects3)

Degree ofgoal fulfilment

Drop inland value(excl./incl.
forest subsidies)4)m tonnes of m tonnes of m tonnes ofCO2-eqCO2-eqCO2-eq

Per cent

Per cent

DKK pertonne ofCO2-eq

1.5

124.0

16.8/
8.8

475/
150

1.0

1.9

112.9

6.2/
-4.1

525/
250

2.6 (5.3)

0.7

1.9

107.3

8.4/
-2.8

550/
325

-1,9502.6 (5.3)

0.6

2.0

105.8

3.8/
-7.2

750/
475

-2,1252,4 (5,1)

0.3

2.0

99.8

5.5/
-6.0

775/
575

Tax rate(before/after basededuction)

Immediateburden1)

DKK pertonne ofCO2-eq

DKK m

DKK m

DKK m

1

750

5,925

2,425

1,150

3.2 (5.9)

1.6

2a

750/
375

3,050

1,350

-525

2.8 (5.5)

2b

750/
375

2,525

1,325

-700

3a

250/
125

1,900

1,025

3b

250/
125

1,300

850

Model

2)

CO2-eq reductions,
2030(2045)Of which
structuraleffectShadow
price5)

Note: Revenue effect is rounded to DKK 25 m, socio-economic cost to DKK 10 m and shadow prices to the nearest DKK 25 per tonne of CO2-eq. Immediate burden
and revenue after statics effects and behavioural response are given in 2023 level. The CO2-eq effects are indicated for 2030.
1) Immediate burden includes the realised technology costs of using feed additives and tent covering with floating layer for models 3a and 3b. For models 3a and 2b,
the burden also includes the net cost of using the technologies for fertiliser. The costs are associated with uncertainty due to low technological maturity. Tent coveringwith floating layer is one of several potential storage technologies. By 2030, tent covering with floating layers could therefore be replaced by other storage technologies
with an expected similar climate impact.
2) Burden on business after adaptation only includes the impact of the CO2-eq tax on liming and livestock, as well as technology costs from feed additives, tent
covering and floating layers, and the net cost of using the technologies for fertiliser for models 2b and 3b. The burden on business is calculated in 2030, which is why it
differs for crop production from 3.3, 3.5 and 3.7, where the impact is calculated as a discounted annuity for the land value effect.
3) Other effects cover technical effects (reductions that do not affect the scope of production, but reduce emissions per unit produced, e.g. via feed additives for
cattle, biochar by pyrolysis, etc.) and activity effects (e.g. change from agricultural land to forest or carbon-rich agricultural land being rewetted).
4) Land value changes exclude the effect of set-aside and wetland conversion of carbon-rich agricultural land. The effect from subsidies for afforestation is under theassumption that land converted to forest has an average cultivation value compared to agricultural land in rotation.
5) Shadow prices are calculated in factor prices excluding/including side effects. Side effects are included for the nitrogen initiative due to reduced fertiliser usage, as
well as side effects for ammonia. The calculations of the socioeconomics and shadow prices do not include improvements in terms of trade and thus do not include
gains from price effects that occur at the expense of other countries. Socioeconomics are not presented in the table as the models do not result in the same CO2-eq
reductions, which is why shadow prices are considered more comparable for the costs of the models.
Source: Own calculations

Green Tax Reform

2.7 Sensitivity Analyses
Tables 2.17-2.18 show sensitivity analyses based on model 1, model 2a and model
3a with effective tax rates of DKK 750, 375 and 125 per tonne of CO2-eq on emissions
from livestock, as well as the models' respective fertiliser taxes and any technology
requirements. The following two parameters are adjusted in the calculations:1)
2)

Different export elasticities in the food industry
Different modelling of land supply

Different export elasticities in the food industry
A central part of the impact assessment of a CO2-eq tax is how exports and imports
react to price increases. This determines, among other things, the extent to which
Danish production is relocated abroad, see Appendix 7.8, and it will also affect,
among other things, the pass-through and thus the incidence of a CO2-eq tax.
The export elasticities can basically be said to reflect the degree of market power that
Danish producers are expected to have on the export markets. A high export elasticity
implies a low degree of market power, whereas a low export elasticity implies a highdegree of market power. No other countries have introduced a CO2-eq tax in agriculture, which means that the Expert Group has not had access to concrete empirical
data on national CO2-eq taxes on agriculture and forestry. The Expert Group's assessment of export elasticities is therefore based on the general literature on trade
reactions to price increases (e.g. through tariffs and other price shocks). There isconsiderable uncertainty about the size of the export elasticities, which is why theExpert Group in this section includes sensitivity analyses with higher and lower export
elasticities in the food industry compared to the central estimate. The selected sensitivity analyses do not significantly change the overall qualitative effects of the mainmodels. However, it can be seen that the effect of a given tax rate on the expected
emission reduction is greater the higher the export elasticity. This is because in asituation with higher export elasticity and thus less ability to pass on prices to consumers, the food industry is likely to reduce activity more.
The impact assessments in the report's central estimates are based on Fontagné
et al. (2022). Fontagné et al. use a cross-sectional analysis with instrumental variables to estimate trade elasticities at the product level, where tariffs are the instrument for price differences across the countries of the world (the method is explained in Appendix 7.17). Tariff rates generally vary between 0-20 per cent andcan thus be compared to the relevant cost shocks in the Expert Group's models.
Data covers tariffs and trade flows in the period 2001-2016 between 189 exporting countries and 152 importing countries across 5,052 product categories (HS6grouping). An estimate is made for each product – and for each product, an elasticity is determined that is assumed to be representative of the world's countries asa whole.
As tariff rates are typically relatively constant over time, these estimates can be considered long-term assessments of elasticities. The average export elasticity for theentire agriculture and food industry is 8 when the product-specific export elasticities
are compared based on the product composition of Danish exports. This means thata 1 per cent increase in price on average results in an 8 per cent decrease in demand.
The elasticities are not country-specific, but express an average export elasticity forthe specific product across importing countries. The magnitude of the average export
elasticities to comparable to the overall level of export elasticities and the empirical

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literature in general, see e.g. Hertel et al. (2007) and the review of the literature by
Boehm et al. (2023) and Anderson et al. (2004).
The average export elasticities mask a large underlying variation in export elasticities
at the product level. In the dairy industry, for example, the average elasticity is 5.46,
which means that drinking milk has an estimated export elasticity of close to 10 (lower
market power), while butter and cheese have an estimated export elasticity of around3 and 5 (higher market power). Meat powder, residual products (such as tongues),
etc. all have an elasticity above 20. However, weighted together, the export elasticities will be between approx. 5-10.
The export elasticities from Fontagné et al. (2022) are weighted together at the industry level based on the distribution of each industry's exports on the same products.
The industry-specific average export elasticities for agriculture and the food industry
in the Expert Group's impact assessments are shown in Table 2.16.
Table 2.16. Average export elasticities of the agriculture and food industry in theExpert Group's impact assessments
Average

Export shareelasticity
Crop, conventional

5.36

21.5 per centCrop, organic

5.36

21.1 per centHorticulture

7.50

17.2 per centCattle farming

8.11

2.6 per cent

Pigs

6.41

26.9 per cent

Poultry

6.41

17.2 per cent

Dairy

5.46

50.7 per centBakery6.67

21.2 per cent

Other food industry

6.93

36.9 per centSlaughterhouse, cattle

5.69

53.1 per centSlaughterhouse, pigs

12.10

61.3 per centSlaughterhouse, poultry

5.84

27.6 per centNote: The export elasticities shown are weighted together to industry level based on export estimates at product level.
The export estimates at the product level mask a large underlying variation. Note also that the estimates for the animalindustries are largely the same for organic and conventional producers, which is why only one overall estimate isreported for these despite the division in GreenREFORM.
1) The database is documented in BACI: International Trade Database at the Product-level: The 1994-2007
Version (http://www.cepii.fr/pdf_pub/wp/2010/wp2010-23.pdf)
Source: BACI database9 and Fontagné, L., Guimbard, H., and Orefice, G., (2022) 'Tariff-based product-level tradeelasticities', Journal of International Economics.

In the first sensitivity analysis, the average export elasticity is changed by a proportional change in the elasticity of the underlying product groups. The change is implemented in both directions so that demand for agricultural products is respectively
more or less price-sensitive than assumed in the baseline.

9

The database is documented in BACI: International Trade Database at the Product-level: The 1994-2007
Version (http://www.cepii.fr/pdf_pub/wp/2010/wp2010-23.pdf)

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A high price elasticity means that changes in costs are reflected to a greater extent
in quantity changes and to a lesser extent in price changes. Therefore, the price elasticity determines how much of the tax payment leads to higher prices, i.e. is passed
on to consumers. High price elasticity means that a smaller portion can be passed on
to consumers.
In the first scenario, export elasticities for all product groups in the food industry areraised proportionally to an average level of 15 from the initial level of 8. In addition,the "rule of half" is removed from the calculations, which states that consumers havea preference for domestically produced goods and are thus half as price sensitive todomestically produced products, see Section 3.11. The level of 15 corresponds tothe level of average export elasticity recommended by Copenhagen Economics intheir analysis for Agriculture & Food regarding agricultural export and import elasticities.10 Only 9 per cent of Danish agricultural exports are estimated to have an export elasticity above 15 and only 2 per cent above 20 in Fontagné et al. (2022).
In model 1, where the effect of the tax change is greatest, the price pass-through in
consumer prices is approx. 56 per cent with the estimated elasticity of 8 in the baseline, while the high elasticity of 15 leads to a pass-through of 47 per cent.
For quantity changes, the reverse applies in that they become larger when the elasticity increases. In model 1, the effect of the tax on CO2-eq reduction increases by
0.64 m tonnes from 2.77 m tonnes in the central estimate to 3.41 m tonnes with anelasticity of 15. This corresponds to an increase of over 20 per cent. This includes
an almost unchanged CO2-eq reduction from technical measures, and the larger
CO2-eq reduction can thus be attributed to a relatively large increase in the decline
in production. The estimated effects of the tax are thus sensitive to the size of theelasticity, see Table 2.17.
For the other two model types, the effect of the introduced tax is smaller than inmodel 1. In both models, this means that the model results are less sensitive tochanges in elasticity in absolute terms. In model 3, the reduction in CO2-eq emissions increases by 0.25 m tonnes if the elasticity is changed from 8 to 15. However,this is a noticeable percentage increase in CO2-eq reduction from structural effects.
GreenREFORM has published11 estimates of export elasticities for goods-producing
industries at detailed product level (6-digit product codes), based on Feenstra's
method.12 The interpretation of the elasticities is that they can be seen as an average between a short-term elasticity and a long-term elasticity, where the method in
Fontagné et al. (2022), which the Expert Group uses, can be interpreted as a longterm elasticity.

Copenhagen Economics, (2023). ”Landbrugs- og fødevaresektorens eksportelasticiteter” (Export elasticities of the
agriculture and food sector). The report also recommends that agricultural import elasticities should be at the samelevel as export elasticities. In GreenREFORM, however, the import elasticities in agriculture are set to be half of theexport elasticities. In the sensitivity calculation, the assumption of lower import elasticities is also removed in order topresent results that are as close to the CE recommendations as possible. However, it is primarily the higher export
elasticities that affect the model's results, which is why only these are focused on in the text.

10

See "Elasticiteter og markedsvilkår i GrønREFORM" (Elasticities and market conditions in GreenREFORM), and"Estimering af udenrigshandelselasticiteter i MAKRO" (Estimation of foreign trade elasticities in
MACRO), Kronborg, Poulsen and Kastrup 2020 for documentation of the estimation method

11

Feenstra, R., Luck, P., Obstfeld, M. and Russ, K. (2018), 'In Search of the Armington Elasticity', Review of Economics and Statistics 100(1), 135-150. and Feenstra, R. C. (1994), ‘New product varieties and the measurement of international prices’, American Economic Review 84, 157–177.

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Long-term elasticities are typically assessed to be greater than short-term elasticities because the possibility of adjustments among both consumers and competitors
is greater in the longer term. The second scenario uses estimated export elasticities
from GreenREFORM, whose elasticities average around 513, which from a long-term
structural adjustment perspective would be an underestimate.
With an elasticity of 5 on average, the degree of price pass-through in consumer
prices in model 1 increases from 56 per cent to 61 per cent.
Similarly, the volume response becomes lower when the elasticity is reduced. Inmodel 1, the effect on CO2-eq emissions is reduced by almost 0.3 m tonnes if anelasticity of 5 is used instead of 8. In model 3, the corresponding reduction of theCO2-eq effect is just under 0.4 m tonnes.
A higher export elasticity means that the industry is less able to pass on the CO 2-eq
tax in higher sales prices. The consequence of this is that farmers and the food industry bear more of the burden of the CO2-eq tax, leading to greater land value decline,
greater structural effects and thus greater CO2-eq reductions. At the same time, therevenue from the tax is reduced, as a larger part of the animal agricultural production
is expected to cease due to the limited possibilities of passing the tax on to the sales
prices.
Lowering the export elasticity instead means that the food and agricultural industry
can more easily pass on the tax in higher prices. The result is a relative shift of the tax
burden from farmers to consumers, which means a lower land value decline and alower occupational burden. This implies lower structural effects, which increases therevenue from the tax, but lowers the CO2-eq reductions.
Changes in the supply of land
The Expert Group's assessment of the effects includes some limited reaction in the
supply of agricultural land in rotation as demand changes. The supply response isdetermined based on the analysis in Olsen et al. (2022). 14 In the second sensitivity
analysis, the land supply is changed by fixing the supply of crop rotation land and land
values, respectively.
In the case of a fixed land supply, there are minimal changes in the effects comparedto the baseline. This is because across all models, there is only a limited amount ofagricultural land in rotation. The general effects of the baseline are thus not significantly affected by keeping the amount of crop rotation land fixed.
At the other extreme, it can be assumed that the imposition of the tax reduces the
supply of agricultural land so much that the land values remain unchanged. This

Kirk, J. S. and Hansen, K. H. (2023). "Elasticiteter og markedsvilkår i GrønREFORM" ((Elasticities and market conditions in GreenREFORM), and Kronborg, A. F., Poulsen, K. A. and Kastrup, C. S. (2020) "Estimering af udenrigshandelselasticiteter i MAKRO" (Estimation of foreign trade elasticities in MACRO) for documentation of the estimation method.

13

Olsen. J. V. and Pedersen MF (2022). "Endogen udtagning af landbrugsjord" (Endogenous set-aside of agriculturalland). See also Stewart, L. B., Berg, A. K. and Kirk, J. S. (2023) "Jord som produktionsfaktor i vegetabilsk landbrug"(Land as a production factor in vegetable agriculture) for a more detailed review of the modelling of land supply inGreenREFORM.

14

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Green Tax Reformmeans that the farmer is not bound to use a relatively fixed amount of land in theiroperation. The changes in production will therefore be greater for a given tax change.
Such a reaction implies that the burden on business decreases, as the tax is no longer
passed on in land values but rather in sales prices. The larger structural effects andCO2-eq reductions are thus due to both a stronger supply response, which overall
results in greater socio-economic costs, and greater CO2-eq reductions.
Conclusion on sensitivity analyses
The sensitivity analyses carried out indicate that the effects of introducing a CO 2-eq
tax on agriculture may give rise to a greater reduction in the volume produced if either
the price elasticity of demand is higher or the set-aside of agricultural land in rotation
reacts more strongly than assumed in the Expert Group's central estimate. In bothcases, the structural effect is greater and greenhouse emissions are reduced more.
Conversely, a lower price elasticity or a more fixed land supply will favour lower structural effects and lower greenhouse gas reductions.
The conducted sensitivity analyses do not inherently cover all dimensions of theGreenREFORM modelling properties. Thus, there are various additional uncertainties
associated with the model results that are not fully covered by the sensitivity analyses.
In light of the fact that there are no experiences with the introduction of a generalCO2-eq tax on agricultural emissions, the Expert Group considers that there is reason
to follow developments closely as a CO2-eq tax is introduced, and make ongoing assessments of the development with a view on whether the CO2-eq reductions and theobserved development in agricultural competitiveness and economic conditions as aresult of the CO2-eq regulation correspond to what is expected. To the extent that
this is not the case, the Expert Group recommends that an assessment be made of
the overall CO2-eq tax structure – and not just that of agriculture – to ensure that theuniform tax structure across sectors is maintained.

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Table 2.17. Sensitivity analyses, changed export elasticities in the food industry with the CO 2-eq taxes inmodels 1, 2a and 3a, 2030 effects
Model

EffecImmetive tax diate
rate inburden2030(livestock/fe
rtiliser)

Occupationalburdenafter
adjustment

Immedi- CO2-eq reate reve- ductions
nue ef(excl. defect after cided
static ef- measures)
fects andbehavioural response

DKK pertonne ofCO2-eq

DKK m

m tonnes

DKK m

Of which Of which
strucother eftural ef- fects1)
fect

m tonnes of m tonnes m tonnes ofCO2-eq of CO2-eq
CO2-eqPricepassthrough in
consumerpricesDrop inland values (excl./
incl. forest
subsidies)

Shadow
price (excludingside effects)

Per cent

Per cent

DKK pertonne ofCO2-eqModel 1
Standard
Exportelasticity= 15
Exportelasticity=5

750/750

5,775

2,325

3,000

2.77

1.72

1.05

56

16.8/
8.8

450

750/750

5,775

2,400

2,425

3.41

2.54

0.88

47

16.8/
12.2

575

750/750

5,775

2,175

3,150

2.56

1.48

1.08

61

15.8/
5.6

400

Model 2aStandard
Exportelasticity= 15
Exportelasticity=5

375/375

2,875

1,250

1,550

2.20

1.04

1.15

51

6.2/
-4.1

450

375/375

2,875

1,300

1,325

2.61

1.56

1.05

43

6.4/
-1.2

525

375/375

2,875

1,200

1,625

2.07

0.89

1.18

57

5.3/
-6.8

400

Model 3aStandard
Exportelasticity= 15
Exportelasticity=5

125/375

1,725

975

1,050

1.34

0.64

0.69

46

3.8/
-7.2

450

125/375

1,725

1,000

925

1.61

0.96

0.65

40

4.2/
-4.8

500

125/375

1,725

950

1,100

1.25

0.55

0.70

51

3.1/
-9.5

425

Note: Revenue effect is rounded to DKK 25 m, socio-economic cost to DKK 10 m and shadow prices to the nearest DKK 25 per tonne of CO2-eq. Immediateburden and revenue after statics effects and behavioural response are given in 2023 level. The CO2-eq effects are indicated for 2030. These effects are notsignificantly different from the long-term CO2-eq effects, due to an adaptation time of around 5-6 years. The table only shows the results for the CO2-eq taxes on
fertilisers, livestock and liming, including any bottom deductions and technology requirements for feed additives and tent covering corresponding to the content inmodels 1, 2a and 3a. The results in the table do not include interactions and effects from subsidies for afforestation, tax on F-gases and the rewetting of carbonrich agricultural land. In addition, only the results for the a-variants are presented for the sake of clarity. Note that the effects are almost identical for the respective
b-variants.
1) Other effects cover technical effects (reductions that do not affect the scope of production but reduce emissions per unit produced, e.g. via feed additives for
cattle, biochar by pyrolysis, etc.), activity effects (e.g. change from agricultural land to forest or carbon-rich agricultural land being flooded) and efficiency effects(CO2-eq emissions per unit produced decrease as a result of a tax).
Source: Own calculations

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Table 2.18. Sensitivity analyses, exogenous land supply and land values, for the CO 2-eq taxes in models 1,
2a and 3a, 2030 effects
Model

Effective
tax rate in
2030 (livestock/fertiliser)

DKK pertonne ofCO2-eqImme- Occupa- Immedi- CO2-eq
diate
tionalate reve- reducburden burden
nue eftions
after ad- fect after (excl.
justment static ef- decided
fects and measure
behavs)ioural response
DKK m

DKK m

m tonnes

Of which Of which
strucother eftural ef- fects1)
fect

m tonnes m tonnes m tonnes ofof CO2-eq of CO2-eq
CO2-eqPricepassthroughin consumer
pricesDrop inland values(excl./
incl. forest subsidies)

Shadow
price (excludingside effects)

Per cent

Per cent

DKK pertonne ofCO2-eqModel 1
Standard
Exogenous
land
supplyExogenous
land values

750/750

5,775

2,325

3,000

2.77

1.72

1.05

56

16.8/
8.8

450

750/750

5,775

2,275

2,925

2.76

1.73

1.02

57

17.4/
9.5

475

750/750

5,775

1,300

3,275

3.35

2.24

1.12

79

0/
0

600

Model 2aStandard
Exogenous
land
supplyExogenous
land values

375/375

2,875

1,250

1,550

2.20

1.04

1.15

51

6.2/
-4.1

450

375/375

2,875

1,250

1,525

2.19

1.04

1.15

51

6.3/
-4.0

450

375/375

2,875

950

1,750

2.51

1.32

1.18

69

0/
0

525

Model 3aStandard
Exogenous
land
supplyExogenous
land values

125/375

1,725

975

1,050

1.34

0.64

0.69

46

3.8/
-7.2

450

125/375

1,725

975

1,050

1.33

0.64

0.70

46

3.8/
-7.2

450

125/375

1,725

750

1,225

1.58

0.86

0.72

66

0/
0

500

Note: See notes to Table 2.17

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2.8 Dealing with Uncertainty in New Climate Projections
The Expert Group's terms of reference state that different phasing-in scenarios, including sensitivity scenarios, must be made in view of the uncertainty associatedwith projections, and that uncertainty must be taken into account in the phasing-in
scenarios. In addition, the work must consider the fact that technological development is uncertain and that this uncertainty has consequences for the socio-economic costs of meeting the 70 per cent target.
Uncertainty is a basic condition in all projections and economic impact assessments, including climate projections. Thus, it is important that uncertainty does not
become an obstacle to making fundamentally sound structural reforms. As a result,
it is crucial that the proposed initiatives set the right direction towards 2030 and onwards towards the ambitious climate targets for 2045 and 2050. The Expert Groupassesses that a CO2-eq tax in agriculture, as well as subsidies for e.g. further afforestation and set-aside of carbon-rich agricultural land, as well as the roll-out of biochar by pyrolysis and/or other technologies are necessary and appropriate instruments to fulfil the climate goals that follow from Danish and European legislation.
The climate projection depends on a number of projections in areas such as agriculture, transport and energy, including key assumptions about activity in the Danish
economy and uncertainties. The projection covers more than 10 years ahead intime and results may vary from year to year depending on actions and changes inexternal conditions. The projection results are thus subject to both a general methodological uncertainty and a significant uncertainty associated with external variables, including unforeseen developments in behaviour, technology, prices, weather
fluctuations, etc. In addition, changes in calculation methods and emissions factors
affect both historical and projection years. This is especially true in the LULUCF
area, which is associated with particularly high uncertainty and continuous changes
due to new research results. A recent example of this, is the correction of January2024, where the previously assumed level of emissions from carbon-rich agriculturalland was reduced, resulting in the reduction deficit to the 70 per cent target being
reduced by approx. 2 m tonnes of CO2-eq in 2030.
In connection with Denmark's Climate Status and Outlook 2024, the forest projections
will also be updated with a new methodology, expected to impact total emissions in
2025 and 2030. What is particular for forests is that, even though there is a small
uncertainty (0.9 per cent) associated with the projection of the forest area, even minor
differences in projections and calculations will have major consequences for net emissions due to relatively large carbon pools, see Section 3.3. In addition, new emissions
factors for carbon-rich agricultural land are expected towards Climate Status andOutlook 2025, which means that the total emissions from carbon-rich agricultural land
may be adjusted again. Thus, the estimated reduction deficit may fluctuate significantly from one projection to another solely due to methodological changes or improvements in the calculation basis.
The overall direction of the recommendations is thus clear, but the uncertainty in the
projections still needs to be managed in practice, which is why the Expert Group
proposes a number of adjustment mechanisms in the following sections in the eventof changed assumptions. The initiatives could also be utilised if there is a more general desire to achieve further CO2-eq reductions, but they would have to be weighedagainst the additional costs for business and society, which has also meant that the

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Expert Group has excluded them from its main recommendations. The adjustment
mechanisms are likely to have more relevance in the short term, including the next
climate projection, compared to the longer term, as knowledge and development oftechnologies is constantly changing.
Adjustment mechanisms in the short term
Specifically, the Expert Group recommends a precautionary principle in the form of
re-visits and frequent evaluations of the effects in order to ensure fulfilment of the 70
per cent target and other climate commitments, as well as to support sustainable
and fair regulation of Danish agriculture. The revisits will also look at the extent towhich agriculture's investments in the green transition are commensurate with the
tax level.
When making adjustments to climate regulation, an overarching principle can be tominimise uncertainty about framework conditions. This means that tax rates inparticular should not be adjusted too often, as this will create uncertainty about
long-term investment decisions etc. Furthermore, the principles for levelling taxes
across the economy should not be deviated from in the event of changed shortfall
estimates – i.e. the general tax levels (including consideration to carbon leakageetc.) should be revisited rather than revisiting the tax in individual sectors andindustries.
When reviewing tax rates, the overall tax system in the economy must be
considered, including for industry, where the starting point is the harmonisation of
the price of greenhouse gas emissions, taking into account the guiding principles of
the Danish Climate Act.
The estimated effects on CO2-eq emissions, burden on the agricultural sector,
immediate revenue effect after static effects and behavioural response/expenditureand shadow prices for a number of measures are presented in Table 2.19.
Table 2.19. Adjustment mechanisms in the short term and towards 2030
Initiative

CO2-eqreduction

Burden on
business after
adjustment

Revenue after
statics effects
andbehavioural
response

Shadow price(average
excludingside effects)

m tonnes

DKK m

DKK m

DKK per tonneof CO2-eq

Subsidies for fieldmanagement

0.2

-25

0

530

Requirement for nitrification inhibitors

0.6-0.7250

275-300

1,200

Increase subsidies
for biochar by pyrolysis

0.2

0

-225

1,900

More reductions
neededNeed for fewer
reductions

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Reduced set-asideof carbon-rich agricultural land

-0.3

0

0

570

Reduced subsidy
for biochar by pyrolysis

-0.2

0

225

1,900

Remove requirements for feed addition and tent covering

-0.5

-175

125

350

Source: Own calculations.

2.9 Structure of Tax and Subsidies after 2030
In its recommendations, the Expert Group has emphasised that the proposed initiatives contribute to the longer-term goal achievement after 2030, including the objective of climate neutrality in 2045 and the objective of a 110 per cent emissions reduction in 2050 compared to 1990.
When the Expert Group recommends a significant increase in afforestation, it is particularly with the longer term in mind, as it can have a large potential impact in2045-2050 and beyond. The climate impact in 2030 is thus relatively limited compared to other initiatives in the Expert Group's recommendations. Similarly, the majority of the impact from the rewetting of carbon-rich agricultural land also decreases after 2030.
Long-term climate goals require initiatives that can remove carbon from the atmosphere (so-called negative emissions), such as increased afforestation, biochar bypyrolysis, etc. A fully cost-effective CO2-eq tax requires that the incentive for reductions also includes negative emissions, which are included on an equal footing withthe reduction of positive emissions. As negative emissions are included in national
climate targets, they should be subsidised (a "negative tax") at a rate similar to theCO2-eq tax. This ensures the same incentive to reduce emissions everywhere, sothat reduction efforts are made where they are cheapest. Subsidies for negativeemissions should in principle be available for all technologies that can ensure negative emissions.
In light of the long-term goal fulfilment, the expert group also recommends subsidising selected technologies that are considered socio-economically expensive or have
limited potential in the short term. Technologies such as biochar by pyrolysis are notexpected to be adopted on market terms by 2030, even at high CO2-eq tax levels.
Subsidising relatively expensive technologies today can thus contribute to pushingdevelopment in a direction that will eventually allow them to be used on market
terms.
More generally, the Expert Group expects that initiatives that result in negativeemissions can eventually be operated on market terms as the EU develops instruments that can create market-based incentives for this. This includes the Commission's proposal for a certification framework for carbon removal and possible new initiatives in upcoming proposals for EU climate targets and regulation towards 2040.

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Here, the Commission is looking at opportunities to extend the polluter-pays principle to emissions and uptake of greenhouse gases from agriculture, including extending emissions trading to the agricultural sector. The ongoing development in EU
regulation and market conditions, especially ETS allowances in the agricultural sector, means that tax levels and subsidies must be continuously harmonised in linewith new knowledge and regulation.
As stated in Chapter 6, in Q1 2024, the European Commission is expected to present a communication on a new EU climate target for 2040, which will set the direction for a new climate architecture in the EU after 2030. In line with the government,
the Expert Group recommends that emissions trading should be expanded to theagricultural sector. An EU-wide ETS ensures uniform pricing of CO2-eq emissions
from agriculture, ensuring the same competitive conditions across EU countries.
If an EU ETS were to be introduced for emissions from agriculture, the Expert Group
recommends that a reduction in the CO2-eq tax for the expected ETS allowance
price should be introduced, as is the case for companies in industry that are covered by allowances. The specific reduction in the tax on the allowance price for agriculture would depend on the national climate targets in place at the time, the expected development of the allowance price and balancing with the reduction in theCO2-eq tax on companies covered by allowances in industry etc.

2.10 Compensation
The terms of reference state that the Expert Group must assess different forms ofcompensation for the industry subjected to the CO2-eq tax. This should include
competitive conditions and the risk of carbon leakage, among other things.
Against this backdrop, the Expert Group has assessed various arrangements for thecompensation. As a starting point, it is possible to reduce the burden on business of
CO2-eq-intensive industries by lowering the tax on the industries in question, suchas for industrial companies in the EU ETS and in the industry of mineralogical processes etc.
Base deduction
The Expert Group's models 2 and 3 include a base deduction in the tax as a form ofcompensation. Please refer to Section 2.4 for a more detailed description.
Restructuring of the direct agricultural subsidy to subsidies for CO 2-eq reduction
For fertiliser usage, a restructuring of direct agricultural subsidies is an alternative toa CO2-eq tax. It is possible to use the fertiliser standards as a starting point in theexisting regulation of fertilisers and provide a subsidy for reduced fertiliser usage,
which corresponds to, for example, DKK 750 per reduced tonne of CO2-eq emissions that a farm falls below the fertiliser standards. For the farmer, the regulation
with subsidies for CO2-eq reduction has the immediate advantage – compared tothe tax model – that no tax is payable on the fertiliser that continues to be used. Thismeans that the structural effect is reduced compared to a tax on fertiliser and therefore results in fewer CO2-eq reductions.
It is assumed that the subsidy is financed by a reduction in direct agricultural subsidies. For the existing farmer, this has a negative effect on overall earnings. The restructuring will also involve a loss of capital, as a reduction in direct agricultural subsidies lowers the value of agricultural land.

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Compensation for land value loss through afforestation
A tax on CO2-eq emissions in agriculture leads to a lower value of land, see Appendix 7.14. The consideration of the best socio-economic use of land means that theExpert Group has considered other options for compensating for the loss of land
value. The loss of land value is due to the CO2-eq tax reducing the return on theland. An alternative use of part of the land that entails a higher yield, will therefore
help to maintain land values. Partly due to this, as well as other considerations, theExpert Group proposes to significantly increase the support be to convert to forestry. This will help to maintain land values and thus act as compensation for existing owners. At the same time, the increase in forests in Denmark will contribute tolower CO2-eq emissions in the long term. The subsidy is designed so that the government's target of 250,000 hectares of new forest is met, see Section 3.3.
Support for transition to greener methods of production, including support
for the dismantling of existing production capacity
The guiding principles of the Danish Climate Act include a consideration for sustainable business development of agriculture as a whole, whereby a profitable production, in general, can be maintained. This may involve considering minimising transition costs to ensure sustainable business development and minimise the loss for existing owners. For this reason, the Expert Group has investigated options for compensating farmers who, for example, want to convert their farms to less CO 2-eq-intensive production, such as crop production.
One tool to support structural changes in agriculture and reduce transaction costs
for the individual farmer could be the establishment of a voluntary subsidy scheme
for full or partial capacity closure of livestock production.
It is considered immediately possible to obtain EU approval for a voluntary decommissioning scheme for capacity closure based on, for example, environmental or climate considerations. The scheme can be organised so that the capacity closure
only concerns the keeping of livestock on a property, allowing other agricultural operations, such as plant cultivation or conversion to forestry, to continue. In general,
this entails that the associated areas are not included in the scheme.
For a more detailed overview of the possibility of providing support for the dismantling of existing production capacity, see Appendix 7.12.

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Handling of Other
Emissions3

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3. Handling of Other
Emissions
3.1 Rewetting of Carbon-Rich Agricultural Land
Carbon-rich agricultural land15 is characterised by the accumulation of organic
material from plants and similar sources in the top layer of soil (e.g. drained
peatlands), see Appendix 7.3. Due to high water levels, the decomposition of deadplant material has been very slow. Thus, much of the carbon-rich agricultural land
was originally formed in natural wetlands such as bogs and wet meadows. When
land is drained to be used as agricultural land, e.g. cultivated fields, or land forlivestock, the soil is oxygenated. The combination of a high content of organic
matter and oxygen gives the soil's small animals and microorganisms goodconditions to break down the organic matter, causing the carbon to decompose anddegas, primarily as the greenhouse gas carbon dioxide (CO 2).
The rewetting of carbon-rich agricultural land is important for reducing greenhousegas emissions from agriculture, and the effort is expected to contribute significantly
to achieving the 70 per cent target.
Based on the latest status of the set-aside effort from November 2023, which is
calculated including peripheral areas, it can be estimated, using the preliminary
assumptions for Climate Status and Outlook 202416, that set-aside and rewetting ofapprox. 17,400 hectares of carbon-rich agricultural land excluding peripheral
areas17 has been initiated since the beginning of 2021. Among these, approx.
14,200 hectares are under feasibility study, and approx. 3,200 hectares are underrealisation.
It should be noted that this is based on the new mapping of carbon-rich agriculturalland published by Aarhus University in early December 2023. The new mapping ofcarbon-rich agricultural land leads to a significant reduction in the area and thus
emissions from carbon-rich agricultural land, resulting in a significant partial
reduction in expected emissions by 2030.

15

Carbon-rich agricultural land (unlike other types of agricultural land) has a very high content of organic matter (>6per cent), which emits CO2-eq.
16
The projection of carbon-rich land uses KF24 assumptions to account for the new mapping of carbon-rich land
published by AU in December 2023. The projection with KF24 assumptions is published by DCE, Scientific note
2024 60.
The figure is an estimate based on a conversion from the stated project hectares, which are calculated including
peripheral areas in the status from November 2023 based on preliminary assumptions for KF24, which is why the
figure is subject to considerable uncertainty.

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3.1.1 Stronger incentives for increased set-aside through a
combination of tax and subsidy
Barriers to existing set-aside
Various challenges have been identified in the existing set-aside efforts that weaken
the work of setting aside land. The effort is voluntary, and if the farmer's financial
gain from setting aside carbon-rich agricultural land does not exceed the gain fromkeeping the land in rotation, the farmer does not have a sufficient financial incentive
to participate in the effort. There may also be several other reasons why alandowner does not want to participate in a set-aside project, including the farmer's
amenity value associated with maintaining drained land.
A significant barrier to rewetting carbon-rich agricultural land is a lack of support
from landowners. Often, a set-aside project will involve a large number of landowners and if some of them do not want to participate, it makes the implementation of
the project difficult. In addition, some carbon-rich agricultural land can be difficult torewet for legal or economic reasons. In addition, some farmers may be hesitant toparticipate in set-aside efforts due to uncertainty about the future possibilities andconsequences of agricultural land set-aside, or because it is difficult to find replacement land in the land distribution.
Stronger incentives
The Expert Group suggests a model with 100 per cent compensation for rewetting
costs etc. combined with a tax of DKK 10 per tonne of CO2-eq from 2030. The Expert Group notes that it is important to monitor the development of the set-aside effort and reassess whether the assumed set-aside effort can be achieved by 2027 atthe latest. If the set-aside effort in 2027 is not deemed to deliver sufficient reductions, the tax can be increased.
Overall, it is the Expert Group's assessment that a model with 100 per cent compensation for all costs associated with rewetting, combined with a tax on carbonrich agricultural land from 2030, will lead to the rewetting of 35,700 hectares of carbon-rich agricultural land excluding peripheral areas by 2030, increasing to 70,000
hectares of carbon-rich agricultural land excluding peripheral areas by 2032. Thatis, about 14,300 hectares more in 2030 and 44,600 hectares more in 2032 than indicated in the baseline with the assumptions used for Climate Status and Outlook
2024. When taking into account that the rewetting of carbon-rich agricultural land
will often also affect neighbouring areas – the so-called peripheral areas – a total set
aside in 2032 of 140,000 hectares is achieved.
This will result in CO2-eq effects of 0.3 m tonnes in 2030 and 1.0 m tonnes in 2032
at a shadow price of DKK 570 per tonne of CO2-eq excluding side effects (externalities and nitrogen) and around DKK 20 per tonne of CO2-eq including side effects.18
In the Agreement on the Green Transformation of Danish Agriculture from 2021, an
expanded technical reduction potential of 0.5 m tonnes of CO2-eq in 2030 from theeffort to rewet carbon-rich agricultural land was designated. The effect in 2030 and
2032 should be seen in light of the fact that it is currently estimated to take five
years to set aside land based on the current voluntary schemes. If the combinationof tax and subsidy increases support for the initiative, it could result in the rewettingof more land by 2030.
The figure is calculated based on the assumptions behind the Agreement on Green Transformation of Danish Agriculture.

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Page 81The effect estimate of a total rewetting of 70,000 hectares is based on the assumption that barriers and any bottlenecks that may arise can be handled, which is considered realistic, see Section 3.1.8.
Table 3.1. Realisation of the rewetting of agricultural land, CO2-eq effects, shadow price and financing

2030
2032

Wettedlands excl.
existing
schemes

Wettedlands incl.
existing
schemesCO2-eq effect of proposed
model

Financingtowards
2032, including existing
schemes
DKK bnBurden2) oftax

Shadow
price(excl./incl.
side effects)

m tonnes

Financingtowards
2032, excluding existing
schemes
DKK bnNumber ofhectares

Number ofhectares

DKK m

0.3
1.0

9,41)

16.7

4.3
13.4

DKK pertonne of CO2eq
570/2014,30044,60035,70070,000Note: 1) Total financing for 70,000 hectares of carbon-rich land is DKK 16.7 bn, of which DKK 7.3 bn has been allocated in previous agreements, leaving a financing
requirement of DKK 9.4 bn. 2) The tax burden corresponds to the immediate burden.
Source: DCE, Scientific note no. 2024 60 based on AU, Peat 2022 map

For comparison, another Expert Group (for set-aside of drained peatlands) was
tasked specifically with examining the potential for rewetting carbon-rich agriculturalland as part of the Agreement on the Green Transformation of Danish Agriculture.
This Expert Group reassessed the area potential for the set-aside of carbon-rich agricultural land from 38,000 hectares (that formed the basis for the Agricultural
Agreement) to 52,000-68,000 hectares of carbon-rich agricultural land. The reassessed area potential is based on an updated analysis of barriers to wetland restoration, as well as adjustments in relation to the updated map basis and new
knowledge about groundwater levels.
The total set-aside of carbon-rich agricultural land will be determined by the economic incentive to rewet drained lands, which can be affected using a tax or subsidy. EU state aid rules dictate that, as a starting point, you may only compensate
for the cost of using a given instrument. An increase in the tax will thus be offset bya reduction in the subsidy/compensation rates. This is due to the fact that landowners are compensated for their loss of income by taking out the carbon-rich agricultural land. A higher tax will affect how much income a landowner loses by taking out
the carbon-rich agricultural land and thus affect the possibility of repatriating EU
subsidies, as well as reduce the public costs, see Section 6.4.
The combination of tax and subsidy should be seen in the light of the fact that theaim of the regulation is to ensure wetland restoration of the land. Generally, a uniform tax on emissions is the most efficient way to ensure climate reductions. But
that's not necessarily the case for emissions from carbon-rich agricultural land. A
high tax will result in some farmers being relatively heavily burdened by a tax given
the high emissions factors. For some farmers, rewetting will be very expensive, soeven with a high tax, they cannot rewet the land and remove the tax burden. This
creates the risk of farmers going bankrupt if they can neither sell the land nor havethe incentive to rewet it. It is proposed that in the future, the state will continue tobear the costs of wetland restoration to ensure that the greatest possible climate
benefit is achieved from the effort.

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The prospect of a higher tax in the future will appear more credible if it is backed up
now by a decision on a low tax rate in 2030. Once a tax has been decided and implemented, it is considered administratively simpler to raise the rate. The tax is proposed to be introduced from 2030 to allow time to establish the necessary administrative basis, including improving the map basis, which is subject to some uncertainty.

3.1.3 Consequences of a tax
A tax of DKK 10 per tonne of CO2-eq corresponds to approx. DKK 300 per hectareannually in 2030 on average. The tax burden varies from land to land; the land withthe highest emissions will trigger an annual levy of up to DKK 500 per hectare. Conversely, the payment for land that emits less will be lower. If the tax is increased toe.g. DKK 100 per tonne of CO2-eq, this corresponds to almost DKK 3,000 per hectare annually.
After rewetting of carbon-rich agricultural land, there are still limited emissions fromthe soils that will disappear over time. It is proposed that the tax is removed once
the land is set-aside or set-aside and rewetted, i.e. no tax is paid on the remaining
emissions. If the landowners have applied to set-aside and rewet the land, but theauthorities have assessed that it does not seem possible to rewet the land for practical, economic or legal reasons, it can be considered to waive the tax. Consideration
will need to be given to how to identify which land should have the tax waived. As
mentioned, the tax and the prospect of a higher tax is intended as an instrument toincrease the incentive to allow carbon-rich agricultural land to be taken out of production.
The effect of the recommendations presupposes that a political decision on the
adoption of a tax is made as soon as possible in order to provide the necessary administrative basis for a credible prospect that the tax can be raised if the desired
set-aside is not achieved.

3.1.4. Prerequisites
Map basis
In 2020, the Ministry of Climate, Energy and Utilities initiated a research project ongreenhouse gas emissions from carbon-rich agricultural land based on a report from
Aarhus University (AU) that stated that the calculation of emissions from carbon-richland was subject to considerable uncertainty.
AU pointed out, among other things, that the area of carbon-rich land in the emissions inventory is assumed to remain constant in the period after 2010, despite thefact that agricultural land will degas over time and thus can no longer be classified
as carbon-rich (mineralisation). In addition, there is uncertainty about the relationship between carbon content and emissions, and the cultivated carbon-rich agricultural land is generally less drained and thus more water-saturated than assumed inearlier calculations and projections.
The project is divided into two parts. In a first partial delivery published in December
2023, Aarhus University has mapped the distribution of Danish carbon-rich agricultural land, including estimating the mineralisation of carbon-rich agricultural land

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over time. The second partial delivery concerns the emissions factor from carbonrich agricultural land, including the relationship between soil carbon content, waterlevels and emissions. The Ministry of Climate, Energy and Utilities expects to receive
the second partial delivery in 2024 for inclusion in Climate Status and Outlook 2025.
Based on the second partial delivery, emissions and effects must be recalculated.
Based on the new map basis, the area of carbon-rich land in Denmark is estimatedto be 218,180 hectares, of which approx. 117,000 hectares are within the agricultural area. This corresponds to 54.2 per cent.
The area of carbon-rich land is mapped by Aarhus University based on a model thatuses point measurements of carbon content in around 10,000 sample locations aswell as a number of environmental variables. Aarhus University delivered an updated map to the Ministry of Climate, Energy and Utilities in December 2023, basedon the collection of 733 new soil samples in 2022.
The map shows the carbon content of Danish land at a resolution of 10x10 metres.
Table 3.2. Distribution of carbon-rich agricultural land, 2022 (hectares)
Within the agricultural area

Total

6-12 per centcarbon content

71,217129,234> 12 per centcarbon content

45,58588,946

Total

116,802

218,180

Source: DCE, Scientific note no. 2024 60 based on AU, Peat 2022 map

3.1.5. Current efforts to set-aside and rewet carbon-richagricultural lands
The Danish Environmental Protection Agency's scheme
The Danish Environmental Protection Agency currently administers a subsidy
scheme for the rewetting of carbon-rich agricultural land for the purpose of restoring
natural hydrology to achieve a reduction in CO2-eq emissions while supporting othernature, environmental and climate adaptation considerations. Under this nationally
funded scheme, a municipality or a farmer applies for a grant for a feasibility study.
Once the feasibility study has been completed, the Danish Environmental Protection
Agency decides on the realisation of the project. The Danish Environmental Protection Agency can pay one-off compensation, but land redistribution is not part of thescheme.
The Danish Nature Agency's peatland projects
The Danish Nature Agency has a capital appropriation and is currently working on anumber of projects to rewet carbon-rich agricultural lands throughout the country incollaboration with municipalities and agricultural organisations. These nationally
funded peatland projects are climate-focused, although it is possible to support
other considerations and thus create more holistic projects. In connection with projects, the Danish Nature Agency can allow the farmer to participate in land distribution to promote the realisation of projects, thus providing participating farmers an

Green Tax Reform

opportunity to receive land and contiguous areas possible for cultivation. Areas purchased as part of a project is resold after the project has ended in order to reuse
the funds for further set-aside of agricultural land. In the event of a sale, easements
restricting agricultural use of the property will be registered.
The Danish Agricultural Agency's scheme
The Danish Agricultural Agency currently administers the 'Water and Climate Projects' scheme. The scheme aims to promote the completion of peatland and wetland
projects. The peatland projects aim to reduce greenhouse gas emissions from agriculture by extensifying operations and wetland restoration of high-carbon agricultural land. The wetland projects must contribute to reducing the discharge of nitrogen or phosphorus to fjords and coastal waters. A proportion of wetlands overlap
with carbon-rich agricultural land, so they can also contribute with climate effects. In
this scheme, it is possible to use land distribution and land acquisition as an alternative to compensation.
It is either the municipalities or the local units of the Danish Nature Agency that are
granted commitments under the 'Water and Climate Projects' programme to implement either peatland projects or nitrogen wetland projects as part of the implementation of set-aside projects, the municipalities or the Danish Nature Agency enter
into agreements on compensation to landowners who allow areas to be included ina set-aside project.
Peatland projects under the Danish Agricultural Agency are financed 100 per centby the European Common Agricultural Policy (CAP), and nitrogen wetland projects
are financed 80 per cent with funds from agricultural subsidies and 20 per cent withnational funds.

3.1.6. Cost elements
The socio-economic costs of rewetting carbon-rich agricultural lands are modelledwith three cost components, see Box 3.1.
Box 3.1
Description of the components of the socio-economic costs
The socio-economic costs are calculated as:
𝑺𝒐𝒄𝒊𝒐 − 𝒆𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝒄𝒐𝒔𝒕𝒔= 𝒄𝒐𝒔𝒕𝒔 𝒐𝒇 𝒍𝒐𝒔𝒔 𝒐𝒇 𝒄𝒖𝒍𝒕𝒊𝒗𝒂𝒕𝒊𝒐𝒏 𝒗𝒂𝒍𝒖𝒆+ 𝒄𝒐𝒔𝒕𝒔 𝒐𝒇 𝒘𝒆𝒕𝒍𝒂𝒏𝒅 𝒓𝒆𝒔𝒕𝒐𝒓𝒂𝒕𝒊𝒐𝒏 + 𝒄𝒐𝒔𝒕𝒔 𝒐𝒇 𝒎𝒂𝒓𝒈𝒊𝒏𝒂𝒍 𝒂𝒓𝒆𝒂𝒔

The socio-economic costs of setting aside and rewetting carbon-rich agricultural landconsist of:•Loss of cultivation value on the carbon-rich land: Income from cultivating the land isdetermined by the cultivation value. When land is set aside, this revenue is lost. In
addition to the actual cultivation value, this item also includes the value of the land
as a so-called harmony area, i.e. land that can be used to fulfil other regulations. Finally, this cost component includes compensation to the farmer for time spent on
administration etc.

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Costs of wetland restoration (construction etc.): When the land is set aside and rewetted, it is associated with construction costs. In addition, there may be the establishment of preventative measures in the form of dikes/embankments to prevent thewetland from affecting neighbouring infrastructure that is not carbon-rich agricultural land, such as residential areas. It can also be preventative measures to avoid
leaching of phosphorus. The cost also includes feasibility studies and any administrative costs related to land consolidation.

•

Costs of setting aside peripheral areas: It will often be necessary to rewet organicsoils adjacent to the carbon-rich agricultural land (extent will depend, among otherthings, on preventive measures such as dikes, etc.). In this connection, there arecosts for loss of cultivation value and costs for construction etc. for these.

For a given soil, it is the sum of these three components that determines the total
cost of rewetting. Each of the three components is subject to significant variation,and therefore the cost of taking out agricultural land varies greatly; the more land
you want to set aside, the less likely you are to opt out of difficult and costly projects.
Therefore, increased set-aside is likely to result in increased costs.
At a level of ambition of 70,000 hectares, the average total cost to the state is estimated at DKK 239,000 per hectare of carbon-rich agricultural land If this cost is
spread over all the hectares that are expected to be included in the projects – i.e.
including peripheral areas – the cost is estimated at DKK 119,000 per hectare.
These cost estimates assume that the introduction of a tax will reduce compensation rates. It should be noted that a higher price per hectare has been used in the
preliminary assumptions for Climate Status and Outlook 2024.
The selection of projects depends partly on the willingness of landowners and partly
on the cost-effectiveness of the projects. This means that the cheapest land is preferably selected, but the fund that can be selected from does not include all land.
Lost cultivation value and compensation
According to current rules, the land can basically receive the same basic payment
per hectare from the common agricultural policy both before and after removal andwetland restoration.19 Thus, as a starting point, the loss of the hectare subsidy forthe set-aside of carbon-rich agricultural land should not be considered.
The cultivation value associated with a given piece of land depends to a large extent
on the type of farming that takes place on the land. This is currently taken into account when it comes to determining the current compensation rates, which are thebasis for the calculation of the level of compensation Thus, the compensation thatthe farmer receives today varies from just under DKK 5,000 per hectare for naturalareas to over DKK 80,000 per hectare for crop rotation land. Permanent grazing
land is associated with a compensation rate of approx. DKK 36,000 per hectare. In
addition to lost cultivation value, the compensation also covers the value of lost harmony area and one-off administration costs.
Costs of wetland restoration
The peatland projects that have received commitments in the period 2020-2022 areused to estimate the costs of wetland restoration. Data from this period, along withFor EU-funded projects that only have a climate impact and do not contribute to directive implementation, the possibility of basic payment is limited to a maximum of five years.

19

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assessments from relevant agencies, are used to construct a cost curve for wetland
restoration.
The cost of wetland restoration varies considerably from land to land. Often, construction costs will be lower on peripheral areas than on carbon-rich land It is estimated that the average cost for wetland restoration at the set level of ambition
amounts to DKK 78,000 per hectare when the peripheral area is taken into account.
Peripheral areas
Typically, the wetland restoration of carbon-rich land will involve the rewetting ofneighbouring areas without high carbon content. This ensures a more natural demarcation of the project area and can minimise the need for costly measures suchas dikes and pumps. The most cost-effective projects will usually take place in areasthat are naturally bounded by carbon-rich soils and thus require only a modest
amount of peripheral area. As the extent of setting aside increases, it will be necessary to implement projects on carbon-rich agricultural land, which is more difficult todelineate and thus requires more peripheral area. Especially the so-called fragmented carbon-rich land – i.e. small isolated blobs on the map – can require significant peripheral land.
It is assumed – in accordance with the preliminary assumptions behind the Climate
Status and Outlook 2024 – that on average 1 hectare of peripheral area is taken out
for every hectare of carbon-rich agricultural land. Thus, the total project area will be
140,000 hectares. However, part of this area is already out of agricultural use. The
area taken out of agricultural use is estimated to be approx. 110,000 hectares,
which, in terms of size, corresponds to almost the entire island of Lolland.

3.1.7. Impact on nature and the environment
NitrogenAs shown in the section above, the current 'Water and Climate Projects' scheme
aims to finance both peatland projects (primarily for climate purposes) and wetland
projects (primarily for nitrogen purposes). If a credible threat of a higher tax on carbon-rich agricultural land is implemented, it could have a positive knock-on effect on
the realisation of wetland projects. This is because it is assumed that a proportion of
the wetlands are located on carbon-rich agricultural land.
Based on the assumptions behind the Agreement on the Green Transformation ofDanish Agriculture, it is expected that the setting aside and rewetting of carbon-richagricultural land will reduce the nitrogen load in coastal waters by approx. 40 kg nitrogen per hectare of project area per year.
Nature and biodiversity
The set aside of carbon-rich agricultural land can also contribute to more and better
nature on land and increase the diversity of plant and animal species on the land. In
the long term, the rewetting of carbon-rich agricultural land can thus contribute toimproving nature and increasing biodiversity in Denmark, both on land and at sea.
The wetland nature that exists or can be restored on carbon-rich agricultural land ismainly swamp forests, bogs and meadows. These are areas that can develop into
natural areas with protected habitats (also referred to as § 3 areas) and that can be

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important habitats for many wild animals and plants. Birds and amphibians in particular, including particularly vulnerable, threatened or protected species, will be able
to utilise the areas as habitats.
Further potential for enhancing nature and biodiversity exists through the set-asideof carbon-rich agricultural land surrounding existing natural areas. If such carbonrich agricultural land is set aside, it can act as a buffer between natural areas andintensively cultivated land by reducing the nutrient impact on existing natural areas,
thereby improving existing nature and biodiversity. Irrigation of carbon-rich agricultural land around and between natural areas such as meadows and marshes is expected to develop into habitats for species and nature over time, thus creating moreand coherent nature and contributing positively to the quality of nature.

3.1.8. Bottlenecks for set-aside
The technical estimate assumes that any bottlenecks in the set-aside effort can behandled. Based on experience from the current set-aside schemes, the Danish Agricultural Agency has identified potential bottlenecks for the fulfilment of the technicalestimate, which are described below. These bottlenecks and the amount of resources allocated to deal with them can thus have an impact on the rate of setaside and thus the effect in 2030.
Project management
Very few projects can be established by individual farmers, as the areas to be wetted typically are owned by more than one farmer. Today, this role is performed by
the municipalities or local departments of the Danish Nature Agency, with a few exceptions, depending on the project organisation. If there is a shortage of qualified
personnel at the Danish Nature Agency and the municipalities, it can create a riskthat projects are not initiated or delayed in their implementation, or not applied for in
the first place.
Technical feasibility study
Prior to a wetting project, it must be ensured, among other things, that there is complete clarity about which areas will be wetted in the project. This may involve flooding of areas other than agricultural land, such as housing, infrastructure, etc. Today,
feasibility studies are primarily carried out by consultancy companies such as WSP,
COWI, SWECO and Envidan, which are hired for the task by municipalities and theDanish Nature Agency Increased set-aside will, therefore, lead to an increased needfor consultancy services for technical feasibility studies.
Land distribution and purchase/saleLand distribution and purchase/sale is an important element of the Danish Nature
Agency and the Danish Agricultural Agency's current rewetting projects. In a land
distribution, the landowner can choose to sell their land or to receive compensation
for the restrictions on availability that the project entails If desired by the landowner,
replacement land can be purchased in connection with land distribution for the project land that is to be taken out of rotation, so that an area for e.g. feed production
and spreading of the property's livestock manure can be maintained. At the sametime, better consolidation of the property's areas can be created, which typicallyleads to operational and socio-economic benefits. An increased set-aside will leadto an increased need for land distribution and purchase/sale, which is dependent on
qualified land distributors and a land distribution commission to approve the land

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distribution at a land approval meeting, surveyors to determine the project boundaryand new boundaries, land registration, etc.
Permits from the authorities
When agricultural land is rewetted, a number of different permits are required. Municipalities are the primary authority on the most commonly occurring ones. Examples include screening in accordance with the Environmental Assessment Act, exemptions/permits under Section 3 of the Nature Conservation Act, watercourse permits and rural zone permits.
State authorities also often need to issue regulatory decisions in order for projects tobe realised. Examples include the Danish Coastal Directorate (dune and beach protection), the Conservation Board (conservation areas), the Danish Agency for Culture and Palaces (dykes and ancient monuments), the Danish Environmental Protection Agency (Forestry Act), the Danish Road Directorate (Road Act) and theDanish Agricultural Agency (Agricultural Act). In state-owned projects (by the Danish Nature Agency), the Danish Environmental Protection Agency is the environmental assessment authority and is responsible for screening and any environmental impact assessment (EIA).
Contractors
Contractors usually establish set-aside projects, which is why an increased setaside effort will lead to an increased demand for contractors. In addition, construction work for peatland projects should preferably take place during the dry months,
as driving in peatland areas is often impossible or significantly more difficult in wetter
conditions.
Administration and processing of subsidies
The case processing of peatland projects is demanding, with many assessments
and calculations as well as diverse functions. It requires a long training programme
for administrators. An increased set-aside effort will mean that administration capacity must be built up in time.
The Danish Environment and Food Board of Appeal and the Danish Town
and Country Planning Board of Appeal
Most regulatory decisions that are prerequisites for realising a project involving the
set-aside of carbon-rich agricultural land can be appealed to the Danish Environment and Food Board of Appeal and the Danish Town and Country Planning Boardof Appeal. Appeals against regulatory decisions, which are a prerequisite for the realisation of the projects, can, if they have a suspensive effect, significantly postpone
the projects and thus delay the overall effort.

3.2 Regulation of Fertiliser
In the following, the Expert Group's considerations on the regulation of fertilisers arepresented, either through a fertiliser tax with a base deduction or by restructuring
direct agricultural subsidies into subsidies for reduced fertiliser usage
CO2-eq emissions related to fertiliser applied to fields are expected to amount to a
net 1.7 m tonnes of CO2-eq in 2030, see Climate Status and Outlook 2021. Add tothis 0.2 m tonnes of CO2-eq from liming.

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This chapter elaborates on fertiliser regulation and how it relates to existing nitrogen
regulation. The Expert Group has analysed two different regulatory models for fertilisers, which weigh the considerations of the Danish Climate Act and the terms ofreference for the Expert Group's work in different ways. The Expert Group has analysed the following two regulatory approaches;a.

b.

A tax on fertiliser usage of DKK 750 per tonne of CO2-eq and a base deduction
corresponding to 50 per cent of the tax base, paid per hectare of agricultural
land
Restructuring of the direct agricultural subsidy to a subsidy for reduced fertiliser
usage of DKK 750 per tonne of CO2-eq.

Both regulation models involve a tax on applied agricultural lime corresponding to
DKK 750 per tonne of CO2-eq.
Table 3.3 provides an overview of the climate effects, shadow prices and burden on
business of the two regulatory models. CO2-eq reductions from fertiliser regulation
can be split into a direct effect due to reduced fertiliser usage on the fields and an
indirect effect through changed production behaviour in agriculture and the rest of
the economy as a result of fertiliser regulation. In the table, interaction effects showthat reductions in emissions largely depend on how livestock production responds
to a new regulation of fertiliser usage.
Table 3.3. Effects of variant a and b for regulating CO2-eq emissions from applied fertiliser.

Tax/subsidy rate, DKK per
tonne

Variant a

Variant b

Tax and base deductions

Subsidy

750

750

Net reduction of emissions
in 2030, m tonnes of CO2eq

0.28

0.09

- of which interaction effectbetween tax on livestockand tax on fertiliser1)

0.16

-0.03

Shadow price2), DKK per
tonne of CO2-eq (excl. side
effects and terms of tradeeffects)

190

380

Shadow price2), DKK per
tonne of CO2-eq incl. side
effects (excl. terms oftrade effects)

-490

380

Burden on business, DKK
m

200

175

Total decline in land values
from fertiliser regulation
excluding forest, per cent.

-1.1

1.1

Note: 1) In model a, interaction effects will lead to additionalCO2-eq reductions, which covers the fact that animal
production is reduced by a fertiliser tax, as the cost of roughage for the animals increases. In model b, the interaction
effects will conversely reduce the total CO2-eq reductions, as subsidies for reduced fertiliser usage increase the yield

Green Tax Reformof marginal land to the extent that the cost of reducing fertiliser use is less than the subsidy. This reduces the cost ofroughage slightly and thus increases animal production.
2) It should be noted that the shadow price is calculated including interaction effects, i.e. that part of the effect comesfrom the interaction between the regulation of fertiliser and a possible tax on livestock etc. in the primary models.
Source: Own calculations based on calculation from Ørum, J. E. (2023), Department of Food and Resource
Economics, unpublished working paper delivered to the Ministry of Food, Agriculture and Fisheries, December 2023.

Climate regulation of fertiliser applied on the field
The Expert Group has looked at the possibilities of regulating agricultural emissionsof greenhouse gases (nitrous oxide from nitrogen) from fertiliser usage via a tax on
the total amount of fertiliser applied (variant a) or by restructuring the direct agricultural support to subsidies for reduced fertiliser usage relative to the applicable nitrogen norm20, which sets a ceiling for the use of nitrogen in fertiliser based on the specific crop and soil type (variant b). The reduction is then deducted from the farm's
total nitrogen quota. Increased regulation of fertiliser use by farmers will lead to reduced yields, whether through a tax or through subsidies for reduced fertiliser usage.
Reduced fertiliser usage on the field will impact several emission categories in thenational emissions inventory. The dominant effect will be a reduction in direct nitrous
oxide emissions from nitrogen in fertiliser applied to the field, and thus in net CO 2-eq
emissions. There will also be a reduction in indirect nitrous oxide emissions as well
as reduced carbon storage in mineral soils, as less organic matter is added to thesoil through fertiliser and plant cover.
Climate regulation of lime applied to the field
Agricultural lime is applied to certain Danish agricultural land to optimise the soil's
pH and thus the availability of certain nutrients for plants (including nitrogen) and on
difficult clay soils to improve the soil structure and thus cultivability. The use of agricultural lime emits CO2-eq as a result of the chemical reactions that occur during
the dissolution of the applied material. The application of lime on fields is not currently regulated.
It should be noted that with a tax on the use of agricultural lime, and thus an expected reduction in the use of agricultural lime, there is a risk of acidification of thecultivation soil, which can lead to less effective nitrogen uptake in the crop. The consequence of this will be lower yields or an increased need for nitrogen input, resulting in increased emissions from fertilisers. Recent research also shows that liming
acidic soils can have a reducing effect on the amount of nitrous oxide emitted fromthe soil as a result of nitrogen decomposition.21 However, this interaction between
direct CO2-eq emissions and nitrous oxide emissions from soils is not currently reflected in the national calculation method.

3.2.1. Advantages and disadvantages of fertiliser regulation
Tax on fertiliser with base deduction
A uniform tax system on applied fertiliser puts a uniform price on the CO2-eq emissions that occur when fertiliser is applied to fields, regardless of crop choice. The

20

Box 3.8, in the section on implementing fertiliser subsidies, describes the setting of nitrogen norms in more detail.

https://agro.au.dk/aktuelt/nyheder/vis/artikel/kalkning-af-sur-jord-reducerer-udledning-af-lattergas-og-oeger-udbyttet

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tax on fertiliser use will thus provide an incentive to reduce fertiliser usage within existing field operations and increase the incentive to shift field operations towards
crops with a lower fertiliser requirement and permanent set-aside of agriculturalland. A tax on applied fertiliser is thus assessed to be the most socio-economicallycost-effective instrument for achieving CO2-eq reductions, as the tax provides a uniform incentive for CO2-eq reduction across the instruments. A tax on fertiliser usage
also provides an incentive to shift production to less climate-intensive production,such as forestry.
If the tax in practice drives activity shifts between crops, this will reduce the structural effect of the tax and increase the technical and other effects. The size of thiseffect is unclear.
A base deduction in the fertiliser tax is based on the number of hectares in a farm.
The combination of a higher marginal tax rate and a base deduction means that themarginal tax determines the farmer's incentive to lower their fertiliser usage, while
the base deduction per hectare is fully capitalised in the land value and, therefore,
mitigates the land price loss from the tax on fertiliser usage. The base deduction
thus reduces the burden on business.
If a fertiliser tax is introduced without a base deduction, it will lead to a greater loss
in land value. For this reason, a tax model with a base deduction favours existing
farmers by directly compensating for part of the loss in land value.
It should be noted that if the tax is phased in from 2027, the tax will immediately leadto a need to adjust current CAP subsidy schemes for 2027, such as the organic
subsidy and the targeted nitrogen regulation. This should be seen in light of the factthat EU state aid rules dictate that, as a starting point, you may only compensate forthe costs of the programme in question. An increase in the tax will thus be offset bya reduction in the subsidy.22
A restructuring of the direct agricultural subsidy to subsidies for reduced
fertiliser usage
A restructuring from direct agricultural subsidy to subsidies for reduced fertiliser usage provides an incentive for a reduction within existing field operations, but unlike atax, there is no increased cost for the remaining fertiliser usage. This reduces the
structural effect in comparison to the tax model and thus the risk of carbon leakage.
It is expected that a restructuring of the direct agricultural subsidy to subsidies for
reduced fertiliser usage could be implemented based on the existing targeted regulation, see Chapter 5. However, it must be assessed whether organic farms can receive both organic area grants and subsidies under the scheme.
The subsidy for reduced fertiliser usage is assumed to be financed by a reduction in
the direct agricultural subsidies that farmers receive based on their land area. The
existing hectare subsidy is given per hectare regardless of whether the land is cultivated or fallow.23 Although direct agricultural subsidies do not distort production

The subsidy schemes compensate the farmer for the costs and lost income that participation in the scheme entails.
A fertiliser tax will certainly affect the contribution margin when cultivating the land and thus the need for compensation for loss of income due to changes in operation as a result of participation in the subsidy scheme.

22

Farmers must fulfil a number of conditionality requirements regarding the climate and environment, public and plant
health and animal welfare in order to be eligible to receive hectare subsidy.

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within agriculture, direct agricultural subsidies can be considered a distortion acrossthe entire economy, as the hectare subsidy creates an incentive to maintain agricultural production over other land uses. In addition, the hectare subsidy is a redistribution to agricultural land owners from the rest of society. The direct agricultural subsidies also tie up public funds that could have been used for e.g. CO2-eq-reducing
technologies.
The hectare subsidy will be reduced for all farmers, regardless of whether they receive a subsidy for reduced fertiliser usage or not. This means that ecologists, forexample, can help finance the restructuring of the direct agricultural subsidy. If they
can't receive the subsidy, it will reduce the incentive for organic farming, all otherthings being equal. However, the effects of reduced direct agricultural subsidies are
expected to be partially offset by increasing subsidies for organic farming. Thus,
there is an opportunity to increase the current subsidy levels for organic farming
within the subsidy ceilings calculated on the basis of Pedersen (2020). 24 The consequences and effects of this need to be investigated further.
As the model is financed through a restructuring of the direct agricultural subsidy,
there will be no additional revenue, unlike the tax model, and thus no revenue to be
returned to the industry.
Since the model is financed by the direct agricultural subsidy, the overall regulation
implies a decline in land values. The positive effect of the subsidy on land value ismore than offset by the reduction in direct agricultural subsidies, which capitalises
into lower land values. According to the GreenREFORM model, the decline in land
value will be slightly larger in the subsidy model than in the tax model with a basededuction. However, the calculated difference in the effect on the land values depends on the specific assumptions about substitution between crops and the effecton cultivation intensity of a tax versus restructuring of the direct agricultural subsidy,
and the expert group assesses that there is hardly any significant difference in theland value effect in the two regulatory models. Furthermore, unlike the tax, the subsidy relieves the effect on the farmer's contribution margin, as no tax is paid on thefertiliser that continues to be used.
The tax with base deduction leads to higher operating costs and increased structural effect, but also slightly higher value of the production land than the subsidy
model. Part of the subsidy for fertiliser reduction will also be capitalised into theprice of land, but as the subsidy is conditional on the land not being taken out ofuse, less land is set aside, which in isolation lowers the land values. Further, a shareof the savings from the subsidy is shared with consumers through a lower increasein food prices, which lowers the structural effect relative to the tax model.
A subsidy for reduced fertiliser usage is determined based on the applicable nitrogen norms, which set a ceiling for nitrogen use when growing a given crop on agiven soil type. As the nitrogen norms are set per crop, there is no incentive toswitch to less fertiliser-intensive crops, which may reduce the emission reduction
compared to the tax model.
The nitrogen norms are set on the basis of the average economically optimal use of
nitrogen across farm types, see Chapter 5. In practice, the economically optimal

Pedersen, M. F., (2020). Background calculations for the determination of subsidy rates for organic area subsidy in
CAP 2020, 36 p., IFRO Commissioned Work No. 2020/06.

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Green Tax Reformuse of nitrogen will vary between farms. In this way, the subsidy risks being paid out
without leading to a real change in the behaviour of farmers whose optimal and actual nitrogen use is lower than the nitrogen norm. In practice, however, this only has
a distributional impact.

3.3 Forest
The total carbon stock in Danish forests in 2022 was approx. 160 m tonnes of carbon, corresponding to approx. 600 m tonnes of CO2. Since 1990, Danish forests
have increased their carbon storage in the living biomass (trunks, branches, leaves,needles and roots) by 16.2 m tonnes of carbon. This means that forests have removed over 59 m tonnes of CO2 from the atmosphere, or about 1.9 m tonnes of
CO2 per year. The net uptake is both due to the fact that the forest area has increased since 1990 and that the old forests have become denser or richer in woodmass25, since annual growth rates in forests have exceeded the amount of logging.26
Since 1990, the Danish forest area has expanded by approx. 3,000 hectares per
year. During this period, afforestation has been promoted through state afforestation, subsidies for private afforestation and, most recently, through the Danish Climate Forest Foundation.
Afforestation is a socio-economically appropriate climate initiative that contributes to
CO2 reductions in the long term. This is partly due to high climate effects in the period 2035-2050 and the high co-benefits associated with forests, such as recreational values and reduction of nitrogen leaching. As a result, afforestation is a key
transitional element to fulfil climate targets beyond 2030.
Afforestation has a limited short-term climate impact. This is mainly due to the factthat newly planted forests' growth and thus CO2 uptake is relatively low in the firstyears after planting. Forests typically reach a peak of growth around the age of 2040 years or more. When national forests are used for wood products, they contribute to temporary carbon storage in the harvested wood products category according to the IPCC guidelines, from which CO2 is continuously depreciated in the inventory as wood products decay or burn.

3.3.1 Recommendations regarding forests
In the Expert Group's models, the subsidy for afforestation is increased to incentivise
the establishment of 250,000 hectares of new forest by 2045, when Denmark aims
to be climate neutral.

25

The wood mass of the forest is the above-ground living biomass in the form of trunks and branches.

Logging is when the trees are felled and trunks and larger branches are typically sold as, for example, timber andwood biomass, while roots, leaves, needles and smaller branches are often left in the forest.

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3.3.2. Subsidy for afforestation
The Expert Group's models include the establishment of a subsidy scheme for private afforestation of almost DKK 92,000 per hectare, which is more than double thecurrent DKK 35,000 per hectare for the current subsidy for private afforestation financed by agricultural subsidies. It is estimated that the subsidy can be increased,
as it is possible to compensate for lost income from agricultural operations whenconverting to forestry. In the current subsidy scheme, subsidies are given for establishment and maintenance in the first year, subtracted with income from logging,with no subsidies given for lost income.
The subsidy rate thus includes costs associated with planting material, establishment of the forest subtracted with current income from the sale of wood of approx.
DKK 20,000 per hectare. Compensation for operation and maintenance of approx.
DKK 24,000 per hectare. In addition, the marginal opportunity cost associated with
agricultural operations based on the price projections used in the tax modelling calculations of approx. DKK 48,000 per hectare
A subsidy for afforestation of just under DKK 92,000 per hectare is estimated to increase afforestation up to and including 2030 by 50,000 hectares of new forest, andincrease afforestation up to 2045 by a further 200,000 hectares of new forest. By
2045, a total afforestation of 250,000 hectares will be achieved in addition to the expected afforestation in the Climate Status and Outlook 2023. Realising afforestationon this scale is associated with uncertainty. In the short term, there may be limited
availability of planting material of the right type and quality, which may limit annual
planting up to 2030.
The subsidy is assumed to be implemented from 2025 and is estimated to have a
CO2 effect (uptake) of 0.1 m tonnes of CO2 in 2030, 0.7 m tonnes of CO2 in 2035
and 2.1 m tonnes of CO2 in 2045, see Table 3.4. The subsidy of approx. DKK
92,000 per hectare corresponds to a cost of approx. DKK 470 per tonne of absorbed CO2 with a socio-economic shadow price of approx. DKK -400 per tonne,
where positive side effects are taken into account in the form of less nitrogen discharge to the aquatic environment as well as recreational value.
In addition to the CO2 effect in the LULUCF sector, which includes the CO2 uptake
in the trees themselves, the forest floor and the soil, there is a CO2-eq effect in the
agricultural sector of 0.05 m tonnes of CO2-eq in 2030 as a result of agriculturalland being taken out of operation and fertilisers no longer being applied. There will
be overlap between this effect and a CO2-eq tax on agriculture, which will also leadto the set-aside of land. The total effect for fertilisers can be found in Chapter 2. In
addition, there will be derived CO2 effects on energy consumption from converting
agricultural land to forest, which are not included in the current calculations.

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Table 3.4. Afforestation and CO2-eq effects and side effects
Total afforestation in addition CO2-eq effect, 2030
to KF23

Thous
Of whichandhectar2025es
2030
250

50

CO2-eq CO2-eq Shadow
effecteffect
price
2035
2045
excl. side
effects

Shadow priceincl. side effects

Subsidy rate

20302045

m
tonne
s of
CO2

Of
which
LULUC
F

Of
which
agricul
ture

m
tonne
s of
CO2

m
tonne
s of
CO2

DKK pertonne of
CO2

DKK per DKK per hectare
tonne of CO2 present value

200

0.15

0.10

0.05

0.67

2.10

470

-400

Of which

92,000Note: Figures are rounded. Costs and shadow price are in 2023 factor prices. The stated 250,000 hectares of afforestation and its CO2-eq effects are beyond what isalready expected with KF23. It is assumed that the first forest planting will take place in 2025. The calculations assume that the forest is planted on mineral soil andthat there is then increased carbon sequestration in the soil compared to continued farming. If the forest is planted on carbon-rich drained land, there will still beemissions associated with the soil. Side effects include less nitrogen discharge to the aquatic environment and recreational value of forests.
Source: IFRO Commissioned Work 21/09, IFRO Commissioned Work 2022/04, IGN and own calculations

In the Expert Group's model, forests are planted with tree species that strive for highCO2 uptake in both the short and long term, including by mixing fast-growing tree
species, while at the same time focusing on ensuring robust and stable forests thatare resilient to the climate of the future and that also have the potential to harvest
synergy effects in relation to other purposes. Specifically, the calculations are basedon forest mixes consisting of 50 per cent traditional tree species mix (afforestation
since 1990) with predominantly deciduous trees and 50 per cent fast-growing trees,
including a large proportion of conifers. The forest is predominantly assumed to be
managed as a production forest, i.e. the trees are continuously harvested and soldfor timber or energy wood. When it comes to actual implementation, there should bea focus on involving local stakeholders so that the forest is placed with the greatest
possible value for the surrounding community, and there is interaction with otherland use initiatives, such as the set-aside of carbon-rich agricultural land.
Financing of afforestation and realisation
The Expert Group assumes that afforestation will be financed by national funds,
where a national afforestation scheme must be established as soon as possible under the Ministry of the Environment, through which the afforestation effort can be
managed. The introduction of a more favourable national scheme is assumed tomean that the current CAP scheme will not be applied for. Specifically, this will
mean that approx. 70 m annually from 2025-2030 from the CAP scheme for afforestation, with an expected realisation of almost 14,000 hectares in the same period,
will have to be reprioritised. The announcement of a higher subsidy rate may also
lead to the cancellation of applications under the Rural Development Programme(RDP) in 2023. Implementation will also depend on when a decision is made to increase the subsidy.
The total costs associated with subsidies for afforestation up to 2045 are estimatedto be around DKK 20 bn, see Table 3.5. The total costs include the financing of thealmost 14,000 hectares of forest that are no longer realised through the agricultural
subsidy for forests, which means that a total of 264,000 hectares of forest are financed. In addition, other afforestation from already allocated finance act funds isassumed to be unaffected, see memorandum outlining preconditions for Climate
Projection 2023. However, the efforts under the Danish Climate Forest Foundation
may need to be adapted in relation to a new subsidy scheme so that the schemes
support each other.

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Table 3.5. Costs associated with afforestation
2025

2026

2027

2028

2029

2030

Total, 20252045

Start-up aid

189

189

189

209

229

235

5,222

Care, upscaling ofplant material

46

92

138

188

244

255

5,710

Loss of income*

38

76

115

157

203

249

9,134

Total expenses

274

358

442

555

676

739

20,066

Expenses, DKK m

Notes: Costs are in 2023 factor prices.
*Loss of income covers both lost contribution margin and loss of potential future income associated with other land use, as well as potential future loss of the hectare
subsidy.
Source: Own calculations

Realising afforestation on this scale at the calculated subsidy rate will depend,among other things, on future prices for agricultural operations, wood products andprices associated with alternative use of land, such as buildings and renewable energy production. By combining subsidies with a requirement for a duty of forest
preservation, it can be ensured that the operation of the forest is regulated by the
Forestry Act. To ensure sufficient afforestation, the subsidy rate is continuously evaluated in relation to other land uses so that, if necessary, afforestation can be stimulated in other ways, e.g. by allocating more funds to state afforestation or by increasing incentives to plant new private forests.
To ensure that the conversion to a forest is permanent, the subsidy can be conditional on the areas being subject to a duty to preserve a forest, possibly with thepossibility of a temporary right of cancellation against repayment of the subsidy if the
duty of forest preservation is perceived as a barrier to afforestation with a subsidy.
Synergies from afforestation
Newly established forests can have a number of side effects/externalities, such as
impact on the aquatic environment, recreational value, biodiversity, health, etc. Efforts should be made to promote these synergies.
The shadow price calculation in Table 3.4 includes the recreational value of forests
and the value of reducing nitrogen emissions, see Appendix 7.9. Set-aside of agricultural land for forestry will have value in areas with a need for action in the waterplans due to reduced fertiliser use and the forest retaining nitrogen. An averagevalue of nitrogen emissions has been used, see Appendix 7.9, as the location of theforest is not known in advance. Afforestation in isolation does not have an effect onammonia emissions, but the reduced fertiliser use on agricultural land reduces ammonia emissions. The socio-economic value of this is calculated for the total change
in fertiliser use and is shown in Table 3.4. Therefore, this value is not included in thecalculation of the shadow price of afforestation.
The location, layout and access conditions are of great importance for the use of theforest, and thus the recreational value. Many new public forests are located close to
the city, and there is free public access everywhere in the forests at all times. In private forests, access is restricted to roads and paths and only during daylight hours.
These differences may have contributed to the fact that in a 2014 report, the Danish
Economic Councils estimated the recreational value of state afforestation to be approx. DKK 50,000 per hectare per year in 2023 prices, while the corresponding
value for private afforestation was estimated to be DKK 4,000 per hectare per year.

Green Tax Reform

This report is based on private afforestation and therefore uses a value of approx.
DKK 4,000 per hectare per year. Assessing the recreational value is associated withparticular uncertainty, as the specific design of the forests is not known, and a significant expansion of the forest area can affect the marginal recreational value of forests. The recreational value can also change over time as the forest grows.
The Expert Group has presented a model with private afforestation, as this results inthe lowest public costs (per tonne of CO2-eq). However, the high recreational valueof state afforestation may mean that more funds should be allocated to achieve thesame CO2-eq effect with higher state costs but greater recreational value. The Expert Group's models therefore imply that the relevant authorities and political decision-makers ensure an appropriate distribution of private and state-owned forests
based on an overall assessment of costs and socio-economic profitability, including
consideration of the applicable environmental and nature objectives.

3.3.3 The framework for forest regulation
Private afforestation is subsidised under the Common Agricultural Policy (CAP).
Support for private afforestation is in 2023 funded under the Rural Development
Programme (RDP) and from 2024 will be funded under the CAP plan, which is partof the Agricultural Agreement. The current subsidy scheme provides start-up aid(and care in the first year), which is deducted from logging revenues.
Afforestation is also supported through the Danish Climate Forest Foundation,
where the state on several occasions has contributed funds that can be used forthis purpose, along with expected additional funds from private sources. The fundwas established in 2020.
In addition, afforestation is supported with funds for state afforestation, which is realised through state purchase of agricultural land followed by planting and state management of the areas. State afforestation is carried out in co-operation with municipalities and waterworks, which co-finance the efforts as a means of ensuring drinking water protection.
Forest management of a given forest area in Denmark is primarily regulated by the
Forestry Act. The purpose of the law is to preserve and protect the country's forests
and to increase the forest area. The law regulates the use of areas subject to theduty of forest preservation, which covers approx. 70 per cent of the Danish forest
area. The main rule is that areas subject to the duty of forest preservation must be
kept covered with trees that form or will form a closed forest of tall standard trees.27
Logging, with the exception of thinning, may not take place until the stand or individual tree has reached an age or dimension where it is ready for logging.
Certain habitats and species that may occur in forests may be protected either by
national rules or by rules in the EU nature conservation directives, which are implemented in various national laws.

Exceptions to the main rule include, among other things, that 10 per cent of the area subject to the duty of forest
preservation can be used for logging or wood pasture, another 10 per cent can be used for open nature areas, and10 per cent can be cultivated with Christmas trees and ornamental greenery.

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Other laws and regulations affect forest management more indirectly. This includes
the recently adopted EU Deforestation Regulation, which prohibits the sale of anumber of products from seven commodity groups, including wood, if they are produced on land that has been subject to deforestation or forest degradation. The regulation will thereby significantly reduce the incentive to clear or degrade forests in
Denmark, regardless of whether the area is subject to a duty of forest preservation
or not. In addition, the EU Directive on the Promotion of Renewable Energy applies,
which lays down rules for the utilisation of forest biomass for energy purposes, including requirements for reforestation of forest areas after logging. The rules apply
regardless of whether the forest area is a subject to a duty of forest preservation ornot.

3.3.4 Follow the development of existing forests
Current forest projections predict an increase in logging by 2030 and a significant
decrease in net forest removals compared to the average of almost 3 m tonnes of
CO2 per year observed over the past 10+ years. The Expert Group has noted that inprevious years, significant decreases in net forest uptake have also been projectedwithout subsequently being registered in the actual measured and reported uptake
and emissions from forests, see Section 2.8. The Expert Group also notes that forest projections are subject to great uncertainty and that they seem to have tended
to underestimate the net uptake of forests. The Expert Group is not in a position toassess the reasons for this.
Despite the uncertainties in the projections, the Expert Group assesses that, if desired, the net uptake of forests could be affected temporarily and significantly in the
short term by any regulation that limits logging.
Increased net removals in 2030 can be achieved through general reductions in logging, or by introducing more specific regulations that can limit the extent of main
logging in existing forests. The Expert Group's models therefore imply that the development in carbon uptake of forests is monitored, but do not recommend specificregulation.

3.4 Handling of Road Transport and Minor Emission Sources
In the following, the Expert Group's recommendations for road transport and minor
emission sources are reviewed.
Road transport
Projections show that emissions from road transport will be around 9.6 m tonnes in
2030 if no new initiatives are implemented to reduce emissions. This corresponds toapprox. 36 per cent of the expected total Danish greenhouse gas emissions in
2030.
As mentioned in the first interim report, CO2 reductions through increases in taxes
on fuels for road transport in general are significantly more expensive from a socioeconomic perspective than in other sectors. This is partly because overall taxes onpassenger cars are already very high compared to other areas, and fuel sales are

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sensitive to cross-border trade. A strict requirement for harmonisation would immediately mean that the tax level on road transport would have to be reduced.
After the transition to a higher and more uniform CO2 tax in the Agreement on
Green Tax Reform for industry etc. (June 2022), the total tax level will continue tobe higher for motor fuels for road transport than for other applications. In addition, a
new CO2-emissions trading system will be implemented in 2027 that includes fuels
for transport, which increases the price of motor fuels. The Expert Group has also
noted that sales of green cars have increased significantly in recent years. Furthermore, a road tax for lorries for freight transport has been adopted, which is kilometre-based and CO2-differentiated according to the lorries' emissions, and will comeinto force from 1 January 2025.
Finally, the government has proposed increasing the diesel tax by almost DKK 0.50
per litre (2023 prices). This corresponds to an increase of approx. DKK 175 per
tonne of CO2 to a total of approx. DKK 1,575 per tonne of CO2-eq (2023 prices).
An increase in the diesel tax will increase the tax differential between diesel andother uses, see Figure 3.1. Assuming the increase in the diesel tax is implemented –and in the context of the other factors above – the Expert Group has no further suggestions for models for changing the taxes on fuel for road transport.

Recommendations for minor emission sources
Minor emission sources cover the categories (CO2-eq emissions in 2030):
1. F-gases (0.2 m tonnes)
2. Biogas leakage (0.3 m tonnes)
3. Landfills (0.3 m tonnes)
4. Garden and park waste (0.2 m tonnes)
5. Wastewater (0.2 m tonnes)
6. Other, e.g. accidental fires and non-sectoral methane and nitrous oxide
emissions from burning biomass (0.3 m tonnes)
Emissions are expected to total around 1.5 m tonnes of CO2-eq in 2030, see Figure
3.1.

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Figure 3.1. Expected emissions in 2030, m tonnes of CO 2-eq
16
14
12
10
8
6
4
2
0
Non-energy-relatedRoad transport
Industry (Discussed in Other emissions,emissions from the(Discussed in both the first interim report) including the waste
agricultural sector andreports)
sector (Discussed in
LULUCF (Discussed
the second partial
in the second interim
report)report)Source: Climate Status and Outlook 2023

The Expert Group's models include raising the current tax on F-gases to DKK 750
per tonne of CO2-eq, corresponding to the tax that was agreed upon for thecompanies in the industry not subject to ETS. This results in CO2-eq reductions of
0.1 m tonnes of CO2-eq in 2030. For the remaining categories, various forms ofregulation are already politically planned, which will mean that only very small
additional reductions can be achieved through additional tax regulation, which is notconsidered to be commensurate with the administrative costs of a CO 2-eq tax. In
these areas, the Expert Group, therefore, recommends not imposing a CO2-eq tax
but instead implementing the already planned regulatory measures.
F-gases
Part of the Expert Group's models include increasing the tax on emissions of Fgases so that the tax follows the CO2-eq tax agreed as part of the Agreement on
Green Tax Reform for Industry, etc. (S, V, SF, RV and K). This maintains the current
symmetry where the tax on F-gases is balanced with the current CO2-eq tax.
In particular, the F-gases HFC and SF6 are emitted in Denmark. HFCs
(Hydrofluorocarbons) are mainly used as refrigerants, with the most commonly used
F-gases being between 1,000-4,000 times more harmful to the climate than CO2.
HFC is mainly used as a refrigerant in e.g. air conditioning, refrigeration systems
and heat pumps. There are no F-gases in newly manufactured equipment such as
domestic refrigerators, freezers and mobile air conditioning in the EU. The use of Fgases will therefore be phased out as these types of systems are replaced by new
ones.
However, the use of F-gases in households will increase by 2030 due to the growthof air-to-air and air-to-water heat pumps, see Climate Status and Outlook 2023. The
industrial gas SF6 is mainly used in the electricity sector and in some high-voltage
installations and is approx. 24,000 times more harmful to the climate than CO 2.
F-gases are already regulated and taxed today when the substances are used in the
manufacture and maintenance of installations. The rates on F-gases are set per
CO2-eq based on the Global Warming Potential (GWP) of the gases. The tax rates
for F-gases are currently balanced according to the current CO2-eq tax, which inPage 100

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Page 1012023 is DKK 181 per tonne of CO2-eq. Therefore, there will be no majoradministrative costs associated with adjusting the current tax.
The EU has revised the current F-gas regulation. This does not affect the assessments for F-gases. The reason for this is that the revised regulation's content has
been known for a long time, and therefore, its effect has already been taken into account in the assessments.
With the Agreement on Green Tax Reform for Industry, etc. from 2022 (S, V, SF, RV
and K), which introduces a higher and more uniform CO2-eq tax, the tax rates for Fgases will no longer be balanced with the CO2-eq tax for other industries.
The Expert Group's models maintain the symmetry and allow the tax on F-gases tofollow the higher and more uniform CO2-eq tax agreed in the Agreement on Green
Tax Reform for Industry, etc. including the planned phase-in from 2025-2030.
F-gases are not subject to quotas, which means that emissions will be subject to a
tax of DKK 750 per tonne of CO2-eq. If the tax is raised from the current DKK 181
per tonne of CO2-eq to DKK 750, it is estimated that this will result in additional
revenue after statics effects and behavioural response of approx. DKK 80 m, as well
as a CO2-eq reduction in 2030 of approx. 0.1 m tonnes, see Table 3.6.
Table 3.6. Consequences of raising the tax on F-gases from DKK 181 per tonneof CO2-eq to DKK 750 per tonne of CO2-eq in 2030
CO2-eq reductions

Immediate revenue

Revenue after behavioural response

Shadow pricem tonnes

DKK m

DKK m

DKK per tonne of CO2eq

0.1

130

80

475

Note: Estimates are subject to uncertainty and are consolidated in connection with legislative proposals. Legislative
proposals, including the reduction effect, must be consolidated in relation to inclusion in Climate Status and Outlook.
Source: Own calculations.

The tax payment is incurred in the production of an installation that uses F-gas. Assuming that the tax payment is passed on to the price of the installation in the longterm, it is estimated that a tax increase to DKK 750 per tonne of CO 2-eq will meanthat the acquisition price for, e.g. large heat pumps, which must have a maximum of
coolant per unit corresponding to 5 tonnes of CO2-eq, will increase by approx. DKK2,800 per heat pump.
Similarly, the acquisition price of a typical household's air-to-air heat pump is estimated to increase by approx. DKK 480 per heat pump as a result of the tax increase. For an air-water heat pump, the acquisition price will increase by approx.
DKK 960 per heat pump. The Danish Energy Agency's technology catalogue estimates the lifespan of individual heating systems for households to be around 15
years. This means that the annual cost for a typical household would be DKK 32 peryear for an air-to-air heat pump, while it would be DKK 64 per year for an air-to-water heat pump. The tax payment is incurred when f-gases are used in the manufacture or maintenance of an installation.
An increase in the tax is estimated to have financial consequences for the businesssector corresponding to the immediate income effect, which amounts to approx.
DKK 130 m annually. The tax is expected to be passed on in higher prices toGreen Tax Reform

consumers over time. Today, there are approx. 1,200 companies in the relevant
sectors.
Biogas leakage
The Expert Group does not recommend a CO2-eq tax on emissions from biogas
leakage.
Biogas production is associated with methane loss from biogas plants due to leaks
etc. With the Climate Agreement on Green Power and Heat from June 2022 (S, V,
SF, RV, Ø, K, DF, LA, Æ and KD), a new regulation has been agreed upon to
reduce leakage from biogas production, which, among other things, involves review
and control of plants, plant improvements and a point source limit of no more than 1
per cent for upgrading plants. The regulation came into effect from 1 January 2023.
It is estimated that the new regulation will reduce CO2-eq emissions by 0.5 m tonnesof CO2-eq from 0.8 CO2-eq to 0.3 m tonnes of CO2-eq in 2030.
It is currently not considered technically feasible to further reduce methane leakage,as production cannot be hermetically sealed. Therefore, it is very uncertain whether
a tax on methane emissions will reduce leakage or increase production costs.
The introduction of a CO2-eq tax on biogas leakage will also require valid
measurements of methane emissions from each individual plant. This is not the casetoday, where emissions are calculated based on random sampling. If it becomes
possible to obtain the necessary data in the future, it may be possible to regulate
biogas leakage more effectively in the future.
Landfills
The Expert Group does not recommend a CO2-eq tax on emissions from landfills, as
the administrative and economic consequences of such a tax are not considered to
be proportional to the effect on reducing greenhouse gases.
Landfilled waste can produce landfill gas, which contains the greenhouse gases
CO2 and methane. A large part of landfill gas is formed by the biologicaldecomposition of organic material. The amount of methane from the landfill sector
has been decreasing since 1997, when a ban on landfilling waste suitable forincineration, including organic waste, came into effect. This means that the methane
formation potential of waste going to landfill today is 89 per cent lower than it was in1990. As historically landfilled waste gasifies, the amount of methane from thelandfill sector is decreasing and is estimated to continue to decrease until 2040.
There is currently a tax on landfill of waste amounting to DKK 475 per tonne ofwaste, which, including operating costs at the specific landfill site, is paid as part ofthe so-called landfill tariff. Waste that is currently sent to landfill is not considered
recyclable or suitable for incineration, which is why landfill is often the only
environmentally sound option.
Under the auspices of the political agreement on the Climate Plan for a green waste
sector and circular economy from June 2020 (S, V, RV, SF and LA), it has been
agreed that initiatives will be launched that can lead to locally profitable socioeconomic reduction measures at landfills and waste treatment plants. This work is
still ongoing.
The most commonly used measure to reduce emissions from landfills are biocovers,
which are a layer of biogenic material that keeps the landfill gas from being released

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into the atmosphere. The support scheme for the use of biocovers is still in theestablishment and monitoring phase and is expected to be finalised by the end of2027.
Composting garden and park waste
The Expert Group does not recommend a CO2-eq tax on emissions fromcomposting of garden and park waste28, as the effect is assessed to be limited, andtherefore the administrative and economic consequences of a tax are notproportional to the CO2-eq effect.
In Denmark, around 1,000,000 tonnes of garden waste are produced annually, witharound 75 per cent coming from households, e.g. at recycling stations, and around
25 per cent from businesses.
With the Climate Plan for a Green Waste Sector and Circular Economy from June
2020 (S, V, RV, SF and LA), it has been decided to initiate an analysis and then takemeasures to reduce greenhouse gas emissions from garden waste by at least 20
per cent. Measures can include stricter operating conditions to ensure thatanaerobic conditions are not created in the composting process, which gives rise tomethane emissions.
A CO2-eq tax on composting garden park waste could economically encourage
more garden waste to be sold for biogasification or conversion to CO2-eq-reducing
composting methods, or to be exported for recycling in neighbouring countries,
which, all else being equal, would reduce national greenhouse gas emissions.
Recycling garden park waste, including composting, is an important part ofrecycling nutrients such as phosphorus, nitrogen and potassium back into
agricultural soil. Composting garden waste is therefore instrumental in meeting the
EU's binding recycling target for household-like waste by 2025, as garden waste
has a very high recycling rate. Denmark's actual recycling rate was 46 per cent in
2021 and will increase to 55 per cent by 2025.
Wastewater
A CO2-eq tax on wastewater emissions is not included in the expert group's models,
as it is not considered to have any significant effect in relation to the agreed limit
values. In this context, the Expert Group notes that the previously agreed limit
values should be introduced.
There are approx. 100 municipally owned wastewater companies in Denmark, withsome facilities both transporting and treating wastewater, while a smaller number
only transport wastewater. The vast majority of discharges are generated by the
biological treatment of wastewater. Nitrous oxide emissions can be reduced byeither controlling the treatment processes or covering the treatment plant andcapturing the gases.
There is currently a tax on wastewater. The wastewater treatment plant pays a tax
on the discharge of domestic and industrial wastewater after treatment. It iscollected from wastewater treatment plants based on information about residual
impurities in the wastewater, including phosphorus and nitrogen discharged, and via
sewerage authorities for properties that are not connected to communal sewerage.

It should be noted that the designation of the fraction "garden and park waste" is referred to as "garden waste" inother contexts.

28

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As part of the Climate Plan for a Green Waste Sector and Circular Economy (S, V,
RV, SF and LA) from 2020, it was agreed to introduce limit values for nitrous oxide
emissions from wastewater treatment plants that treat wastewater for minimum
30,000 person equivalents (PE). This means that the limit values cover approx. 65
per cent of the wastewater volume and 75 per cent of the nitrous oxide emissions
from the process. The reduction effect of the limit value is expected to be approx.
0.1 m tonnes of CO2-eq in 2030. This effect is currently not recognised in the
Climate Projection. Based on the experience gained, it will be discussed with theparties to the agreement by 2025 at the latest whether the limit should be reduced
from 30,000 person equivalents (PE) to a lower level. It is estimated to have a
reduction potential of approximately 0.02 m tonnes CO2-eq. The possibilities of
imposing a CO2-eq tax on wastewater discharges can be revisited at a later date,e.g. by revisiting the effect of the limit values.
Others
The emissions primarily include non-sectoral methane and nitrous oxide emissions
from biomass burning, other emissions from, e.g. indirect CO 2-eq emissions fromindustry, which occur when CO2 is converted to other greenhouse gases in theatmosphere, fugitive emissions from oil and gas storage facilities, accidental fires ofbuildings and vessels, etc.
These emissions are generally limited, and regulation will not be able to beadministered due to a lack of options for control and identification, which is why theExpert Group has chosen not to regulate them in its models.

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Advantages and Disadvantages of Tax on
End Consumption

4

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4. Advantages andDisadvantages of Tax
on End Consumption
The additional terms of reference state that the Expert Group must, as part of its
final report, "analyse the pros and cons of imposing a CO2-eq tax on end
consumption". This section presents the Expert Group's analysis of the pros andcons of such a tax, exemplified by a tax on the end consumption of climateimpacting foods.
A tax on end consumption will only to a limited extent contribute to meeting thenational 70 per cent target linked to emissions from domestic production. As aresult, a tax on end consumption will only allow for a very limited reduction of a tax
at the production stage. In addition, a tax on end consumption is a more imprecise
taxation of the actual climate impact than a tax at the production stage.
Based on the analyses below, a climate tax on end consumption is not included in
the models presented by the Expert Group in Chapter 2.
Characteristics of a consumption tax
A climate tax on the end consumption of climate-impacting food products should
ideally be proportional to the total amount of CO2-eq estimated to have been
emitted in connection with the production and transport of the individual taxed
product. However, as further explained in the sub-section on administrative issues
below, it will be necessary to operate with the same tax rate for all products of agiven category, such as beef, based on an estimate of the average climate impactof the product group. This means that individual farmers cannot reduce the tax
burden on their products by choosing a more climate-friendly production method.
Unlike a production tax on emissions from individual farms, a consumption tax will
therefore not incentivise individual farmers to adopt more climate-friendly
technologies. This is a significant disadvantage of a climate tax on end
consumption.
In return, a climate tax on end consumption will be imposed at the same rate on
imported and domestically produced goods of a given type. This prevents the tax
from weakening the country's international competitiveness.
On the other hand, a climate tax in the production stage is only imposed on
domestic primary food producers and will, thus, all other things being equal, reduce
domestic competitiveness. Danish-produced food products will, therefore, to someextent be replaced by imported food products in domestic end consumption,
whereby part of the reduction in domestic greenhouse gas emissions may be offset
by increased emissions abroad. A production tax can therefore lead to somePage 106Green Tax Reform

leakage of greenhouse gas emissions abroad. However, it is important to note thatthe total emissions abroad are affected by the country-specific targets forgreenhouse gas reductions.
The Danish Climate Act states that Danish climate initiatives "must lead to real,
domestic reductions, but we must also ensure that Danish initiatives do not simply
move all greenhouse gas emissions outside Denmark's borders". The Expert
Group's terms of reference also state that its recommendations must consider therisk of greenhouse gas leakage.
Against this background, it is discussed below how to counteract greenhouse gas
leakage and what role a consumption tax can play in this regard. Next, theappropriateness of a consumption tax is discussed in light of the Danish national
climate targets and international commitments.
Mitigation of greenhouse gas leakage – Fundamental considerations
The theoretical research literature agrees that a country can most purposefully
counteract greenhouse gas leakage by combining a climate tax in the production
stage with an import tax on CO2-eq-intensive goods and a tax exemption foremissions from production to export, see e.g. Hoel (1996).29 This ignores thepractical challenges of implementing such a system, which are discussed below. In
addition, the system may violate WTO rules on international trade cooperation as
well as EU law.
However, research literature has also pointed out that it is possible to counteract
greenhouse gas leakage and reduce the country's global climate footprint by
combining a climate tax at the production stage with a climate tax at theconsumption stage and a production subsidy for domestic producers, see e.g.
Böhringer et al. (2017) and Kruse-Andersen and Sørensen (2022).30 The
consumption tax must then be imposed on all imported and domestically produced
goods at a rate that reflects the estimated CO2-eq content of the goods, and the
production subsidy to the individual domestic producer must be proportional to thecompany's production multiplied by an estimated average CO2-eq intensity of
production in the industry to which the company belongs. As the individual company
typically has little influence on the average CO2-eq intensity of the industry, theclimate tax at the production stage will encourage companies to reduce theiremissions, while the production subsidy neutralises the negative impact of the tax
on the competitiveness of the typical company in the industry.
Thus, if a production subsidy is introduced, the tax at the consumption stage is notnecessary to protect domestic competitiveness. The consumption tax, on the other
hand, aims to lower the country's global climate footprint by curbing theconsumption of climate-impacting goods. The motivation for such a combined tax
and subsidy model is thus that the domestic country not only has an objective to
avoid carbon leakage from domestic production, but has a broader objective to

See M. Hoel (1996). Should a carbon tax be differentiated across sectors? Journal of Public Economics 59, pp.
17-32.

29

See C. Böhringer, E.J. Balisreri, T.F. Rutherford (2017). Robust policies to mitigate carbon leakage. Journal of Public Economics 149, pp. 35-46, and P.K. Kruse-Andersen and P.B. Sørensen (2022). Optimal energy taxes and subsidies under a cost-effective unilateral climate policy: Addressing carbon leakage. Energy Economics 109, May
2022, 105928.

30

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lower the overall global climate footprint from domestic production and consumption
activities.
In a Danish context, the difficulty with the described tax and subsidy model is thatthe aforementioned production subsidy to domestic producers may be in conflictwith EU law. In addition, there can be serious practical difficulties in delineating thedifferent sectors (or forms of operation in agriculture) when calculating the average
CO2-eq intensity of the sector (operating branch) and when assigning the individual
business (agricultural business) to the relevant sector (operating branch).
If, for these reasons, a production subsidy is abandoned, you are left with thedomestic tax at the production stage, which can lead to carbon leakage, and theconsumption tax. To reduce the leakage effect, the tax can be lowered at the
production stage. This will increase emissions from domestic production, and since
the carbon leakage rate will normally be less than 100 per cent, see Beck et al.
(2023)31, global emissions will also increase, albeit to a lesser extent. If you want toavoid this increase in the global climate footprint, you can choose to raise theconsumption tax to curb the consumption of imported as well as domestically
produced climate-impacting goods. A (partial) restructuring from taxation at the
production stage to taxation at the consumption stage can thus in principle reduce
the loss of domestic competitiveness and the resulting greenhouse gas leakage
without increasing the country's global climate footprint.
Tax at the consumption stage versus tax at the production stage – The
importance of climate policy objectives
A climate tax at the consumption stage can theoretically be an appropriate
instrument if there is a political objective to reduce Denmark's global climate
footprint.
However, international climate cooperation is based on the territorial principle,
where each country commits to reducing its own emissions. For example, theDanish Climate Act stipulates that emissions from Danish territory (calculated
according to UN guidelines) must be reduced by 70 per cent in 2030 compared toemissions in 1990. In relation to the EU, Denmark is also committed to reducing theaccumulated territorial emissions from the Effort Sharing Regulation sector and the
LULUCF sector by a certain amount by 2030, which represents Denmark's
contribution to the fulfilment of the Paris Agreement through EU cooperation.
These national and international climate policy objectives reflect the fundamental
principle of European and global climate cooperation that each country is
responsible for the emissions from its territory, which primarily stem from theproduction activities that take place in the country, including the production ofdomestic transport services by households for their own consumption. The rationale
behind the territorial principle is that it is easier for nation states to measure andregulate territorial emissions than to calculate and control the country's global
climate footprint, as the climate footprint of imported goods depends on the
production methods and climate regulation of production in the country from which
the import originates.

See U.R. Beck, P.K. Kruse-Andersen, L.B. Stewart (2023). Carbon leakage in a small open economy: The importance of international climate policies. Energy Economics 117, 2023, 106447.

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Page 109

When the political objective is to regulate greenhouse gas emissions from thedomestic territory, the most targeted approach is to impose a climate tax onemissions from domestic production. Admittedly, a tax on the end consumption will
also lower domestic emissions to the extent that a lower domestic production ofthese goods offsets the resulting decrease in the consumption of climate-impacting
goods. However, since the consumption tax does not include emissions from thepart of domestic production that is exported, achieving a given target for reducing
domestic emissions through a consumption tax rather than a tax in the production
stage would require a significantly higher tax and thus entail a much higher socioeconomic cost.
Food consumption and greenhouse gas emissions – a numerical explanation
Table 4.1 provides an overview of the expected food consumption of Danish
households in 2030 and the resulting CO2-eq emissions in Denmark and abroad.
The estimate is associated with considerable uncertainty.
Table 4.1. Danish households' food consumption in 2030 (DKK bn) and the resulting
CO2-eq emissions (m tonnes)
Danish products

Imported products

Value
of
consumption,
DKK bnEmissions inEmissio
ns

Value
of

Emissions

Denmark,
CO2-eqabroad,CO2-eqconsumption,
DKK
bn.

abroad,CO2-eqAgriculture andhorticulture

2.4

0.3

0.04

3.3

0.6

Cattleslaughterhouses

0.9

0.3

0.02

1.7

0.2

Pig
slaughterhouses

6.1

0.4

0.1

3.6

0.3

Poultryslaughterhouses

1.2

0.04

0.03

1.4

0.1

Dairies

8.2

1.2

0.2

3.1

0.3

Fishing industry

0.5

0.01

0.02

0.9

0.04

Bakeries andbread factories

6.9

0.2

0.2

3.5

0.2

Other foodindustry

7.9

0.3

0.3

17.2

1.0

Other industries

59.2

0.3

0.4

2.7

0.2

93.2

3.1

1.2

38.3

3.1

Households' foodconsumptiondelivered from

(wholesale andretailtrade, etc.)
Total

Note: Food consumption is calculated in 2023 producer prices. All figures are rounded.
Source: Own calculations and the Danish Energy Agency.

The figures in the first column of the table show how much of food consumption ismade up of domestic deliveries from primary agriculture, slaughterhouses, dairies,

Green Tax Reform

bread factories and other food industries, etc. The penultimate figure in the firstcolumn shows that a very large part of the value of Danish-produced food products
is made up of the value added created in the Danish wholesale and retail trade infood.
The Danish production of and trade in food products results in greenhouse gas
emissions from Danish territory. These emissions are listed in the second column ofTable 4.1. Danish food production and trade also require the import of several
inputs for agriculture, slaughterhouses, dairies, etc., and the foreign production andtransport of these inputs give rise to emissions abroad, which are shown in the thirdcolumn of the table.
In addition, Denmark imports processed food from foreign farms, slaughterhouses,
dairies, etc. The value of these imports and the foreign emissions from theproduction of these imports are shown in the fifth and sixth columns of Table 4.1.
The emissions derived from Danish households' consumption of plant-based foods
primarily appear in the top row of the table (Agriculture and horticulture), where total
emissions in Denmark and abroad amount to just over 0.9 m tonnes of CO2-eq. In
comparison, the figures in Table 4.1 imply that the total emissions from Danish andforeign cattle slaughterhouses, pig slaughterhouses and dairies resulting from
Danish food consumption amount to 3 m tonnes of CO2-eq. The bottom row of thetable shows that Danish food consumption results in global emissions totalling 7.4 m
tonnes of CO2-eq, of which emissions from the food industries in the top eight rowsof the table amount to 6.5 m tonnes of CO2-eq.
Consumption tax versus a climate tax in the production stage
The following presents model calculations of the effects of a consumption tax on
climate-impacting foods and a tax on greenhouse gas emissions from domestic
agricultural production. Furthermore, the effects of a combination of the two types oftax are examined.
As shown in Table 4.1, food deliveries from cattle and pig slaughterhouses anddairies are the main contributors to climate impact. Against this background – andbecause a system of differentiated climate taxes on all food consumption would
involve very large administrative challenges – it is assumed that it is possible inrelation to EU law to limit the consumption tax system to three separate unit taxes
on the estimated CO2-eq emissions derived from Danish households' consumptionof beef, pork and dairy products. It is also assumed that all types of e.g. beef are
taxed at the same rate.
In the calculations below, the tax rate on beef, for example, is determined on thebasis of the CO2-eq emissions in Denmark and abroad that beef from Danish cattleslaughterhouses to Danish households is estimated to cause in 2030. Thus, it iscalculated how many tonnes of CO2-eq per DKK of consumption value (in 2023
prices) are emitted from the production of the agricultural raw materials and all other
inputs that Danish cattle slaughterhouses buy from Danish and foreign suppliers of
inputs to the cattle slaughterhouses. Similarly, an average total CO 2-eq emission in
Denmark and abroad has been calculated per krone of consumption of pork anddairy products delivered from Danish pig slaughterhouses and dairies.
To avoid the tax being perceived as discriminatory, and thus incompatible with EU
law and the WTO, it is assumed that Danish and imported food products of a given
category are subject to the same consumption tax rate. Thus, for tax purposes, it isPage 110

Green Tax Reform

assumed that the CO2-eq intensity of Danish and imported foods of a given type isthe same.
The consumption tax rate is assumed to be DKK 750 per tonne of estimated CO2-eq
content in the given food category. The tax is generally levied at the retail level.
The production tax rate is also assumed to be DKK 750 per tonne of CO 2-eq
emitted from each farm and is assumed to be collected from each farmer.32
Table 4.2 shows the emissions covered by the two types of tax in the calculations,compared to the total emissions from the production and consumption of food. It is
assumed that the tax base does not include the emissions from wholesale and retailtrade in food.
The central difference between the two tax types is that the consumption tax, unlike
the production tax, does not affect the emissions from the production of Danish foodfor export, but that the consumption tax, unlike the production tax, includes theestimated emissions abroad from the production of imported finished food and fromthe production of imported inputs in Danish food production (where the emission
coefficients in foreign and Danish production are assumed to be the same as
mentioned).33
Table 4.2 shows that the base for the consumption tax is significantly narrower thanthe base for the production tax. This primarily reflects the fact that Denmark's foodexports are larger than its food imports, so including exports rather than imports inthe tax base provides a broader tax base. Even if all emissions from total Danish
food consumption (excluding emissions from wholesale and retail trade) were
included in the tax base, according to the figures in Table 4.2, the tax base would
only amount to 6.5 m tonnes of CO2-eq, whereas the base for the production tax is
8.1 m tonnes of CO2-eq, even if emissions from carbon-rich agricultural land are notincluded.

The production tax is assumed to consist of a combination of a fertiliser tax and a set of taxes on the different categories of livestock corresponding to the tax base in Chapter 2 of the report. Emissions from carbon-rich agriculturalland are thus not included in the basis for the production tax. In the production levy system, to ensure comparability
with the consumption levy, there is no requirement for the use of the instruments tent covering and nitrification inhibitors, but the high levy rate makes it favourable for farmers to use feed additives, which is taken into account in themodel calculation.

32

The assumed emission coefficients in foreign production in Table 4.2 thus deviate from the foreign emission coefficients in Table 4.1, where an international input-output table is used to estimate the actual foreign emissions per unit
produced.

33

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Table 4.2. Emissions subject to taxes
m tonnes of CO2eq

Emissions

Emissions

Emissionssubject

subject

to consumption
tax

production tax

Danish production
for food
consumption ofDanish households

3.1

1.9

2.1

Danish production

7.3

0

6.0

1.2

0.4

0

3.1

0.9

0

14.7

3.2

8.1

for export
Imported
Inputs for Danish
food production
Import of finishedfood products
Total

Note: Emissions from domestic production are based on industry-specific emissions from GreenREFORM. Emissions
from domestic production for domestic consumption and export exclude emissions from carbon-rich agricultural land.
Emissions include emissions from agriculture and other industries that contribute to the value of food consumption. All
figures are rounded.
Source: Own calculations and the Danish Energy Agency.

Table 4.3 summarises the modelled effects of the two alternative tax systems. In
addition, the effects of a combined tax system are shown, where both aconsumption tax of DKK 750 per tonne of CO2-eq and a production tax of DKK 700
per tonne of CO2-eq are introduced. Such a system achieves approx. the same
reduction in domestic emissions as a production tax of DKK 750 per tonne of CO 2eq alone. The production tax in this example only includes fertiliser, liming andlivestock, and therefore does not include other measures included in Chapter 2,
including emissions from carbon-rich agricultural land. For this reason, the results,
including climate impact and shadow price, cannot be directly compared with model
1 in Section 2.3.
The premise for such a combined tax system in the third column of the table is that
there is a political objective that agriculture should contribute a certain reduction ofdomestic emissions. It should be noted that in the combined tax system, there is adouble taxation of the CO2-eq content in the part of the domestic agricultural
production that goes to domestic consumption, as this part of the production is
subject to both the production tax of DKK 700 per tonne of CO 2-eq and theconsumption tax of DKK 750 per tonne of CO2-eq. It is noted that an alternative
combined tax system, where a consumption tax is levied on imported goods as acounterpart to a production tax on domestically produced goods, is considered very
difficult to reconcile with EU law.
In the modelling calculations in Table 4.3, the calculation of the effects on foreign
emissions takes into account the derived effects on the foreign economy when
Denmark's exports and imports of food products change. This takes into accountthe fact that an increase in foreign agricultural production in order to increase
exports to Denmark will require a transfer of labour, capital, energy and other inputs

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from other parts of the foreign economy to foreign agriculture. This transfer ofresources will, all else being equal, reduce emissions from other parts of the foreign
economy, thereby limiting the overall carbon leakage effect of a production tax on
Danish agriculture.
The table shows that the production tax alone reduces emissions in Denmark byapprox. 2.8 m tonnes of CO2-eq, but increases emissions abroad by just over 0.7 m
tonnes of CO2-eq in the lower estimate for carbon leakage, see Appendix 7.8,
whereby global emissions are only reduced by just over 2.1 m tonnes of CO 2-eq.
This means that a reduction of domestic emissions by 1 tonne increases emissions
abroad by approx. 0.25 tonnes, corresponding to a carbon leakage rate of approx.
25 per cent from the production tax alone, given the assumptions about climate
policy abroad that are used as a basis for the lower estimate in the carbon leakage
calculations, see Appendix 7.8. The effect of the consumption tax on foreign
emissions is slightly negative, but close to zero. The consumption tax does slightly
curb the import of climate-impacting food products, but since the tax revenue isassumed to be returned to consumers, the tax primarily leads to a change in thecomposition of private consumption, whereby the lower import of meat and dairy
products is offset by increased imports of other consumer goods whose production
gives rise to emissions abroad.
Table 4.3. Effects of climate taxes on consumption and production
Consumptiontax
Tax(consumption/production),
DKK per tonne of CO2-eq

Production tax

Combination

750

750

750/7001)

Denmark

0.2

2.8

2.8

Abroad

~0

-0.7

-0.6

Globally

0.2

2.1

2.2

Crops

0.2

-7.9

-7.5

Cattle

-1.9

-20.2

-20.9

Pigs

-0.6

-17.7

-17.0

Consumer price index forfood products

1.2

0.3

1.4

Consumer price index forfood products (excluding
drinks)

1.6

0.4

2.0

Decline in land values(excl./incl. afforestation
subsidies)

0.6 / -11.1

16.8 / 8.8

16.4 / 8.3

CO2-eq reduction (mtonnes)Change in production (percent)

Price change (per cent)Green Tax Reform

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Shadow prices, excludingside effects (DKK per
tonne of CO2-eq)
Shadow price on
domestic reductions

3,250

450

650

Shadow price on global
reductions

3,250

600

800

Note: The consumption tax is levied on the consumption of beef, pork and dairy products. The production tax does
not include emissions from carbon-rich agricultural land. All figures are rounded.
1) The consumption tax is DKK 750 per tonne of CO2-eq, while the production tax is DKK 700 per tonne of CO2-eq
Source: Own calculations

According to the third column in Table 4.3, the introduction of a consumption tax of
DKK 750 per tonne of CO2-eq on beef, pork and dairy products would allow for a
reduction in the production tax from DKK 750 to DKK 700 per tonne of CO2-eq if thesame reduction in domestic emissions from Danish agriculture is to be maintained.
This means that an increase in the consumption tax rate of DKK 1 will only enable a
reduction in the production tax rate of just under DKK 0.7, and that a consumption
tax must be 15 times as high as a production tax to ensure the same domestic CO 2eq reduction.
This partly reflects the fact that the consumption tax base is significantly narrower
than the production tax base. If one simplistically assumes that the effect of a tax
charged at a given rate is proportional to the tax base, the figures in Tables 4.2 and4.3 imply that a consumption tax would have to be almost 6 times as high as a
production tax to ensure the same domestic CO2-eq reduction if the tax base for thetwo tax types had the same size.34
This result shows that a tax at the production stage is a much more effective
instrument to reduce domestic emissions than a consumption tax. This is due toseveral factors. Firstly, the consumption of the particularly climate-impacting foods
is relatively insensitive to price increases, even when taking into account thepossibility of substitution towards less climate-impacting plant-based foods, see Box
4.1. The production tax, on the other hand, hits exports, which are far more priceelastic than domestic food consumption due to international competition in theexport market. Therefore, the production tax has a significantly higher impact on
domestic agricultural production.
Secondly, the production tax is directly targeted at lowering domestic emissions,whereas the consumption tax does not include emissions from domestic production
for export, but works in part by lowering food imports and thus emissions abroad.
Thirdly, a large part of the effect of a consumption tax on food consumption can also
be achieved through a production tax, as approximately half of the cost increase
due to a production tax will be passed onto consumer food prices, according to themodelling calculations.

According to Table 4.2, the production tax base is 8.1/3.2 = 2.53 times larger than the consumption tax base. If thebasis for the two types of tax were the same, the effects of the consumption tax would therefore be approx. 2.53
times greater than the effects shown in Table 4.3. In this case, the consumption tax rate would only need to be
15/2.53 = 5.93 times higher than the production tax rate to ensure the same CO2-eq reduction.

34

Green Tax Reform

Fourthly, unlike the consumption tax, the production tax gives the individual
domestic agricultural company a direct incentive to reduce emissions throughtechnical measures such as feed additives, which in the model calculations
contribute CO2-eq reductions of almost 0.5 m tonnes.
The figure of production change in Table 4.3 further help to explain the difference in
the impact of the two types of taxes on domestic emissions. It can be seen that the
production tax leads to a decrease in domestic animal agricultural production in theorder of approx. 20 per cent, whereas the consumption tax only reduces domestic
animal production by 1-3 per cent. The structural effect of a consumption tax is thus
much smaller, which can be seen as an advantage, but the counterpart to this isthat the consumption tax only contributes very little to fulfil Denmark's obligations to
reduce territorial emissions.
As the consumption tax is an ineffective tool for reducing domestic emissions, thesocio-economic shadow price of domestic CO2-eq reductions using this instrument
is almost five times as high as that of domestic CO 2-eq reductions using a
production tax, see the penultimate row in Table 4.3. The consumption tax is aslightly more effective instrument for reducing emissions abroad, as it does not
result in carbon leakage, unlike the production tax, but nevertheless, the bottom row
in Table 4.3 shows that the shadow price of reducing global emissions (the sum ofdomestic and foreign emissions) is more than three times higher with a consumption
tax than with a production tax. This is because the production tax is a much more
effective instrument for lowering domestic emissions.
Box 4.1
How does food consumption react to a climate tax in the consumption stage?
If a consumption tax is introduced on particularly climate-impacting foods, it has three immediate
consequences for households: 1) The tax erodes real disposable income, so households will have to
reduce their overall consumption over time. 2) Food becomes more expensive compared to othergoods. 3) The particularly climate-impacting foods become more expensive compared to otherfoods. The first effect can be largely eliminated if the tax revenue is channelled back to households,
which is assumed in the following.
The second effect 2) encourages consumers to lower the consumption of food in relation to theconsumption of other goods. The size of this substitution effect depends on the so-called elasticity of
substitution between food and other goods, denoted by sF in equation (1) below. This elasticity of
substitution indicates the percentage decrease in the ratio between food consumption and otherconsumption when the relative price of food increases by 1 per cent.
The third effect 3) encourages consumers to reduce their consumption of particularly climateimpacting foods relative to the consumption of other foods. The strength of this substitution effectdepends on the elasticity of substitution sK between the particularly climate-impacting and the lessclimate-impacting foods, which indicates the percentage decrease in the ratio between the
consumption of these two food groups when the relative price of the climate-impacting foods
increases by 1 per cent.
The size of the total effect of the consumption tax is measured by the price elasticity of demand forclimate-impacting food products, which indicates the percentage decrease in the consumption ofthese products when their relative price increases by 1 per cent. The price elasticity depends on theabove-mentioned elasticities of substitution and on the weight with which the taxed and non-taxed
food are included in the household budget. If one assumes that consumers seek to maximise thesatisfaction of needs they can achieve with a given total consumption budget, it can be shown thatthe price elasticity of demand for climate-damaging foods (denoted e K ) is given by the formula
eK = (aK – a) sF + (1- aK) sK(1)

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where a is the share of the household's total consumption budget that goes towards the purchase ofclimate-impacting food products, and aK is the share of the household's total food budget that goes
towards the purchase of these products. Since only a portion of the total household budget is spent
on food purchases, aK is greater than a. Thus, the expression (aK – a) sF on the right-hand side of (1)is positive and captures the effect of an increase in the price of climate-impacting foods, encouraging
a decrease in total food consumption. In contrast, the expression (1-aK) sK reflects the effect of
encouraging consumers to shift food consumption towards less climate-impacting foods.
Several empirical studies indicate that substitution between household consumption of food andnon-food goods is limited, which is intuitive as food fulfils basic needs. An empirically plausible value
for the elasticity of substitution between food and non-food products is sF = 0.3. The possibility of
substitution between particularly climate-impacting foods (e.g. meat and dairy products) and lessclimate-impacting foods is greater, and an empirically plausible size of the elasticity of substitution isestimated to be in the order of sK = 1.2. In Denmark, food consumption accounts for approx. 10 per
cent of total private household consumption. For example, if the consumption of particularly climateimpacting foods accounts for half of total food consumption, i.e. aK = 0.5, this means that the share ofthese products in the total household consumption budget is a = 0.1×0.5 = 0.05. With all theseparameter values, it follows from equation (1) that the price elasticity of demand for climateimpacting food is
eK = (0,5 – 0,05)×0,3 + (1- 0,5)×1,2 = 0,735(2)This result means that the consumption of particularly climate-impacting foods will fall by just over 0.7
per cent when their relative price increases by 1 per cent. According to Table 2 above, aconsumption tax of, for example, DKK 750 per tonne on particularly climate-impacting foods would
increase the average price of all foods (excluding beverages) by almost 1.5 per cent. If it is roughly
assumed that the price of particularly climate-impacting products increases by double, as only theseproducts are affected by the tax, it follows from the estimate of the price elasticity in equation (2) thatthe consumption of climate-impacting foods will fall by 3 × 0.735 = 2.2 per cent.
Greenhouse gas emissions from the production and transport of food are assumed to decrease
roughly proportionally with consumption. For example, if you want to reduce emissions caused by
the consumption of particularly climate-impacting foods by 10 per cent, it follows from the priceelasticity in (2) that the price of these products must increase by 10/0.735 = 13.6 per cent, which
would require a consumption tax that is many times higher than the DKK 750 per tonne mentioned
above.
The analysis above is stylised and is only intended to illustrate some basic relationships.

The main conclusion from the modelling calculations above is that the introductionof a consumption tax in combination with a production tax and as a partial substitutefor a production tax only to a very limited extent can reduce the adjustment burdenof agriculture when there is a target to reduce emissions from domestic agriculture
by a certain amount. Such a combined tax system also implies a higher shadow
price on domestic CO2-eq reductions than the pure production tax, as foodconsumers will bear a higher burden. The shadow price of global CO 2-eq reductions
from a production tax is subject to considerable uncertainty due to uncertainty
about the size of the leakage effect. If the leakage effect is larger than the one usedin the modelling above, the difference between the shadow prices of global CO 2-eq
reductions under the two tax forms narrows, but in any case, the Expert Group's
analysis indicates that the shadow price is significantly higher under a consumption
tax than under a production tax.
Administrative issues
A climate tax at the consumption stage would need to be designed to reflect how
much greenhouse gas is emitted globally in the production and transport of the
product being consumed. In practice, this is very uncertain and administratively
difficult. This is particularly due to the fact that the domestic authorities only have
limited information about how production and transport abroad has taken place, see

Green Tax ReformBox 4.2.
Box 4.2
Administrative aspects of a CO2-eq tax at the point of consumption – an example with beef
A CO2-eq tax on beef would ideally be designed to reflect how much greenhouse gas is emitted
during the production and transport of each type of beef.
Cattle become beef at a slaughterhouse when they are slaughtered. If the emissions associated withbeef production are to be reflected 1:1 in the tax, it would require the authorities to have detailed
knowledge of the production method and transport of the product, e.g. under what conditions thecattle have lived, what feed they have consumed, breed, weight, etc. All of these factors must thenbe converted into greenhouse gas emissions. These conditions will vary depending on where thecattle are raised and where they are taken after slaughter. In addition, there will be a lot of variation
across different types of beef and products where beef is a proportion of the product. Furthermore,
beef that is not sold as a product in itself but is included in other products, such as pizza, cold meats,etc., will have to be taxed.
Such detailed information is very difficult for the taxpayer to provide and for the authorities to verify fora tax base. This applies in particular to detailed information from exporters of beef from remotecountries to Denmark, where an effective control by the Danish tax authorities is unlikely to bepossible, as the Danish authorities do not have detailed information on how production and transportabroad has taken place. In addition, foreign-produced beef is, all other things being equal, expected
to have longer transport distances and thus emit more greenhouse gases, which means that ahigher tax must be paid on foreign meat. This may raise obstacles under EU law due to theprohibitions on discrimination against foreign products and quasi-customs charges.
For these reasons, it is deemed necessary to base a beef tax on an estimate of the average CO2-eq
emissions per kilo of meat consumed. It may be possible to try to differentiate the tax across themain categories of beef, but this would raise difficult administrative demarcation issues. In any case,using an estimated average emission for a given category of meat would mean that individual
producers would not be incentivised to switch to more climate-friendly production methods, as thiswould not trigger a lower tax on their product. Furthermore, for practical and EU law reasons, astandard rate of tax could hardly be higher for imported goods than on similar domestically produced
goods, even if the imported goods have undergone a longer transport.
If the tax is calculated and imposed late in the retail chain, e.g. just before the sale to the consumer(to include all transport to the supermarket in the tax base), the supermarket will be the one tocalculate and declare the tax. This will result in an administrative burden for supermarkets, which, likethe tax, is expected to be passed on in consumer prices. In addition, a tax imposed late in the chain
will mean a large number of taxable businesses with a significant need for control.
A state-controlled climate label on all food products (both imported and domestically produced)
could possibly solve the administrative challenges and form the basis for a tax late in the chain, butwould still present control challenges in relation to foreign food products.
A tax at the production stage, on the other hand, does not require knowledge of the form of
production and transport abroad.

The Expert Group notes that a Danish task group has been set up, which in its
report recommends that a state-controlled climate label be established, where all
foods are ranked according to their climate footprint.35

See, for example, the Danish Veterinary and Food Administration: ”I Udvikling af et klimamærke til fødevarer anbefalinger fra Arbejdsgruppen” (Developing a climate label for food products - recommendations from the SubCommission). April 2023 (https://foedevarestyrelsen.dk/Media/638207095580381128/Klimam%C3%A6rke_anbefalinger%20fra%20arbejdsgruppen_27.%20april%202023.pdf)

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Administrative issues in relation to EU law
It is considered possible within EU law to introduce a combination of a production
and consumption tax in the case analysed above, where the consumption tax covers both domestically and foreign-produced goods for domestic consumption.
A combination of production and consumption tax, on the other hand, is consideredvery difficult to implement in accordance with EU law if you alternatively want to impose a consumption tax on imported goods as a counterpart to a production tax on
domestically produced goods.
The starting point in EU law is that no tariff-like measures may be established within
the EU customs union.
It is not considered possible to impose a consumption tax on imported goods frome.g. cattle and pigs (meat and dairy products) at the same time as the tax at the
production stage, as this inherently takes place outside Denmark. Instead, a consumption tax on imported goods would have to be tied to other conditions, e.g. afterslaughter when the meat is sold for retail consumption or for further processing. As
the national CO2-eq tax and the consumption tax on imported goods cannot be imposed at the same time or in the same stage, such a combination of production andconsumption tax would probably constitute a quasi-customs tax that is not compatible with EU law.
Even if it were possible within the framework of EU law, it would still be virtually impossible in practice to align the rate of excise duty on all different agricultural products (e.g. meat and dairy) with the rate of production tax, as the domestic authorities, as mentioned, have limited information on how production and transportabroad has taken place, see Box 4.2.
Conclusions and recommendations regarding a climate tax on end
consumption
The Expert Group's analysis of the advantages and disadvantages of a CO 2-eq tax
on end consumption can be summarised as follows:
The advantages of a climate tax on end consumption are that it does not weaken
domestic competitiveness and thus does not create greenhouse gas leakage. Also,
by lowering consumption and imports of climate-impacting goods, it reduces
emissions abroad that are derived from domestic consumption. A consumption tax
can therefore be a relevant instrument if there is a political objective to reduce
Denmark's global climate footprint. However, if the revenue from a consumption tax
on particularly climate-impacting foods is returned to consumers, the lower importsof these goods will be offset by increased imports of other consumer goods that also
give rise to CO2-eq emissions abroad, so the overall effect on foreign emissions will
be very limited.
The disadvantages of a climate tax on end consumption are that in order todetermine the appropriate size of a consumption tax, it will be necessary to quantify
how much of a reduction in climate footprint is desired over a given time horizon,
and there will be a need to clarify how the climate footprint is to be calculated.
However, calculations of a country's global carbon footprint are subject to great
uncertainty, partly because the carbon footprint depends on production methods
and climate policies abroad, which are constantly changing. Furthermore, there iscurrently no quantified target for lowering Denmark's global climate footprint.
International climate cooperation, on the other hand, is based on a territorial

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principle, according to which each country is responsible for the emissions from its
territory. The 70 per cent target in the Danish Climate Act and Denmark's climate
policy commitments to the EU are in line with this principle.
The Expert Group's analyses show that a CO2-eq tax at the production stage on
emissions from individual farms is a far more targeted and cost-effective means ofmeeting Denmark's national climate targets and international climate commitments
than a climate tax on the end consumption of food. This is because a consumption
tax will exempt emissions from the extensive Danish food exports and theassociated domestic deliveries of agricultural raw materials, and it will not incentivise
individual farmers to develop and use more climate-friendly production methods. For
these reasons, the introduction of a tax on end consumption will only allow for a very
limited reduction of the tax in the production stage if Denmark's territorial climate
targets, including the 70 per cent target, are to be met, and the additional socioeconomic cost of a consumption tax will be high. In addition, an administrable
climate tax on end consumption is considered to involve more imprecise taxation of
the actual climate impact than a tax at the production stage.
For this reason, a climate tax on end consumption is not included in the models
presented in Chapter 2.

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Implementation

5

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5. Implementation
The Expert Group's terms of reference state that its recommendations must be implementable and take into account legislative, EU law, systemic and administrative
consequences. In addition, the Expert Group's terms of reference state that the Expert Group's recommendations must take into account that the development andimplementation time for initiatives in the tax area, including new tax structures, isconsiderable.
The Expert Group has emphasised that the models can be implemented both administratively and legally in time to meet the reduction targets in 2030, and that theimplementation is closely linked to the national emissions inventory. The regulatory
basis for agriculture's non-energy-related CO2-eq emissions in the Expert Group's
models is based on data that is already being reported today. This means that there
is only a limited need for increased reporting from farmers.
On this basis, the assessment is that the models fulfil this requirement, and it is expected that the models for the overall tax and subsidy system, including compensatory measures, can be approved under EU state aid rules.
The regulatory basis is based on the same method used for the national emission inventory of emissions from Agriculture and LULUCF.
CO2-eq emissions from agriculture and forestry from e.g. livestock, carbon-rich agricultural land, fertilisers and liming are calculated in the emissions inventory as thesum of emissions from agriculture's 𝑁 various activities, see Appendix 7.3. The
overall method for calculating the emissions is for each activity denoted by 𝑖, to determine an emissions factor and quantity from which the individual activity's emissions can be determined. Thus, agriculture's CO2-eq emissions can be summarised
as follows:𝑁

CO₂-eq emissions = ∑ quantity𝑖 ∙ emissions factor𝑖
𝑖=1

The total emissions are calculated based on farm-related activities and standardisedemissions factors linked to each activity, as well as, in certain areas, emissions factors for used greenhouse gas-reducing technology. It is thus assumed that emissions from livestock (digestion and fertiliser management) and fertiliser applied tofields can be regulated based on the farm-specific information and activity data usedin the national emissions inventory. Similarly, it is assumed that emissions from carbon-rich agricultural land can be regulated based on farm-specific information fromthe map basis and activity data used in the national emissions inventory.
The farm-specific information and activity data are already registered today via selfreporting from the individual farms as part of the existing environmental and foodregulation. However, stable and storage technologies are not self-reported today,Green Tax Reformneither in the fertiliser accounts nor in other registers in the environmental area. It is
assumed that these will be included in the regulatory basis when the necessary registration is provided.
The recommended models involve the implementation of four new taxes (alternatively three new taxes and the restructuring of direct agricultural subsidies to subsidies for reduced fertiliser usage):1.

Tax on livestock. The tax is assumed to be based on the amount of emissions in
tonnes of CO2-eq calculated at the farm level based on reported activity data
and the associated emissions factor, see Appendix 7.6 and sections below. The
calculation of the tax can thereby take into account different activities in linewith variations from the emission inventory, where there is variation based on,e.g. breed, weight, types of housing, etc., as well as possibly adoption of technology such as feed additives.

2.

Tax on fertiliser on fields or subsidies for reduced fertiliser usage. The tax is assumed to be imposed per kg of nitrogen applied to the field based on the calculation from the emissions inventory, while the subsidy is allocated per reduced
kg of nitrogen in relation to the fertiliser standard of the individual field.

3.

Tax on agricultural lime on fields. The tax is assumed to be imposed per kg ofagricultural lime sold by producers and importers of agricultural lime.

4.

Tax on CO2-eq emitted from carbon-rich agricultural land used as agriculturalland. The tax is assumed to be levied per hectare based on existing maps ofcarbon content in agricultural land at farm level.

As stated in Section 6.3, in Q1 2024, the European Commission is expected to present an announcement on a new EU climate target for 2040 and a new climate architecture in the EU after 2030, including an ETS in agriculture at EU level. If an ETS
in agriculture at the EU level is adopted, the Expert Group, therefore, recommends
that the regulatory basis for national taxes and subsidies supports the work of theEuropean Commission on a regulatory basis for an ETS in agriculture at the EU
level.
Tax on livestock, fertiliser application and carbon-rich agricultural land:
Farm-related activities and emissions factors
A farm-related inventory of emissions from livestock can be made by multiplying activity data (AD) by an emissions factor (EF) that varies across activities, in:
Farm-related inventory of emissions from livestock = ∑ 𝐴𝐷𝑖 ∗ 𝐸𝐹𝑖
On this basis, the tax payment for the individual farm with livestock can be expressed in the formula below, where T is the CO2-eq tax of, for example, DKK 750
per tonne of CO2-eq.
Tax payment = 𝑇 ∗ 𝐸missions from livestock = 𝑇 ∗ (∑ 𝐴𝐷𝑖 ∗ 𝐸𝐹𝑖 )Activity data is e.g. number of dairy cattle, number of pigs (sows, fattening pigs andpiglets) and type of housing. Based on the emissions inventory, there are approx.
250 unique variations for activities (AD) in emissions from digestion and fertiliser
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each with an individual emissions factor (EF). In the situation where, for example,
feed additives become widespread and widely used, this will be reflected in theemissions inventory's ongoing work with emissions factors. Emissions factors will
decrease with the introduction of approved technical reduction measures such as
feed additives.
Based on the above, the approach to data for calculating the tax can be illustrated
as in Figure 5.1. The figure is based on the tax on livestock. However, it is the same
system that applies to the regulatory basis for fertiliser tax and carbon tax on agricultural land.
Figure 5.1. Data streams used for calculating tax
The farmer self-declares activity data (AD) according tocommon practice in e.g. the fertiliser accounts and the livestock register on livestock and type of housing (number ofcattle/pigs, type (dairy cattle/fattening pigs).

1
The Danish Customs andTax Administration calculates
the tax based on the calculation of the farm-related inventory of emissions fromitem 3 and creates a levy forthe farm (Farmer from item1). The Danish Customs andTax Administration handles
any complaints about calculation and collection.

4

2
3

Activity data in the fertiliser accounts is controlled and managed by the Danish Agricultural
Agency (data owner). The data
owner also fulfils other administrative law obligations in relationto activity data (e.g. correctionsof activity data, declaration ofdata, data rectification and complaint handling in connection
with the activity data).

The Danish Customs and Tax Administration multiplies
emissions factors (EF) and activity data (cattle/pigs,
type (dairy/fattening pigs) and type of housing) via adata link to activity data. The owners of the activity
data send a statement of the farms subject to tax tothe Danish Customs and Tax Administration.

Base deduction in tax
The base deduction in the tax on livestock is organised according to the same criteria as for the tax, i.e. with variations based on weight, breed, stable types, etc., see
Appendix 7.6. This means, for example, that dairy cows receive a base deductionthat is higher than the deduction for beef cattle.
De minimis limits in tax
The starting point is that all livestock included in the emissions inventory must be
taxed based on the emissions factors from the emissions inventory. In addition toGreen Tax Reform

cattle and pigs, the emissions inventory includes chickens, pheasants, ducks, mink,
sheep, goats, horses, deer, lambs and ostriches.
When introducing a tax, de minimis thresholds will need to be set for when a farmshould be taxed. The introduction of de minimis thresholds means that not all livestock are included in the tax base, which may constitute state aid. For a de minimis
threshold to be in line with EU state aid rules, there must be proportionality between
the administrative burden that is reduced by not including all animals and theamount of emissions that will be reduced. The assessment is that de minimis thresholds can be established within the framework of EU state aid rules, with the final assessment depending on their design. There are already de minimis limits in the fertiliser accounts for how large a farm must be (measured in e.g. produced kg nitrogen) to be registered in the fertiliser accounts.
Tax on applied fertiliser
To calculate emissions from fertiliser spread on fields, the emissions inventory uses
an average emissions factor for nitrogen of approx. 4.2 kg of CO 2-eq per kg nitrogen spread on fields.
Reducing fertiliser usage in relation to a farmer's nitrogen quota can be used as an
instrument in the existing nitrogen regulation. The effect of this is included in Climate
Status and Outlook 2023. If a tax on applied fertiliser is introduced, it will, all else being equal, displace part of the climate effect of mandatory catch crops and livestock
catch crops, which are included in the existing nitrogen regulation. In order to ensure that the climate effect of a tax is additional to the effect of the existing nitrogen
regulation, it is assumed that the existing nitrogen regulation is adjusted by, for example, removing reduced fertiliser usage as an instrument in the mandatory catch
crops and livestock catch crops. Other things being equal, such an adjustment will
increase the costs for the farmer to comply with the nitrogen regulation. The cost of
this has not been calculated.
Tax and subsidies for wetland restoration of carbon-rich agricultural land
Unlike activity data on livestock and fertiliser, farms do not self-report the number of
hectares of carbon-rich agricultural land. In the emissions inventory, emissions fromcarbon-rich agricultural land are calculated by an overlap analysis between the carbon map (formerly the Texture14 map, now the Peat 2022 map) and the so-called
cultivation maps (IMK maps) of agricultural land used for the payment of agricultural
subsidies.
In recommending a tax, the Expert Group assumes that it is possible to create aregulatory basis based on the same overlap analysis. In addition, the structure forthe tax on carbon-rich agricultural land is assumed to be the same as for livestockand fertiliser applied to fields, see the figure above.
The Expert Group recommends that farmers are given the opportunity to challenge
the carbon map if they have been levied a tax and disagree with the classification of
the carbon content of their soil. The farmer must be able to have his soil tested by
an impartial, state-authorised third party who takes soil samples based on set technical standards, and an accredited laboratory must analyse the soil samples. The
Expert Group has noted that AU(DCA) is working on a proposal for how a challengeright of the carbon map at field level can be designed in relation to technical standards (including number of soil samples, location of soil samples in relation to thespecified area and possibilities for including measurements of carbon content withdrones).

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Such a solution would involve financial costs for sampling as well as an increased
demand for resources for soil samples. In addition, the solution incurs financial costsin terms of processing time to handle the complaints from farmers.
It can be considered whether a fee should be charged to the farmer if they wish to
exercise their right of challenge provision.
If the updates are to be used by the authorities to adjust the tax, the updates fromthe soil samples must be plotted on a map. AU owns the data in the carbon map. It
would be recommended that the authorities and AU work together to ensure that
farmers' objections can be updated in the existing carbon map. The Expert Group
notes that the basis for emissions from carbon-rich agricultural land is uncertain.
Most recently, AU (DCA) has decreased the number of hectares, and towards KF25
an adjustment of the emissions factors is expected. Therefore, it is a prerequisitethat the necessary resources are allocated to the area to establish a robust tax
base.
It is assumed that the subsidy can be based on an expansion of the appropriationfor existing schemes, see Section 3.1.
Subsidy for afforestation
The Expert Group has presented a model with private afforestation, which has thelowest public costs (per tonne of CO2-eq). However, the high recreational value ofstate afforestation may mean that more funds should be allocated to achieve thesame CO2-eq effect with higher government costs but greater recreational value.
The Expert Group therefore recommends that the relevant authorities and politicaldecision-makers ensure an appropriate distribution between private and stateowned forests based on an overall assessment of costs and socio-economic profitability, including consideration of the applicable environmental and nature objectives.
Subsidy scheme financed by agricultural subsidies for reduced fertiliser usage
It is considered possible to implement a subsidy scheme for reduced fertiliser usage
from 2026 if a decision is made before the end of 2024. The scheme could be financed from agricultural subsidies by reducing direct agricultural subsidies (thehectare subsidy). Specifically, the subsidy will be given to farmers to reduce theirso-called fertiliser quota. This is described in more detail in Box 5.1.

Box 5.1
The fertiliser quota
A farmer's fertiliser quota is the sum of the nitrogen norms for the farmer's fields. The norms are an
estimate of the amount of nitrogen that gives the farmer's economically optimal crop yield at the fertiliser level, where the income from the extra yield can just about pay for the extra cost of the nitrogen
fertiliser. The norms are estimated by averaging the optimal fertiliser application across farms. The
norms are set by a committee led by Aarhus University, with participation from SEGES, the Department of Food and Resource Economics and the Ministry of Food, Agriculture and Fisheries of Denmark, and constitute a central element of the existing nitrogen regulation.
The actual average fertiliser usage by farmers is below the norm. This is because the norm is set as
an average of the economically optimal use and sets an upper limit on fertiliser usage. This meansthat some farmers have an economic optimum for their fertiliser usage that is below average and will,
therefore, use less fertiliser than the norm allows. The average fertiliser usage indicates a large
spread.

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A possible subsidy scheme is based on the existing model for targeted nitrogen regulation, which will have to be adjusted in a number of areas, as compensation for reduced fertiliser quotas has not previously been given.
The subsidy scheme is expected to be offered as a so-called bio scheme. Like othereco-schemes, the scheme will work by allowing farmers to apply for subsidies for reduced fertiliser usage at the beginning of the year (early February to late April). The
Danish Agricultural Agency will be responsible for development, case management,
payment of subsidies, control of the scheme, etc. The introduction of an ecoscheme requires funding and the approval of the EU Commission. A new ecoscheme will have to be included in the Danish strategic plan for the implementationof agricultural subsidies, which is covered by the Agricultural Agreement. Amongother things, the EU Commission will have to accept that the quota reduction iscompensated.
EU rules for agricultural subsidies state that losses or additional costs can be compensated for and that the compensation rate can be set according to the averagemarginal cost of implementing the desired reductions. This is described in more detail in Box 5.2. The calculation of the subsidy rate must be carried out or verified byan institution independent of the ministry. In Denmark, the University of Copenhagen (IFRO) handles this task.
Box 5.2
Determination of CAP-funded subsidy
The calculation of subsidies is stipulated in the EU rules for agricultural subsidies. It must be carriedout or verified by a knowledge institution independent of the ministry, which is why IFRO handles thecalculations in Denmark.
EU rules for agricultural subsidies state that farmers can be compensated for the loss or extra cost
incurred by complying with the subsidy scheme's requirements. The calculation may also take into
account the objectives to be achieved by the scheme, which, depending on the specific scheme,
may allow for a more marginal consideration, see (EU) 2021/2115, Article 31(7)(b) for eco-schemes
and Article 71(4) for Pillar II.
The compensation rate can be set according to the marginal cost of realising the desired reductions.
IFRO's calculation will be based on the costs and losses incurred by farmers to meet a given target.
Here, it is assumed that the farmers first use the transition elements with the lowest costs, then theelements with the second lowest costs, and so on until the costs correspond to the farmers' averagemarginal costs of reaching the target.
By taking marginal costs, rather than average costs, as a starting point when setting a compensation
rate, the possibility of achieving the set goals increases. Such an approach is currently used to determine the compensation rate in the targeted nitrogen regulation, where the specific approach has
been approved by the European Commission.

When introducing regulation for reduced fertiliser usage, interaction challenges withother environmental subsidy schemes will need to be addressed. For example, it iscurrently unclear whether ecologists can be included in the subsidy scheme while
receiving a conversion subsidy. The Agricultural Agreement states that the targeted
regulation will be replaced by a new and more cost-effective nitrogen regulation
model from 2026.
Subsidies for biochar by pyrolysis
It is estimated that there is currently no sufficient economic incentive for pyrolysis
producers and farmers to produce biochar by pyrolysis or store biochar. The Expert

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Group suggests that inspiration be sought from the subsidies for capturing and storing CO2 (CCS), where subsidies are given per stored tonne of CO2. This means that
there is a competitive subsidy tender that companies can bid on. The winning company will be responsible for the entire supply chain. The sale of private carbon credits and the fertiliser value of biochar can potentially improve the profitability of biochar. There is currently no experience with subsidy schemes for greenhouse gas reductions from biochar.
According to the IPCC's guidelines, greenhouse gas reductions from biochar are
only recognised when biochar is stored in agricultural land. Therefore, the CO2 effect of the subsidy will only be certain if it is allocated to the storage of biochar in agricultural land. This applies regardless of whether biochar is produced domesticallyor imported. Danish production of biochar that is exported will be included in thecalculation in the recipient country. Support for biochar should, therefore, be conditional on storage in Danish soil. The subsidy rate for biochar should reflect the emissions factor of the biochar, including any variations in relation to the carbon content
of the stored biochar. The carbon content depends, among other things, on the biomass used to produce biochar. The exact design of a possible subsidy scheme
must be clarified in further work. Establishing an aid scheme for storing biochar in
agricultural land will involve the development of a new aid model, which will need to
be authorised under the EU State Aid Guidelines.
In addition, clarification of a number of environmental issues, agronomic consequences and determination of climate effects of storing biochar in agricultural land isongoing. Among other things, research results on the amount of environmentally
harmful substances in biochar are still pending. The inclusion of climate effects inthe national emissions inventory and Climate Status and Outlook will await methodology development for the emissions factor for biochar, see Section 7.5.
It is assumed that there is clarity on the regulatory framework, including environmental regulation, the emissions factor and the subsidy scheme for storing biochar
in agricultural land in 2027.
Implementation time
The Expert Group has noted that, in connection with the implementation of the CO 2eq regulation models, there will generally be a need to strengthen the control andquality of the data sources for activity data from the existing environmental, foodand regulation, increase the incentives for correct registration in existing registers
and adjust the administrative setup if the data sources are to be able to be used asassumed above and be used as a basis for variations in a taxation and subsidy basis. In the assessment, it is assumed that authorities with responsibility for the data
used, e.g. from existing environmental and food legislation, are also generally responsible for administrative law obligations, including the declaration process anddata corrections. The Ministry of Food, Agriculture, and Fisheries expects that theDanish Agricultural Agency can handle an improvement in data quality for livestock(including stables) in 2 to 4 years if the necessary administrative resources are provided. It has not been possible to estimate the timeframe for improving data quality
and control on fertiliser application and providing data on the use of technologies,
but it is assumed that this is feasible.
It is expected that the Danish Customs and Tax Administration can develop and implement systems for calculating and collecting the taxes. The Ministry of Climate,
Energy and Utilities issues an executive order setting emissions factors for the purpose of applying the taxable base. When setting emissions factors, consideration

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should be given to updating them as new knowledge is obtained about, for example,
technologies, minor adjustments to existing emissions factors, and how often theemissions factors and, thus, the tax base are adjusted. In addition, a data connection between the systems of the Danish Agricultural Agency and the Danish Customs and Tax Administration will need to be developed and implemented. Overall,the Expert Group's models will result in administrative costs for affected authorities.
Subject to the specific content of the tax model, it is estimated that the implementation of the calculation engine, collection module and data connection between thesystems in, for example, the Danish Agricultural Agency and the Danish Customs
and Tax Administration will take 2-4 years. It is estimated that legislative proposals
can be submitted 12-15 months after a political agreement has been reached.
In its calculations, the Expert Group has assumed that a tax on agricultural greenhouse gas emissions could come into force from 1 January 2027 and be phased in
towards 2030.
State aid and other obligations
The tax initiatives, including the aforementioned base deductions per hectare andper animal, together with the other tax and subsidy elements in the Expert Group's
models, must be implemented in accordance with EU legal obligations, including
state aid rules and other obligations. Once the final model is finalised, it may be necessary to obtain approval of the model under state aid rules or at least discuss any
state aid issues with the European Commission.

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Main Characteristics
of Current Regulation

6

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6. Main
Characteristics ofCurrent Regulation
The Expert Group's considerations must be seen in the context of the current regulation of greenhouse gas emissions. This chapter describes the current CO 2-eq regulation of agriculture and LULUCF today and in the future.
Today, greenhouse gas emissions are not separately regulated for the agriculturaland forestry sector, but environmental regulations, to a large extent, also affectgreenhouse gas emissions. Environmental regulation consists mainly of regulation of
nitrogen from fertilisers, livestock regulation and incentives via the EU's common agricultural policy.
It also describes international CO2-eq regulation (Section 6.1) and upcoming EU
plans and initiatives (Section 6.3).

6.1 International CO2-eq Regulation
The international regulation of greenhouse gas emissions from the agriculture andforestry sector is primarily overseen by the EU. In the EU, this is done through the
EU's Effort Sharing Regulation, the EU's LULUCF Regulation and the EU's Common
Agricultural Policy (CAP).
The Effort Sharing Regulation and the LULUCF Regulation's reduction commitments
can basically be realised in two ways: 1) by national reduction measures and 2) byusing a variety of flexibility mechanisms. This provides more options that can impact
the coherence between the fulfilment of EU commitments and the 70 per cent target
as well as the climate target for agriculture.
The EU obligations impose certain demands on the need for national reductions.
Thus, the connection between fulfilling the EU obligations and the national climate
targets depends partly on timing and partly on the reduction efforts in the specificsectors. As the national 70 per cent target is a point target in 2030, and the Effort
Sharing Regulation is a budget target for the period 2021-2030, a significant reduction effort early in the period may mean that meeting the EU obligations does not, in
isolation, lead to meeting the 70 per cent target. However, it is possible that the fulfilment of the national climate targets, including the 70 per cent target, the climate
target for agriculture, and the EU obligations are considered in conjunction, so that
all the obligations are fulfilled simultaneously without over- or underfulfilment. If reduction efforts are organised so that all obligations are met simultaneously, the useof flexibility mechanisms can alleviate the need for how speedily reduction efforts
are initiated.

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6.2 Regulation of Non-Energy-Related Greenhouse Gas Emissions from Agriculture and Forestry
Non-energy-related greenhouse gas emissions from agriculture are not currently
regulated. This means, among other things, that they are not covered by the CO 2
tax that was agreed upon in the Green Tax Reform Agreement from 2022. However,current environmental regulation has an impact on greenhouse gas emissions, so it
can be said that environmental regulation also indirectly regulates a share of thegreenhouse gas emissions.
A number of activities in the use of agricultural land determine each farm's impact
on both the climate and the environment. These are cycles of carbon, nitrogen (asnitrate, nitrous oxide and ammonia) and phosphorus, where environmental and climate action can have both positive and negative synergies at the same time. Animal
digestion is only regulated to a limited extent within current environmental regulation.
Current environmental regulation can be broadly categorised into three categories:i) land use regulation, ii) livestock regulation and iii) the EU's common agricultural
policy. These types of regulations are rooted in various EU directives and national
regulations, a number of which are aimed at reducing the environmental impact ofagricultural production.
Land use regulation affects emissions from fertiliser spread on fields. The regulation
focuses primarily on nitrogen emissions. The purpose is to protect the water environment and reduce the risk of oxygen depletion in coastal areas as a consequenceof nitrogen leaching from fertiliser usage, thereby contributing to the fulfilment of the
EU Nitrates and Water Framework Directives. When nitrogen is spread on fields,
some of it turns into nitrous oxide (N2O), which is a greenhouse gas. Thus, the regulation of fertiliser usage in agriculture has an impact on both climate and environmental goals. Efforts in relation to climate and the environment can therefore be seen incontext.
The land use regulation includes a number of initiatives, including so-called catch
crop schemes, where farmers can choose between a number of measures to reduce nitrogen leaching. The nitrogen initiative is expected to be increased towards
2027, as agreed in the Agreement on the Green Transformation of Danish Agriculture from 2021. A number of initiatives have been launched in the area of nitrogen,see Section 3.2.
Livestock regulation affects emissions from fertiliser management, i.e. the storage ofslurry in stables, containers and the like. The regulation consists of permits and environmental approvals for these. The aim is to limit pollution from livestock farming, including the use of technologies in relation to ammonia and odour. In addition, theregulation contributes to the fulfilment of a number of EU directives, including the Industrial Emissions Directive, the Habitats Directive and national requirements onodour nuisance, nature conservation, noise impact, dust, etc.
The EU's Common Agricultural Policy (CAP) indirectly affects emissions from a number of production methods through voluntary subsidy schemes. In addition, there
are a number of requirements (conditionality requirements) that the farmer must ful-

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fil in order to be eligible to receive the hectare subsidy, which also affects agricultural emissions. This includes requirements that 4 per cent of the farmer's area ismade up of non-productive elements (e.g. fallow land). The purpose of agricultural
subsidies is to ensure an economically viable agricultural industry that produces
safe food within the framework of environmentally sustainable production. In addition to direct agricultural subsidies, agricultural subsidies include both voluntary initiatives and basic requirements in a number of areas. Denmark designs the various
subsidy schemes within the overall EU framework, but it must be approved by theEuropean Commission.

6.2.1 Existing nitrogen regulation
Nitrogen regulation in Denmark fulfils obligations arising from a number of EU directives, including the Water Framework Directive, the Nitrates Directive and the Habitats Directive.
The Water Framework Directive obliges EU Member States to create the conditions
for good ecological status in coastal waters by 2027. According to the Danish implementation of the directive, this means, among other things, a need to reduce thedischarge of nitrogen to coastal waters.
It is currently estimated that the total need for action amounts to approximately
13,000 tonnes of nitrogen reduction. The need for action is very unevenly distributed across the country and is calculated on the country's 108 coastal water catchments. While additional efforts are not needed in some areas of Denmark, very significant reductions are needed in other areas. A new assessment (second opinion)of the need for action will be carried out ahead of the review of the Agreement on
the Green Transformation of Danish Agriculture of October 2021 (the Agricultural
Agreement). The need for action may be adjusted as a result.
There is currently a fertiliser tax of DKK 5 per kg of nitrogen, which farmers can be
exempted from by registering in the fertiliser register. Almost all farmers are enrolled
in the register and thus do not pay the tax.
Nitrogen initiative
The Agricultural Agreement includes a technical budgeting of the majority of theoutstanding reduction needs. The breakdown of these initiatives is shown in Table
6.1.
Table 6.1. Technical budgeting of the nitrogen initiative at national level, see
Agreement on Green Transformation of Danish Agriculture
Initiative

Effect in 2027

EU requirements and other general efforts

2,400

Collective action measures to reduce nitrogen emissions

1,500

Targeted nitrogen regulation/New regulation model

6,500

Remaining effort to be handled on revisit in 23/24

2,600

Total

13,000Source: River Basin Management Plan 2021-2027 (VPIII)

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In addition to the initiatives listed in Table 6.1, a general basic regulation is implemented. The overall nitrogen regulation is outlined in Figure 6.1.
Figure 6.1. Nitrogen regulation

The individual elements of the figure are explained below:
Foundational regulation. The initiatives agreed in the Agricultural Agreement expand
the existing general regulation that all farms above a certain size are subject to. The
general regulation includes a number of requirements for the establishment of catch
crops, restrictions on the possibility of using fertiliser etc. The general regulation follows in particular from the Danish implementation of the EU's Nitrates Directive, as
well as EU requirements for good agricultural practice (GAP).
In addition to the general, nationwide regulation, supplementary measures are implemented in areas with additional needs, see the Danish implementation of the Water Framework Directive. These efforts consist of the collective measures to reduce
nitrogen emissions and targeted regulation.
Collective measures to reduce nitrogen emissions. With the collective measures,
farmers can choose to create wetlands, among other things. With the Agricultural
Agreement, it is technically budgeted that the collective measures will achieve a nitrogen reduction of 1,500 tonnes. In the Agricultural Agreement, it is assumed thatthe collective measures have a climate effect of 0.02 m tonnes of CO 2-eq in 2025
and 0.1 m tonnes of CO2-eq in 2030, which is included in the Climate Status andOutlook 2023.
Targeted nitrogen regulation/New regulation model. The existing targeted regulation
ensures annual nitrogen reductions. According to the Agricultural Agreement, thetargeted regulation will be replaced by a new and more cost-effective nitrogen regulation model from 2026. Both the existing and future nitrogen regulation models relate specifically to fertiliser applied to fields and field operations and are discussed in
more detail below. The Agricultural Agreement assumes that targeted regulation
has a climate effect of 0.29 m tonnes of CO2-eq in 2025 and 0.54 m tonnes of CO2eq in 2030, which is included in the Climate Status and Outlook 2023.

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Outstanding action needs. With the Agricultural Agreement, no decisions weremade on initiatives that could ensure the realisation of the full reduction requirement
under the Danish implementation of the Water Framework Directive. The extent of
the outstanding effort depends on the above-mentioned assessment of the nitrogen
initiative. In connection with the review of the Agricultural Agreement, a decisionmust be made on how to handle the outstanding need for action.
Targeted nitrogen regulation
As mentioned above, the targeted regulation is only implemented in areas where reductions are needed in accordance with the reduction obligations under the Danish
implementation of the River Basin Management Plan.
The existing targeted regulation model has been phased in since 2017 and consistsof two parts:
1. A CAP-funded voluntary subsidy scheme
2. A subsequent mandatory requirement if the need for a nitrogen initiative is not
met under the voluntary subsidy scheme
Voluntary subsidy scheme. Under the voluntary subsidy scheme, the farmer can apply for a subsidy to establish various transition elements. The transition elements include catch crops, early sowing of winter cereals and set-aside of farmland. The
subsidy rate that farmers can receive is calculated across farm types and geographical areas and is set according to the average marginal cost to farmers of using thetransition elements to fulfil the need for action within a given coastal water catchment. Each farmer is free to choose how much effort they want to put into the voluntary round. If there are too many applicants in relation to the need for action in an
area, the applications are prioritised according to the effect of the transition elements in the water environment.
In addition to the compensated transition elements, farmers can choose to apply thetransition element of reduced usage of nitrogen fertiliser. This option is currently not
eligible for reimbursement, which means that the option is only used to a limited extent, despite the fact that it is generally considered cost-effective up to a certain
level. If the transition element was compensated, it is expected that there would be
increased utilisation.
Mandatory catch crop requirement. If the need for action in the individual areas is
not met with the voluntary subsidy scheme, a mandatory catch crop requirement is
set in the sub-catchment. Farmers who have already contributed under the voluntary subsidy scheme will be credited for this effort when the mandatory requirement
is distributed. The farmer is not compensated for fulfilling the mandatory requirement, but can still choose to use the same catch crop alternatives as under the voluntary scheme. The vast majority of the effort is handled in the voluntary subsidy
scheme. In 2023, for example, approx. 97 per cent of the effort was handled withthe subsidy scheme.

6.2.2 The EU's Effort Sharing Regulation
The Effort Sharing Regulation sets national reduction targets for the sum of emissions from agriculture (excl. LULUCF), road transport, individual heating of build-

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ings, small industrial companies, other waste (not waste incineration) and other minor emissions. The Effort Sharing Regulation includes a reduction target in 2030
compared to 2005 and annual reduction commitments up to 2030. The reduction
targets in the agreement are primarily set based on the economic prosperity of thecountries, so the most prosperous countries must deliver the largest reductions.
As part of the EU's Fit for 55 package, the Effort Sharing Regulation was revised andthe Member States' national reduction targets were generally increased by around
10 percentage points. Denmark's national reduction target was increased from 39
per cent to 50 per cent in 2030 relative to 2005 levels.
Status of fulfilment of the Effort Sharing Regulation's reduction targets
Denmark's outstanding greenhouse gas reductions (so-called total reduction deficit)
in the Effort Sharing Regulation over the period 2021-2030 are estimated, with significant uncertainty, to a total of approx. 11.5 m tonnes of CO 2-eq. The shortfall is
the total accumulated difference in the period between the annual reduction commitments (the reduction path) and the expected greenhouse gas emissions in thespecific years. In comparison, a reduction of greenhouse gases (reduction deficit) in
2030 of 2.5 m tonnes of CO2-eq is required to meet the national 70 per cent target,
which, unlike the target from the Effort Sharing Regulation, is a so-called point target
that only concerns emissions in 2030.
The determination of Denmark's reduction path consists of two main parts:
1)

2)

Denmark must reduce its emissions by 50 per cent by 2030 relative to 2005.
This corresponds to reducing emissions to 20.2 m tonnes of CO2-eq by 2030.
The point in 2030 is thus the end point of the reduction path. The reductions
must be found within the sectors subject to the Effort Sharing Regulation.
From 2021 to 2029, a reduction path is defined as an approximately linear progression between a starting point in 2021 and the end point in 2030. 2021 indicates a starting point for Denmark's historical emissions. However, the process
is based on different periods for Denmark's historical emissions, which meansthat the reduction path is only approximately linear.

Reductions in the covered sectors (agriculture (excl. LULUCF), road transport, individual heating of buildings, small industrial activities, other waste (not waste incineration) and other minor emissions) will contribute to the fulfilment of the Effort Sharing Regulation. The majority of emissions, and thus the reduction potential, occur inthe agricultural sector (excl. LULUCF) and the transport sector, whereas reductions
to meet the 70 per cent target are not limited by sector, see Figure 6.2.

Figure 6.2. Status of Denmark's fulfilment of the Effort Sharing targets

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Note: The reduction path indicates the annual emission allowances. The annual reduction deficit is the difference
between emissions and the reduction path.
Source: Ministry of Climate, Energy and Utilities

Denmark has the option of utilising various flexibility mechanisms, see Box 6.1. The
flexibility mechanisms consist of 1) cancellation of ETS allowances, 2) use of LULUCF credits and 3) purchase of other countries' emission allowances.
Box 6.1
Different flexibility mechanisms
The Effort Sharing Regulation contains three types of flexibility mechanisms that Denmark can use tohelp fulfil its commitments if sufficient reductions are not achieved.
1) Cancellation of ETS allowances. The regulation allows nine Member States, including Denmark, toannually cancel ETS allowances corresponding to a maximum of 2 per cent of the emissions in 2005
from sectors covered by the Effort Sharing Regulation for the fulfilment of the reduction obligation.
For Denmark, this is equivalent to a total of 8 m tonnes of CO2-eq for the period 2021-2030. Denmark has so far committed to cancelling 4 m allowances for the period 2021-2025, but this does not
require Denmark to use the cancellation to fulfil the obligation. The use of the cancelled allowances
will thus not be associated with an additional government cost. If it is decided to cancel up to an additional 4 m allowances, there will be a government cost depending on the allowance price. Basedon the Ministry of Finance's allowance price projections, the cancellation of an additional 4 m allowances for the period 2026-2030 is estimated to result in additional government costs of approx. DKK
3.2 bn as a result of lost auctioning revenue. A decision on further quota cancellation must be madebefore the end of 2024, with the possibility of an adjustment in 2027.
2) LULUCF credits. The regulation allows for the use of national LULUCF credits (under the LULUCF
Regulation) based on net removals in the LULUCF sector to fulfil the reduction commitment. In principle, Denmark will be able to use LULUCF credits corresponding to a maximum of approx. 14.6 m
tonnes of CO2-eq over the entire period of 2021-2030. These are limited so that a maximum of approx. 7.3 m tonnes of CO2-eq can be used in each of the two periods 2021-2025 and 2026-2030,
and there is no possibility to transfer credits between the two periods.
Denmark is expected to generate significantly more LULUCF credits in the period 2021-2025 thancan be used in the Effort Sharing Regulation in the same period, see Climate Status and Outlook 23.
The need for reduction under the Effort Sharing Regulation in 2021-2025 is estimated at approx. 4.1
m tonnes of CO2-eq, which is why it is expected that a maximum of 4.1 m tonnes of CO2-eq can becovered by LULUCF credits. As credits cannot be transferred between the two periods, excess LULUCF credits will be cancelled if they are not sold to other Member States. In the period 2026-30,
Denmark is not expected to fulfil its LULUCF obligation, which means that no LULUCF credits are
expected to be generated.

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States can save the surplus and carry over the reduction to later years. There is an upper limit on
how much can be saved for later years, but the limit is so high that it is unlikely to be binding for Denmark. In years where greenhouse gas emissions are higher than the annual target, Member States
can borrow a limited amount of allocations from the following year. It gives Member States the flexibility to deal with annual fluctuations in emissions due to weather or economic conditions. In addition,
Member States can buy and sell allocations from and to other Member States.

The regulation with the Effort Sharing Regulation is binding and contains a penalty
mechanism of 8 per cent of the under-fulfilment in a given year. Thus, if the yearlytarget is underfulfilled by 1 m tonnes of CO2-eq, an additional obligation of 1.08 m
tonnes of CO2-eq is carried over to the following year. Ultimately, non-compliancewith the regulation can result in an infringement case before the European Court ofJustice.

6.2.3 EU LULUCF Regulation
The EU LULUCF Regulation sets targets for greenhouse gas emissions and removals from the LULUCF (Land Use, Land Use Change & Forestry) sector, i.e. emissions from primarily fields and forests. The LULUCF Regulation covers emissions
from cultivated land, grazing land, wetlands, forests and buildings. Emissions fromagriculture, such as emissions from livestock or fertiliser usage, are therefore notcovered by the LULUCF Regulation. As part of the EU's Fit for 55 package, the LULUCF Regulation has been revised so that the regulation's commitments are divided
into two periods:
1.
2.

In the period 2021-2025, Denmark must ensure that the carbon balance in the
LULUCF sector does not deteriorate.36
In the period 2026-2030, Denmark must comply with two separate obligations:
1) net emissions in the LULUCF sector must be reduced by 0.4 m tonnes ofCO2-eq in 2030 compared to the average level of the reference period 20162018, 2) meet a national budget target for 2026-202937, set by the Commission
in 2025 based on the latest emissions inventory.

The two commitment periods of the LULUCF Regulation (2021-2025 and 20262029) are budget targets. With budget targets, there are less stringent requirements
for when the reduction takes place, although timing still matters. For example, a permanent reduction of 1 m tonnes of CO2-eq from 2026 to 2029 would result in a total
reduction of 4 m tonnes of CO2-eq. In contrast, a reduction of 1 m tonnes in 2029
would only contribute 1 m tonnes of CO2-eq to the target.
Status of fulfilment of the LULUCF Regulation's reduction targets
Denmark is estimated to exceed the target in the LULUCF Regulation for the period2021-25. The budget target for 2026-2029 is finalised in 2025 based on the latest

There is no requirement for additional uptake from the sector, but the sector must as a minimum maintain the levelof carbon sequestration, as defined by specific accounting rules.

36

The budget target means that the sector must achieve a set amount of reductions within the period, but there is norequirement for reductions per year.

37

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available historical emissions data. Based on projected emissions, Denmark's reduction deficit is estimated to be around 7.0 m tonnes of CO2-eq in the period 20262029 and around 1.1 m tonnes of CO2-eq in 2030, see Figure 6.3.
Figure 6.3. Status of Denmark's fulfilment of LULUCF commitments

Note: The dotted line for the budget target 2026-2029 indicates the maximum emissions Denmark may have in the period to fulfil the reduction obligation in the
LULUCF Regulation. The difference between the dotted line and the line indicating net emissions is the reduction shortfall, which is estimated at 7.0 m tonnes ofCO2-eq for 2026-2029. The 2030 reduction target specifies the maximum amount of emissions Denmark may have in 2030. The difference between net
emissions in 2030 and the reduction target in 2030 is the reduction deficit of 1.1 m tonnes.
Source: Denmark's Climate Status and Outlook 2023 and own calculations

From 2021 to 2030, net forest uptake is estimated to be reduced by approx. 2 m
tonnes of CO2 annually relative to the average net forest uptake since 1990. The
projected decrease in net forest uptake is a driving factor in the development of theestimated total LULUCF net emissions towards 2030. In addition, carbon-richagricultural land account for about 90 per cent of the LULUCF sector's gross emissions in 2030. There is a high degree of uncertainty associated with the projection ofgreenhouse gas emissions from the LULUCF sector.
The EU commitment is formally set as a net uptake target for the EU of 310 m
tonnes of CO2-eq in the LULUCF sector in 2030. This corresponds to an increased
uptake of approx. 42 m tonnes of CO2-eq compared to the average annual uptake
for 2016-2018 for the entire EU. The total EU reduction burden is distributed among
the member states so that each Member State is allocated a reduction proportional
to its share of the EU's total LULUCF area.
The EU obligations for the 2026-29 and 2030 periods must be met separately, withno possibility of transferring over- or underfulfilment between the two periods. The
budget target for the entire period 2026-29 can formally be met if emissions are significantly reduced in 2029, even if nothing happens in the years 2026-28. On theother hand, only reductions in 2030 have an impact on whether the 2030 reduction
target is met.

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Denmark has the option of using various flexibility mechanisms to fulfil its LULUCF
commitments, see Box 6.2. The flexibility mechanisms consist of 1) cancellation ofemission allowances in the Effort Sharing Regulation, 2) purchase of other Member
States' LULUCF credits and 3) land use flexibilities.
Box 6.2
Different flexibility mechanisms to fulfil LULUCF commitments
The LULUCF Regulation contains three types of flexibility mechanisms that Denmark can use to help
fulfil its commitments.
1) Flexibility with the Effort Sharing Regulation: If a Member State does not comply with one or bothobligations of the LULUCF Regulation, the obligation can be fulfilled through the cancellation of emission allowances in the Effort Sharing Regulation. The flexibility can be used within each commitment
period, but cannot be used to, for example, cover a deficit in the period 2026-2030 by cancellingrights from the period 2021-2025.
2) Trading of credits: Member States can buy and sell LULUCF credits from and to other Member
States, subject to their availability. After each commitment period, a Member State gains access toan amount of LULUCF credits corresponding to its possible overachievement of its national commitments, which may incentivise Member States to over-implement their own commitments. It is uncertain to what extent LULUCF credits will be available after the end of the commitment period and at
what price they will be traded.
3) Flexibility for land use: Denmark has access to a limited compensation for a potential shortfall in
the period 2026-2030 of 0.05 m tonnes of CO2-eq, provided that the EU meets its overall target for
the LULUCF sector of 310 m tonnes CO2-eq in 2030. Member States have access to a similar compensation mechanism for the period 2021-2025, which in practice is not relevant for Denmark foraccounting reasons.

The LULUCF Regulation is binding and contains a penalty mechanism of 8 per centof the underfulfilment in the budget period 2026-2029. If the target for the budget
period is underfulfilled by 1 m tonnes of CO2-eq, the emission allowances in the next
budget period will be reduced by 1.08 m tonnes of CO2-eq. For example, if Denmark underachieves the point target in 2030 by 1 tonnes of reductions and at thesame time has underfulfilled the commitment in the budget period 2026-2029 by 1
m tonnes, Denmark will have a total result in 2030 of missing reductions of 2.08 m
tonnes of CO2-eq, which will be transferred to the commitment after 2030. In preparing the post-2030 commitment, the Commission is obliged to take into accountpossible deficits for 2030 when presenting proposals for the post-2030 period. In
extreme cases, non-compliance with the regulation may result in an infringementcase before the European Court of Justice.
The Expert Group's model 1 fulfils both the LULUCF Regulation's budget target from2026-2029 and the point target in 2030, see Table 6.2. Model 2 fulfils the budget
target and approximates the point target, while the reduction deficits to meet thetargets are significant in model 3.
It should be noted that all models assume the use of LULUCF credits in the period2021-2025 to fulfil the Effort Sharing Regulation, as well as up to EUR 8 m in LULUCF credits for the period 2021-2025. ETS allowance cancellations over the entire
period 2021-2030 correspond to Denmark's total opportunities for allowance cancellation. It is assumed that the use of LULUCF credits is prioritised before the useof ETS allowance cancellations.

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Denmark has already committed to and paid for the cancellation of allowances corresponding to 4 m tonnes of CO2-eq for the period 2021-2025. The use of the cancelled allowances will thus not be associated with an additional government cost. If
it is decided to cancel up to an additional 4 m allowances, there will be a government cost depending on the allowance price.
In addition, it is assumed that overfulfilment of the Effort Sharing Regulation is used
to fulfil the LULUCF commitments in 2026-2029. Finally, it is assumed that LULUCF
credits and ETS allowance cancellations are used chronologically (i.e. as soon as
and if they can fill a reduction need that is not covered by domestic reductions).
If no ETS allowance cancellations are used, none of the models fulfil the LULUCF
commitments, while the Effort Sharing Regulation is fulfilled in models 1 and 2, see
Table 6.2.
Table 6.2. Fulfilment of LULUCF commitments in the Expert Group's models
LULUCF, 2026-29
Outstandingreduction
deficitFulfilment(per cent)(m t ofCO2-eq)The Effort Sharing Regulation, 20212030

LULUCF 2030

Outstanding
reduction deficit(m t of CO2-eq)

Fulfilment(per cent)

Outstanding
reduction
deficit(m t of CO2eq)

Fulfilment(per cent)

When using 8 m ETS allowance cancellations
Model 1

0

100

0

100

0

100

Model 2a

0

100

0

100

0

100

Model 3a

0.58

92

0.00

100

0

100

Without the use of ETS allowance cancellations
Model 1

5.88

17

0.74

35

0

100

Model 2a

6.46

8

0.54

53

1.00

94

Model 3a

5.60

21

0.00

100

2.99

79

Source: Own calculations

6.2.4 The EU's Common Agricultural Policy (CAP)
The aim of the EU's Common Agricultural Policy is to ensure an economically viable
agricultural industry38 that produces safe food within the framework of environmentally sustainable production. The Common Agricultural Policy finances several voluntary initiatives in areas such as the environment, climate, and biodiversity andsets basic requirements for receiving the subsidy. The Common Agricultural Policy(CAP) provides the framework for EU countries' agricultural policies and is set for38

https://www.eu.dk/da/dokumenter/traktater/traktaten-euf/tredje-del/afsnit-iii/artikel-39

Green Tax Reformthe period 2023-2027. A new framework for the Common Agricultural Policy is expected for the period from 2028, presumably corresponding to the period of thenext EU budget period (MFF).
Agricultural subsidies consist of a so-called Pillar I and Pillar II. Pillar I is fully EUfunded and includes direct agricultural support, coupled production-linked supportand eco-schemes, where support is provided for agricultural practices with a focus
on the environment, climate, animal welfare, etc. Pillar II is co-financed between the
EU and each Member State. Pillar II provides, for example, investment aid aimed at,among other things, climate and the environment, but also with the possibility of investments for the modernisation of agricultural holdings, start-up aid for young farmers and support for local action groups. For each country, the distribution between
the pillars is regulated by EU rules.
In the Danish implementation, approx. 90 per cent of the funds are in Pillar I. Member States are required to earmark the equivalent of at least 25 per cent of Pillar I
funds for so-called green eco-schemes in the period 2023-2027 and 35 per cent of
Pillar II funds for green purposes, including animal welfare. In addition, a portion of
the funds is required to be used for young farmers and to support local actiongroups. Member States have the possibility to transfer funds between pillars and offset any over-fulfilment for green purposes in Pillar II against the earmarking for ecoschemes in Pillar I. If Member States do not fulfil the requirements, earmarked EU
funds could ultimately be lost.
The direct agricultural subsidy amounts to approx. DKK 1,900 per hectare and is
granted on the condition that a number of requirements are met. This includes statutory EU management requirements on the environment, animal welfare, etc., in
sectoral legislation, as well as requirements for good agricultural practice in pre-defined areas. Together, these requirements are termed conditionality and, together
with any other relevant national legal requirements, constitute the basic requirements for the farmer that cannot be compensated through voluntary schemes. The
starting point is that the funds spent on voluntary schemes in the CAP (such as ecoschemes) must be used to achieve additional effects. However, under certain conditions, subsidies may be granted for up to two years after a requirement has become
applicable to a farmer.
The CAP rules also set limits on the amount of compensation for measures within
the voluntary schemes, which must also be verified by an independent institution. In
Denmark, it is the Department of Food and Resource Economics (IFRO) at the University of Copenhagen that usually verifies. In the case of compensation for changes
in agricultural practices, e.g. to deliver a greater environmental or climate effort on
agricultural land, the compensation is calculated based on the calculated additionalcosts (including offsetting of saved costs such as reduction of tax payments) or lost
profit that the farmer will experience as a result of the changes in agricultural practices that a given subsidy scheme gives rise to.
No compensation can be granted within the Common Agricultural Policy covering2021-2027 or the corresponding state aid guidelines for the agricultural sector or
the block exemption scheme for the agricultural and forestry sector for e.g. thenumber of tonnes of CO2 emissions reduced. On the other hand, a subsidy for investments in changing agricultural practices can be granted, where the subsidy may
amount from 20 per cent to 100 per cent of the eligible investment itself. Greentechnology investments can be subsidised by up to 80 per cent. In the case of in-Page 141

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vestments that do not increase productivity, such as green investments like disconnecting drains in peatland projects or afforestation, the subsidy can be increased to
100 per cent.39
The implementation of the Common Agricultural Policy can therefore support
measures that lead to reduced environmental and climate impact when the change
in practice occurs. In the Agricultural Agreement from 2021, agricultural support delivers climate and nitrogen effects through some of the basic requirements as wellas through the individual subsidy programmes, such as set-aside of carbon-rich agricultural land and targeted regulation (nitrogen).
It is possible to apply annually for the European Commission's approval of changes
to the CAP plan as well as three additional times in the period 2023-2027.
The Expert Group's considerations on the use of agricultural subsidies in interaction
with overall models for more uniform CO2-eq regulation in agriculture and forestry
are presented in Chapter 2.

6.3 Upcoming EU Plans and Initiatives
The Expert Group's work on this final report has run in parallel with discussions in
the EU on future initiatives. Future international and national regulation must be integrated.

6.3.1 An ETS for the agriculture and food sector
In Q1 2024, the European Commission is expected to present a communication ona new EU climate target for 2040 and a new EU climate architecture beyond 2030.
In the spring of 2023, the Commission launched a public consultation seeking viewson the possibility of pricing greenhouse gases from the agricultural sector, including
through an emissions trading system. The European Commission has not finalised
whether it will propose such a solution.
In November 2023, a report was published by the consultancy Trinomics40, which
was commissioned by the European Commission to investigate the possibilities of
introducing an emissions trading system for the agricultural and food sector. The report is exploratory and does not contain clear recommendations, but highlights anumber of issues including possible ways to address them. This includes how
broadly the system should cover, which emissions are included, the risk of CO2-eqleakage and the integration of carbon capture. In particular, the report frames a discussion on whether the quota obligation should be imposed on farms, producers offeed and fertilisers ("upstream"), or food companies such as slaughterhouses anddairies ("downstream").
The regulatory framework for subsidies and taxes outlined in this report will contribute to the European Commission's work on a regulatory framework for an ETS in the
agricultural and food sector. Among other things, the Expert Group's proposal for a
It is a prerequisite for support under the agricultural subsidy that the subsidised product is listed in Annex 1 of the
EU Treaty on agricultural products (Treaty on the Functioning of the European Union (2016/C202/01)).

39

40

Pricing agricultural emissions and rewarding climate action in the agri-food value chain, Trinomics.

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regulatory basis proposes to use several of the registers used in Denmark in connection with agricultural subsidies, which are registers that are used across theMember States. There is therefore reason to believe that the Expert Group's regulatory framework could also be implemented in other Member States.
The Danish government has decided to work for the expansion of emissions tradingin the EU to as many sectors as possible, including the introduction of an emissions
trading system for the agricultural sector after 2030.
On this basis, Denmark has proposed that, as far as possible, pan-European regulation of agricultural emissions and removals should be introduced through an EU
common agricultural pillar. With the proposal, emissions and removals from agriculture and agriculture-related LULUCF will be integrated so that all agricultural emissions are covered and regulated through emissions trading. It will increase farmers'
incentives for reductions. With one overall EU reduction commitment for agriculture,
which is realised through emissions trading, it may be natural that nationally differentiated reduction targets are abolished. Concrete adjustments to national regulation must be examined as international regulation is concretised, decided upon andimplemented. A future national climate tax for Danish agriculture will have to be
seen in relation to a possible future EU ETS for agriculture, just as there are areas
within industry where the tax is seen in the context of the EU ETS.

6.3.2 New separate emissions trading system - ETS 2
In 2023, EU Member States and the European Parliament reached a final agreement on a new separate EU Emissions Trading System (ETS2) for CO 2 emissions
from fossil fuels used for road transport, internal transport and heating and coolingof buildings in the non-agricultural sector.
The purpose of ETS2 is to increase and standardise the economic incentive to
reduce CO2 emissions from road transport and buildings across the EU, and to support the fulfilment of EU climate targets. The sectors in ETS2 must reduce greenhouse gas emissions by a total of 43 per cent in 2030 in the EU relative to 2005 levels. ETS2 will operate separately from ETS1 with an expected allowance price of approx. DKK 403 per tonne of CO2 in 2030 according to the Commission, relative toan estimated allowance price in ETS1 of approx. DKK 806 per tonne in 2030. The
reductions resulting from ETS2 are all expected to contribute to Denmark's fulfilmentof the Effort Sharing Regulation. The main elements of ETS2 are summarised in Box
6.3.
Box 6.3
The main elements of ETS2
• Scope: CO2 emissions from fossil fuels in road transport, commercial/institutional buildings, heating and cooling of buildings, cogeneration and heating installations producing
heat for commercial/institutional buildings and households, and emissions from industry
and heat production below 20 MW (not included in ETS1).
• Operators in ETS2: (excluding the use of options) include petrol and diesel fuel distributors, small heat and power plants below 20 MW (not included in ETS1), and gas, coaland oil distributors supplying fuels for domestic and commercial space heating.
• Reduction target: The sectors in ETS2 must reduce greenhouse gas emissions by a totalof 43 per cent in 2030 in the EU relative to 2005 levels.

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Green Tax Reform• Emission permit and monitoring from 2025: In ETS2, operators must have a greenhousegas emission permit, which is obtained by applying to the Danish Energy Agency. In addition, operators will be subject to monitoring, verification and reporting (MRV) obligations from 2025.
• Allowance payment from 2027: Start buying/selling allowances from 2027.

6.3.3 Carbon removal certification framework
On 30 November 2022, the European Commission presented a proposal for a voluntary EU certification framework for carbon removal. The main objective is to create a better methodological basis for developing credible certificates for activities
that remove carbon from the atmosphere, including in the agriculture and forestry
sector.
The proposal could potentially contribute to increased financial incentives for e.g.
rewetting of carbon-rich agricultural land or ploughing of biochar into agriculturalland as a result of the sale of certificates, and in that case could contribute to Denmark's LULUCF commitments. However, it is not possible to estimate how many
farmers will join the scheme. Furthermore, the concrete methodologies for the certificates are not expected to be developed until 2030, so a potential climate impact islikely to materialise only after that. It is therefore not expected to have an impact on
the Expert Group's models for regulating carbon emissions from carbon-rich agricultural land.
The EU certification framework does not formally limit the possibility of introducing
national regulation. For example, a political decision could potentially be made to introduce a negative tax on an activity that could also potentially be certified voluntarily under the certification framework. In that case, there will be no question of double
regulation, as any certification is voluntary and not with a view to complying with legal requirements. It should be noted that it is also possible today for operators to apply for certification through similar private schemes. A possible market for climate
credits has not been taken into account in the Expert Group's models.

6.4 The EU's Common Agricultural Policy (CAP)
and the Expert Group's Models
The terms of reference state that "The second report will also assess the advantages and disadvantages of a regulatory solution for the agricultural sector, asubsidy model for EU agricultural support and a CO2-eq tax for this sector or a combination of these, as well as possible measures for cost-effective regulation of agriculture that address CO2-eq emissions and other externalities, including, e.g. environment and health".
The Common Agricultural Policy (CAP) is part of the EU countries' policy and regulation in the field of agriculture, see Section 6.2. Denmark's implementation of the
CAP and the use of CAP funds have been agreed in connection with the Agricultural
Agreement and are approved by the EU Commission in the Danish CAP plan 20232027. New schemes or changes to existing ones in the CAP plan must be approvedby the European Commission.

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However, it is not the task of the Expert Group to come up with a model for a revised CAP plan or future CAP plans. However, based on the terms of reference, andin consideration of the principle in the Danish Climate Act of supporting the cheapest socio-economic solution for Denmark, the Expert Group has adopted a principlethat tax and subsidy models must not lead to a significant loss in the possibility of
securing EU funds.
The EU's Common Agricultural Policy, CAP, is designed to support the green transition of the agricultural and food sector. With the CAP funds and the measures thatcan be implemented under the CAP, it is basically possible to support a wide rangeof voluntary agricultural activities and technological measures, including relatively
expensive measures such as storage and fertiliser management, as well as feed additives. Other possibilities are via the CAP, such as providing investment aid for environmental and climate technologies in stables etc., including increasing the current subsidy rates for such investments. As a starting point, it is also expected to bepossible to provide investment aid for the establishment of pyrolysis plants in the
CAP, but the investment volume for this may be challenged due to the various considerations that the CAP must deliver on.
A tax on production factors, such as livestock, will affect the production mix and thecontribution margin from agricultural production. Since the CAP subsidy for activitybased measures is often calculated based on the loss compared to a corresponding
production without this activity, a tax could parallel shift the income from the reference. This can reduce the maximum subsidy on certain schemes. Depending on thescale, this may create a need to reallocate CAP funds.
One point to note when utilising CAP funds is that the funds are generally implemented through voluntary schemes. Thus, farmers must be sufficiently incentivised
to apply for the schemes. However, under certain conditions, it is possible to grantsupport for up to 24 months after a national requirement has entered into force if therequirement goes beyond the corresponding minimum requirements set out in EU
law. Depending on the chosen models and requirements, the CAP will, for example,
be able to mitigate the cost for farmers, either through a voluntary subsidy scheme
until it becomes a requirement, such as a tent covering with floating layers, or
through subsidies for up to 24 months after the requirement is made on the use ofclimate control agents as feed additives.
Development, establishment, IT setup, negotiations with the European Commission
and approval of new subsidy schemes will take around 1-1.5 years, and this workand subsequent administration and control is associated with increased costs. Experience has shown that the schemes that achieve the best response are productive schemes where the requirements of the subsidy scheme can be met in connection with continued agricultural production. In the longer term, the tax models will
also affect subsidy schemes under an upcoming CAP in the next period 2028-2034.
The Expert Group notes that the establishment of a climate tax in agriculture will affect the currently agreed and approved implementation of the CAP in Denmark. This
includes an expectation that subsidy rates will need to be recalculated and that new
and different schemes will need to be developed under the CAP, partly to respect
the EU requirement for green earmarking and partly to repatriate the funds under
the CAP. However, there are several options for establishing increased or new subsidies that can support and incentivise climate action in agriculture. Thus, the models are assessed to allow for continued utilisation of CAP funds.

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Green Tax ReformAppendices

7

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7.1 Terms of Reference for the Green Tax Reform
This chapter reiterates the terms of reference and additional terms of reference.
Purpose and background
The agreement on Green Tax Reform reached between the Government (Social
Democrats), the Left Party, the Radical Left Party, the Socialist People's Party andthe Conservative People's Party on 8 December 2020 states that a CO 2-eq tax
should be a key instrument for achieving the 70 per cent target, taking into accountthe guiding principles of the Danish Climate Act, including sustainable business development and Danish competitiveness, sound public finances and employment, astrong welfare society, cohesion and social balance, and thus real CO 2-eq reductions (minimising CO2-eq leakage) and without overall job losses abroad.
In the short term, taking the first and essential steps towards a more uniform CO 2
tax is possible. However, in a number of areas, appropriate tax models will require
further development, and EU legal, administrative and implementation issues willneed to be examined.
The government and the parties to the agreement have therefore agreed to implement the green tax reform in two phases. The first phase will focus on adjustments
within the existing tax system as well as extensions to well-defined areas. The second phase will set the framework for a uniform CO2-eq tax.
It is the ambition of the parties to the agreement that in 2030, Denmark will have auniform CO2-eq tax taking into account leakage effects, etc.
Tax structure
A uniform CO2-eq tax on all emissions is the most cost-effective way to ensure thatthe 70 per cent target is met, as it sets a uniform price for the emission of greenhouse gas equivalents, with which the reductions across sectors take place where
they are cheapest.
Danish CO2 emissions from fossil fuels are currently taxed with a combination of climate and energy taxes. In addition, parts of industry and large energy and combustion plants are covered by the EU ETS. One of the aims of the tax system is to favour companies in competition with foreign companies. The industries exposed tocompetition (e.g. mineralogical processes, etc., electricity production and agriculture) therefore pay the lowest energy taxes or are completely exempt from paying
energy taxes. Conversely, other businesses and Danish households are taxed moreheavily, for example, in connection with heating and their consumption of petrol anddiesel.
In addition, the current tax system is characterised by significant variations in thelevel of taxation depending on the use of fossil fuels.
Under the current tax system, for example, companies pay a much higher tax toheat their buildings than to produce their goods. Taxes on space heating for buildings amount to about DKK 1,300 per tonne of CO2, while taxes on industrial processes in production amount to about DKK 0-250 per tonne of CO2. Similarly, subsidies per tonne of CO2 vary significantly across areas.
Overall, there are high taxes on CO2 emissions from fossil fuels used for transportand for general heating in houses, etc. Mineralogical processes (cement production

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Green Tax Reformetc.) and fossil fuels for electricity production are effectively tax-exempt in the current tax system, but covered by quotas, just as non-energy-related emissions fromagriculture, such as methane from cattle or nitrous oxide from fertiliser usage, arealso tax-exempt.
However, non-energy agricultural emissions of methane from livestock, nitrous oxide from fertiliser usage and carbon sequestration on agricultural land need to be
seen in the context of other regulated nutrient emissions. However, there is currently not a sufficient basis to tax CO2-eq from all non-energy agricultural emissions.
Thus, restructuring the tax system, including a shift from energy taxation to CO 2,
would imply a major restructuring that would have to be seen in conjunction with national subsidy schemes, the EU Energy Taxation Directive, the EU Emissions Trading System Directive and the state aid rules, as well as forthcoming proposals to revise EU climate and energy legislation, including the Energy Taxation Directive andthe EU Emissions Trading Scheme Directive, expected in mid-2021. Among otherthings, the EU Commission is expected to propose strengthening the ETS and models for extending the ETS to additional sectors, including road transport and individual heating of buildings.
Tasks of the Expert GroupThe Expert Group will be tasked with developing models for uniform CO 2-eq regulation, including the design of a more uniform CO2-eq tax. A comprehensive analysis
will be provided in the form of sub-reports assessing the impacts of different models
for a more uniform CO2-eq tax. Therefore, the optimal tax structure must be explained in relation to the 70 per cent target, and any derived conditions, including
other regulation of other externalities, administrative conditions and barriers to national regulation, must be explicitly stated.
The Expert Group will develop different scenarios that contribute significantly to the70 per cent target by 2030.
The Expert Group will also consider how to operationalise the guiding principles of
the Danish Climate Act. In this context, the Expert Group should present different
scenarios that weigh the considerations differently (e.g. weighs carbon leakage highor low). The starting point for all the scenarios should be that they deliver the cheapest socio-economic solution. To the extent that this consideration is departed from,reasons must be given.
The Expert Group should aim for scenarios that are revenue neutral overall and support GDP and labour supply in a socially balanced way. However, the proposals
need not be revenue-neutral year-on-year. The Expert Group should also include a
proposal where taxes and duties do not increase overall.
In addition to the end goal, different phasing-in scenarios must be created, including
sensitivity scenarios with regard to uncertainty associated with the projections. Uncertainties in the phasing-in scenarios need to be taken into account. Among otherthings, these scenarios should be seen in the context of meeting the 2025 target.
Each scenario should highlight the following:• Socio-economic: The total socio-economic impact measured by distortion losses
both in total and as a share of CO2-eq reduction (shadow price).

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Green Tax Reform• National economic consequences: Revenue, including tax burden, GDP, labour
supply, competitiveness and employment, burden on industries (including detailed industry breakdowns) and households. These consequences must be outlined in the short term (adjustment/transition costs) and structurally.
• Emissions, carbon leakage and environmental impact: CO2-eq reductions, CO2eq leakage, contribution to EU climate targets and other environmental impacts
etc. (externalities), if deemed relevant.
• Social balance: Distributional effects, GINI, regional differences, etc.
In addition, the work must consider the fact that technological development is uncertain and that this uncertainty has consequences for the socio-economic costs ofmeeting the 70 per cent target. As a result, the Expert Group will look at the technological conditions and opportunities across each sector, including the current andfuture technological options for restructuring.
The work of the Expert Group will ensure that the proposed CO 2-eq regulation best
supports the introduction of new resource-saving technologies for both industry andagriculture.
Finally, the Expert Group's proposals must be implementable and take into accountregulatory, EU legal, systemic and administrative implications. Consideration mustalso be given to the proposal's compliance with the energy taxation directive, a possible proposal for a new energy taxation directive, the EU's state aid rules and otherrelevant international regulation. This must be seen in the light of the fact that thedevelopment time and implementation time for initiatives in the tax area, including
new tax structures, is considerable.
The work must also be considered in conjunction with other climate policy
measures, including current subsidy and agreement schemes etc., and regulation ofother environmental impacts (externalities).
It must be ensured that the rescheduling of phase 1, where the rescheduling of theagreed increase in DKK per GJ balanced by CO2 must be consistent with the longterm solution.
An interim report will be prepared at the end of 2021 in order to be able to convene
the contracting parties for discussions at the end of 2021 on the basis of the report.
Final reporting will take place in autumn 2022.
Content of the first interim report
The first interim report will describe the overall architecture for a uniform CO 2-eq
regulation, including leakage, the link with the 70 per cent target and the EU ETS(current and future) and subsidy schemes, as a basis for working towards the concrete models to be included in the final report. If possible, the first report may also
include models for the level of a uniform CO2-eq tax in 2030.
As a step towards the final architecture for a more uniform CO2-eq regulation, thefirst interim report will outline a model for restructuring energy taxation to a more direct tax on CO2-eq emissions.
With the first phase of a green tax reform, the government and the agreement parties have agreed to increase the energy tax on fossil fuels for businesses by DKK 6
per GJ. This element is expected to lead to reductions in climate-changing emissions of around 0.5 m tonnes of CO2-eq by 2025.

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At the same time, the Expert Group will work towards broadening the tax base to areas that are relatively well-defined, including CO2 emissions from oil and gas extraction and refining, CO2 emissions from mineralogical processes etc., fossil fuels forelectricity generation and any other CO2 tax exemptions that the Expert Group considers relevant to include in the first phase.
When restructuring from energy taxation to CO2 taxation must take into account,among other things, the fossil content (in the form of plastics, etc.) of the waste volumes from waste incineration for district heating, as well as how coal can be phased
out in district heating. Furthermore, the impact of the district heating price cap, e.g.
on surplus heat from surplus heat suppliers, as well as the space heating tax on individual and collective space heating, needs to be clarified.
The Expert Group must identify appropriate compensation and feed-back mechanisms. The compensation mechanisms can, for example, be in the form of base deductions, subsidies, differentiated rates and/or delayed phasing in of taxes as well
as more general compensation measures.
The Expert Group should also assess the interaction between the extended tax
base, national subsidy schemes and the European ETS to ensure a uniform CO 2-eq
regulation. In particular, whether it would be appropriate to give a deduction in theCO2-eq tax for allowance payments must also be addressed. In addition, for comparison, CO2 taxation in other relevant countries can be looked at.
Content of the final report
With the second report, the Expert Group will elucidate models for a more uniform
CO2-eq regulation of all covered emissions. Including different tax levels and phasein profiles up to 2030 and their economic and practical consequences.
The second report will also assess the advantages and disadvantages of a regulatory solution for the agricultural sector, a subsidy model for EU agricultural support
and a CO2-eq tax for this sector or a combination of these, as well as possible
measures for cost-effective regulation of agriculture that address CO2-eq emissions
and other externalities, including, e.g. environment and health. Farm accounts are a
prerequisite for CO2-eq taxes on agriculture. It is assumed that this work will be carried out separately. In addition, an assessment of the advantages and disadvantages of different solutions for emissions from agricultural land and other emissions from LULUCF must be included, which the Expert Group deems relevant tohighlight. Future EU legislation in this area, including a potential new approach toregulating the climate impact of agriculture through the revision of the EU's Effort
Sharing Regulation and LULUCF Regulation and a separate agricultural pillar in the
EU ETS, will be taken into account.
Finally, the Expert Group must come up with proposals for possible ways to construct compensation mechanisms, including, among other things, base deductions,subsidy schemes, differentiated rates, delayed phasing in and connection to existing
subsidy schemes, general measures and other possible mechanisms, including European regulation and through the ETS. Compensation mechanisms should also beseen in the light of, among other things, carbon leakage, competitiveness of companies and employment. This should take into account the wide variation in the burden
on business both between and within sectors. Proposals for compensation mechanisms must be weighed against other effects thereof.

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The work could involve the whole tax and subsidy system, including deductions, exemptions, compensatory measures and grant schemes, whether as a contribution
to climate objectives, a financing element, or to address other unintended effects of
the reform, such as distributional concerns.
Organisation of the Expert GroupThe commission will consist of an external chairman and, in addition, five external
members.
In addition, heads of departments from Ministry of Taxation, Ministry of Finance, theMinistry of Climate, Energy and Utilities, Ministry of Industry, Business and Financial
Affairs and Ministry for Food, Agriculture and Fisheries participate in the discussions. Heads of departments from other ministries are involved as needed.
The Expert Group will be provided with an independent secretariat composed of officials from the ministries involved and co-chaired by Ministry of Taxation and Ministryof Finance.
In addition, a follow-up group to the Expert Group will be established, consisting of
the Confederation of Danish Industry, the Danish Chamber of Commerce, GreenPower Denmark, the Danish Agriculture & Food Council, the Danish Trade Union
Confederation, Kraka, Concito, Green Transition Denmark, the Danish Council on
Climate Change and the Secretariat of the Danish Environmental Economic Council.
The follow-up group can function as a useful knowledge bank for the commission. In
this way, the follow-up group will be able to contribute current and relevant
knowledge to the Expert Group's work on, e.g. the technological development, incentives and economic conditions. In addition, the Expert Group may use external
experts, including when ordering external analyses.
Additional terms of reference
In addition to the Expert Group's original terms of reference, the government platform states that "The climate tax must ensure implementation of the development
track and fulfilment of the binding reduction target for the agriculture and forestry
sector of 55 per cent to 65 per cent in 2030 compared to 1990. The government
will ask the expert committee to present different scenarios for achieving this goal inline with the recommendations the committee presented in connection with theCO2-eq tax on industry, including consideration of counteracting the relocation of
production, including international experience and the possibility of applying a CO2eq tax on end consumption as a possible instrument".

7.2 Other Land Use Objectives
There are a number of political ambitions and objectives for the areas of Denmark.
The government platform includes an ambition to establish 250,000 hectares of forest and to implement 15 nature national parks, see Table 7.1.
In addition, in connection with a number of political agreements, agreements havebeen made on, among other things, an ambition to set aside 100,000 hectares ofcarbon-rich agricultural land, a doubling of the organic area and an ambition toquadruple renewable energy on land.

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Under the EU's auspices, Denmark must contribute to the EU's objective of 30 per
cent protected nature, of which 10 per cent is strictly protected. 41 The target is noteffort shared, and it has not yet been decided how Denmark's contribution will be realised.
Overall, there are political ambitions for approx. 646,600 hectares, corresponding to15 per cent of the current area of Denmark. In addition, there are political ambitions
and agreements where it is not yet possible to set specific hectare estimates. Thisapplies, for example, to an upcoming law on nature and biodiversity.
Table 7.1. Ambitions and political objectives for Denmark's land area
Political objectives/ambition

OriginClimate impact

Number of hectares

The Agricultural Agreement2021

It is currently not possible toestimate the climate impact
of converting to organic
production in Climate Status
and Outlook.

200,000

Government platform 2022

Afforestation is a relatively
long-term transition element.
Afforestation towards 2030
will contribute more toclimate targets for the period
2040 to 2050 than for the 70
per cent target.

250,000

Set-aside of carbon-richagricultural land including
peripheral land, including
extensification of 38,000
hectares3)

The Agricultural Agreement
2021

With wetland restoration,
CO2-eq emissions from
cultivated and drainedcarbon-rich farmland are
significantly reduced.
Emissions are also reduced
by extensification, albeit to alesser extent.

100,000

Secure framework conditions
that enable a quadrupling of
renewable energy on land4)

Climate Agreement on GreenPower and Heat 2022

The climate impact occurs
through displacing fossil
fuels.

36,600

It is currently impossible toestimate the climate impactof implementing the law.

-

No direct climate impact. The
indirect climate impact will
depend, among other things,
on the degree of
deforestation, subsequent
growth in wood biomass, andland use before and after
planting.

-

Doubling the organic area1)

250,000 hectares ofafforestation2)

Unified Act on Nature andBiodiversity

Implementation of aminimum of 15 naturenational parks

Government platform 2022
Contribution to EU target

Government platform 2022

In other words, the natural processes are essentially left undisturbed to respect the ecological conditions in thearea. Further definition awaits initiative from the European Commission (expected in spring 2024).

41

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Designation of up to three
new national parks

Government platform 2022

No direct climate impact.

Note: 1) Announced in the government platform 2019. Number of hectares compared to figures for the organic area in 2018, as this was the most recent figure. 2)
Announced in the government platform 2022. The number of hectares is calculated as afforestation in addition to the expected afforestation with the Climate Status andOutlook 2022 of approx. 20,000 hectares in the period 2025-2030. 3) Announced with the Agricultural Agreement, 2021. 4) Announced with the Climate Agreementon Green Power and Heat, 2022. The number of hectares is calculated by comparing with the RE area in 2021. A doubling of the wind turbine area and a tenfold
increase in the solar cell area is assumed.

7.3 Elaboration of Emissions from the Agriculture
and Forestry Sector
Emissions from animal production
In 2030, greenhouse gas emissions from animal production are expected to total
6.5 m tonnes of CO2-eq, see Table 7.2.
The vast majority of CO2-eq emissions from livestock production come from cattle
and pigs, which account for 6.1 m tonnes in 2030, corresponding to about 95 percent of total livestock emissions. Of this, 4.5 m tonnes of CO2-eq comes from cattle
and 1.6 m tonnes of CO2-eq from pigs.
Emissions from livestock come from two emission sources: 1) digestion (methane/CH4) and 2) manure handling in stables and storage facilities (methane andnitrous oxide/N2O), i.e. emissions from manure handling in stables and when manure is stored in e.g. slurry tanks.
Table 7.2. Emissions from animal production

Digestion(CH4)

Fertiliser
management instables,storagefacilities andfields(CH4 and N2O)

Total
emissionsm tonnes of CO2-eq in 2030

Share ofemissionsfromagriculture
and forestry
Per cent

Dairy cows

2.4

0.7

3.1

24.7

Other cattle

1.0

0.5

1.5

11.7

Pigs

0.4

1.3

1.6

13.0

Broilers andchickens

0.0*

0.0*

0.0*

0.2

Other livestock

0.2

0.0

0.2

1.7

Indirect
emissions

-

0.1

0.1

0.7

Grazing

-

0.0

0.0

0.2

Total

3.9

2.6

6.5

52.3

Total cattle
and pigs

3.7

2.4

6.1

49.4

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Note: The total does not add up due to rounding. Other livestock includes pheasants, ducks, mink, sheep, goats,horses, deer, lambs and ostriches. Indirect emissions are totalled for all livestock and cover ammonia and NOx
emissions that are converted to nitrous oxide in the atmosphere during manure handling. 0.00* does not mean that
there are no emissions. It's just less than the 2nd decimal place.
Source: Climate status and Outlook 2023 incl. partial correction for the new map of carbon-rich agricultural land andown calculations.

According to the Climate Status and Outlook 2023, emissions of approx. 4.5 m
tonnes of CO2-eq from cattle (divided into dairy cattle and other cattle) are expected
in 2030, see Table 7.3. The majority of emissions from dairy cattle and other livestock are methane from digestion.
Box 7.1
Net emissions from cattle digestion
Digestion from cattle makes up 70 per cent of the cow's total emissions.
The cow eats carbon in the form of grass and fibre. The feed (grass and fibre) is ruminated in the
cow's four stomachs: the rumen, reticulum, omasum, and abomasum. In the cow's rumen, a fermentation process occurs that first converts fibre into hydrogen. The hydrogen is converted to methaneby microorganisms in the rumen. Methane is primarily released via the cow's breath and burping.
The remaining methane is released after the feed has passed through all four stomachs and is excreted as manure.
The methane emitted by the cow has a CO2-eq conversion factor of 28 in relation to the carbon thatthe cow has eaten. Thus, the methane emitted by the cow has a factor 28 higher climate impact per
tonne emitted than the carbon in the cow's feed.

Table 7.3. Emissions from dairy cattle and other cattle in 2030
Methane(CH4)

Nitrous oxide(N2O)

Total CO2-eq

m tonnes of CO2-eq in 2030

Number ofanimalsm units in 2030

Dairy cattle

3.0

0.1

3.1

0.5

Digestion

2.4

-

2.4

-

Fertiliser
management

0.6

0.1

0.7

Other cattle(e.g. suckler
cows and veal
calves)

1.4

0.1

1.5

1.0

Digestion

1.0

-

1.0

-

Fertiliser
management

0.4

0.1

0.5

Total

4.4

0.2

4.5

-

-

Note: The total does not add up due to rounding
Source: Climate status and Outlook 2023

In 2030, emissions from pigs are expected to be around 1.6 m tonnes of CO2-eq in
2030. In Climate Status and Outlook 2023, the pig population is expected to consistof approx. 0.9 m yearling sows and approx. 32.9 m piglets, of which approx. 19.3 m
will become fattening pigs within the same year, see Table 7.4. Approx. 13.6 m pigs

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Page 155are exported, after which emissions are not included in the calculation. The majorityof emissions from pigs can be attributed to emissions from fertiliser management instables and storage facilities.
Table 7.4. Emissions from pigs in 2030
Methane(CH4)

Nitrous oxide(N2O)

Total CO2-eq

m tonnes of CO2-eq in 2030

Number ofanimalsm units in 2030

Piglets

0.2

0.0

0.2

32.9

Digestion

0.1

-

0.1

-

Fertiliser
management

0.1

0.0*

0.2

-

Fattening pigs

0.9

0.1

1.0

19.3

Digestion

0.2

-

0.2

-

Fertiliser
management

0.7

0.1

0.8

-

Yearling sows

0.4

0.0*

0.4

0.9

Digestion

0.1

-

0.1

-

Fertiliser
management

0.3

0.0

0.3

-

Total

1.5

0.2

1.6

Note: The total does not add up due to rounding. 0.0 means that there are still emissions. It just doesn't show up at
the 1st decimal place.
Source: Climate Status and Outlook 2023

It is estimated that in 2030, there will be emissions of approx. 0.3 m tonnes of CO2eq from other livestock, see Table 7.5. The population of other animals is expected
to be around 155 m animals, of which around 134 m are broilers.

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Table 7.5. Other livestock in 2030
Methane(CH4)

Nitrous oxide(N2O)

Total CO2-eq

m tonnes of CO2-eq in 2030

Number ofanimalsm units in 2030

Hens

0.002

0.02

0.02

9.8

Broilerchickens

0.002

0.03

0.03

133.6

0.002

0.002

0.00

1.0

Pheasants(hens)

0.002

0.002

0.00

0.1

Ducks, geese
and turkeys

0.002

0.002

0.00

0.6

Mink

-

0

Sheep

0.03

0.01

0.04

0.1

Goats

0.002

0.002

0.00

0.0

Horses

0.12

0.05

0.17

0.2

Deer

0.002

0.01

0.01

0.0

Lambs

0.01

0.002

0.01

0.1

Ostriches

0.002

0.002

0.00

0.0

Total

0.2

0.1

0.3

145.7

Pheasants(chicks)

0.2

Note: The total does not add up due to rounding. It should be noted that Climate Status and Outlook does not reportemissions from other livestock at the above level of detail. Therefore, data from DCE 2021 has been used, which
results in a deviation of 0.1 m tonnes of CO2-eq compared to the emissions projected in the Climate Status andOutlook 2023. 0.0 means that there are still emissions. It just doesn't show up at the 1st decimal place.
Source: Report from DCE 2021 and own calculations.

Emissions from carbon-rich agricultural landCompared to other types of agricultural land, carbon-rich agricultural land has ahigh content of organic matter (over 6 per cent carbon), which emits CO 2-eq. 42
Emissions from the land can be reduced by setting aside land and rewetting it. Rewetting involves restoring the natural water level. This means that there may be periods of time when the soil is not under water.
Carbon-rich agricultural land is estimated to be around 75,000 hectares in 2030
and is estimated to emit around 2.2 m tonnes of CO2 in 2030.43 Carbon-rich agricultural land is expected to account for around 3 per cent of the total agricultural areaby 2030.

Carbon-rich agricultural land is created when organic matter builds up in the soil near the surface due to high waterlevels. Thus, much of the carbon-rich agricultural land was originally formed in natural wetlands such as bogs andwet meadows. When the land is drained for cultivation, the soil is oxygenated and the carbon decays and is released
into the atmosphere, primarily as carbon dioxide (CO2). If the carbon content is below 6 per cent, the soil is not characterised as carbon-rich.

42

Based on DCE, Scientific note no. 2024 60 (Gyldenkærne et al., 2024) update of updated map of carbon-rich agricultural land from AU (Beucher et al., 2023)

43

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In the emissions inventory, the 75,000 hectares of carbon-rich agricultural land are
divided into four types with different emissions factors. The four types are cultivatedland and permanent pasture with carbon contents of 6-12 per cent and greater than
12 per cent, respectively, see Table 7.6. Emissions from carbon-rich agriculturalland are reduced if land is set-aside for permanent pasture, see Table 7.6. However,the biggest reduction is achieved by the rewetting of the areas and their subsequenttransition to the area-class wetlands
Following the wetland restoration of carbon-rich agricultural land, there are still limited emissions, which come from a slight increase in methane emissions. If all carbon-rich agricultural land is rewetted, methane emissions are estimated to be 0.4 m
tonnes of CO2-eq in 2030.
Research is ongoing to update the emissions factor from carbon-rich agriculturalland, including the relationship between soil carbon content, water levels and emissions. This research may give reason to revise the current assumption that soils with
6-12 per cent carbon have emissions equivalent to half of the soils with >12 per centcarbon. It is expected that the results of the research project will be incorporated
into the Climate Status and Outlook for 2025.
Table 7.6. Emissions and hectares of carbon-rich agricultural land
Area

Emissions per
hectareTotal

Area-classes by
per cent carbon
content

1,000 hectares,
2030

Tonnes of CO2-eq
per hectare, 2030

m tonnes of CO2-eq in
2030

Cultivated land
(agricultural land),
6-12 per cent

16.7

25.2

0.4

Cultivated land
(agricultural land),larger than 12 per
cent

7.5

50.3

0.4

Permanent
grazing land, 6-12
per cent

29.1

18.7

0.5

Permanent
grazing land,
greater than 12
per cent.

21.7

37.4

0.8

Total

75.0

28.71)

2.2- of which carbon
pool

25.91)

1.9- of which
cultivation

2.81)

0.2

Note: The total does not add up due to rounding. 1) Average of all carbon-rich agricultural land
Source: DCE, Scientific note no. 2024 60 based on correction due to new map for carbon-rich agricultural land (Peat2022)

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Emissions from applied fertiliser and agricultural lime
Emissions from fertilisers applied to fields and agricultural lime can generally beclassified into nitrous oxide or CO2 emissions and are accounted for, see IPCC
guidelines, in the agricultural sector, see Table 7.7. Nitrous oxide emissions comefrom nitrogen in fertiliser applied to fields. CO2 comes from agricultural lime that is
applied as part of field operations. The addition of nitrogen and lime is necessary toprovide nutrients to the agricultural land to maintain plant production. Emissions
from applied fertiliser and liming are thus the primary sources of emissions associated with plant production. Urea is a carbon-based fertiliser that is applied to thefield. It represents a very limited amount of the total fertiliser usage.
Table 7.7. Emissions from applied fertiliser and agricultural lime
SectorActivity

Emission source

Nitrous oxide (N2O)

Carbon dioxide (CO2)

Total (CO2-eq)

m tonnes of CO2-eq in 2030
Agriculture

Fertiliser
appliedAppliedagricultural
lime1
Other
fertilisers

Artificial fertilisers

0.9

0.9

Organic fertiliser

0.8

0.8

Liming

-

Urea
Total

1.7

0.2

0.2

0.0

0.0

0.2

1.9

Note: The total does not add up due to rounding
1) Liming is not covered by the current nitrogen regulation.
Source: Climate Status and Outlook 2023 based on the emissions inventory.

Emissions from field operations
Emissions from field operations can be broadly classified into CO 2-eq emissions/removals due to changes in the soil's carbon balance and nitrous oxide emissions
from fields.
The largest emission sources for field operations in 2030 are decomposition of plant
residues and uptake from carbon sequestration in mineral soils, which are accounted for under agriculture and LULUCF, respectively. The two effects are mutually dependent. Crops initially cause carbon build-up, but when plant residue is left
on the field, nitrous oxide is released. Therefore, the net effect on greenhouse gas
emissions from field operations depends on the relationship between nitrous oxide
emissions and carbon uptake, which depends on crop choice, soil type and quality,
among other things.
When crops die and decompose in the field, nitrous oxide emissions are released,
which is accounted for under the agricultural sector (decomposition of plant residues). After that some nitrous oxide emissions from the decomposition of biomass
that occurs in the soil is released, which is also accounted for under the agricultural
inventory (mineralisation).
CO2-eq emissions/removals in the soil's carbon balance are calculated under the
LULUCF sector, see IPCC guidelines. The LULUCF sector is an umbrella term forland use and covers both emissions and removals from agricultural land use and theforestry sector.

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Emissions and uptake of carbon in mineral soils depend on the interaction between
the input of organic matter (plant material and fertiliser) and the decomposition oforganic material. The breakdown depends on annual temperature fluctuations.
Other things being equal, increased temperatures will cause a greater decomposition of the existing organic material in mineral soil, resulting in net discharge. Conversely, a cooler year will result in a lower decomposition of soil organic matter, thusincreasing carbon sequestration and net uptake. Varying weather conditions thus
contribute to the overall uncertainty associated with projecting carbon pool changes
in mineral soils. This variation can result in both negative and positive emissions.
Since 1990, yields and temperature in particular have fluctuated.
However, the CO2 effect of adding biomass is highly dependent on the soil's carbon
content and cultivation history. Increased addition of organic matter to mineral soils,
such as through increased plant cover as a result of alternative crop rotation or theuse of catch crops, can contribute to more carbon being sequestered in the soil
over a long period of time until the soil reaches a new equilibrium point. In the new
equilibrium point, the increased input of organic matter will be counterbalanced byan increased decomposition of organic matter, so there will no longer be a CO2-eq
uptake from maintaining the same new plant cover. On the other hand, it will benecessary to maintain the supply of organic matter (plant cover) to prevent the carbon pool in the soil from returning to a lower equilibrium point, which will lead toCO2-eq emissions.
Emissions from indirect nitrous oxide consist of atmospheric deposition and N leaching and runoff. The emissions are a derived effect of the supply of nitrogen to thefield through fertiliser, crop residues, mineralisation, etc.
Table 7.8. Emissions from field operations
SectorEmission source

Methane(CH4)

Nitrous oxide(N2O)

Carbon dioxide(CO2)Total (CO2-eq)

m tonnes of CO2-eq in 2030

The
agricultural
sectorCrop residues

0.9

Atmospheric deposition

0.2

N leaching and runoff

0.4

Burning of biomass
Mineralisation of the organic nitrogen
pool

The
LULUCF
sector

0.9

0.0

0.0
0.0

0.0

Mineral soil on permanent agricultural
land1

-0.3

-0.3

Mineral soil on newly cultivated land

0.0

0.0

Living biomass on permanentcultivated land

0.2

0.2

Living biomass on newly cultivatedland (deforestation)

-0.0

-0.0

Dead wood as a result of
deforestation

0.0

0.0

Mineral soil on newly cultivatedgrazing land

-0.0

-0.0

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Living biomass on permanent grazing
land

0.1

0.1

Living biomass on newly cultivatedgrazing land

0.0

0.0

Dead organic matter on newly
cultivated grazing land

0.0

0.0

Deforestation for agricultural land

0.0

0.0

Deforestation for grazing land

0.0

0.0

Total

0.0

1.5

-0.0

1.5

Note: The total does not add up due to rounding. 0.0 means that there are still emissions. It just doesn't show up to the 1st decimal place. "-" means that CO2 isbeing absorbed.
1) Agricultural land refers to cultivated land and permanent grazing land.
Source: Climate Status and Outlook 2023 based on the emissions inventory.

Emissions and removals from forests etc. and other land use
Uptake and emissions from forests are measured from various sources, including
the living biomass (i.e. the trees themselves and their roots), the forest floor anddead wood (branches etc.) and the soil itself. In addition to these, are storage in andemissions from harvested wood products. Removals and emissions from forests areaccounted for in the LULUCF sector and calculated as changes in carbon pools between two periods. For example, if the total amount of dead wood increases between two periods as a result of increased growth in the forest, and this growth isgreater than the ongoing decomposition of dead wood, a net uptake will be calculated.
According to the Danish Institute for Geosciences and Natural Resource Management, CO2 uptake from forests and harvested wood products is estimated to decrease significantly until 2025, after which CO2 uptake will increase slightly in 2030
and 2040. From 2025 to 2040, the annual CO2 absorption in the forestry sector isthus estimated to be reduced by approx. 2.8 m tonnes of CO2 relative to the CO2
absorption in 2021, see Table 7.9, although the forest area is also estimated to increase towards 2030. The development is due to an expectation of increased thinning and felling in IGN's forest projection based on the current age structure of theforests. The average annual uptake in the period 1990-2020 was approx. 2 m
tonnes of CO2.
When trees are harvested, all the CO2 that was previously sequestered in the trees
is recorded as an emission. However, the part of the harvest where the carbon is instead sequestered in wood products will be transferred to a fund for Harvested
Wood Products (HWP). Denmark's annual increment in the HWP pool is the part of
the Danish harvest that is processed in Denmark into lumber, wood panels or paper.
Every year, a portion of the sequestered carbon in the HWP pool is written off according to a writing-off period set in the IPCC guidelines. A write-off of uptake in
HWP results in an emission.
Overall, the net increase in the Danish HWP pool in 2030 is estimated to be around
0.2 m tonnes of CO2. In 2021, the uptake in the HWP pool amounted to approx. 22
per cent of the total registered logging in the same year, corresponding to a net uptake of approx. 0.1 m tonnes of CO2, see Table 7.9.

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Table 7.9 Emissions and removals from forests etc. and other land use
m tonnes of CO2-eq per
year

2021

2025

2030

2035

Emissions and removals from forests etc.

Living biomass(underground andabove ground)

-2.3

0.3

-0.2

-0.4

Forest floor (small
branches, needles andleaves)

-0.7

0.1

0.1

0.1

Dead wood (deadtrunks and thickbranches)

-0.1

-0.3

-0.1

-0.1

Mineral soils

-0.1

-0.1

-0.1

-0.0

Carbon-rich soils

0.2

0.2

0.2

0.2

Forest in total

-2.9

0.3

-0.0

-0.2

Harvested wood
products (HWP)

-0.1

-0.3

-0.2

-0.2

Forest and HWP in total

-3.0

-0.0

-0.2

-0.3

Buildings

0.2

0.3

0.3

0.3

Wetlands

0.1

0.1

0.3

0.3

Other land use

0.3

0.4

0.6

0.6

Emissions from other land use

Note: The total does not add up due to rounding. 0.0 means that there are still emissions/uptake. It just doesn't show up at
the 1st decimal place. Positive numbers represent net emissions; negative numbers are net uptake. HWP stands for"Harvested Wood Products".
Source: Climate Status and Outlook 2023.

Emissions in the forest floor category cover the fact that layers of small branches,
needles, and leaves build up the carbon pool on the forest floor. The category ofdead wood, on the other hand, covers carbon build-up based on larger trunks andbranches that lie in the forest and decompose.
See Denmark's National Inventory Report 202344, mineral soil with forest is not asource of CO2 emissions. As there is currently no separate emissions factor for forest floor soil for carbon-rich soils with 6-12 per cent carbon content, only forest floor
soil with a carbon content above 12 per cent is included. Today, there are approx.
37,000 hectares of forest on carbon-rich soils (over 12 per cent), see the forest inventory. The estimated emissions from this area are 0.2 m tonnes of CO2.
Emissions from other land use cover built-up areas and natural wetlands. Built-up
areas are not associated with emissions per se but cover written-off emissions frombefore the area was built on.

44

DCE SR 541 https://dce2.au.dk/pub/SR541.pdf

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7.4 IPCC Guidelines and Rules for the National
Emissions Inventory
The guidelines from the Intergovernmental Panel on Climate Change (IPCC) 45 set
the framework for Denmark's national emission inventory of greenhouse gas emissions and removals (negative emissions). Denmark's fulfilment of international obligations to the UN and the EU is tied to the annually reported emissions inventory to
the EU and the UNFCCC, just as the emissions inventory is the basis for the Danish
climate targets, see the Danish Climate Act.
The IPCC guidelines and the systematics of the emissions inventory are therefore
important for the determination of relevant instruments and cost-effective achievement of international and national climate targets. The guidelines specify how a specific emission or removal can be included in the national emissions inventory to ensure the best possible degree of transparency, accuracy, comparability, consistency
and completeness across country reporting. The guidelines are thus central to theestimated effect of a given regulation on emissions and removals (negative emissions) across sectors, including from the activities of the agricultural and forestry
sector. At the same time, the guidelines specify documentation requirements forhow emission-reducing climate measures can be included in national emission inventories.
International guidelines for the national emissions inventory
The national greenhouse gas inventory is reported annually in March to the EU andin April to the United Nations Framework Convention on Climate Change (UNFCCC). In Denmark, the DCE (the Danish Centre for Environment and Energy at
Aarhus University) prepares yearly national greenhouse gas inventory based on activity reports from relevant authorities and research institutes.
The IPCC's international guidelines describe the framework for how emissions
should be calculated and how emissions should be accounted for in predefined sectors across all countries.
According to the UNFCCC, all territorial emissions are categorised into five sectors:
1) The energy sector (including transport, households and industry),2) The Industrial Processes and Product Use (IPPU) sector,
3) The agricultural sector,
4) The Land Use, Land-Use Change and Forestry (LULUCF) sector, and
5) The waste sector.
The IPCC guidelines are based on a territorial principle that emissions and removals
are calculated in relation to the impacting activities they are associated with on thenational territory. This means that the Danish emissions inventory must include
emissions from activities that take place in Denmark, e.g. methane emissions from
Danish cattle farming and emissions from fertiliser when it is applied. This meansthat each nation must account for emissions associated with activities within its own
territory. At the same time, it ensures that emissions associated with, for example,
the consumption of foreign products are included in the producing country's calculation. This ensures that all emissions are accounted for and avoids double counting.

45

IPCC (2006). 2006 IPCC Guidelines for National Greenhouse Gas Inventories.

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Emissions from international shipping and aviation are handled under UN agreements with their own climate targets in the respective intergovernmental organisations for this purpose, respectively. IMO (shipping) and ICAO (aviation). Emissions
from e.g. Danish ships in international waters are therefore not included in the Danish emissions inventory, but are subject to independent reduction targets.
The greenhouse gases covered are carbon dioxide (CO2), methane (CH4), nitrous
oxide (N2O) and the so-called F-gases (e.g. refrigerants). The gases are included in
the calculation based on the greenhouse effect of the gases converted to CO 2
equivalents (CO2-eq) based on the Global Warming Potential (GWP) of each individual gas in a 100-year perspective in relation to CO2, see Box 1.1 in Section 1.2.
As new knowledge emerges as a result of technological development, research,
etc., IPCC guidelines and methods are continuously adjusted. This ensures that thenational inventories reflect the latest knowledge and technology. Technologies thatare covered by the IPCC's existing guidelines are included in the Danish national inventory when DCE has qualified that the effects of use are sufficiently documented.
For all countries, the designated authority must qualify any adjustments according to
specified guidelines from the IPCC. In practice, the reflection of detailed measuresrequires that emissions and removals are calculated with a detailed methodologythat requires a high degree of national data, which therefore also requires a high degree of documentation.
The inclusion of the climate impact of new technology in national emission inventories is assessed through UN (and EU) review processes to determine whether there
is sufficient evidence to support the inclusion. This ensures that all countries follow
the same standards. If a technology is not covered by the IPCC guidelines, it will
generally require the IPCC to update the guidelines before the effects of the technology can be recognised, or in some cases a national methodology can be developedthat is qualified by the IPCC. Biochar produced by pyrolysis is an example of a technology where the IPCC guidelines do not provide a clear framework for recognising
reductions from the technology, which is why national research is needed, see Box
7.2.
Box 7.2
Recognition of biochar in national inventory
Biochar produced by pyrolysis applied to land is included in the IPCC guidelines. However, the IPCC
has currently only further defined the accounting principle for biochar in agricultural land and grazing
land in the LULUCF sector. This means that the climate effect of storing carbon in the form of
spreading biochar on agricultural land can be included as negative emissions (removals) in the Danish national emissions inventory when the DCE has approved a method for calculating the effects ofbiochar added to agricultural land. The preparatory work for the development of the methodology
has been initiated.
According to the DCE, the application of biochar on other soil types such as paved areas, forests,
etc. is in principle covered by the IPCC guidelines. The IPCC specifically states that the method for
calculating biochar stored in agricultural land and grazing lands does not apply to forest areas, wetlands and sealed areas. Since the guidelines do not explicitly address forest areas, wetlands andpaved areas, it is even more up to the countries themselves to develop a methodology. The methodology will have to go through an extensive UN review process before the climate impact of these
forms of storage can be recognised in the national inventory. Such work has not been initiated.
It also follows from the IPCC guidelines that reductions from CO2 capture can only be included in thecalculation when there is subsequent permanent storage. For capture without permanent storage,

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emissions must be included in the emission inventory. The IPCC does not define what permanentstorage is, but refers to geological storage.
The guidelines do not describe the storage of biochar in above-ground storage with an aim for permanent storage. This means that the framework and circumstances that must be met before thestorage can be labelled as permanent storage and thus be recognised as a reduction in the calculation are not specified. Clarifying this is estimated to be an even more extensive UN review process,including the development of principles, methodologies and possibly standard factors.
Alternative uses of biochar, e.g. in building materials, are not covered by the IPCC guidelines. It will,
therefore, require a revision of the guidelines before the effects of this type of use can be recognised
in national emissions inventories.

The guidelines were last adjusted in 2019. Since the Paris Agreement, a note has
been added to the COP26 reporting format to ensure that some forms of CCS associated with industries or power plants that are fuelled wholly or partly by biomass(Bioenergy with Carbon Capture and Storage (BECCS)) can be included. Technological developments towards 2030 could potentially increase the pressure for an
update of the IPCC guidelines. In January 2024, the UN Member States agreed,among other things, that the IPCC should prepare a methodology report on emissions inventories for "Carbon Dioxide Removal Technologies, Carbon Capture Utilization and Storage", to be completed in 2027. The detailed content of the methodology report, including whether pyrolysis and biochar will be part of the report, is expected to be finalised in 2024. After the finalisation of the methodology report in
2027, it must be decided whether the IPCC guidelines should be revised on this basis. Experience has shown that revising the guidelines is a relatively extensive process that can take up to several years. In addition, all new IPCC guidelines must
subsequently be adopted under the UN Framework Convention on Climate Change,
either as mandatory or voluntary for countries.
Adjustments in calculation methods or adjusted emissions factors for individual
emission sources will both change CO2 emissions, but also affect CO2 emissions
backwards and forwards to ensure time series consistency. This means that the entire reported time series will be recalculated, and in some cases adjustments may
be made all the way back to 1990.
Calculation of emissions in the national emissions inventory
Emissions and removals from the agriculture and forestry sector are generally associated with the agriculture and LULUCF sectors, see IPCC's categorisation. Energyrelated emissions from agriculture, e.g. diesel consumption, are calculated in theenergy sector, which was covered in the first interim report.
Emissions from the agricultural and LULUCF sectors are measured differently. Emissions from the agricultural sector are calculated based on the biological processes
from agricultural activities in agricultural production: primarily methane and nitrous
oxide emissions from livestock digestion and fertiliser management, as well as nitrous oxide emissions from fertiliser applied to fields. Emissions and removals in the
LULUCF sector are calculated based on changes in carbon pools from the entire
area of Denmark, which is categorised into agricultural land, grazing land, forest andbuildings.
The starting point for Climate Status and Outlook is that climate effects are not recognised until a national calculation method or emissions factor has been developed
and approved by the DCE.

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The regulation of emissions from the agricultural and forestry sector must, as astarting point, be based on the systematisation and categorisation in DCE's inventories, so that the regulation supports reductions in accordance with the nationalemissions inventory. It can be politically decided that this practice should bechanged in relation to Danish objectives.
The governmental platform behind the Expert Group's models follows the systematics and categorisation in DCE's inventories. A regulation that deviates from the systematics and IPCC categorisation in the national emissions inventory can, in theworst case, create inappropriate incentives that lead to more emissions, just as it
can lead to a risk of double counting across sectors, see Box 7.3.
Box 7.3
Biogas based on livestock manure in the Danish emissions inventory
According to IPCC guidelines, territorial greenhouse gas emissions of methane (CH4), nitrous oxide(N2O) and CO2 are accounted for in the agricultural sector as well as the other sectors. CO2 frombiogenic sources such as biomass is recognised in the LULUCF sector in the country of origin of thebiomass. CO2 from biogenic sources is therefore recognised as CO2-neutral in the energy sector,
among others.
Livestock manure causes methane and nitrous oxide emissions in the agricultural sector. Emissions
are calculated in connection with fertiliser management in stables and storage facilities, as well as
nitrous oxide emissions from manure spread on fields.
Fertiliser management can produce methane from the carbon content of livestock manure when thefertiliser is in low-oxygen conditions in stables and storage facilities. The emissions are included in the
agricultural sector and can be reduced by different types of housing and measures, including frequent removal, see Technology Catalogue.
If livestock manure is to be used for biogas production, it means that the manure must be quickly
transported from the stable to the biogas plant. This will reduce methane and nitrous oxide emissions
in fertiliser management, as the livestock manure stays for a shorter time in stables and storage facilities and, therefore, does not produce the same amount of methane. Specifically, the reduction will
result from, e.g. frequent removal and will be recognised in the agricultural sector.
When methane is burned in the energy sector, the methane is converted to CO2, and since theCO2is formed from a biogenic source, it is calculated as CO2-neutral in the energy sector, see IPCC
guidelines. Therefore, the use of biogas in the energy sector can lead to reductions if the biogas replaces fossil fuels. There will be very limited methane and nitrous oxide emissions associated with theburning of biogas, which are recognised in the energy sector. In addition, biogas production can beassociated with methane leakage from the biogas plants due to leaks etc. These emissions are recognised in the waste sector.
Livestock manure will typically be spread on agricultural land. The application of livestock manure will
be associated with nitrous oxide emissions. This applies to both livestock manure that is not used as
input for biogas production and livestock manure that is degassed at biogas plants. Nitrous oxide
emissions are unaffected by whether or not the manure is degassed in connection with biogas production and are recognised in the agricultural sector. There may also be derived benefits for the
farmer, as degassing livestock manure can increase the quality of fertiliser, thereby reducing theneed for and use of fertiliser.

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Calculation methods for the national emissions inventory
The IPCC guidelines contain detailed calculation formulas for calculating emissions,as well as descriptions of the data that should be collected for this purpose. Again,
this ensures that there is a consistent standard across countries. For the majority ofthe emission sources in the national emissions inventory, the IPCC guidelines specify three possible tier levels that can be used to calculate emissions, see Box 7.4.
Box 7.4
IPCC classification of tier-level calculation methods
Tier 1
A Tier 1 method is the simplest calculation method using the IPCC standard emissions factors. The
IPCC also provides suggestions on where to find activity data for a given source. Emissions are calculated by multiplying activity data (AD) by an emissions factor (EF) in the simple formula: Emissions= AD × EF
Tier 2
A Tier 2 method requires more country-specific data rather than the IPCC's standard emissions factor. There is variation across emission sources as to what specifically constitutes a Tier 2 method,
but the method follows the same formula as for tier 1. There are also requirements for scientific documentation of why the country-specific factor is considered more accurate than the IPCC's standard
emissions factor. While the overall calculation method is simple in itself, the specific calculations canbe relatively complex, for example by including broad data from many samples. In particular, theneed for more detailed activity data to be collected annually complicates the use of Tier 2 and 3.
Tier 3
A Tier 3 method is a calculation method that is developed on a country-specific basis. It differs in that
it is based on measurements and/or modelling and therefore does not follow the simple formula ofTier 1 and Tier 2. Tier 3 methods should be documented by scientific publications and detailed methodology reports and, according to the IPCC, should be peer-reviewed and undergo quality assurance. The purpose of the quality assurance is to avoid any bias in the emission estimate.

There are no specific requirements in the guidelines as to which tier levels should be
used to calculate emissions from individual emission sources. This means that countries are free to choose whether to use the IPCC's standard emissions factors ormore detailed national emissions factors to calculate specific emissions. It is gener-

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Green Tax Reformally recommended that emission sources identified as "key categories" use a minimum of Tier 2. Key categories include emissions related to fertilisers applied tofields, livestock and cultivation of carbon-rich agricultural land. These emission
sources have a significant impact on the country's emissions either quantitatively orshow a significant trend over the years.
In the Danish emissions inventory, different methods and types of emissions factors
are used to calculate emissions in the agricultural and forestry sector. For Tier 1 and2 methods, emissions are typically calculated based on recorded or estimated activities, such as the number of cows or the amount of fertiliser applied. For these areas, there will be a simple correlation between e.g. regulatory base and inventory.
For other types of calculation methods, several variables may be included in the calculation of emissions from an activity, e.g. rainwater volume and cultivation history,
which is why there will not immediately be a simple connection between the regulatory basis (the activity that the farmer can influence) and the calculation of emissions.
In general, the emissions inventory is subject to uncertainty, including in relation to
the estimation of activity data and emissions factors. Uncertainties in the agricultureand LULUCF sectors are generally higher than in other sectors. However, this is especially true for those emissions in LULUCF that are biologically determined, where
temperatures, humidity, chemistry, nutrient availability and microbial activities,
among other things, determine the final emissions.
Inclusion of new measures in the national emissions inventory
Including new measures in the national emissions inventory requires documentationof the reduction effect and activity data (deployment and operating conditions).
In this context, it is recommended that the relevant authorities work together to prioritise the provision of research results and documentation in order to ensure thatnew technologies are incorporated into the DCE's inventories as soon as possible.
Technologies and transition elements for reducing agricultural emissions are at different stages of maturity, see Appendix 7.5.
When introducing voluntary subsidy schemes or reduced taxes in connection withthe use of technologies or transition elements, it is necessary to ensure the compilation of activity data. If a measure is stipulated by law, the emissions inventories canassume that the law is followed and the measure is therefore widespread.
For example, if the use of methane-reducing feed is to be calculated in the nationalemissions inventory, two types of data must be obtained before the DCE can approve the technology. Firstly, representative impact data must be collected. Efficacy
data documents that methane-reducing feed has the claimed reduction effect whennational differences in feed composition and ration are taken into account. Secondly, activity data must be collected, which is data on actual usage in Denmark.
The two types of data must ensure that there is certainty about both the effect of theindividual technology and the extent to which the technology is used in practice. For
example, for the methane-reducing feed additive Bovaer, it is estimated that withthe research activities initiated, there will be sufficiently solid results for the technology to be included in the national emissions inventory. It is possible to include estimates for the uptake of the technology in the projection.

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7.5 Technology Catalogue
This chapter provides an overview of the current options for technical transition in
the agriculture and LULUCF sector.
The options for technical transition in the agricultural sector relate to livestock digestion, manure management and fertiliser application, and for the LULUCF sector, soil
carbon uptake. The options for technical transition are generally limited in their impact, have high socio-economic costs (low cost-effectiveness), and are low in maturity.
Most of the option for technical transition presented in this chapter correspond towhat is presented in the government's Climate Programme 2023 from September
2023.

Overview of technologies
Table 7.10 provides an overview of the currently known technological transition elements for agriculture and LULUCF. Estimates have been made for potential, costs,
side effects, maturity level and the status of being able to recognise the effects oftechnical conversion options in the emissions inventory.
The effects in the technology catalogue deviate from several stakeholders' assessment of the potential for technological change in agriculture. This is largely due tothe fact that the effects in the table below can be recognised in the Climate Status
and Outlook, which ensures that there is no overlap between effects recognised asa result of previous political agreements, e.g. the Agricultural Agreement and various financial laws.
Many of the transition elements are substitutes and their effects cannot be added
together within the same emission source. Table 7.10 shows the full potential foreach technology. For a number of technologies, overlaps will need to be taken into
account, which is why the potentials cannot be summarised. In the calculations of
the presented models, overlaps and substitutes are taken into account.
The technical reduction potential examines solely the technically possible reduction,
based on the limiting factors such as area or number of animals. It does not take
into account the possibilities for realising the transition elements, e.g. whether it ispossible to install tent covering with floating layers on all slurry tanks or to build acertain number of pyrolysis plants by 2030.
The assessment of the total potential in 2030 is based on a summation of the median estimates for each of the instruments. Realisation in 2030 will depend on whenand how the instruments are incentivised, as there may be practical challenges associated with rolling out all the instruments over a short number of years towards
2030.
The current maturity level of the technologies from a purely technical point of view isindicated by a Technology Readiness Level (TRL) scale 1-11 (1= low maturity, 11=high maturity), which is based on the International Energy Agency's Clean Energy
Technology Guide 2021. The maturity of the technologies is continuously monitored.
There is a big difference in maturity. For the feed additive Bovaer, for example, there

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is reasonable certainty of efficacy, but efficacy documentation under Danish conditions is pending. For the storage technology tent covering with floating layers, documentation for efficacy is pending, while nitrification inhibitors are being studied forboth efficacy under Danish conditions and possible environmental impact (groundwater pollution).
It is generally required that the reduction effect of a given technology is well documented and included in the IPCC guidelines in order to include it in the emissions inventory. Table 7.10 indicates the following for each technology: ready, if it can be
immediately recognised today, possible, if research projects have been initiated thatare expected to document the effect before 2030, uncertain, if research projects
have yet to be initiated to document the effect or side effects, and difficult, if thetechnology is considered so immature that it is unlikely to be realised before 2030.
The categories only cover documentation of the reduction effect. This does not take
into account activity data and penetration, which are also necessary data to recognise the effect in the emissions inventory.
It should be noted that these are uncertain estimates of costs and reduction potentials. There is a general uncertainty associated with estimating future technologicaldevelopment. Description of the individual technologies follows Table 7.10.
Table 7.10. Current known technical transition options for agriculture and LULUCF
Technology /Transitions element

Technological costs
in factor prices(DKK per tonne)

Positiveside effects infactorprices(DKK
pertonne)

Reduction
potentials

Limiting factor(mtonnesin2030)1)

TRL
1-11
(ma
turit
y)

Statusforinclusion in theemissions
inventory in
2030

Agriculture, Livestock digestion (effects from the different feed measures cannot be added together) 2)

0.50

Number of conventional dairy cattle. Organic cattle cannot receive Bovaer.
Bovaer cannot currently be used whencows are grazing.

9

Possible00.7

Number of conventional cattle andwhether it will be EU-approved for all
conventional cattle.

2

Uncertain.

Negative

0.13

Number of conventional dairy cattle andsafe allocation method.

6

Uncertain

.

.

1.3

Animal health – the seaweed is being
risk assessed. Whether the seaweed isorganic.

1-4

Uncertain

Stable acidification,
cattle (excludes othermeasures including
storage facilities)

1,000

200

0.04

Number of conventional dairy cattle.
Slurry cannot be used for biogas. Can
only be used in some types of housing

9

Possible

Slurry cooling, newstables

4,825

150

0.02

The number of newly constructed barns
from 2025.

9

Ready

Bovaer (feedadditive)

425

0

Substance X2 (feedadditive)-

NitrateTropical red algae
Fertiliser management in stables

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Slurry cooling, existing
stables
Change of type of
housing – pigs 3)
Slurry removal every 7
days

-

0.05

The calculation does not differentiate
between new and old stables.

9

Ready

0.07

Potential is limited by new requirement
for frequent removal.

9

Possible--

Relevant in pig barns, as new cattle
barns are established with daily removal or stable acidification due to current environmental regulations.

9

Possible0-

Slurry and fertiliser management in storage
Tent covering +floating layer – pigs

300

0

0.12

Not relevant if slurry is acidified or set
aside for biogas.

7

Uncertain

Tent covering +floating layer – cattle

425

0

0.04

Not relevant if slurry is acidified or set
aside for biogas.

7

Uncertain

Storage acidification- pigs.

.

0.08

Same as tent covering

6

Possible

Storage acidification– cattle

.

.

0.04

Same as tent covering

6

Possible

Flaring – pigs

.

.

0.15

Same as tent covering

6

Possible

Flaring – cattle

.

.

0.07

Same as tent covering

6

Possible

Biofilter – pigs

.

.

0.18

Same as tent covering

6

Possible

Biofilter – cattle

.

.

0.08

Same as tent covering

6

Possible

STAF/Nogas
Washing robots

.

.

-

.

3

Difficult

.

.

.

.

3

Difficult

Nitrification inhibitors –added to livestock manure4)

1,250

Positive

0.17

Total amount of livestock manure. Riskof groundwater contamination is investigated.

9

Uncertain

Nitrification inhibitors –added to inorganic fertiliser4)

1,500

Positive

0.22

Total amount of inorganic fertiliser. Riskof groundwater contamination is investigated9

Uncertain

Nitrogen application on fields

LULUCF
Carbon balance in cultivated soil 5 (effects from the different cultivation methods cannot be added together)
Catch crops5)-

Positive-

Agricultural land

9

Ready

Catch crops-

Positive-

Agricultural land

9

Ready

Winter crops (earlysowing)5)-

Positive-

Agricultural land

9

Ready

Fallowing5)-

Positive-

Agricultural land

9

Ready

Perennial energy
crops5)-

Positive-

Agricultural land

9

Ready

Grass in crop
rotation5)-

Positive-

Agricultural land

9

Ready

Biochar bypyrolysis6)900-3,300

9

Possible

5)Agricultural land-

0.8-38Environmental authorisation of quantity
per hectare (phosphorus cap)

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Note: Technological costs are stated in 2023 factor prices, administration costs etc. are not included. For capital investment, a required rate of return of 7 per cent isassumed. Costs and side effects are rounded to the nearest DKK 25 per tonne. TRL technology readiness level (1= low maturity, 11= high maturity). 1) The reduction
potentials are calculated additionally in relation to KF23. 2) The general requirement for livestock digestion from the Agricultural Agreement corresponding to increased
fat feeding has been deducted from the technologies' potentials, as there is currently assessed to be full overlap. It is uncertain whether this is possible for organic cattle.
3) It is a prerequisite for the use of nitrification inhibitors that negative side effects are clarified, including the risk of groundwater contamination via leaching togroundwater. 4) It has not been possible to estimate the cost curve and climate effect for the individual field management measures. 6) The technical potential forbiochar reflects a range if biochar is produced only on digestate, which has the highest phosphorus content (the 0.8 m tonnes of CO2-eq), and if biochar is produced
only on wood, which has the lowest phosphorus content (the 38 m tonnes of CO2-eq).

Agricultural sector
Livestock - digestion
Methane is formed in the rumen during the digestion of feed in ruminant livestock,
but various measures can reduce methane emissions from livestock digestion andthus reduce the emissions factor per animal. Cattle have by far the largest methane
emissions from digestion, which is why methane-reducing technologies target cattle.
It is not fully clarified whether the different types of methane-reducing feed have anadditional effect when used together or whether their effects are mutually exclusive.
Studies already conducted have not demonstrated additive effects when using several types of methane-reducing feed at the same time, which is why the possibilities
are considered to be limited. However, it should be noted that different types of methane-reducing feed can be used simultaneously for different types of cattle. An example is the feed additive Bovaer, which is only authorised for conventional dairy
and breeding cows, and the feed additive Substance X2, which is expected to be
used for beef cattle as well. Therefore, the expected future distribution of conventional and organic dairy cattle will affect the potentials, just as the potentials will depend on the number of cattle in 2030.
It was decided with the Agricultural Agreement to implement a general reduction requirement for conventional cattle digestion from 2025, corresponding to an effect ofapprox. 0.2 m tonnes of 2-eq in 2030 based on an increased proportion of fat in thefeed, but with methodological freedom. However, increased fat content is not expected to be utilised with the other feed additives.
For a number of the methane-reducing measures, sufficient documentation of theclimate effect and studies of side effects on animal health and the environment are
still lacking.
Bovaer/3-NOP (feed additive)
Bovaer (with the active ingredient having the chemical name 3-NOP) is a feed additive approved in 2022 as the first methane-reducing feed additive in the EU, and is
expected to be marketed in Denmark within a shorter timeframe. It is expected thatthe substance will be marketed in complementary feed that is mixed into the feed.
Bovaer is authorised for use in conventional dairy cows and breeding cows, while itis currently not authorised for use in organic cattle46. The substance is sold today ine.g. Netherlands, Belgium, Italy and Australia.
The climate impact of using Bovaer under Danish conditions is the subject of an
ongoing research project with the final report being due in 2024. Among other things,

46

Bovaer is currently not authorised for organic cattle because it is synthetically produced.

Green Tax Reformthe research project aims to clarify whether the effect of Bovaer can be included in
the national emissions inventory for 2025.
The effect of Bovaer depends on the feed ration to which it is added. In a Danish
feed ration, the substance is expected to reduce methane emissions by up to 30 per
cent, which corresponds to an additional reduction of approx. 0.5 m tonnes of CO 2eq in 2030. The reduction effect is adjusted for the general reduction requirement.
Bovaer need to be fed daily in the barn, but feeding methods for grazing cattle are
currently being worked on, which is expected to be possible in two years. It is also
expected that Bovaer will have a similar effect on heifers as it does on dairy cows.
SEGES has estimated that this reduction will amount to around 0.17 m tonnes ofCO2-eq. However, the climate impact on heifers still needs further documentation
before it can be included in the national inventory.
COWI has estimated the cost of purchasing Bovaer based on dialogue with the
manufacturer and on the basis of the price of a specific product. On this basis, it isestimated to cost the industry in the region of DKK 250 m annually to feed all conventional dairy cattle with Bovaer. The technological costs are estimated to bearound DKK 425 per tonne of CO2-eq.
Substance X2 (feed additive)
At Aarhus University (AU), research is being conducted into the development of amethane-reducing feed additive called 'Substance X2', which is expected to be used
for conventional cattle. As the substance is still being patented, the content of Substance X2 is not publicly known, nor has a timeline been set for the publication of
the research results
According to AU, Substance X2 is expected to reduce methane emissions by up to
30 per cent for all conventional cattle, which corresponds to a reduction potential of
approx. 0.7 m tonnes of CO2-eq. Substance X2 could potentially reduce methane
emissions by up to 40 per cent if a so-called "triple-action" product is successfully
developed with Substance X2 as a sub-component. In this case, the potential would
be up to 1 m tonnes of CO2-eq in 2030. However, there is considerable uncertainty
about whether this can be realised in practice.
Substance X2 is currently not market-ready, and it is not used anywhere in theworld as it is still under development. This includes further clarification of how Substance X2 affects animal health, including whether it has any derived effects on feedintake and milk yield.
NitrateCalcium nitrate (nitrate for short) is a feed additive that works by removing some ofthe hydrogen produced in the cow's rumen that would otherwise be used to create
methane. Therefore, changing the composition of the feed ration through increased
addition of nitrate could potentially reduce methane emissions from livestock digestion. Nitrate can potentially be used for all types of cattle in conventional farming,
but not by organic farmers.
Research indicates a 10 per cent reduction in methane emissions from cattle digestion. The limiting factor for the use of nitrate is considered to be the high content of
nitrogen in nitrate, which means that nitrate must replace other nitrogen-containing
feed materials in the ration to avoid a reduction in methane emissions being fully or
partially offset by an increase in nitrogen emissions. Further clarification of both theenvironmental effects and how nitrate affects animal health is also needed.

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Seaweed, algae, etc. in feed
Seaweed in feed is an example of a feed additive that is currently very immature andwhere the health and other side effects have not yet been analysed. Other feed additive measures include essential oils, plant extracts, etc.
Initial studies have indicated that seaweed added to feed can have a reducing effecton over 50 per cent of methane emissions from digestion in young cattle, but only
25-35 per cent in dairy cattle. The estimate is uncertain and research is ongoing.
The European Commission has asked the European Food Safety Authority (EFSA)
to assess the risks of using red algae in feed, but they do not expect to present arisk assessment until 2024 at the earliest.
Livestock - Fertiliser management in stables
Storing slurry in the barn before transferring it to storage releases methane and nitrous oxide as it evaporates. Different stable systems have different surface areasand capacity for slurry. Changing these factors can change the emissions factor per
animal. In addition, technologies can be added to treat the slurry while it is stored.
Switching to a stable with more frequent slurry discharge and installing stable acidification are mutually exclusive. This is because it is not relevant to establish barn
acidification in barns that are already climate-friendly due to their slurry handlingsystem with wire-type stable cleaners/scraper. Slurry cooling can be established at
the same time as stable acidification and a change in the type of housing. In practice, however, it is often a choice between a stable acidification system or a slurrycooling system, as there are high costs associated with both.
Change in type of housing - pigs
A farm's choice of stable is closely linked to animal type with a particular determinant being the market situation (demand, price formation, production costs, etc.),
where the entire production apparatus (stable, storage, technologies, etc.) isgeared towards a specific type of animal. However, it is possible to change the stable for a given animal type, which would be a purely technical conversion. Choosing
a "low emission stable" will reduce the emissions factor per animal.
The total reduction potential for pig farms is estimated to be less than 0.07 million
tonnes of CO2-eq in 2030. The cost range of -100 - 84,000 covers different production types, herd sizes and whether the existing stable system has been depreciated.
The majority of the potential effect is associated with a high shadow price. The
range of the shadow price is large, as it depends on the specific type and age of thestable. For all types of production, the technological costs exceed DKK 8,000 per
tonne of CO2-eq if the type of housing is changed before the existing housing is depreciated. If only fully depreciated barns are included, the potential is less than 0.01
million tonnes in 2030.
When changing the stable system, the reduction effect depends on the slurry's residence time in the stable. The potential is limited by the fact that there is a general
requirement for frequent removal from pig houses as a result of the Agricultural
Agreement that came into force on 1 May 2023. The distribution of stable systems
across animal types with their respective emissions factors are included in the emissions inventory based on the fertiliser register.
Stable acidification, cattle

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During acidification in stables, the pH value in the slurry is lowered by the allocationof sulfuric acid via a stable acidification plant, reducing the turnover and formation of
methane and ammonia in the slurry. Stable acidification has the advantage that the
reduction effects in the stable are expected to be retained in the storage facility.
Livestock acidification is a mature technology due to its use as an ammonia-reducing technology. However, the climate impact still needs further documentation before it can be included in the national inventory. With stable acidification, the use of
the slurry for biogas is excluded, as sulphuric acid is incompatible with biogasification.
Based on estimates for the spread of the technology, which are based on the
spread of types of housing where livestock housing acidification can be directly implemented, it is estimated that the technological costs associated with an increased
share of stable acidification amount to DKK 575-3,950 per tonne of reduced CO2.
There is an estimated potential to reduce emissions by 0.04 million tonnes of CO2eq in 2030. The starting point for this potential is that only existing and new cattle
stables with a ring channel that does not already acidify the stable or supply biogas
can be converted. Further documentation of possible negative side effects on theenvironment is still pending. In addition, it is estimated that there is an additional potential of 0.42 million tonnes of CO2-eq in 2030, for which technological costs cannot be estimated. Realising this potential will require remodelling the type of pig
housing that do not have slurry channels. Overall, the shadow price of converting
pig houses is estimated to be significantly higher than the estimates given here.
Slurry cooling, without the possibility of utilising excess heat
Slurry cooling lowers the temperature of the slurry while it is stored in the stable,
thereby reducing the conversion and formation of methane. Slurry cooling is only
relevant in pig houses, which are typically closed stable systems. Slurry cooling is amature technology due to its use as an ammonia-reducing technology. Slurry cooling does not technically exclude any other slurry and fertiliser technologies. Slurrycooling contributes to both ammonia and methane reduction. By using slurry cooling, the excess heat can be utilised. It is estimated that further use of slurry coolingwill take place in stables where the excess heat cannot necessarily be utilised.
The technological costs associated with an increased share of slurry cooling systems amount to DKK 4,250-6,125 per tonne of CO2-eq reduced. Based on the technological costs, it is estimated that there is a potential to reduce emissions by 0.02
million tonnes of CO2-eq. The potential is limited by the assumption that slurry cooling is not implemented in existing stables, as this would require extensive and costly
remodelling. Therefore, it is estimated that there is an additional potential of 0.05
million tonnes of CO2-eq in 2030 for which technological costs cannot be assessed(existing stables).
Final documentation for slurry cooling has yet to be finalised, including the optimal
operation of a plant to reduce methane from the slurry.
Livestock - Fertiliser management in storage
There is full overlap between the different technologies for handling slurry in thestorage facility. At the same time, the storage technologies will have no effect in
combination with stable acidification. Conversely, the best effect will be achieved if
storage technologies such as low-dose storage acidification are combined with frequent removal from the stable or slurry cooling at the stable.
Tent covering with floating layers

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Tent covering on the slurry container combined with a natural floating layer on top of
the slurry reduces greenhouse gas emissions by stabilising the water balance of thefloating layer, and makes it possible to regulate the air exchange with the aim ofmaintaining an elevated concentration of methane in the air above the floating layer.
Although tent coverings and floating layers are used individually as ammonia technology, the combined technology as a climate technology is very immature due tothe concept being in the pilot phase. Tent covering with floating layers are not relevant for slurry sent to biogas, as the slurry is not stored in the slurry tank before degassing. It is estimated that the technological costs associated with an increased
proportion of tent roofing with floating layers amount to DKK 75-975 and DKK 50875 per tonne of reduced CO2-eq for pig and cattle slurry, respectively. The range
in costs covers different costs depending on the size of the slurry tank. Especiallyslurry tanks where a tent covering is already installed will have low costs, as only thefloating layer needs to be installed. Based on the technological costs, it is estimatedthat there is a potential to reduce emissions by 0.16 million tonnes of CO 2-eq. Final
documentation of the reduction effect on greenhouse gases and more detailed
knowledge of construction and operation are still pending.
Low-dose storage facility acidification
Low-dose acidification in the slurry tank lowers the pH of the slurry by adding sulphuric acid to the slurry tank while stirring the slurry. The combination of added sulphur from sulphuric acid and a lowered pH means that the formation of methane isinhibited. Storage facility acidification is currently used as an ammonia-reducing
technology, but is added just before application and therefore only has an effect out
on the field. Low-dose acidification in storage facilities is an immature technology.
Further research is needed on, for example, acid dose and optimal addition andmixing methods before the concept is ready for implementation as a methane-reducing technology. Low-dose storage facility acidification is not relevant in combination with biogas, as slurry is typically delivered to biogas plants directly from the stable. Low-dose storage facility acidification could potentially fulfil two requirements at
once, ammonia and methane reduction. The total technical reduction potential is estimated to be 0.12 million tonnes of CO2-eq in 2030. Documentation of the reduction effect and more detailed knowledge about the operation of the technology ispending.
Flaring
In flaring, the methane emitted from the slurry is collected in the air above the slurrytank under a tightly sealed tent, then discharged into a flare and burned. Flaring is
not considered relevant in combination with stable acidification or with biogas, as
slurry is typically delivered to biogas plants directly from the stable and as acidification is assumed to reduce or eliminate methane emissions from the storage facility.
Flaring is a known technology for burning methane in landfills (e.g. Danish company
Deponigas). However, flaring in slurry tanks is still early in the research and development phase, and the final concept is not yet known. At this point, only a prototype
for slurry storage has been developed. The technical reduction potential is 0.23 million tonnes of CO2-eq in 2030. There are uncertainties associated with the potential,
including a lack of documentation of the reduction effect on greenhouse gases, design and operation.
Biofilter
Biofilters work by collecting the methane-containing air from slurry stores and blowing it into a layer of soil or compost, where methane-oxidising bacteria break down
methane into CO2. The same principle is currently used in landfills under the term bi-

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ocover, but the technology's effect has not yet been proven in slurry storage facilities. Biofilter is an immature technology due to the lack of documentation of the reduction effect and the lack of repeated full-scale testing. Biofilter is not considered
relevant in combination with stable acidification and is not relevant in combination
with biogas, since slurry is typically delivered to biogas plants directly from the stable and since biofilter is assumed to reduce or eliminate methane emissions fromthe storage. Overall, biofilter is estimated to have a technical reduction potential of
0.26 million tonnes of CO2-eq in 2030. The assessment is subject to a number of
uncertainties, partly due to the still incomplete documentation of the reduction effect.
STAF/Nogas
STAF is a slurry additive whose active ingredients tannin and fluoride reduce microbial activity in the slurry, preventing the formation of methane and ammonia. In laboratory trials, STAF has shown a promising reduction effect on methane and ammonia in the slurry before application, as well as a reducing effect on nitrous oxide
emissions during application. In 2019, the University of Southern Denmark's project
managers have roughly estimated that if STAF is used on 50 per cent of all slurry inDenmark, the additive will potentially reduce greenhouse gas emissions from agriculture by 0.4-1 million tonnes of CO2-eq annually. The assessment has been madewithout consideration of the overlap between this technology and other technologies(such as biogas). This potential is associated with significant uncertainties, as thetechnology has not yet been fully developed or tested in practice in stables and storage facilities. The documentation behind the estimated potential is based on laboratory tests and is therefore still very incomplete, as field trials under Danish conditions are still pending.
Washing robots
A washing robot is a robot that can wash the slurry pits in pig houses. With a washing arm, the robot removes all residual fertiliser and bacteria from the slurry channels between each batch of pigs, thus providing poorer growth conditions for themethane-producing bacteria. An ongoing GUDP project, GreenSlurry, expects thatthe washing robot can reduce total methane emissions from stables and storage facilities by up to 60 per cent. However, this estimate is associated with significant uncertainties due to the low maturity, which is why it is not considered possible to estimate a technical reduction potential for the technology.
Field application of nitrogen - Decomposition of nitrogen in the field
Nitrogen applied to fields can be converted into nitrous oxide when it comes into
contact with soil microbiological life. By 2030, changes are expected in the way nitrous oxide emissions from agricultural fertiliser usage are measured, as current assumptions do not match actual measurements in the field. Current research indicates that the emissions factor for fertilisers is lower than the emissions factor fromlivestock manure.
Nitrification inhibitors
Nitrification inhibitors have been developed as a means to optimise the utilisation offertilisers and manure applied to fields. The addition of nitrification inhibitors reduces
nitrous oxide emissions from the applied fertiliser and manure, thereby reducing theemissions factor per unit of manure/fertiliser applied.
It is estimated that the technological costs associated with the use of nitrification inhibitors amount to DKK 1,325 and DKK 1,225 per tonne of reduced CO 2-eq for live-

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stock manure and non-organic fertiliser, respectively. The potential to reduce emissions is estimated at 0.39 million tonnes of CO2-eq overall. The addition of nitrification inhibitors to fertilisers is estimated to have a positive side effect in the form of reduced nitrogen leaching to the aquatic environment.
Research is ongoing into the climate impact of nitrification inhibitors under Danish
conditions and whether they pose a risk of contaminating drinking water. It is aprerequisite for the use of nitrification inhibitors that negative side effects areclarified, including the risk of leaching to groundwater. If the preliminary results fromongoing Danish research into the emissions of nitrous oxide in relation to fertiliser
application show that the emissions factor for non-organic fertilisers is lower thanpreviously assumed, this will mean that the use of nitrification inhibitors in nonorganic fertilisers has a significantly smaller reduction effect. The research projects
are expected to report in 2024.

LULUCF sector
Carbon balance in cultivated land - Change in carbon pools
Changes in the soil's carbon pool are calculated in a dynamic model with historicalinput data. The key is that the carbon pool is moving towards equilibrium. If thesame amount of biomass is added to the soil annually, the same equilibrium is maintained, keeping the soil carbon pool constant. If the amount of biomass added increases, other things being equal, there will be an increased carbon uptake until a
new equilibrium with a larger carbon pool is reached, and if the amount of biomass
added decreases, other things being equal, there will be an increased emission until
the adaptation to a new equilibrium with a lower carbon pool. The carbon balance issensitive to weather changes, so a new temperature projection will affect the calculations.
The different types of biomass can replace each other to a certain extent, so for example, biomass from straw can be replaced by several cover crops, although notnecessarily 1:1.
Catch crops
Catch crops are grown after harvesting the main crop and take up excess nitrogenin the soil, reducing leaching and ideally making the nitrogen available for next season's crop production. In terms of climate impact, the cultivation of catch crops willlead to a reduction in indirect nitrous oxide emissions. This is due to reduced leaching and runoff of nitrogen, reduced nitrous oxide as a result of reduced fertiliser usage and increased carbon uptake in the soil through the greater amount of plant
residues in the field. Note that the carbon build-up in the soil follows a decreasing
curve until the saturation point is reached. At the same time, the effect is reversible.
Decomposition of plant residues from catch crops leads to increased nitrous oxide
emissions and a marginal increase in ammonia emissions.
Nitrogen regulation includes the following schemes to limit nitrate leaching from theroot zone: 'Targeted regulation', 'mandatory catch crops' and 'livestock catch crops'.
In all schemes, the farmer can choose between several alternatives, and catch
crops are the measure that farmers primarily use.
Catch crops

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Catch crops are used with the aim of limiting nitrate leaching from the root zone.
Catch crops are grown before sowing winter crops and absorb excess nitrogen in
the soil, reducing leaching. Cultivation of catch crops leads to reduced emissions of
indirect nitrous oxide from the leaching and runoff of nitrogen and increased carbon
uptake in the soil through the greater amount of plant residues in the field. Nitrous
oxide from decomposition of plant residues from catch crops will also marginally increase ammonia emissions.
Climate regulation of field operations
Cultivation practices in the field affect the soil's carbon stock and can thus lead toemissions or removal of CO2-eq. An increased supply of organic matter in the field,
e.g. through increased plant cover or application of organic fertiliser, will lead to a
gradual build-up of carbon in the soil. The build-up of carbon will continue until a
new equilibrium is reached in the soil carbon stock that corresponds to the new cultivation practices. Carbon storage in arable farming is reversible, which means that
if there is a change in cultivation practices towards a lower input of organic matter,carbon storage will gradually decrease. This will lead to CO2-eq emissions. To avoid
this, it is thus necessary to maintain a given cultivation practice. It is estimated that it
takes around 20-60 years to achieve a new equilibrium in the soil.
The existing nitrogen regulation uses measures (e.g. catch crops and catch crops)that can increase carbon storage in the soil by increasing the supply of organic material to the field. These measures are used in large areas of the country to reduce
nitrogen leaching and also have a climate impact. This climate effect is already included in the climate projection and it is expected that these measures will be maintained until 2030 due to nitrogen considerations.
The CO2-eq shadow price of a cultivation practice that affects soil carbon stocks
must reflect that the effect is diminishing and reversible. This means that any subsidy rate should be reduced to ensure a uniform financial incentive across reversible
and irreversible CO2-eq reductions when all effects and costs over time are taken
into account. In addition, maintaining field management measures such as catch
crops and intercropping may result in a small net emission of CO 2-eq in the longterm due to a permanent emission of nitrous oxide that continues after carbon buildup has ceased.
Field management measures to reduce nitrogen leaching are central to the planned
nitrogen regulation, and the Expert Group recommends that climate effects, such ascarbon absorption in the soil and nitrous oxide emissions from plant residues, be included in the new regulation. Granting subsidies for field operations may be considered to increase the soil's carbon stock, bearing in mind that the effect is diminishing and reversible. Subsidies for field management measures are included as a possible adjusting screw in Section 2.6.
It is possible to derive the optimal ratio between subsidies for measures with a renewable effect and carbon storage measures with a decreasing impact so that asimilar shadow price is achieved across the two types of measures. The optimal ratio will depend on the future carbon accumulation and the cost of maintaining themeasures discounted according to the socio-economic discount rate. With a subsidy of DKK 429 per tonne of CO2-eq, it is estimated to provide a CO2-eq reductionof 0.2 in 2030 with a marginal shadow price of DKK 700 per tonne of CO2-eq in
2030. As the effect is diminishing, the CO2-eq reduction is estimated to be 0.1 in
2045 if the cultivation practice is maintained.

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Research has been initiated to help improve fertiliser emissions factors so that theoverall cultivation practice, including crop selection and management, can be taken
into account when calculating the nitrous oxide loss from applied fertiliser. In thisway, field operations can eventually be included in the calculation of the farm's emissions and improve the interaction between climate and nitrogen regulation.
Biochar by pyrolysis
Pyrolysis is a process where material is heated under oxygen-deficient conditions,creating a form of incomplete combustion of the material. The pyrolysis process produces a carbon-containing solid product and a pyrolysis gas, which can be converted into a pyrolysis oil when cooled. When biomass is used as an input to the pyrolysis process, the solid fraction is called biochar. Over time, some of the sequestered carbon is rereleased. Still, since only a small portion is expected to be released after 100 years and a large portion of the carbon in biochar is expected to be
stored for centuries, biochar is considered to be approximately a long-term store orcarbon.
The pyrolysis process also produces energy products in the form of waste heat, pyrolysis gas and potentially pyrolysis oil. It is estimated that the pyrolysis oil will be
used in shipping, which is outside the 70 per cent target, and that the gas and excess heat will replace other renewable energy production. It is therefore assumed
that pyrolysis oil, gas and excess heat do not lead to CO 2 reductions in the nationalemissions inventory, but that the pyrolysis plant sells all energy products, which
generates revenue for the plant.
Pyrolysis costs are made up of plant investment costs, operating costs, biomass
costs and costs associated with the transport and application of biochar. Revenue isgenerated from the sale of waste heat, pyrolysis gas and pyrolysis oil. Climate credits may also be sold, but these are not included in the technological costs per tonneof CO2, see Table 7.10. The technological costs depend on which biomass is used
for production, as well as the amount of biochar produced, as it is estimated to be
more expensive the more biomass that must be allocated to biochar production.
The technological costs thus amount to DKK 900-3,300 per tonne. However, the socio-economic costs per tonne will be higher, as the CO2 effect here must be offset
by the fact that some of the biomass was a temporary carbon store to begin with.
Biochar can be produced from different biomasses such as straw, biogas digestate
and wood waste. However, the technical potential is highly dependent on the phosphorus content of the biomass. If the applied biochar is limited to biochar producedby the total Danish amount of biomass that is currently either applied to agriculturalland or incinerated, the total technical potential would be approx. 3.5 million tonnesof CO2. If only Danish biomass that is currently used on agricultural land is used, thepotential is even lower at a total of approx. 1.6 million tonnes of CO 2.
If large amounts of biomass are imported, the potential for biochar application will bevery high. For biochar produced on wood, it is estimated that 12 million tonnes of biochar can be applied annually, corresponding to 38 million tonnes of CO 2, while it isestimated that 6 million tonnes of biochar can be applied annually on straw, corresponding to 12 million tonnes of CO2. For biochar produced on digestate, it is estimated that 0.8 million tonnes of biochar can be applied annually, corresponding to a
CO2 effect of 0.9 million tonnes of CO2.
Research into the formation and degradation of environmentally harmful substances
during biochar production, which is expected to deliver results by the end of 2025,

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in 2033, with annual reports and interim reporting in 2027, are still pending. In addition, a methodology for including biochar in Denmark's emissions inventory has yet
to be developed and is expected to be finalised in 2026.
In the short term, the realisation of biochar application is estimated to depend on thepossibility of obtaining a permit for large-scale biochar application, which depends
on the upcoming research results. In addition, realisation in the short term is estimated to be limited by the expansion of facilities, as there are currently only small
demonstration facilities.

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7.6 Regulatory Basis and Data
It is assumed that regulatory models for taxes and subsidies in the agricultural andforestry sectors are based on the same data as in the preparation of the emissions
inventory, which calculates agricultural emissions, see Chapter 5. This appendix describes farm-related data that is included in the preparation of the national emissions inventory, including how it can be included in the regulatory basis that willserve as the foundation for taxes and subsidies in the agricultural area. These aredata that farms currently self-report as part of the existing environmental and foodregulation under the Ministry of the Environment and the Ministry of Food, Agriculture and Fisheries and emissions factors estimated by the DCE. The chapter should
also be read in conjunction with Appendix 7.4, which describes the methods used toprepare the national emissions inventory.
The Expert Group has noted that there will be a need to strengthen the control andquality of data sources from existing environmental, food and climate regulation, increase incentives for correct registration in existing registers and adjust the administrative setup if data from these registers are to be used in the implementation of a
tax and subsidy system. This is because the current data is designed with other purposes in mind, which requires customisation to ensure reliable and relevant data for
the CO2-eq regulation models.
When assessing the implementation options, see Chapter 5, it is assumed that authorities with responsibility for the data used, e.g. from existing environmental andfood legislation, are also generally responsible for administrative law obligations, including the declaration process and data corrections.
Farm-related activities and emissions factors
CO2-eq regulation of the agricultural and forestry sector's non-energy-related emissions must, as a starting point, be based on the systematics and categorisation in
the national emissions inventory so that the regulation supports reductions in accordance with the national emission inventory, see Appendix 7.4. In this context, it isimportant that the inventory is continuously developed within the framework of the
IPCC guidelines so that new knowledge is taken into account and the effect of newtechnologies can be reflected.
The DCE's calculation follows the IPCC guidelines, which specify calculation formulas for calculating emissions and contain descriptions of the data that should be collected for this purpose. Emissions are basically calculated by multiplying activity
data (AD) by an emissions factor (EF) in the simple formula: Emissions = AD × EF.
Activity data is e.g. number of dairy cattle, number of pigs, hectares of carbon-richagricultural land, amount of fertiliser applied to fields and type of housing. Activity
data included in the national emissions inventory is based on the farm-related datathat is self-reported as part of existing food and environmental regulation.
The emissions factor for the emitting activities can either be an IPCC standard factor, a country-specific factor or modelled from national data. Emissions factors associated with a given activity can be updated if adjustments are made based on initiatives, such as the development of new technology, that affect the activity or emissions factors. This update takes place in the work on the national emissions inventory. The emissions factors associated with an activity can both be updated generally as a result of new research, but can also be adjusted based on farm-specificconditions. This means that a company's emissions can be affected by, for example,
the company using a new, approved technology that affects the emissions from a

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given activity in relation to the standard emission in accordance with the emission
inventory, see Appendix 7.4. The basis for subsidies for technologies that are notcurrently included in the national emissions inventory is described in Appendix 7.5.
The basis for regulation can be based on the existing reporting of activities, while atthe same time work is initiated to increase the scope and quality of reporting, administration and control, see Chapter 5. This will meet a consideration that the tax andsubsidy base should follow the calculation of emissions associated with a given activity in the emissions inventory, see Appendix 7.4.
Data
The following sections describe data that is assumed to be used as a basis for regulating emissions from livestock. Examples include cattle and pigs, fertiliser applied tofields, field management and carbon-rich agricultural land. For other livestock, thesystematisation will be comparable to cattle and pigs. Emissions from livestock can
be attributed to 1) emissions from animal digestion, 2) emissions from animal manure in stables and storage facilities, see Appendix 7.4.
Livestock (emissions from digestion processes)
Registering data on cattle
The emissions inventory's unique variations (type and subtype) for cattle are registered in the fertiliser accounts, see Table 7.11. Cattle are registered in the fertiliser
accounts in the number of animals produced per year, corresponding to the countin the emissions inventory.
Table 7.11. Variations for cattle emissions from digestion in the emissions inventory, including data sources in existing environmental and food legislation

Type

Dairy cows

Sucklercows

Cattle forbreeding

Veal calves

Subtype

Emissionsfactor, tonne ofCO2-eq per
animal1

Data source forsubtype

Dairy cows, jersey

3.79

Fertiliser accounts

Dairy cows, heavy breed

4.61

Fertiliser accounts

Suckler cows <400 kg

1.23

Fertiliser accounts

Suckler cows >600 kg

2.02

Fertiliser accounts

Suckler cows 400-600 kg

1.78

Fertiliser accounts

Breeding, 0-6 months, jersey

0.47

Fertiliser accounts

Breeding, 0-6 months, heavy
breed

0.63

Fertiliser accounts

Breeding, >6 months - calves,jersey1.19

Fertiliser accounts

Breeding, >6 months - calves,
heavy breed

1.59

Fertiliser accounts

Veal calves, 0-6 months, jersey

0.26

Fertiliser accounts

Veal calves, 0-6 months, heavy
breed

0.18

Fertiliser accounts

Veal calves, >6 months - 328
kg, jersey

0.47

Fertiliser accounts

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Veal calf, >6 months - 440 kg,
heavy breed

0.34

Fertiliser accounts

Note: It is the type and subtype that is registered farm by farm in the fertiliser accounts. The emissions factor is
calculated as part of the emissions inventory and is therefore not included in the fertiliser accounts. The emissions
inventory is prepared on the basis of reports from the fertiliser accounts. 1) These are emissions factors based ondata for emissions from 2021. Emissions factors change continuously as part of the work on the national emissions
inventory, which is published annually.

Registration of data on pigs
All the unique variations (type and subtype) of pigs in the emissions inventory are
registered in the fertiliser accounts, see Table 7.12. Pigs (fattening pigs, piglets andyearling sows) are recorded in the fertiliser accounts as the number of animals produced per year, corresponding to the count in the emissions inventory.
Table 7.12. Variations for pigs' emissions from digestion in the emissions inventory, including data sources in existing environmental and food legislation
Type

Pigs

Subtype

Emissions factor,
tonne of CO2-eq
per animal1

Data source fortype/subtype

Fattening pigs, 31-115 kg

0.01

Fertiliser accounts

Piglets, 6.7-31 kg

0.00*

Fertiliser accounts

Yearling sows

0.08

Fertiliser accounts

Note: It is the type and subtype that is registered farm by farm in the fertiliser accounts. The emissions factor isprepared as part of the emissions inventory and thus does not appear in the fertiliser accounts. *0.00 means thatemissions do not appear at the 2nd decimal place. There are still emissions. 1) These are emissions factors based onemissions data from 2021. Emissions factors change continuously as part of the work on the national emissions
inventory, which is published annually.

Livestock (emissions from fertiliser management in stables and storage)
Types of housing are crucial for variations in emissions factors for emissions fromfertiliser management in the stable and at storages from cows and pigs. Types of
housing refer to different flooring and fertiliser systems in the stable. Table 7.13
shows a sample of selected types of housing and subtypes of livestock. In total,
there are over 100 variations in the emissions inventory for emissions from types of
housing for cattle and pigs across different animal types. Data on types of housing
are registered farm by farm in the fertiliser accounts.

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Table 7.13. Table with selected variations on emissions from types of housing
for cattle and pigs

Type

Dairy
cows,
heavy
breed

Fattening
pigs, 31115 kg

Subtype

Emissionsfactor, tonneof CO2-eq per
animal1

Data source fortype/subtype

Deep bedding (entire area)

4.62

Fertiliser accounts

Deep bedding, solid floor, scraper

2.23

Fertiliser accounts

Deep bedding, slatted floor,
flush/channel

2.23

Fertiliser accounts

Deep bedding, slatted floor, scraper

2.23

Fertiliser accounts

Tied-stall w/ floor grating

1.67

Fertiliser accounts

Cubicles, solid floor, scraper

1.56

Fertiliser accounts

Cubicles, slatted floor, flush/channel

1.56

Fertiliser accounts

Cubicles, slatted floor, scraper

1.56

Fertiliser accounts

Cubicles w/ solid floor, 2 per centslope, scraper

1.56

Fertiliser accounts

Biogasified slurry system

1.08

Fertiliser accounts

Tied-stall w/ gutter

0.39

Fertiliser accounts

Deep bedding

0.09

Fertiliser accounts

Partially slatted floor (50-75 per centsolid floor)

0.04

Fertiliser accounts

Partially slatted floor (25-49 per centsolid floor)

0.04

Fertiliser accounts

Drained floor + slatted floor (33/67)

0.04

Fertiliser accounts

Divided rental area

0.03

Fertiliser accounts

Biogasified slurry system

0.03

Fertiliser accounts

Solid floor

0.01

Fertiliser accounts

Note: It is the type and subtype that is registered farm by farm in the fertiliser accounts. 1) These are emissions factors
based on data for emissions from 2022. Emissions factors change continuously as part of the work on the nationalemissions inventory, which is published annually, and are therefore not included in the fertiliser accounts.

In addition to types of housing, there are a number of stable and storage technologies that reduce greenhouse gas emissions on the individual farm, such as slurrycooling, frequent removal, delivery to biogas, acidification, flaring and covering of

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slurry tanks, etc. This is described in Appendix 7.5. It should be noted that thesetechnologies are not included in the emissions inventory today, as the climate effects are not sufficiently documented. However, most of the mentioned stable andstorage technologies are included in the Climate Status and Outlook, as there isdeemed to be sufficient documentation for the DCE to be able to recognise the effects in 2027. Some of the technologies are currently used to reduce ammonia
emissions in agriculture.
Barn and storage technologies are not currently registered in the fertiliser accounts
or in other registers in the environmental area. It is assumed that these will be included in the regulatory basis when the necessary registration is provided.
Fertiliser applied to fields in kg nitrogen
Emissions from fertiliser applied to fields are calculated based on how many kilograms of nitrogen are in the fertiliser applied to agricultural land. Some of the nitrogen in the fertiliser is converted into nitrous oxide, which is a greenhouse gas.
A tax on nitrous oxide emissions from fertiliser applied to fields can be based on how
many kg of nitrogen is applied annually to the individual farms' land, see Table 7.14.
According to current regulations, this is already registered. The farmer reports information in the fertiliser accounts about how many kg of nitrogen is applied annuallyto the farm's land. The requirement for balance between farmers' nitrogen quota
and nitrogen consumption is covered by the rules on conditionality and cross-compliance. Violation of the requirement will thus result in an administrative sanction in
relation to the payment of agricultural subsidies.
Table 7.14. Data sources in existing environmental legislation for applied fertiliser (kg N)
Type/subtype

Emissions factor

Fertiliser applied to thefield (kg N)

4.2 tonnes of CO2-eq per
tonne N applied to fields

Data source fortype/subtype
Fertiliser accounts

Note: It is the type and subtype that is registered farm by farm in the fertiliser accounts. The emissions factor is
calculated as part of the emissions inventory and is therefore not included in the fertiliser accounts. This is anemissions factor based on data for emissions from 2022. Emissions factors change continuously as part of the workon the national emissions inventory, which is published annually.

In the emissions inventory, emissions from fertilisers are calculated based on anemissions factor of 4.2 tonnes of CO2-eq per tonne of nitrogen applied to fields, regardless of whether livestock manure, non-organic fertiliser or other types of organic
fertiliser are applied.
A tax on how much fertiliser (in kg nitrogen) the individual farm applies to its fields
annually, based on the emissions factor, will target the calculation of Denmark's 70
per cent target but will not take into account the variation in CO 2-eq emissions fromfertiliser applied to fields, e.g. as a result of use in connection with plant production.
It is expected that the emissions factor will eventually differentiate the emissions factor between livestock manure, non-organic fertiliser and other organic fertilisers.
Carbon-rich agricultural land
A regulatory basis for carbon-rich agricultural land in agriculture can be prepared byan overlap analysis of the so-called carbon map (Peat 2022) and the cultivation map(IMK), which is used in connection with the payment of the hectare subsidy. Such

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an overlap analysis already forms the basis for the regulation of the current voluntary efforts to set aside carbon-rich agricultural land and the calculation of emissions
from carbon-rich agricultural land in the national emissions inventory.
Today, there are no existing data and registers that contain a farm-specific inventoryof the amount of carbon-rich agricultural land. Thus, an independent regulatory basis will have to be prepared, which is described in section 3.1 as part of the Expert
Group's models for regulating emissions from carbon-rich agricultural land.
The emissions factors from the emissions inventory for different types of carbon-richagricultural land in agriculture are shown in Table 7.15. Emissions are reduced upon
wetland restoration.47 After wetland restoration, there is still a minor CO2-eq emission, which comes from an increase in methane emissions.
Table 7.15. Emissions from carbon-rich agricultural land in agriculture and data
sourceType

Emissions factor1

Units

Tonne of CO2-eq per
hectare

Cultivated land (agricultural land),
6-12 per cent25.2

Cultivated land (agricultural land), >12 per cent50.3

Permanent grazing land, 6-12 per
cent

18.7

Permanent grazing land, > 12 per
cent.

37.4

Data source for type

Overlap analysis between
the so-called carbon map(Peat 2022) and the cultivation map (IMK)

Note: This is an emissions factor based on data for emissions from 2022. Emissions factors change continuously as
part of the work on the national emissions inventory, which is published annually.
Source: DCE, Scientific note 2024 60.

Rewetting means that the natural water level is restored and the land can become a kind of wetland. In practice,there are soils where restoring the natural water level means that there are periods when the soil is not under water.

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7.7 ETS in Agriculture and Forestry
The terms of reference of the Expert Group state that:"The second report will also assess the advantages and disadvantages of aregulatory solution for the agricultural sector, a subsidy model for EU agricultural
support and a CO2-eq tax for this sector or a combination of these, as well as
possible measures for cost-effective regulation of agriculture that address CO2-eq
emissions and other externalities, including, e.g. environment and health."
As stated in the summary and models section, the Expert Group has chosen topresent models where tax and subsidies are combined in order to fulfil climate
targets and EU obligations. As part of this work, the Expert Group has considered
whether an ETS within agriculture (which may also include forestry) would be amore appropriate tool to fulfil Denmark's climate goals. In an ETS with tradable
allowances, the state issues a number of allowances that entitle the right to emit acertain amount of CO2-eq and allows companies to trade the allowances among
themselves.
After weighing up the advantages and disadvantages of an ETS for agriculture, theExpert Group has chosen not to present such a system in the models in Chapter 2.
The main benefits of an ETS are as follows:
1) An ETS allows for precise control of total emissions from agriculture. It is anadvantage if there is a political requirement for agriculture to reduce emissions by acertain amount within a given timeframe. With a CO2-eq tax, there is not the samecertainty of achieving a specific reduction.
2) An ETS offers the opportunity to reduce the burden on the agricultural sector andassociated capital losses of climate regulation through some free allocation ofallowances.48 This can reduce the need for other and potentially more complicatedcompensation schemes.
An ETS, on the other hand, has the following disadvantages:
3) Under an ETS, it is difficult to align the price of agricultural CO2-eq emissions
represented by the allowance price with the CO2 tax for other industries outside the
EU ETS. This is a problem if there is a political desire for a uniform CO 2-eq price forall industries.
4) Unpredictable fluctuations in the price of allowances over time will increase
uncertainty about the profitability of investments in more climate-friendly
technologies. This is not the case under a tax system where the development of thetax is fixed in advance.
5) A compensation scheme in the form of free allocation of allowances ischallenging to design without creating either discrimination between current and48

However, an ETS with free allowances will basically work in the same way as a tax system with a base deduction.

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undesirable redistributions within the agricultural industry that would require
additional compensation schemes.
In the Expert Group's assessment, the disadvantages 3), 4) and 5) of a separate
national ETS for agriculture outweigh the advantages 1) and 2).
However, the Expert Group is aware that the European Commission is considering
the possible introduction of an EU ETS for agriculture. A significant advantage ofsuch a common climate regulation is that it will put Danish agriculture on an equal
competitive footing with agriculture in the rest of the EU, thereby avoiding distortions
in agricultural production. The models presented by the Expert Group, which do not
introduce a separate Danish ETS for agriculture, should, therefore, not beinterpreted as a rejection of a possible future pan-European ETS for agriculture. The
Expert Group notes that the preparation of the administrative basis for a Danish
climate tax on agriculture will probably contribute to the future implementation in
Denmark of a common EU ETS for agriculture, should such a system be adopted.
The Expert Group's considerations on an ETS for agriculture are elaborated in thefollowing.
ETS versus tax system: Similarities and differences
In a theoretical world with perfect information exactly the same CO 2-eq price andthe same amount of emissions can, in principle, be achieved with a tax system aswith a system with tradable CO2-eq allowances. Under complete information, theauthorities can calculate the exact amount of emissions resulting from a given tax
rate, just as they can calculate the precise price of allowances resulting from a given
allowance supply. This will allow authorities to implement exactly the same CO 2-eq
price and emissions in the two systems.
However, in the real world, with uncertainty about companies' cost and market
conditions, there will be uncertainty about how high emissions will be at a given
CO2-eq tax rate, while under an ETS there will be uncertainty about what quota
price will be formed at a given quota supply.
An ETS with a liquid market for tradable allowances, like a tax system, can deliver
cost-effective reductions in greenhouse gas emissions from the sector covered by
the allowances, as the price of allowances establishes a uniform price on emissions
for all covered production units. Through the determination of the supply ofallowances, the state can precisely control the amount of emissions from the sector,
which in principle provides full certainty that the desired reductions will be achieved.
In contrast, the price of allowances cannot be perfectly controlled as there is
uncertainty about the cost to producers of reducing their emissions and, thus,
uncertainty about the demand for allowances. With a separate ETS for agriculture, itis therefore difficult to standardise the price of CO2-eq across sectors incombination with e.g. the CO2-eq tax on industry, etc. The purpose of a uniform
CO2-eq tax is to ensure that CO2-eq reductions are made where it is cheapest, bothwithin and across sectors. If agriculture is regulated separately through an ETS andthe price of allowances differs from the CO2-eq tax for industry, the same degree ofcost efficiency that a common, uniform CO2-eq tax for industry and agriculture
would create is not achieved, as the marginal reduction costs are not equalised
across sectors. However, if politicians want to operate with a different CO 2-eq price

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for agriculture than for other sectors, this argument against a separate ETS for
agriculture naturally carries less weight.
Another problem, however, is that the CO2-eq price can fluctuate significantly overtime under an ETS due to uncertainty about the cost to producers of reducing theiremissions and because, for example, fluctuations in the prices of agricultural
products can cause fluctuations in the price of allowances. These uncertainties
mean that the incentives to invest in climate-friendly technologies may be lower
under an ETS than under a tax system, see box 7.5.
Box 7.5
Examples of investments in technologies under an ETS in agriculture
In an ETS, the price of allowances can vary from year to year, whereas the price of a CO2-eq tax isfixed. Below are two stylised examples of a technology that is invested in annually and a technologythat requires a longer-term investment.
For a technology where the farmer has to decide annually whether to use the technology, e.g. feed
additives, the implementation of the technology under an ETS will depend on the relative prices ofallowances and the specific technology. With a tax system, the implementation of a given technology
will depend on the technology price in the given year. In both cases, the farmer will assess each year
whether or not it is profitable to invest in the technology. The figure below illustrates an example
where the price of a given technology is fixed year on year. Under an ETS, the farmer will only invest
in the technology in years where the price of allowances exceeds the price of the technology,
whereas under a tax system, the farmer will invest in the technology every year, provided the tax ishigher than the cost of implementing the technology.
The investment decision will depend on the farmer's long-term expectations of relative prices for atechnology that requires a longer-term investment, such as technologies for stables. Under an ETS,
the investment decision depends on the farmer's expectations for the development of the price ofallowances and how much risk the farmer wants to take on. In a tax system where the future tax rate
is predetermined, the uncertainty about the future CO2-eq price is removed and the farmer only has
to assess whether it is profitable to invest in the technology based on his knowledge of the investment cost and the expected future operating costs of using the technology.
Overall, a tax system can thus provide more favourable incentives for investment in climate-friendly
technologies than an ETS.
Example of technology costs relative to allowance price andtax level

Note: Range indicates uncertainty in price. Uncertainty increases the further into the future it is.

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The design of an ETS
In its purest form, an ETS works by the state auctioning allowances to companies,
which are then authorised to emit a given amount of CO2-eq. Companies can thentrade allowances among themselves as needed after the initial auction round. The
state receives revenue from the sale of allowances, which can be used to compensate emitters, for general tax or duty relief, or for increased public spending.
The rules for the use of allowances can be designed in two main ways that will affectcompanies' incentives differently, see Box 7.6.
Box 7.6
Design of the EU ETSTime-limited allowances
The allowances expire after a given period of time, e.g. one year, after which a new allowance period
starts. If the allowances expire after a given time period and are subsequently worthless, it creates
certainty to achieve a given volume reduction within that time period. This will create certainty in relation to political reduction targets, such as the 70 per cent target.
On the other hand, there will be uncertainty about the price of CO2-eq in this ETS, as there may belarge variations in the demand for allowances both within the individual allowance period and acrossallowance periods, e.g. due to fluctuations in weather conditions.
Allowances that can be saved up
Alternatively, you can allow allowances to be "saved up" for later use. This can reduce short-term
fluctuations in the price of allowances, as companies can choose to bank allowances in years when
the price of allowances is relatively low and use banked allowances in years when the price of allowances is particularly high. Such a system gives the companies the opportunity to make a larger
share of the reductions this year when the reduction efforts are relatively cheap, thereby reducing
the present value of the total reduction costs over time. An ETS with the option to bank allowances
does not guarantee the achievement of a given reduction in any given year, but still ensures a certain
amount of reductions within the time horizon over which banked allowances can be utilised. Even if
allowances can be utilised in perpetuity, there will still be a guarantee that total emissions over timecannot exceed the total amount of allowances issued over time. However, there will be no certainty
that a specific amount of reductions will be achieved in a given future year, such as 2030.

An ETS with free allowances
If the government wants to reduce the immediate business burden of the ETS, it canchoose to allocate some or even all of the issued allowances to companies free ofcharge. This reduces the need for other forms of compensation to companies, as
the allocation of free allowances is equivalent to handing out financial assets with amarket value equal to the price of allowances.
The extent of the allocation of free allowances can be gradually phased out overtime to the extent that there is a political will to enforce the polluter pays principle.
The distributional consequences of such a system will depend on the criteria forallocating free allowances. In the following, various possible criteria are discussed.
Allowance allocation based on historical emissions
In an ETS for agriculture, allowances could be allocated according to the farms'
historical emissions from land and livestock. A fixed free allowance allocation that is
independent of the company's current production means that the price ofallowances is fully reflected in the companies' marginal costs. Thus, it is a questionof compensation for the farmer, which does not affect the farmer's production
decision. In this way, the farmer's full incentive to reduce their emissions ismaintained. For example, at the margin, livestock producers will have the same

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incentive to reduce livestock numbers as if the allowance were auctioned by thestate.
It is essential that the allocation of allowances is based on a criterion such as
historical emissions that is not influenced by the current behaviour of companies, sothat individual companies do not risk having the allocated amount of free allowances
reduced if they reduce their emissions after the introduction of the system.
Otherwise, companies that implement reduction measures will fear that their freeallowance will be reduced in the long run, thereby weakening the incentive totransition.
However, a system of free allowances based on historical emissions may be lessefficient than a system based on auctioning allowances, as more efficient farmers
with increasing production will have to buy allowances from less efficient farmers
with decreasing production. This will result in an economic redistribution in favour ofthe latter group, which can hamper the industry's productivity development. A
particular problem is that farmers who set up after the introduction of the ETS
cannot be allocated free allowances on the basis of historical emissions, so special
allocation criteria must be designed for this group to avoid discriminating against
new generations of farmers.
In addition, there may be administrative and control challenges when calculating thehistorical emissions of the individual farms.
Allowance allocation based on the farm's production
Within the EU's emissions trading system (ETS) for the energy sector and theenergy-intensive industry, allowances are allocated free of charge to companies incertain industries exposed to competition, such as steel and cement, where there isconsidered to be a particularly high risk of leakage of CO2 emissions to countries
outside the EU. The allocation of free allowances to each company is proportional tothe company's production over a certain previous period multiplied by an emissions
factor that reflects the average CO2 intensity (CO2 emissions per unit produced) of
the 10 per cent of companies in the industry with the lowest CO2 intensity. Under
this system, an increase in a company's production will, with a certain delay, trigger
an increase in the company's allocated amount of free allowances, which in isolation
strengthens the company's competitiveness and counteracts the structural effects(the fall in production) caused by the ETS. At the same time, the individualcompany's incentive to lower its CO2 intensity through technical conversion of
production (thereby freeing up allowances that can be sold on the market) ispreserved, as the individual company has no significant influence on the average
CO2 intensity that forms the basis for the allocation of allowances.
However, a similar system for allocating free allowances in a national quota system
for agriculture would probably result in a very high allowance price if the climate
targets are to be met, see Box 7.7. As the box explains, free allocation ofallowances on the basis of individual farm's production will severely weaken the
incentive to reduce emissions when emissions are highly correlated with production
due to limited technological possibilities to lower emissions per unit produced. The
Expert Group's analyses indicate that the technical possibilities for lowering theemission intensity of Danish agriculture at affordable reduction costs are so far
limited and that it is, therefore, not realistic to meet Denmark's national climate
targets and international climate commitments without some reduction inagricultural production. A system of free allocation of allowances based on
production will inhibit the necessary production adjustment, which means that the

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price of allowances must be pushed up very high to ensure the necessary
greenhouse gas reductions. A disproportionately high CO2-eq price in agriculturecompared to the CO2-eq tax on other industries will make climate action less costeffective. A free allocation of allowances based on the individual farm's production
may therefore be inappropriate.
Box 7.7
Free allocation of allowances based on the individual farm's production
A simplified example can illustrate the potential problem of allocating free allowances toeach farm based on the farm's production.
Consider a dairy farmer who owns K dairy cattle, each producing q litres of milk per year, so the
farm's total annual production is q × K. Assume that the average emission per dairy cow in total agriculture is estimated to be u based on Denmark's emissions inventory, and that the dairy farmer inquestion is allocated a quantity Q = k × u × q × K of free allowances, where k is a proportionality
factor common to all producers and u q × K is the emissions that the dairy farm would have if its production had the average greenhouse gas intensity u. Furthermore, assume that you are in the ideal
situation where you can measure the actual greenhouse gas intensity u f from the farm in question. If
the allowance price is p, the ETS will then impose a total net payment N on the farm of the size
N = (p × uf × q × K) – (p × k × u × q × K)

(1)

where the term in the first parenthesis on the right-hand side of equation (1) is the farm's cost of purchasing allowances in the absence of free allocation of allowances, and the term in the last parenthesis is the market value of the free allocated allowances, which depends on the allowance price p. If
the dairy farmer is able to reduce the farm's emission intensity by the amount du f, e.g. via feed additives, it follows from (1) that his net payment will decrease by the amount du f × p × q × K, since theamount of free allowances allocated to the farm will remain unchanged. Thus, the free allocation
does not weaken the incentive to reduce emissions through technical reduction measures.
If the farm instead lowers its emissions by lowering the cattle population by the amount dK, thechange dN in the farm's net payment according to (1) will be
dN = (uf - k × u) × p × u × q × dK

(2)

According to (2), compared to an ETS without free allocation of allowances, where k = 0, free allocation will reduce the decrease in the farm's net payment and thus weaken the incentive to reduce
emissions by reducing the effort of the production input (in this case cattle) that is the source of emissions.
The example illustrates that if there are only limited technical possibilities to reduce emission intensity
and thus a high degree of proportionality between production and emissions, a system of free allowance allocation on the basis of the individual farm's production can weaken the incentive for greenhouse gas reductions to such an extent that it will require a very high allowance price to achieve thetargeted reductions. The issue is exacerbated if it is difficult in practice to measure the actual emission intensity (uf) on the individual farm, as this will reduce the individual farmer's incentive to implement technical reduction measures.

Allowance allocation per hectare of land
Another option is to allocate free allowance proportional to the area of the individual
farm. This would be administratively simple, as the area of farms is alreadycalculated in connection with the payment of the hectare subsidy under the EU's
Common Agricultural Policy. Furthermore, an allowance allocation based on

Green Tax Reform

hectares will not reduce or distort farmers' incentives to implement reduction
measures, as these will not affect the allowance allocation.
An allowance allocation per hectare of land that applies to both current and future
landowners will counteract the decline in land values that would otherwise occur inan ETS without free allowances. This may be a desired effect in terms of limiting thenumber of bankruptcies and the resulting pressure on financial stability inconnection with a future climate regulation of agriculture. However, the counterpart
to capitalising the value of free allowances in land values is that these can become
more volatile due to fluctuations in the price of allowances.
By linking the free allocation of allowances to the area and continuing the freeallocation when ownership changes, the system avoids favouring current farmers
over future generations of farmers. This equality of current and future farmers is afavourable feature of the area criterion compared to a system where free allowances
are allocated based on historical emissions.
However, unlike an allocation based on historical emissions, an allocation based onarea will have more significant distributional consequences within the current
generation of farmers, as the area criterion will favour producers with large areas
over producers with more limited areas. In particular, livestock farms with highemission intensities will be less favoured by using the area criterion. If you politicallywant to counter this redistribution effect, you could choose to supplement anallowance allocation based on area with an allowance allocation per animal, which
could work in the same way as a base deduction per animal, as described in
Chapter 2. This will help reduce the redistributive effect of an allowance allocation
per hectare and maintain the incentive at the margin to use technological solutions,but it will still be difficult to control the CO2-eq price.
It should be noted that an allocation of free allowances based on the area of the
farm in an ETS will work in the same way as a base deduction based on area in a
tax system.
State aid law issues
When assessing whether a possible ETS is covered by the state aid rules, it will
have to be assessed whether the introduction of such a system may involve state
aid in relation to companies that the ETS does not cover, are allocated proceedsfrom the system, or are allocated free allowances that the company cansubsequently trade.
In the variants of a Danish ETS for agriculture discussed above, it is assumed thatany allocation of free allowances is not limited to selected agricultural subsectors,
but is extended to all farms above a certain size according to one of the threecriteria discussed above. Thus, the issue of state aid law concerns whether thesesystems for free allocation of allowances will be considered to distort competition
within the EU's internal market, even though they are only intended as (partial)
compensation for the burden on Danish agriculture that a national ETS would
constitute.

7.8 Carbon Leakage
The terms of reference state that the Expert Group must consider greenhouse gas
leakage (carbon leakage), including the consideration in the Danish Climate Act, toensure that Danish CO2-eq reduction measures do not simply move greenhouse

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gas emissions outside of Danish territory. In general, climate actions that result in
CO2-eq reductions due to structural changes can be associated with carbon
leakage. For this reason, carbon leakage in agriculture caused by a CO2-eq tax
should be compared with alternative reduction measures that may also cause
carbon leakage.
This section describes the Expert Group's work on carbon leakage in agriculture,including the risk of carbon leakage through the modelling of greenhouse gas
emissions from agriculture.
No conclusion is drawn on the exact size of the risk of carbon leakage, as there is ahigh degree of uncertainty associated with the calculations. Instead, different
estimates of carbon leakage under different assumptions are presented.
Chapter 2 presents three different designs of tax systems that reflect the weightingof low socio-economic costs against considerations of limited carbon leakage andlimited structural changes in agriculture. This section describes the overall risk ofcarbon leakage in each of the models included in chapter 2. It is estimated that alower tax level will result in a lower carbon leakage rate if the subsidy fortechnological reductions is increased so that the technical share for a given CO2-eq
reduction is increased.
Background on greenhouse gas leakage from the first interim report
As described in the first interim report, greenhouse gas leakage refers to a situation
where domestic measures aimed at reducing greenhouse gas emissions in
Denmark lead to increased emissions abroad, e.g. if part or all of the production of agiven product is moved abroad. This means that Danish climate policy measurespotentially reduce global emissions less than Danish emissions are reduced.
This effect can be calculated as a carbon leakage rate, which indicates the
proportion of domestic CO2-eq emissions that are replaced by foreign emissions fora given measure. Carbon leakage can, for example, occur through foreign trade bymaking Danish production of goods with a high climate footprint more expensive asa result of a CO2-eq tax, which can weaken the competitiveness of Danish
producers and lead to Danish and foreign consumers shifting their consumption
from goods produced in Denmark to goods produced abroad.
In what follows, a decomposition is reviewed that illustrates that the results for the
carbon leakage effects in Danish agriculture are very sensitive to whichassumptions are used as a basis for the calculations. Next, the assumptions that areconsidered to have a significant impact on the size of the carbon leakage rate are
analysed.
Decomposition of the carbon leakage effect of a CO2-eq tax on agriculture
The following shows step-by-step calculations of the leakage effects for Danish
agriculture of an exemplified CO2-eq tax of DKK 750 per tonne on fertiliser usage,liming and livestock, including subsidies for afforestation and other measures, aswell as the harmonisation of the tax on F-gases to DKK 750 per tonne of CO2-eq
and the set-aside of carbon-rich agricultural land, see Figure 7.1, and broken down
by industry level, see Table 7.16, where the assumptions that are expected to affectthe carbon leakage rate in Danish agriculture are gradually changed. The
calculations show, among other things, that the results for carbon leakage effects
are very sensitive to assumptions about the production's greenhouse gas intensity,i.e. emissions in relation to value added, in agriculture in Denmark and abroad. In

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elaborates on each step.
Step 1: Step 1 assumes that the greenhouse gas intensity of Danish agriculture is
the same as abroad and that Danish production is replaced 1:1 by foreign production. A 100 per cent carbon leakage rate would mean, among other things, that
there are no technological reduction options in agriculture.
Step 2: When other effects49 are included, the carbon leakage rate drops from 100
per cent to 52 per cent, which is due to the fact that technical effects lead to significant CO2-eq reductions at a tax of DKK 750 per tonne of CO2-eq.
Step 3: Carbon leakage rates can be broken down into a combination of direct carbon leakage and indirect carbon leakage. In step 2, only direct carbon leakage istaken into account, i.e. how much of the emissions directly move from Danish agriculture to foreign agricultural sectors. The indirect carbon leakage shows the general equilibrium effects that may occur, including industry shifts and reduced returnon capital in Denmark as a result of the tax. For this reason, indirect carbon leakage
is taken into account in step 3, reducing the carbon leakage rate to 37 per cent.
Step 4: Steps 4a and 4b look at how different assumptions regarding the relative
greenhouse gas intensity of Danish agriculture compared to other countries affectthe carbon leakage rate. In step 4a, it is assumed that Danish agriculture has alower greenhouse gas intensity than foreign agriculture, resulting in a carbon leakage rate of 44 per cent. In step 4b, it is assumed that Danish agriculture has ahigher greenhouse gas intensity than abroad, which reduces the carbon leakage
rate to 22 per cent.
Step 5: In this step, the carbon leakage rate in GreenREFORM is calculated withleakage coefficients from GTAP-E50, where it is assumed that EU countries will fulfil
binding limits for their emissions in the part of the industry that are not currently regulated under the Effort Sharing Regulation sector, while there are no limits for emissions from non-EU countries In addition, substitution away from consumption offoods with a high climate footprint is taken into account. The carbon leakage rate isthen reduced to 21 per cent.
Thus, the Expert Group assesses that the carbon leakage rate of a CO 2-eq tax on
Danish agriculture is significantly less than 100 per cent, as it is expected that the
tax will drive technical change and lead to general equilibrium effects. For thisreason, the leakage rate is based on steps 3-5, where it is estimated that the carbon
leakage rate in agriculture is between 21-44 per cent, corresponding to 21-44 percent of the reductions from a CO2-eq tax of DKK 750 per tonne of CO2-eq on
agriculture resulting in carbon leakage, see Figure 7.1 and Table 7.16.

Other effects include technical effects (reductions that do not affect the scope of production but reduce emissions
per unit produced, e.g. via feed additives for cattle, biochar in pyrolysis, etc.) and activity effects (e.g. change fromfarmland to forest or carbon-rich agricultural land being flooded).
50
The GTAP model is a model of global trade that describes bilateral trade patterns, production, consumption andintermediate use of goods and services. GTAP-E is an extended model that includes energy consumption and CO2eq emissions and can be used to determine carbon leakage rates.
49

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Figure 7.1. Decomposition of carbon leakage effects in agriculture at a CO 2-eq
tax of DKK 750 per tonne

Note: For each step, a single component changes from the previous calculation. For example, steps from 3 to 4aassume that Danish agriculture has a lower CO2-eq intensity than abroad for similar production, but still take into
account price pass-through in agricultural goods. Greenhouse gas intensities for the lower estimate (4a) come from
Lesschen et al. (2011), while the upper estimate (4b) assumes that agriculture in the rest of the world is 42 per centless greenhouse gas intensive than Danish agriculture in 2030, as assumed in the 2020 report from the Danish
Environmental Economic Council (DMØR).
Source: Own calculations

The decomposition of the carbon leakage effect can also be done at industry level,
see Table 7.16. In step 2, it can be seen that the technical effects have the greatest
impact on the carbon leakage rate for cattle, which is mainly due to the cattle
producers' ability to apply CO2-eq-reducing measures.
Table 7.16. Changes in foreign emissions and carbon leakage rates in model 1
by agricultural sectors (2030 effects)

Step 1:
Immediate
effectStep 2:
StructuraleffectStep 3:Afterindirecteffects

Step 4a:HigherCO2-eqintensity
abroadStep 4b:Lower
CO2-eqintensity
abroadStep 5:
Restrictionsonemissionsin the EU
etc.

Million tonnes of CO2-eq (Carbon leakage rate in per cent)
Crop

0.4
(100)

0.3
(67.7)

0.2(48.8)

0.2(57.1)

0.1(28.3)

0.1(25.3)

Cattle

1.8
(100)

1.0
(56.1)

0.7(40.4)

0.8(47.3)

0.4(23.4)

0.4(23.7)

Pigs

0.5
(100)

0.3
(62.2)

0.2(44.8)

0.3(56.51)

0.1(26.0)

0.1(21.4)

Other
measures

0.4
(100)

0.0
(0.0)

0.0
(0.0)

0.0
(0.0)

0.0
(0.0)

0.0
(0.0)

Overall

3.2
(100)

1.6
(51.6)

1.2(37.1)

1.4(44.1)

0.7(21.5)

0.7(20.5)

Note: The effects in 2030 of introducing a CO2-eq tax of DKK 750 per tonne of CO2-eq (2022 prices) on fertilisers,
liming and livestock and introducing subsidies for afforestation. Changes in foreign emissions are stated in million
tonnes of CO2-eq and rounded to the nearest 100,000 tonnes. The total emission changes do not necessarily matchthe sum of the individual categories due to rounding. Other measures include a tax on F-gases and the set-aside ofcarbon-rich agricultural land. A tax on F-gases and the rewetting of carbon-rich agricultural land will lead to reductionsof 0.1 and 0.3 million tonnes of CO2-eq in 2030, respectively, which are assumed to be 100 per cent technical andGreen Tax Reform

activity effects that are therefore not replaced by emissions abroad.
Source: Own calculations

Box 7.8
Description of the decomposition of the carbon leakage effect
Step 1: As a starting point, it is assumed that the greenhouse gas intensity of Danish agriculture is
the same as abroad and that Danish production is replaced 1:1 by foreign production. A 100 per
cent carbon leakage rate would mean that there are no technological reduction options in agriculture, and the total decrease in emissions of 3.2 million tonnes of CO2-eq from a CO2-eq tax on agriculture of DKK 750 per tonne and other measures would consist solely of structural effects. However, this is considered to be an unrealistic scenario, as it is expected that agriculture will use technological measures at a CO2-eq tax of DKK 750 per tonne.
Step 2: When other effects, including technological measures and activity effects, are included, thecarbon leakage rate drops from 100 per cent to 52 per cent, which is due to the fact that other effects amount to approx. 1.5 million tonnes of CO2-eq within the individual agricultural industries, see
Chapter 2. For this reason, structural effects will amount to 1.6 million tonnes of CO2-eq at a CO2-eq
tax of DKK 750 per tonne. Thus, it is the structural effects of the total decrease in emissions that constitute the carbon leakage effect in step 2, and therefore the carbon leakage rate is less than 100 per
cent of the total effects. If the effect of rewetting carbon-rich agricultural land is not taken into account, the carbon leakage rate would be 57 per cent.
Step 3: Carbon leakage rates can be broken down into a combination of direct carbon leakage andindirect carbon leakage. In step 2, only direct carbon leakage is taken into account, i.e. how much of
the emissions directly move from Danish agriculture to foreign agricultural sectors. The indirect carbon leakage shows the general equilibrium effects that can occur, including industry shifts due to increased activity in other industries in the Danish economy, as capital and labour move from Danish
agriculture to other industries, thereby increasing their production and emissions. Conversely, capitaland labour abroad move away from other industries and towards the agricultural sector, which lowers production and emissions from other industries abroad. The tax reduces the return on capital in
Denmark, which leads to a slight deterioration in global investment opportunities and thus lowers
overall global production.51 The indirect carbon leakage rate is determined based on Beck et al.
(2023), who find an indirect carbon leakage rate of -28 per cent.52 By including this indirect carbon
leakage rate, the total carbon leakage rate becomes 37 per cent.
Step 4: Next, we look at how different assumptions regarding the relative greenhouse gas intensity ofDanish agriculture compared to other countries affect the carbon leakage rate. Step 4a assumes
that foreign agriculture has a higher greenhouse gas intensity than Danish agriculture. Here, greenhouse gas intensities from Lesschen et al. (2011)53 are used, resulting in a carbon leakage rate of
44 per cent. In step 4b, on the other hand, it is assumed that agriculture abroad has a 42 per centlower greenhouse gas intensity than Danish agriculture based on 2014 data from the GTAP database, which reduces the carbon leakage rate to 22 per cent. These two assumptions can be considered the extremes of relative greenhouse gas intensity, and for this reason, the carbon leakage rateis expected to be within a range. There is thus considerable variation in the analyses of relative
greenhouse gas intensity, and it is not clear which analyses are generally the most accurate in termsof carbon leakage effects, see Box 7.9.
Step 5: In this step, the carbon leakage rate is calculated in GreenREFORM, assuming that EU
countries will meet binding limits on their emissions in the Effort Sharing Regulation sector, i.e. that
EU countries fulfil the Effort Sharing Regulation. In addition, substitution away from consumption of

The first interim report described how general equilibrium effects can affect leakage effects (https://skm.dk/media/Skatteministeriet/Publikationer/Rapporter/groen-skattereform-foerste-delrapport-tilgaengelig.pdf)

51

Beck, U. R., Kruse-Andersen, P. K., & Stewart, L. B. (2023), “Carbon leakage in a small open economy: The importance of international climate policies”, Energy Economics.

52

Lesschen, J.P., et al. (2011), "Greenhouse gas emission profiles of European livestock sectors", Animal Feed Science and Technology, 166-167, 16-28.

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foods with a high climate footprint is taken into account. The GreenREFORM's carbon leakage module uses 2014 data from the GTAP database and carbon leakage coefficients from GTAP-E. In theGreenREFORM calculations, it is the greenhouse gas intensity in the activity types and regions
where production increases the most that is important for the carbon leakage and not the greenhouse gas intensity abroad as a whole, in contrast to the partial calculations in steps 1-4. It should be
noted that the assumptions about where production will increase the most are subject to some uncertainty, see Section 3 on foreign trade below. The calculation assumes that a number of EU countries have restrictions on emissions from the Effort Sharing Regulation sector, while there are no restrictions on emissions for non-EU countries (thus, the Paris Agreement is assumed to be non-binding). It can be seen that if, in relation to step 4b, it is assumed that there are binding restrictions in the
Effort Sharing Regulation sector in the EU, the carbon leakage rate is further reduced to 21 per cent.

Carbon leakage rates in primary models
Table 7.17 presents the estimated carbon leakage rates for models 1-3, as presented in Chapter 2. The carbon leakage rates are based on steps 3-5, which aredescribed above. The carbon leakage rate gradually decreases from models 1 to 3.
This is due to the fact that models with a high share of technological reductions for agiven CO2-eq reduction have a relatively limited change in the occupational structure of the economy and therefore lower structural effects. Therefore, there is a lessrisk of carbon leakage. The gradually lower carbon leakage rate from models 1 to 3
should be seen in light of the fact that the subsidy for technological reductions frombiochar by pyrolysis and other possible technologies increases, and the socio-economic costs rise as a result of that.
Table 7.17. Carbon leakage rates of the models (2030 effects)
Per cent
Model 1

20.5-44.1

Model 2a13.0-29.6

Model 2b8.4-23.1

Model 3a8.0-20.4

Model 3b3.5-12.3

Note: Based on steps 3-5, see Table 7.16. Changes in foreign emissions are stated in million tonnes of CO2-eq androunded to the nearest 10,000 tonnes. Other effects include a tax on F-gases, removal of carbon-rich agriculturalland and subsidies for biochar by pyrolysis. A tax on F-gases leads to reductions of 0.1 million tonnes of CO2-eq in
2030, which is assumed to be 100 per cent structural effects. Tax on F-gases, set-aside of agricultural land andsubsidies for pyrolysis lead to reductions of 0.1, 0.3 and 0.2 million tonnes of CO2-eq in 2030, respectively, which isassumed to be 100 per cent technical and activity effects.
Source: Own calculations

The impact of assumptions on the size of the carbon leakage
As described in the previous section, there are a number of assumptions that havea significant impact on the calculations of the carbon leakage effect. This includes
assumptions about 1) the greenhouse gas intensity of Danish agriculture relative toother countries, 2) assumptions about policy response abroad and international
reduction targets, and 3) assumptions about global trade patterns.
1. Greenhouse gas intensity in Danish agriculture relative to other countries
As described above, the carbon leakage effect depends, among other things, on
Danish agriculture's greenhouse gas intensity relative to the countries to which
production will potentially shift after the introduction of a CO2-eq tax. For example, if
Danish agriculture has a lower greenhouse gas intensity than foreign agriculture,
this will increase the carbon leakage effect of a CO2-eq tax, as the production of aGreen Tax Reformgiven product will have a larger CO2-eq footprint if it is produced abroad rather thanin Denmark.
Conversely, it will reduce the carbon leakage effect of a CO2-eq tax if foreigncountries have a lower greenhouse gas intensity than Danish agriculture. Whencalculating carbon leakage effects, it is therefore important to consider theemissions, earning capacity and production conditions of farm types in Danish
agriculture relative to similar farm types in foreign agriculture.
Within the literature, three studies can be highlighted that shed light on the climate
impact of specific countries, including Denmark, see Box 7.9.
Box 7.9
Description of three studies that review the climate effectiveness of, among other things,
Danish agriculture
Lesschen et al. (2011) finds that Danish agriculture is among the most climate-friendly in the EU,
while Weiss & Leip (2012) finds that Danish agriculture is among the least climate-efficient in the
EU.54 A third study by Wirsenius et al. (2020) finds that Danish agriculture, specifically dairy and pig
production, is among the most climate-efficient from a global perspective, but that other major exporting countries of e.g. dairy products are also relatively climate-efficient.55 Thus, the carbon leakage effect for Danish agriculture as a result of a CO2-eq tax will be reduced if the countries to which
production is shifted are as climate-efficient as Denmark, and the carbon leakage effect will increase
if the countries are less climate-efficient.
The differences in the results in the three studies can be attributed to different approaches to calculating emissions from land use, changes in land use and forestry (LULUCF). Lesschen et al. (2011)
do not include emissions from animal feed production based on land use change, which means thatthe climate footprint does not take into account whether production takes place on land that has recently been used for non-agricultural purposes. Weiss & Leip (2012), on the other hand, include
emissions in production as a result of land use changes, e.g. deforestation of rainforest in SouthAmerica for soy production, which is not included in Denmark's emissions inventory and thus not in the
70 per cent target. For this reason, their calculation of the carbon footprint of animal production
takes into account that land for feed production may have been used for non-agricultural purposes in
the past. This climate impact due to land use change abroad leads back to the country's soya imports, which increases the international climate footprint of Danish agriculture. Wirsenius et al. (2020)
attempt to account for the opportunity cost of all feed production by including the fact that all agricultural land can, in principle, be converted to e.g. forest. With this calculation method, the climate impact of Danish agricultural production is significantly lower.

The Expert Group assesses that Danish agriculture's relative climate efficiency is
associated with significant uncertainty, as it largely depends on how emissions arecalculated and which countries that are compared with.56 Thus, considerations
about the relative greenhouse gas intensity of Danish agriculture depend on theextent to which a shift is expected and which countries Danish production may shift
to. For example, it depends on whether a shift is to non-EU countries with lessclimate-efficient agricultural production or to countries that are relatively moreclimate-efficient.

Weiss, F. & Leip, A. (2012), "Greenhouse gas emissions from the EU livestock sector: A life cycle assessment carried out with the CAPRI model", Agriculture, Ecosystems and Environment 149, 124-134.

54

Wirsenius, S., et al. (2020), "Comparing the Life Cycle Greenhouse Gas Emission of Dairy and Pork Systems
across Countries Using Land-Use Carbon Opportunity Costs", Working Paper, World Resources Institute.

55

See e.g. Mogensen, L., et al. (2022), "Vidensyntese om livscyklus vurderinger og klimaeffektivitet i landbrugsektoren" (Knowledge synthesis on life cycle assessments and climate efficiency in the agricultural sector), Aarhus
University, DCA Report No. 200, February 2022.

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2. Climate policy abroad and international objectives
The carbon leakage effects of a CO2-eq tax on Danish agriculture will largely depend on foreign climate policy and the credibility of compliance with non-binding international agreements, such as the Paris Agreement. It should be noted that agricultural emissions are regulated through the EU's Effort Sharing Regulation, and ifother EU countries' agricultural production increases as a result of a Danish CO 2-eq
tax, it will immediately put pressure on these EU countries to reduce emissions inother sectors covered by the Effort Sharing Regulation, such as road transport.
It is expected that the EU climate policy will have an impact on carbon leakage andthat European and global climate action will reduce carbon leakage. The size of thecalculated carbon leakage effects will be different if other assumptions are madeabout foreign climate policy and the credibility of compliance with non-binding
international agreements, such as the Paris Agreement.57
The EU's upward revision of the 2030 target of a reduction in CO 2-eq emissions ofat least 55 per cent, together with the EU's Carbon Border Adjustment Mechanism(CBAM), may thus have an impact on carbon leakage. However, agricultural
products are currently not covered by CBAM. Binding climate policy in the EU can
reduce the displacement of the part of Danish production assumed to be taken overby Denmark's trading partners in the EU and thus reduce the extent of carbon
leakage, see below on foreign trade.
3. Foreign trade
Carbon leakage through foreign trade are calculated by, for example, a reduction in
Danish production in a given industry, giving rise to a corresponding increase in
output in each of the other regions based on a trade-weighted average, i.e.
depending on the initial trade with Denmark in the industry in question in eachregion.
Even if initial trade patterns are expected to follow to some extent the current
differences in production and transport costs, product quality, etc., across regions,
it is not certain that changes in Danish production will lead to proportional changes
in foreign output according to current trade patterns. For example, production could
be taken over to a greater extent by one of the other regions, or simply distributed
among the regions in a different way than the initial Danish trade pattern suggests.
There can be a wide range of factors that affect international trade patterns overtime, including climate policy abroad, technology development, trade agreements,
etc. As it can be difficult to predict changes in future trade patterns, the moregeneral assumption presented above is used.

See e.g. Kraka: "Landbrugets lækage afhænger kritisk af udlandets klimapolitik” (Agriculture's carbon leakage depends critically on foreign climate policy), 31 May 2023, (https://kraka.dk/analyse/landbrugets_laekage_afhaenger_kritisk_af_udlandets_klimapolitik)

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Studies of carbon leakage
Three studies, namely the 2019 report from the Danish Environmental Economic
Council58, the 2020 report from the Danish Environmental Economic Council 59 andBeck et al. (2023), estimate the carbon leakage effects of a CO 2-eq tax in Denmark.
Carbon leakage rates are calculated both in aggregate and by industry. The
variation in carbon leakage rates in agriculture can be seen in Figure 7.2. The
carbon leakage estimates in the studies vary between 21-85 per cent depending on
the model approach, assumptions about relative greenhouse gas intensity inagriculture and assumptions about climate policy abroad. It should be noted that the2019 report from the Danish Environmental Economic Council (DMØR) and Beck et
al (2023) do not include technical reduction options in the main scenarios. The
reasons for the large variation in the results of the carbon leakage rate are
discussed in Box 7.10.
Figure 7.2. Studies of carbon leakage rates for agriculture
Per cent
90
80
70
60
50
40
30
20
10

Beck et al. 2023, with Paris, USD 50

Beck et al. 2023, without Paris, USD
50DMØR 2020, without Paris, DKK
1,200 tax, foreign agriculture more
greenhouse gas intensiveDMØR 2020, without Paris, DKK
100 tax, foreign agriculture more
greenhouse gas intensiveDMØR 2020, without Paris, DKK
1,200 taxDMØR 2020, without Paris, DKK
100 taxDMØR 2020, with Paris, DKK 100
taxDMØR 2019, without Paris, DKK
100 tax0

Source: DMØR (2019), DMØR (2020) and Beck et al. (2023)

Secretariat of the Danish Environmental Economic Council (2019), "Economy and Environment 2019", Report fromthe Presidency.

58

Secretariat of the Danish Environmental Economic Council (2020), "Economy and Environment 2020", Report fromthe Presidency.

59

Green Tax ReformBox 7.10
Review of three studies that estimate the carbon leakage effects of a CO2-eq tax for Denmark
The 2019 report from the Danish Environmental Economic Council (DMØR) is based on a modified
version of the GTAP-E model. A 2019 report from the Danish Environmental Economic Council(DMØR) found a total carbon leakage rate for Denmark of 45-53 per cent and a separate carbon
leakage rate for agriculture of 75 per cent in the baseline scenario. Here, the baseline scenario represents a situation where 1) a number of EU countries have restrictions on emissions from non-ETS
sectors, 2) there is no restriction on emissions for non-EU countries and 3) Danish climate policy only
reduces the amount of allowances in the EU ETS to a limited extent in the long term. These assumptions are adjusted in the five alternative scenarios, resulting in a range in carbon leakage rates of 2775 per cent for agriculture.
In a 2020 report from the Danish Environmental Economic Council (DMØR), it was concluded thatthe total carbon leakage rate for the Danish economy is 21 per cent in the central scenario where
the GTAP-E model is coupled with the REFORM model. The large differences in carbon leakage
rates between the two reports are due to the different assumptions made in the report. The Danish
Environmental Economic Council points out that the primary reasons for the lower carbon leakage
for the Danish economy in the 2020 report are that:•••

A smaller share of CO2-eq reductions take place in the EU ETS sector, from 64 per cent in the2019 report to 19 per cent in the 2020 report, lowering the overall carbon leakage rate.
The carbon leakage rate is assumed lower within the EU ETS, where an EU ETS leakage rateof 83 per cent was used in the 2019 report compared to 20 per cent in the 2020 report. The
reason for this can be found in the time horizon for the reduction of the Danish demand for allowances, which in the 2019 report went to 2060, but in the 2020 report it only goes to 2030.
The carbon leakage rate in agriculture is lower than in the 2019 report.

A report from Kraka (2023) argues that the carbon leakage rates found for agriculture are underestimated in the 2020 report from the Danish Environmental Economic Council (DMØR).60 Kraka points
out, among other things, that the model used in the 2020 report does not include capital mobility between Denmark and abroad, which would increase the carbon leakage rate, as the introduction of a
CO2-eq tax will lead to falling productivity in Danish agriculture and thus the relocation of capital,
which increases foreign emissions. In addition, Kraka points out that the modified REFORM model
used in the 2020 report from the Danish Environmental Economic Council (DMØR) does not include
adjustments in the land values, which results in too high an adjustment in crop production and thus
leads to a lower leakage rate. It is thus the assessment of Kraka (2023) that the carbon leakage rate
for agriculture is higher than estimated in the 2020 report from the Danish Environmental Economic
Council (DMØR).
In Beck et al. (2023), the GTAP-E model is used in a modified version in line with the modelling approach in the 2019 report from the Danish Environmental Economic Council (DMØR). A carbon
leakage rate of 73 per cent in agriculture is estimated at a CO2-eq tax of just over DKK 300 per
tonne if it is assumed that the Paris Agreement is not binding, and 30 per cent if the Paris Agreement
is binding, see Figure 7.2. However, the study does not include technical conversion, which may
mean that the study overestimates the carbon leakage rate. The study shows that there is a large
variation in agriculture's carbon leakage rates within the model due to assumptions about international climate policy.
The large differences in the estimates of carbon leakage effects thus result from the different underlying assumptions and modelling assumptions, especially regarding the greenhouse gas intensity ofDanish agriculture relative to other countries, current and future climate policies abroad, as well as
the model and database used and their level of detail.

Ulrik Beck, Andreas Lund Jørgensen, Peter Kjær Kruse-Andersen and Emma Terreni. (2023): ”Lækageraten idansk landbrug” (The carbon leakage rate in Danish agriculture). Kraka on 31 May 2023, (https://kraka.dk/analyse/landbrugets_laekage_afhaenger_kritisk_af_udlandets_klimapolitik).

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7.9 Environmental Externalities
The Expert Group's terms of reference state that the second interim report must include an assessment of the advantages and disadvantages of regulatory solutions,
including taxes, that address CO2-eq emissions and other externalities, including
environment and health. This section explains the environmental externalities thatare included in the calculated shadow prices of CO2-eq reductions in the Expert
Group's regulatory models.
Agriculture's CO2-eq emissions and other negative externalities are largely linked tothe same agricultural activities. This means that environmental regulation generally
reduces agriculture's CO2-eq emissions, just as other negative environmental externalities in agriculture can be reduced by CO2-eq regulation.
There are a number of environmental externalities associated with land use in agriculture, including groundwater pollution and oxygen depletion in lakes and coastal
waters. For example, reducing fertiliser usage will reduce phosphorus discharges tolakes and thereby improve the state of the environment. At the same time, reducing
fertiliser usage will reduce nitrogen leaching into the groundwater, thereby improving the quality of drinking water.
A decrease in agricultural production will reduce agricultural nutrient emissions andpotentially provide more space for nature. Both parts will benefit biodiversity.
For some externalities, valuation of the reduction is difficult, as quantification of thevalue requires both a clear connection between land use and effect, and quantification of the value of the effect. Therefore, the value of e.g. reduced phosphorus discharge to lakes and nitrogen leaching to groundwater is not calculated, even though
it has a socio-economic value. This is primarily due to a lack of valuation of the damaging effects of phosphorus application and the fact that the mechanisms of land
use nitrogen leaching's impact on groundwater have not been determined at thistime.
Two environmental externalities are particularly linked to the emission sources thatare regulated by climate regulation of agriculture and can be quantified and valued
at the same time. These are ammonia emissions and nitrogen leaching, both ofwhich are specifically linked to fertilisers. These two externalities are included in themodelling calculations and are valued based on the socio-economic value of reduction. In addition, the recreational values associated with the recommended afforestation are calculated.
The three quantified values of environmental externalities are adjusted for the increase in total disposable family income up to 2024. This implies an assumption thatthe value of recreational services follows the development in total income, whichmeans that the income elasticity of the individual family's demand for recreational
services is 1 and that demand otherwise develops proportionally to the development

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Green Tax Reformin the number of households. The nominal value of recreation is thus adjusted not
only for inflation, but also for changes in average real income and population size.
Drupp et al. (2023) recommend this practice.61
Ammonia
The largest source of Danish ammonia emissions is agriculture. Ammonia emissions
come mainly from fertilisers. Climate regulation that affects the amount of fertiliser
thus has a direct effect on ammonia emissions, just as certain climate technologies
for stables and slurry storage also reduce ammonia emissions, such as coveringslurry tanks. The national reduction of ammonia emissions in 2030 as a result of atax on CO2-eq emissions in agriculture is estimated with GreenREFORM. 62
The two main externalities from ammonia emissions are human health effects andincreased nutrient loading in natural areas. The nutrient load on natural areas is wellknown, but the impact is largely geographically dependent on proximity to ammoniasensitive natural areas, and it is not quantified, so the value cannot be included. Thismeans that only the value of human health effects is included in the modelling calculations. The value of reduced ammonia emissions is thus a lower bound estimate.
The health effects of ammonia emissions from agriculture have been calculated by
the DCE (2023)63 based on dose-response modelling in relation to the impact on
the population. The valuation is also carried out by DCE based on the value of statistical life as calculated in the Ministry of Finance's documentation note on the valueof statistical life.
Ammonia can be transported long distances in the atmosphere, so there is a highdegree of exchange of ammonia between countries. Therefore, only a small proportion of ammonia emitted on Danish soil will have a negative impact in Denmark.
Based on Brand et al.'s (2023) calculation, the socio-economic damage value forammonia from agriculture is set at DKK 43 per kg of ammonia. However, in connection with the valuation for the green tax reform, only the value of damage on Danish
territory is used, which corresponds to DKK 10 per kg of ammonia.
The contribution of Danish sources to the total ammonia load on Danish territory islimited. It is therefore considered that the stated reductions are marginal and thatthe value can be approximated as constant.
Nitrogen discharge to coastal waters
Nationwide, agriculture accounts for almost 70 per cent of nitrogen emissions tocoastal waters and is thus the largest source64 of nitrogen emissions to the aquatic

Drupp, M., M. Hänsel, E. Fenichel, M. Freeman, C. Gollier, B. Groom, G. Heal, P. Howard, A. Millner, F. Moore, F.
Nesje, M. Quaas, S. Smulders, T. Sterner, C. Traeger, F. Venmans (2023). The increasing benefits from scarceecosystems. Appears in Science

61

Hansen, M.K. and Berg, A.K. (2023). ”Modellering af ammoniakudledninger i landbruget” (Modelling ammonia
emissions in agriculture). DREAM documentation note 2023, December 2023,(https://dreamgruppen.dk/Media/638387647814477951/modellering_af_ammoniakudledninger_i_landbruget.pdf)

62

63

Brandt, J., Christensen, J.H. and Andersen, M.S. (2023). "Miljøøkonomiske beregningspriser for emissioner 4.0"
(Environmental economic calculation prices for emissions 4.0). Aarhus University, DCE, Scientific note no.
2023/54,(N2023_54.pdf (au.dk))
Danish Environmental Protection Agency (2023). "Udledning af kvælstof til kystvand opdelt på kilder" (Discharge ofnitrogen to coastal waters by source). Note to the Environment and Food Committee (https://www.ft.dk/samling/20222/almdel/MOF/bilag/121/2657955/index.htm)

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environment. The main source of nitrogen leaching is nitrogenous fertilisers in theform of livestock and artificial fertilisers. The national reduction in fertiliser application as a result of regulating CO2-eq emissions in agriculture in 2030 is estimatedwith GreenREFORM. This has been converted to nitrogen discharge to coastal water by the Danish Environmental Protection Agency according to the following procedure.
The national estimated reduction in fertiliser application is distributed to coastal water catchments proportional to past fertiliser use.65 This results in a reduction in fertiliser usage for each coastal water catchment. Some of the fertiliser applied is taken
up by plants, metabolised or retained before a smaller proportion of the applied nitrogen reaches coastal waters. The assessment takes into account whether commercial fertiliser or livestock manure is applied. As mentioned, some of the nitrogen
lost from the field is retained or converted before it reaches coastal waters. This is
recognised as a percentage specific to each coastal water catchment. The change
in fertiliser application thus gives the change in nitrogen emissions for each individual coastal water body.
The overall goal of the Water Framework Directive is to achieve a good condition in
the water environment by the end of 2027 at the latest. With the Agreement on theGreen Transformation of Danish Agriculture (2021), efforts have been agreed until
2027 that are estimated to ensure the prerequisites for good ecological status, provided that the shortfall in the nitrogen initiative of 2,600 tonnes and any updating of
the effort requirement is decided when the agricultural agreement is revisited in
2024. A tax can only be introduced from 2027, and the achievement of the target
must be assumed to have been promised at that time. A tax introduced from 2027
will therefore not contribute to the fulfilment of the Water Framework Directive in
2027, but may provide the opportunity to subsequently relax the nitrogen regulation
implemented at that time to meet the objectives of the Water Framework Directive.
The value of nitrogen reductions will thus be the reduction in costs to achieve sucha good condition in the aquatic environment, which varies somewhat across the 108
coastal water catchments in Denmark. The costs of target fulfilment are calculated
in a research project commissioned by the Danish Environmental Protection Agency
with two models, the SMART model (Jacobsen, 2022)66 and TargetEconN (Hasler
et al., 2022)67.
The costs calculated with the two models are used to provide a range for the socioeconomic value of nitrogen reductions. The costs cover the set-up, running and opportunity costs of implementing agricultural measures. The calculations with the two

The distribution of commercial fertiliser and livestock manure is calculated in 2017 at ID15 catchment level and described in (Børgesen and Bach (2023). Børgesen, C.D., Bach E.O. (2023). "Modelberegnet nitratudvaskning fra
landbrugsarealet til en vurdering af grundvandspåvirkningen på grundlag af landbrugsdata fra 2017 og klimadata fra
1990-2010" (Modelled nitrate leaching from agricultural land for an assessment of groundwater impact based on
agricultural data from 2017 and climate data from 1990-2010). Aarhus University, DCA Advisory Note.

65

Jacobsen, B. H., (2022). "Økonomiske konsekvensberegninger af scenarier for vandområdeplaner 2021-2027
med brug af SMART-modellen" (Economic impact assessments of scenarios for river basin management plans
2021-2027 using the SMART model). University of Copenhagen, IFRO Commissioned Work No. 2022/03,(https://static-curis.ku.dk/portal/files/320645278/IFRO_Udredning_2022_03.pdf)

66

Hasler B., Filippelli R., Levin G. & Nainggolan D. (2022). "Økonomiske konsekvensberegninger for vandrammedirektivet i 2027" (Economic impact calculations for the Water Framework Directive in 2027). Scenarios for the full implementation of VP3 action requirements for coastal water catchments 2021-2027". Aarhus University, DCE Scientific Report No. 502, (http://dce2.au.dk/pub/SR502.pdf7)

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Green Tax Reformmodels have been carried out in the same time period, and we have endeavoured toensure that the data basis for the two models is as similar as possible.
TargetEconN models the cost-effective distribution of instruments at field level in the
coastal water catchment, while the SMART model does not optimise the placementof instruments within the catchment area. TargetEconN, therefore, selects fields for
implementation where the contribution margins are low, while SMART uses more
average costs. The results of both models assume optimal use and placement of instruments, which is not expected to be achieved in practice through regulation. The
real costs of target fulfilment and thus the estimated value of reducing nitrogen
emissions will therefore be higher.
The value of nitrogen reduction for each coastal water catchment is calculated
based on the cost of the marginal instrument that must be used to fulfil the nitrogentarget, as this reflects society's willingness to pay for nitrogen reduction in the
coastal water catchment in question. This will be accurate for smaller reductions,but for larger reductions, this will be an overestimate.
The valuation of nitrogen is based on the fulfilment of politically set targets 68, which
are translated into different levels of reduction targets across coastal water bodies.
Due to increasing marginal costs for the majority of the instruments that can beused in nitrogen regulation, the socio-economic value of nitrogen reductions willvary across areas. In coastal water catchments without a need for action, further nitrogen reductions are not valued, as the valuation is tied to target fulfilment. If further improvement of the environmental status in coastal water catchments that haveachieved good ecological status has a socio-economic value, this would mean thatthe valuation is an underestimate.
On this basis, the socio-economic value of nitrogen reduction is estimated to befrom DKK 0 per kg nitrogen to between approx. DKK 380 and 600 per kg nitrogen,depending on the calculation model and coastal water catchment where the reduction takes place. Based on the calculated reduction in nitrogen emissions for eachcoastal water catchment, the full value is calculated, first per coastal water catchment, then totalled to the national level. This results in two estimates of the value of
this side effect of the regulation, and the average is represented in the model section.
Set-aside of land for forestry or peatland will also reduce nitrogen emissions. Partly
because of the reduced fertiliser consumption associated with the set-aside, andpartly because the areas will act as "filters" that reduce nitrogen leaching into theaquatic environment. The value of this effect on Water Framework Directive target
fulfilment will depend on where the area is set aside. Using the above estimates ofmarginal costs from Jacobsen (2022) and Hasler et al. (2022), the average value
would be approx. DKK 102 per kg.

The Agreement on the Green Transformation of Danish Agriculture initiates nitrogen-reducing measures corresponding to a reduction in emissions to coastal waters of approx. 10,400 tonnes of nitrogen. When revisiting theagreement, a decision is made on how to handle the reduction deficit of approx. 2,600 tonnes of nitrogen. An evaluation of the technical and legal basis for the nitrogen initiative is currently being carried out ("second opinion"). Thiscan, among other things, lead to an adjustment of the need for a nitrogen initiative.

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Recreational values
Afforestation has a recreational value. Recreation valuation is methodologically wellestablished in Denmark, where the population's use of forests has been studied extensively since the 1970s, when the first major national study was launched. The
Danish Economic Councils (2014) analysed the Danish population's use of Danish
nature in order to evaluate state and private afforestation. 69 The valuation is basedon a multi-site travel cost method where Danes' observed use of natural areas andthus willingness to incur transport costs is used to derive the value of recreation.
Recreational values of new areas vary significantly across geography, with population density and the number of alternative recreational areas significantly impacting
the value of a new area. It is not possible to take geographical aspects etc. into account in the valuation of the recommended afforestation, as the recommendations
do not include a geographical element. Therefore, an average value is used.
The valuation of DKK 4,038 per hectare (The Danish Economic Councils, 2014)
should be seen as an average valuation for privately owned forests. State forests
are typically located in more densely populated areas and have better access andfacilities. Location, layout, size and access conditions affect the use of the forest
and thus the recreational value. The recreational value of state forests is estimatedto be around DKK 50,000 per hectare (The Danish Economic Councils, 2014),
which is significantly higher than the value of private forests.
Based on these analyses, it is not possible to assess the impact of forest age andspecies composition on the recreational value.
Socio-economic value of side effects in the models
Table 7.18 shows shadow prices for the models with and without the value of reducing the described externalities (side effects).
Table 7.18. Shadow price for the presented models excluding and including side
effects (DKK per tonne of CO2-eq)
Shadow price excludingside effects

Shadow price side effects

Model 1475

150

Model 2a525250

Model 2b550

325

Model 3a750475Model 3b775

575

Source: Own calculations.

Table 7.19 presents the socio-economic value in the individual models for each of
the calculated externalities in 2030.

The Danish Economic Councils (2014) ”Værdi af rekreative områder” (Value of recreational areas), in: Economy
and Environment 2014. Copenhagen, pp. 103–192, (https://dors.dk/files/media/rapporter/2014/m14/m14_kapitel_4.pdf )69

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Table 7.19. Socio-economic value of environmental effects (DKK million in 2030)
NitrogenAmmonia

Recreation

Total

Model 1

480

100

200

770

Model 2a

380

60

200

630

Model 2b

200

40

200

430

Model 3a

260

40

200

490

Model 3b

170

20

200

380

Note: Totals may not add up due to rounding
Source: Own calculations.

Green Tax Reform

7.10 Food Security and Calorie Production
This appendix analyses the impact of a tax on agricultural activities on food security
and food production for human consumption in Denmark. A CO2-eq tax in isolation is
not expected to reduce food security in Denmark. In addition, the analysis shows,with great uncertainty and under certain assumptions and conditions, that a tax of
DKK 750 per tonne of CO2-eq is estimated to lead to a decrease in Danish food production for human consumption of 2-4 per cent, corresponding to a total loss of 225500 bn calories (kcal). The very limited decrease in food production for human consumption, despite the large decline in animal production, is due to an expected shift
in activity from feed production to other crop production.

7.10.1 Food security in the EU
Food security is about ensuring a sufficient supply of food for each individual or region(e.g. the EU). With a growing world population and changes in dietary habits, there isa corresponding need to increase global food production. In addition, some majorcountries, such as China and Brazil, are moving towards increased consumption ofanimal products, partly due to a growing middle class. The OECD and the UN Foodand Agriculture Organisation (FAO) expect global demand for animal proteins to increase over the next 10 years.70
Basically, animal production is more land-intensive than crop production. This is partly
because livestock production requires additional land use for feed production. Thus,
there is generally a higher need for inputs in the production of animal foods comparedto plant-based foods. The balance between animal and plant-based food consumption thus determines how much land use is needed and how many calories are produced for human consumption.
The EU's food trade balance
In 2020, the EU's net exports of food and agricultural products totalled EUR 62 bn,
driven mainly by processed foods. Thus, the EU primarily imports cheap raw materials, such as soybeans for animal feed and cocoa, and exports processed foods, suchas chocolate and dairy products.
A report from the European Commission in 202171 states that more than 85 per centof EU food and agricultural production is consumed within the EU, but that the shareof exports to countries outside the EU has been increasing. The Commission alsoemphasises that the EU has experienced high income growth by exporting certain
food products (e.g. wine, cheese and pork) to third countries, whose consumption
patterns have changed with rising levels of prosperity.
The EU is also the world's largest exporter of food and agricultural products and in
2019 was the world's third largest importer after the US and China. Today, approx.
6-10 per cent of food and agricultural products are imported into the EU, of which
imports of fishery products account for 24 per cent.
The self-sufficiency of food in the EU
70

OECD-FAO Agricultural Outlook 2023-2032.

71

EU Commission, "Contingency plan for ensuring food supply and food security in times of crisis", 2021.

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The European Commission also calculates a self-sufficiency rate, which acts as anindicator of how much of specific products are imported from outside the EU. From2017-2021, the EU was self-sufficient in a wide range of food products, including
wheat, animal products, fruit and vegetables. In contrast, the EU was not self-sufficient when it came to certain cereals (e.g. rice and maize), oilseeds (e.g. rapeseed
oil and soybeans), protein crops (e.g. lentils), and certain fruits and vegetables. In
addition, the EU's self-sufficiency rate for fisheries products was only 42.5 per centand only 14 per cent for the five most consumed types of fish (e.g. tuna, salmon, cod,etc.).
These trade deficits for specific commodities can be interpreted as indicating that the
food system in the EU may be exposed to a certain degree, as it may be difficult to
substitute certain imported commodities in the short term, as they are widely used in
the production of other food products. For example, price increases for oilseed cantranslate into higher production costs for animal products, which can lower production. However, the report from the European Commission emphasises that it would
require a number of significant effects to occur at the same time to challenge the foodsecurity in the EU. This could, for instance, be by having a high import dependency
from specific countries coupled with further disruptions in supply chains elsewhere in
the EU.
The EU is thus a significant global market for the production, trade and consumptionof food. It is estimated that the EU is self-sufficient in a number of important foodcategories, but that the EU's significant trade surplus is primarily due to exports ofprocessed foods, which is why there is also some dependence on imports of certain
raw materials from third countries. However, it is estimated that food supply in the EU
will only be challenged if several special circumstances occur at the same time. It isalso pointed out that within certain food categories, there could be some form of substitution in emergency cases. In addition, it will depend on how dietary habits change
in the future, especially as a result of changing climate policies and regulations, theintroduction of CO2-eq taxes and increasing climate concerns, all of which can lead
to behavioural changes in the population.

7.10.2 Food safety and security of supply in Denmark
Denmark has a high degree of self-sufficiency in cereals, oilseeds, dairy products andgeneral animal production. However, in 2021, self-sufficiency rates were only 83 percent for beef, but for a wide range of products, Denmark was a net exporter and had
a self-sufficiency rate above 100 per cent. For example, Denmark had a self-sufficiency rate of 333 per cent for pork, 232 per cent for general meat production, 156
per cent for dairy products and 112 per cent for cereals. However, there is an estimated self-sufficiency rate of 0 for soybeans, for example, which is why Danish farmers primarily trade with countries outside the EU to meet demand. Soybeans, are forexample used as protein in animal feed, where there is limited scope for producing
alternative crops in Denmark that can be used for animal feed, such as broad beans.
As part of the Agricultural Agreement from 2021, the parties agreed to transition tomore plant production and a larger national protein supply, which are key elementsin the green transition.
The effect of a tax
The introduction of a CO2-eq tax on agriculture can have various effects on food production in Denmark. Animal production may experience a decline, which is estimatedPage 210

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to lead to a decline in both livestock and feed production. A possible consequence of
this could be a weakened food security for animal products in Denmark.
However, these production decreases, e.g. in the number of dairy cattle, can potentially also release areas that can be used for other crop production instead of feed
production.
There may thus be some contradictory effects of a CO2-eq tax on food security in theform of reduced animal production and increased crop production. However, an isolated tax on Danish agriculture alone cannot be expected to have a significant impact
on European food production.72
In addition, Denmark is largely self-sufficient when it comes to several food products. Thus, it is not expected that a CO2-eq tax in isolation will significantly reduce
the food security in Denmark.

7.10.3 Calorie production for human consumption in Danish
agriculture
Crop production in Denmark is characterised by delivering a high degree of input toanimal production in Denmark. There are no precise calculations of how much of theDanish agricultural area is used for feed production. The University of Copenhagen
estimates that approx. 65 per cent of Danish agricultural area was used for feed production in 2022.73 In addition, a large part of Danish feed consumption is imported.
According to the University of Copenhagen, Denmark is 69 per cent self-sufficient inprotein for animal feed, with the rest being imported.74
Feed production thus indirectly contributes to the total calorie production in Denmark,as it is used as an input in livestock production. In the use of feed for livestock production, there is an energy loss as the energy content of the feed is reduced in theconversion to the final output, i.e. meat and dairy products. In addition to livestock
production, the total calorie production in Danish agriculture is also made up of thecrop production of food for human consumption.
As the global population increases, it is expected that the global demand for food will
also increase. The OECD and FAO estimate that there will be an increase in global
food consumption of 1.4 per cent per year over the next 10 years.75 In this context, it
can be assumed that if fewer calories are produced in Denmark for global sales, theincreased global demand will have to be met elsewhere. However, to the extent thata CO2-eq tax reduces Danish feed imports, it may also free up foreign feed production
for other uses.

In 2020, Danish agriculture was the seventh largest producer in the EU and accounted for approx. 2-3 per cent of
the total output from the EU countries' agricultural sectors, see European Commission, "Statistical Factsheet - European Union", June 2021.

72

Analysis of barriers and possible regulatory instruments to promote increased Danish production of green protein
sources for food and feed, IFRO Commissioned Work 2023_20.

7374

Green protein sources for animal feed, IFRO Commissioned Work 2023_07.

75

OECD-FAO Agricultural Outlook 2022-2031.

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Structural effects as a result of a CO2-eq tax for animal production, in the form of
production decline or relocation, can also lead to a decline in feed production. In isolation, lower livestock production will reduce the total calorie production in Denmark.
However, a decline in animal production also releases land from feed production,
which can be used to produce plant-based food, for example.
If it is assumed that the vacant areas can be taken over by plant production for humanconsumption, such as cereals or legumes, the accompanying increase in calorie production can reduce the initial decrease in total calorie production due to the decline
in animal production.
However, plant-based products don't always contain as many vitamins and minerals
as animal-based products. For example, grains lack certain amino acids and micronutrients (vitamins and minerals - e.g. calcium, iron and vitamin B). Livestock, on theother hand, are good at converting energy-dense, but micronutrient-poor grains fromtheir feed into more nutrient-dense protein sources. Therefore, grains from feed production cannot be used as like-for-like for human consumption, as other plant-based
foods, such as legumes, may also be needed to achieve a suitable mix of amino acidsin the dietary composition. There may, therefore, be a need for a shift in crop production from the current land use.
Change in calorie production in structural equilibrium
Table 7.20 shows estimates of changes in calorie production (range) based on themodel calculations for a CO2-eq tax of DKK 750 per tonne on emissions from both
fertiliser usage and livestock.
The results show that a tax is estimated to lead to a decrease in Danish food production for human consumption of 2-4 per cent, corresponding to a total loss of 225-500
bn kcal, see Table 7.20. In isolation, animal calorie production for human consumption is estimated to decrease by approx. 1,425 bn kcal, although this is offset by anincrease in crop production of approx. 925-1,200 bn kcal, depending on how large ashare of crop production is produced for human consumption. It is estimated that the
total calorie production for human consumption, after the introduction of a tax, will beapprox. 12,350-12,625 bn kcal.
In comparison, the average actual calorie consumption for Danes is estimated to beapprox. 3,400 kcal per day per person, indicating that the current calorie production
can feed approx. 10.4 million people with an average Danish calorie consumption.
With a recommended intake of around 2,300 kcal per person per day, the current
production level is estimated to be able to feed around 15.3 million people. After the
introduction of a tax, the total Danish calorie production is estimated to be able tofeed approx. 10.0-10.2 million people with an average actual Danish calorie consumption or alternatively 14.7-15.0 million people with the recommended calorie consumption.
It is assumed that 70 per cent of plant production in Denmark is used for feed production, 15-20 per cent for the production of plant-based food for human consumption, and the remaining 10-15 per cent is used for other purposes, such as rapeseed
for biodiesel, Christmas trees, industrial potatoes, flowers or uncultivated land. This
assumption regarding the distribution of plant production in Denmark for feed production, human consumption or other uses has a major impact on the results. For example, if 20 per cent of plant production is used for human consumption instead of 15
per cent, the increase in calorie production is reduced by 6 per cent. It should be
noted that in the Expert Group's calculations, land will also be taken out of production

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as a result of the tax making certain land unproductive76, which also affects the total
calorie production in a downward direction.
To account for these differences, a range of the possible effects on the net calorie
production for human consumption is shown, depending on assumptions about the
distribution of plant production used for human consumption. The figures are subject to significant uncertainty.
Table 7.20. Calculation of the impact of a tax of DKK 750 per tonne of CO 2-eq on calorie production
Production

Calorie production
before tax

Calorie production
after tax

Change incalorie production
SFA tax

bn kcalChange in production
SFA tax

per cent

Cattle

125

100

-25

-20

Pigs

4,825

3,950

-875

-18

Dairy

3,275

2,750

-525

-16

Animal production(total)

8,225

6,800

-1,425-17

Plant production(total)Of which for humanconsumption

-8
4,625

5,550-5,825925-1,200

Of which for feed
production
Total, humanconsumption

20-26
-15

12,85012,350-12,625-500; -225

-4; -2

Note: Rounded to the nearest 25 bn kcal. Conventional and organic production have been merged. The ranges indicate the results based on different assumptions
regarding the share of crop production for human consumption (15 or 20 per cent)
Source: Own calculations based on figures for production decline in the model calculations and calorie production from FAO, FBS (2020)

In the model calculations, feed imports are estimated to decrease by 14 per cent,corresponding to approx. 775 bn kcal. A degree of so-called calorie leakage must be
expected, as some foreign feed production is no longer exported to Denmark, but isinstead released for other uses, e.g. feed production for other/own countries, increased plant production for human consumption etc. If it is the case that the reduced
feed imports of approx. 775 bn kcal are used abroad in the production of, for example,
plant-based production for human consumption, the total calorie production for human consumption will increase by approx. 2-4 per cent.
It should be noted that the above figures are subject to significant uncertainty, including the extent to which it is possible to switch between different types of crops.

According to the model calculations, a uniform tax on agriculture of DKK 750 per tonne of CO2-eq means that approx. 9 per cent of agricultural land will be taken out of use by 2030.

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7.11 Base Deduction
Model 2 and 3 incorporates a base deduction per animal differentiated by animal
type so that the base deduction is on average 50 per cent of the immediate tax payment for a given farm. Thus, the effective tax rate averages approx. DKK 375 per
tonne of CO2-eq in model 2 and approx. DKK 125 per tonne of CO2-eq in model 3.
The base deduction is organised according to the same criteria as for the tax, i.e.
with variations based on weight, breed, type of housing, etc.
The combination of a higher marginal tax rate and base deduction in model 2 incentivises the farmer to use technological solutions (e.g. more climate-friendly barns,
feed additives) that reduce the tax. The Expert Group estimates that a model withDKK 750 per tonne of CO2-eq on the margin and a base deduction that on averagecorresponds to 50 per cent of the immediate tax payment has better properties thana simple reduction of the tax rate to DKK 375 per tonne of CO2-eq as in the industry's EU ETS.
Table 7.21 shows the CO2-eq impact, including structural reductions, and the burden on the farmer in models with a base deduction and a simple rate reduction to
DKK 375 per tonne of CO2-eq emitted. The effects show that in the model with abase deduction per animal, the CO2-eq reduction is 0.3 million tonnes higher, while
the structural effects are 0.2 million tonnes lower compared to a simple rate reduction. This is because the higher marginal tax rate with a base deduction provides agreater incentive to switch to less CO2-eq-intensive production, such as changing
animal breeds etc. In addition, the burden on the agricultural sector is DKK 75 million lower in the model with a base deduction. The model with a base deduction thusincreases the total CO2-eq reductions and at the same time reduces the overall burden on the agricultural sector as well as the structural effect.
The cost of the model with a base deduction is a higher shadow price compared toa model with a simple rate reduction. This is because the tax model with a simple
rate reduction involves larger structural effects that are cheap in socio-economic
terms, whereas a tax model with a base deduction involves more expensive reductions from shifts in production, e.g. towards other animal breeds.
Fewer structural effects and a lower burden, on the other hand, reduce the risk ofcarbon leakage and preserve more of the existing occupational structure. At thesame time, the shadow price of the additional reductions remains relatively low
compared to other reduction initiatives. Against this background, the Expert Groupfavours a model with a base deduction over models with a simple rate reduction.

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Table 7.21. Effects of base deductions
CO2-eq tax of DKK 750
CO2-eq tax of DKK 375 per
per tonne with a base detonne
duction of 50 per centCO2-eq reductions (million tonnes)- of which are structural (million
tonnes)Burden on the agricultural sector
after adjustment (DKK million)
Shadow price incl. side effects(DKK per tonne CO2-eq)
Value of side effects (DKK million)

2.2

1.9

1.0

1.2

1,350

1,425

300

225

350

350

Note: The shadow price is rounded to the nearest DKK 25. The tax calculation is for the tax on livestock and fertiliser. The value of side effects covers reductions in ammonia and nitrogen emissions. Burden on the agricultural
sector after adjustment covers the tax revenue minus the share of the tax that is passed on in higher consumer
prices. In the calculations for the CO2-eq tax of DKK 375 per tonne, it is assumed that there are requirements forfeed additives and tent covering with floating layers.
Source: Own calculations.

7.12 Subsidy Scheme for Capacity Reduction in
Animal Production
This section examines the possibilities for establishing a voluntary subsidy scheme
for full or partial capacity closure of livestock production in order to support structural changes in agriculture.
It is considered immediately possible to obtain EU approval for a voluntary decommissioning scheme for capacity closure based on, for example, environmental or climate considerations. Such schemes have been state aid approved in Belgium andthe Netherlands with compensation rates up to 120 per cent. The scheme could target cattle production and be designed with a number of prioritisation criteria thatgovern the allocation of subsidy, so that, for example, climate considerations or geographical location with associated need for a nitrogen initiative or proximity to
Natura 2000 areas are used as a basis for prioritising beneficiaries. It must be determined whether climate considerations can include, for example, that the scheme
targets types of housing with high emissions factors in relation to fertiliser management.
The scheme can be organised so that the capacity closure only concerns the keeping of livestock on a property, allowing other agricultural operations, such as plantcultivation or conversion to forestry, to continue. In general, this entails that the associated areas are not included in the scheme. This is linked to the subsidy
schemes and the recommendations for increased afforestation and rewetting ofpeatland areas, as you do not want competition with the other subsidy schemes forthe same areas and cause a smaller drain on these schemes. The state aid rules do
not preclude the areas from being included, e.g. if synergies to the nitrogen initiative
or nature can speak in favour of this.
The scheme cannot include companies that were in crisis at the time the subsidy
was granted, see Box 7.11. There is no overview of how many cattle farms will beclassified as crisis-hit.

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At the same time, the subsidy scheme for capacity closure cannot be directly conditioned on the applicant being significantly negatively affected by a future CO2-eq
tax. If there is no such linkage, it is assessed that it is possible to establish a subsidy
scheme for capacity closure in parallel with the adoption of a CO 2-eq tax to ensure
the achievement of Denmark's climate objectives.
Box 7.11
Definition of a company in crisis
A company in crisis means a company which, without government intervention, will almost certainly
have to cease its activity in the short or medium term. Therefore, a company is considered to be incrisis if at least one of the following circumstances occurs:
1) For limited liability companies, when more than half of its subscribed share capital has disappeared as a result of accumulated losses.
2) For companies where at least some of the shareholders have unlimited liability for the company's
debts when more than half of the share capital recognised in the company's accounts has disappeared due to accumulated losses.
3) When the company is in bankruptcy proceedings or fulfils the criteria under national rules for bankruptcy proceedings at the request of its creditors.
4) When the company is not an SME and in the last two years has had and still has a debt ratio, i.e. a
ratio of book debt to equity, of more than 7.5 and an EBITDA interest coverage ratio of less than 1.0

The support under the scheme can be granted as compensation for the value of theassets measured on the basis of e.g. standardised rates based on the age of theplant etc. In addition, compensation may be granted for the costs of destroying production capacity etc.
A legally binding commitment must be obtained from the beneficiary that the closureof the production capacity concerned is definitive and irrevocable and that the beneficiary will not restart the same activity elsewhere. These commitments must also
be binding on any future purchaser of the land or facility in question. This can be secured, for example, by registering a declaration on the property in question.
It is difficult to estimate the overall process time for the dialogue with the European
Commission. On average, the Danish Agricultural Agency's experience is that theapproval process takes about 8-12 months, but up to 2 years should be expected
for the implementation of the necessary national regulatory framework. It will bepossible to run the legislative and state aid process in parallel.
It should be noted that in 2023, the European Commission approved a Dutch and a
Belgian scheme that provides compensation for the purchase and closure of livestock farms, see Box 7.12. However, the approved schemes differ in some areasfrom the proposed scheme, particularly in that they have the reduction of nitrogen
emissions as their primary objective. The schemes are justified on environmental
grounds.

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Green Tax ReformBox 7.12
Dutch scheme to decommission livestock farms with high nitrogen emissions
On 3 July, the Dutch government opened a nationally funded scheme for the voluntary closure of
livestock farms with high nitrogen emissions. Here, a subsidy is granted for the definitive and irreversible closure of livestock production on the condition that the same activity is not resumed elsewhere. Farmers in the vicinity of Natura 2000 areas (so-called "peak emitters") can be reimbursed
120 per cent of the value of the production capacity (livestock housing, feed silos, etc.), which is calculated based on a standard price per square metre, depending on the type of animal and the ageof the facility. In addition, 100 per cent compensation is given for the market value of production
rights and destruction costs.
Farmers keep their land and are allowed to use it for crop production. The government has allocated
EUR 975 million to the peak emitters scheme, which covers around 3,000 farmers. On 2 May, theEuropean Commission approved the scheme, which runs until 2028. By January 2024, more than
1,250 farms had voluntarily applied to join the scheme.77

If the scheme is approved in mid-2024, it is expected to open in mid-2026. The duration of the subsidy scheme can be considered limited to, for example, 12 months
for the collection of applications for participation and another 12 months for the actual decommissioning to ensure that the capacity closure scheme can quickly havean impact on the market. Combined with an approach where the subsidy is basedon standardised rates, such an arrangement is estimated to increase the likelihoodthat the EU Commission will approve the subsidy scheme.
Example of possible capacity closure of cattle production
It is proposed that the aid in the scheme for capacity closure should be determinedbased on the standard rates. This would ensure that the scheme is based on clear,transparent rules that are easy to administer and contribute to the fact that payment
will be made significantly faster.
This model shows a stylised example of a capacity closure subsidy scheme that includes the following subsidy measures where 100 per cent compensation is given:
1) Support for the dismantling of existing production capacity of cattle stables.
2) Support for the dismantling of existing production capacity of cattle.
3) Support for the dismantling of existing production capacity of cattle-related
equipment.
The subsidy for closing down stables, cattle and cattle-related equipment can becalculated by applying a standard rate per yearling cow, e.g. DKK 20,000 or DKK
25,000. These rates are determined by totalling the asset value of barns, cattle andcattle-related equipment and then dividing by the number of yearling cows on thefarms. At subsidy rates of up to DKK 20,000 and DKK 25,000 per yearling cow, respectively, it is estimated with great uncertainty that the farms that will choose toparticipate in the abandonment scheme possess cattle-related assets with a value
corresponding to 15 per cent and 30 per cent of the value of cattle-related assets
across all farms, respectively. 15 per cent and 30 per cent of the value of cattle-related assets across all farms.
The cattle farms that are expected to participate in the scheme are typically smaller
farms and have approx. 10 per cent or 23 per cent of all yearling cows and heifers
in Denmark.

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The calculated standard rates do not include the opportunity value of yearling cows
and heifers. The slaughter price for yearling cows and heifers is currently not deducted, which could be deducted from the standard rate to get a more accurate
calculation of the real value loss.
Table 7.22. Technical calculation of subsidy scheme for capacity closure
15 per cent of the cattle
30 per cent of cattle farms'
farms' cattle-related assets cattle-related assets
Subsidy per yearling cow

DKK 20,000

DKK 25,000

Number of yearling cows culled1

52,000 units.

120,000 units.

Cost of subsidy scheme

DKK 1.1 bn

DKK 2.9 bn

Note: There is considerable uncertainty in the estimate. The estimate is based on the total book values of livestock-related inventory, cattle and estimated value of livestock housing in cattle farms in 2021. It is assumed thatthe subsidy rate corresponds exactly to 100 per cent of the book value of the assets. Destruction costs and administrative costs are not taken into account in the subsidy scheme. 1) The heifers are also included in the closure, which is recognised in the subsidy amount. 2) Covers stables, cattle and cattle-related inventory.
Source: Own calculations based on accounting data from SEGES.

It should be noted that this example is for illustration purposes only. The final design,
costs and climate impact of a subsidy scheme for capacity reduction requires amore concrete assessment. Further work is needed to define exactly what specificelements the subsidy scheme should include.

7.13 Distribution and Employment
The terms of reference state that the Expert Group should analyse the economic
consequences associated with the models, including the effects on employment, as
well as the effects on social balance, including income distribution. This section
describes the effects on distribution and employment of introducing CO 2-eq taxes,
base deductions and possible requirements for technology use corresponding to theExpert Group's models.
Effects on distribution
The effect of the models on income distribution can be analysed by examining theimpact of changes in consumer prices and changes in wages and transfer incomes
as a result of the tax. Table 7.23 presents the average tax burden from changing
consumer prices and changing wages and transfer incomes as a percentage ofdisposable income across income deciles. The results show that the tax burden as ashare of disposable income is approximately equally distributed across income
deciles, which means that the effect on Gini is estimated to be 0. It should be notedthat the calculations do not take into account any derived effects on savings.
The above results should be seen in light of the following effects:•

The direct price effects on milk, meat, etc. when the tax is passed on in higher
sales prices hit low-income groups a little harder. This is because low-income
groups spend a higher proportion of their total consumption on taxed food compared to high-income groups.

•

Indirect price effects are where the prices of other goods and services fall aspart of the tax is passed on in lower wages, reducing production costs in therest of the economy. This benefits low-income groups relatively more, as they

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spend a larger proportion of their total consumption on other goods and services compared to high-income groups. As other goods and services make up
the vast majority of household consumption, the effect from indirect price effects will dominate over the effect from direct price effects.
Wage and transfer effects cover the fact that part of the tax is passed on tolower wages and that lower wages are reflected in the rate adjustment, which inturn leads to lower transfers. Since high-income households have a larger shareof wage income as disposable income (e.g. low-income groups receive moreincome from transfers on average), they are more affected by the wage decline.
If low-income groups have a higher proportion of transfer incomes, they willbear a greater share of the tax burden from this. The wage and transfer income
effects resulting from wage devaluation thus affect high- and low-income
groups in opposite directions, and overall, these effects are estimated to be distributionally neutral.

Table 7.23. The average change in real disposable income due to consumer price changes across income deciles,
per cent of total consumption
1

2

3

4

5

6

7

8

9

10

Avg.

Model 1
Direct priceeffects

-0.04

-0.03

-0.02

-0.02

-0.02

-0.02

-0.02

-0.02

-0.01

-0.01

-0.02

Indirect
price effects

0.13

0.11

0.10

0.10

0.09

0.08

0.08

0.08

0.08

0.07

0.09

Wage andtransfer income effects

-0.36

-0.36

-0.36

-0.36

-0.36

-0.36

-0.36

-0.36

-0.36

-0.36

-0.36

Overall impact

-0.26

-0.28

-0.28

-0.28

-0.29

-0.29

-0.30

-0.30

-0.29

-0.30

-0.29

Gini coefficient

-

-

-

-

-

-

-

-

-

-

0.00

Direct priceeffects

-0.02

-0.02

-0.02

-0.02

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

Indirect
price effects

0.08

0.06

0.06

0.06

0.05

0.05

0.05

0.05

0.05

0.04

0.05

Wage andtransfer income effects

-0.20

-0.20

-0.20

-0.20

-0.20

-0.20

-0.20

-0.20

-0.20

-0.20

-0.20

Overall impact

-0.15

-0.16

-0.16

-0.16

-0.17

-0.17

-0.17

-0.17

-0.17

-0.17

-0.16

Gini coefficient

-

-

-

-

-

-

-

-

-

-

0.00

-0.02

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

Model 2aModel 2b
Direct priceeffects

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Indirect
price effects

0.05

0.04

0.04

0.04

0.03

0.03

0.03

0.03

0.03

0.03

0.03

Wage andtransfer income effects

-0.13

-0.13

-0.13

-0.13

-0.13

-0.13

-0.13

-0.13

-0.13

-0.13

-0.13

Overall impact

-0.10

-0.10

-0.10

-0.10

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

-0.10

Gini coefficient

-

-

-

-

-

-

-

-

-

-

0.00

Direct priceeffects

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

Indirect
price effects

0.04

0.03

0.03

0.03

0.03

0.03

0.03

0.03

0.03

0.03

0.02

Wage andtransfer income effects

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

-0.11

Overall impact

-0.09

-0.09

-0.09

-0.09

-0.10

-0.09

-0.10

-0.10

-0.09

-0.10

-0.09

Gini coefficient

-

-

-

-

-

-

-

-

-

-

0.00

Direct priceeffects

-0.01

-0.01

-0.01

-0.01

-0.01

0.00

0.00

0.00

0.00

0.00

-0.01

Indirect
price effects

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

Wage andtransfer income effects

-0.04

-0.04

-0.04

-0.04

-0.04

-0.04

-0.04

-0.04

-0.04

-0.04

-0.04

Overall impact

-0.03

-0.03

-0.03

-0.03

-0.03

-0.03

-0.03

-0.03

-0.03

-0.03

-0.03

Gini coefficient

-

-

-

-

-

-

-

-

-

-

0.00

Model 3aModel 3b

Notes: Households are categorised into income deciles based on their disposable income. The direct price effect covers price changes on dairy, vegetables,
beverages, pork, cows, fish and poultry. The indirect price effect covers price changes on houses, cars, energy, services and other non-food products. Behaviouraleffects (substitution effects across products) are not included.
Source: Own calculations.

Effects on employment
Total employment in the economy will fall in the short term as a result of a CO2-eq
tax of DKK 750 per tonne on fertiliser, liming and livestock. Part of this is through theannouncement of the tax, as the anticipation of a future tax will cause food companies and farmers to reduce investments. This lowers the demand for labour that produces capital goods for agriculture. The introduction of the tax reduces agricultural
production, which reduces the demand for labour in agriculture. The weaker development of demand from capital goods and agriculture reduces the rate of wage

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growth. The relative wage decline, in turn, will gradually increase the demand for labour in the economy in general, with employment eventually rising back towards thestarting point so that there are no significant structural changes in employment.
Table 7.24 shows which industries will experience the largest decreases in employment in 2030 in terms of full-time employees as a result of the tax. In particular, animal production and ancillary industries are estimated to experience the largest declines. This is a natural consequence of the significant tax base. The decline in employment in agriculture is offset by a corresponding increase in jobs elsewhere in theeconomy, which is why the employment migrations in Table 7.24 are transitory.
Table 7.24. Employment effects in 2030 of CO2-eq taxes on livestock and fertiliser, change in full-time employees
Baseline in
2030

Model 1: DKK
750 pertonne of CO2eq (livestockand fertiliser)

Model 2a: DKK
750 per tonneof CO2-eq witha basededuction of
50 per centModel 2b:Model 3a:Model 3b:

DKK 750 per
tonne of CO2eq with a basededuction of
50 per cent forlivestock andrestructuring of
the hectare
subsidy

DKK 250 per
tonne of CO2eq or with abase deductionof 50 per centfor livestockand DKK 750
per tonne ofCO2-eq andbase deduction
on fertiliser

DKK 50 per
tonne of CO2eq with a basededuction of
50 per cent forlivestock andrestructuring of
the hectare
subsidy

Number (per cent)Cattle10,950Crop

12,650

Pigs

7,300

Pig slaughterhouses

8,700

Dairies

6,050

Cattle slaughterhouses

1,100

Other food industry

11,300Machine pools

2,800

Poultry

950

Bakeries

13,000

Poultry slaughterhouses

650-2,150-1,200-1,050-700-500(-19.7)(-11.1)(-9.5)(-6.3)(-4.6)-1,350

-900

-400

-700

-200

(-10.8)(-7.1)(-2.9)(-5.5)(-1.6)-1,300

-800

-600

-500

-250

(-17.6)(-10.9)(-8.1)(-6.5)(-3.4)-1,200

-750

-550

-450

-250

(-13.8)(-8.5)(-6.3)(-5)(-2.7)

-950

-500

-450

-300

-200

(-15.5)(-8.3)(-7.2)(-4.6)(-3.4)

-350

-200

-200

-100

-100

(-32.5)(-18.7)(-16.1)(-10.8)(-7.9)

-350

-200

-100

-150

-50

(-2.9)(-1.7)(-1)(-1.2)(-0.4)

-250

-150

-100

-100

-50

(-9.4)(-5.8)(-3.6)(-3.9)(-1.7)

0

0

0

0

0

(-)

(-)

(-)

(-)

(-)

0

0

0

0

0

(-)

(-)

(-)

(-)

(-)

0

0

0

0

0

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Horticulture

1,950

Total

77,450

(-)

(-)

(-)

(-)

(-)

50

0

0

0

0

(1.3)

(-)

(-)

(-)

(-)

-7,950-4,800-3,400-3,050-1,650(-10.2)(-6.1)(-4.3)(-3.8)(-2.0)

Note: Full-time employees are rounded to the nearest 50 people. The effects in the table are the change in the number of full-time employees in a given industry.
Therefore, the table does not indicate specific migration flows between industries or whether the employment table in a particular industry consists of the same
employees as before.
Source: Own calculations.

7.14 Effects on Land, Capital and Cultivation Value
The terms of reference state that the Expert Group must shed light on the economic
consequences associated with the models, including the effects and impact on
business. When a tax is imposed on agriculture, farmers' wealth is reduced throughreduced land and capital value, and future earnings are reduced through increased
operating costs. Subsidies can be used as a means to promoting technologicalchange and development, thereby reducing the decline in land and capital value
and the paradigm shift in business that may result from the application of taxes. The
consequences for agriculture must be seen in the context of current regulation andthe future overall regulation.
This section describes the effects on land, capital and cultivation value of introducing a CO2-eq tax on agriculture corresponding to the Expert Group's three modeltypes with effective taxes of DKK 750, 375 or 125 per tonne of CO 2-eq.
Effects on land and capital value
A tax on agriculture reduces the return that can be generated from a given amountof land and capital, causing a decline in the asset value of land and capital. The
decline in profits can be mitigated if agriculture has technological reduction options
that are cheaper than the tax, or if agriculture reduces the amount of fertiliser for theland in use (e.g. by changing the choice of crop). It should be noted that the total
land value of agricultural land (both in operation and fallow land) is estimated to be
DKK 210 bn in 2030 in the baseline.
Specifically, the calculations take the following into account: A tax results in lessneed for feed and less fertiliser. The lower demand for feed leads to a shift in crop
production away from feed production, and the lower amount of fertiliser increases
the price of fertiliser, which lowers the earnings of crop producers. This translates
into lower land values.
Intra-agricultural market effects:• Tax on livestock leads to fewer animals: The tax on animal husbandry lowers
the earnings per animal, reducing the number of animals.
• Fewer animals affect crop production: Crop producers sell crops in the form of
feed and bedding for livestock production, where there is limited competing
imports. This means that a decrease in livestock production as a result of a
CO2-eq tax will reduce the production value of crop production and thus thecontribution margin on land and capital, see Tables 7.25 and 7.26, if othercrops with the same contribution margin cannot be produced. It reduces theland value for crop producers.

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Reduced animal manure increases the price of fertiliser: Livestock producers
supply manure for crop production, and prices in this market affect profits onland and capital. A decline in livestock production due to a CO2-eq tax will
increase the price of livestock manure (due to the reduced supply), further
lowering the contribution margin and thus the land value for crop producers.

Internal land market:• Organic and conventional agriculture are affected differently: A uniform CO2-eq
tax will constitute a larger share of the production value in conventional crop
production relative to organic crop production, which in isolation makes organic
production relatively more profitable as a result of the tax. The conditions fororganic area subsidy further restrict the use of organic fertilisers on organic
areas compared to the current harmony requirement. This means that moreorganic areas are needed to spread the same amount of livestock manure,which is why a drop in land values will theoretically affect organic farmers
relatively more. In addition, organic farmers cannot use feed additives that
reduce emissions and the tax per animal.
Other demand:• Crops for food industries: Crops are sold to food industries, directly for export
and to other sectors of the economy (e.g. straw for energy production for theutilities sector). Thus, the contribution margin is affected by competitive
conditions for both agriculture and food industries as well as the effects of a
possible tax on the rest of the economy.
However, several of the Expert Group's tax models include subsidy schemes forland use change in the form of transition from agricultural land (grazing land or
cropland) to wetlands or forest. In particular, the recommended subsidy for afforestation of 250,000 hectares, see Section 3.3, can have significant effects on land
values:1.

Effect of compensation: Many of the lands that lose or have a reduced arable
value after a tax could be converted to forest and receive income from subsidies. In addition, the compensation rate may be higher than the existing contribution margins on some land. This will collectively capitalise in the land values
in an upward direction.

2.

Supply effect: When land is converted to other land uses, the supply of crop rotation land is reduced. Less land in rotation increases the price of crops andharmony area, which capitalises in the land values in an upward direction. Increased supply of wood products due to increased forest area reduces theprice of wood products, which capitalises in the land values in a downward direction. The result of afforestation, then, is that an immediate drop in price turns
into an increase in land values that is higher than the subsidy given for afforestation.

Table 7.25. Change in land values in 2030 with different tax models
Model 1Model 2aModel 3aTax on livestock, liming and fertiliser, per
cent

-16.8

-6.2

-3.8

Tax on livestock and liming, per cent

-10.1

-7.3

-4.4

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Tax on livestock, liming and fertiliser + subsidies for afforestation, per cent

-8.8

4.1

7.2

Note: The effect from subsidies for afforestation is under the assumption that the land converted to forest has anaverage cultivation value compared to agricultural land in rotation.
Source: Own calculations.

If a significant area is converted to afforestation, the demand for farm buildings andmachinery will decrease, reducing the value of the current capital stock, see Table
7.26.
Table 7.26. Changes in capital value in 2030 with different tax models
Model 1Model 2aModel 3aTax on livestock, liming and fertiliser, per
cent

-13.7

-8.3

-5.0

Tax on livestock and liming, per cent

-11.0

-5.8

-2.7

Tax on livestock and fertiliser + subsidies forafforestation, per cent

-13.3

-8.1

-5.1

Note: The effect from subsidies for afforestation is under the assumption that the land converted to forest has anaverage cultivation value compared to agricultural land in rotation. Capital value is the present value of the future
payments from the agricultural assets of buildings and machinery, i.e. the discounted value of future net paymentsthat the assets are expected to generate in the normal course of business.
Source: Own calculations.

Effects on cultivation value
With the introduction of a CO2-eq tax, there will be a direct decrease in the cultivation value per hectare, i.e. the return on land, by taxing fertiliser (after behaviouraladjustment). As explained above, the CO2-eq tax may also have other effects on thecultivation value via other channels, such as reduced animal production's importance for livestock manure and crop composition. If the cultivation value (plusany subsidies) falls below the value of the alternative use, it is expected that the land
will switch to the alternative use.
Alternative uses other than cultivation would be afforestation, wetland restoration ofcarbon-rich agricultural land, renewable energy production or fallowing where theland has no productive use.
How much land is taken out of production depends on the spread in land productivity and how much the return on land is affected by a tax. There is a difference in the
degree of productivity of soils that makes some soils more profitable to farm thanothers. Figure 7.3 shows the cultivation value of land in rotation, as measured by the
surplus it is estimated to generate. The difference in land yields has an impact on
how farmers react to higher costs as a result of a CO2-eq tax, including whether tostop cultivation on land with relatively low yields.

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Figure 7.3. Supply curve for land – distribution of cultivation value per hectare
per year
DKK pr.
hectare
8000
7000
6000
5000
4000
3000
2000
1000
0
-1000
0

500.000

1.000.000
1.500.000
Hectares in rotation

2.000.000

2.500.000

Note: Farming value is stated as contribution margin II, which is earnings minus variable and partially variable costs. It
is based on 2013-18 prices. Cultivated land refers to land that is cultivated, whereas land that is not cultivated is used
for other purposes (e.g. fallow land). Cultivated land makes up about 2.2 million hectares of the total agricultural areaof about 2.7 million hectares.
Source: Own calculations and IFRO Documentation 2022 4.

7.15 Examples of Typical Farmers and Bankruptcy
Risk
Type numbers and example calculations for average farm types

Below are a number of examples that illustrate an average farm's immediate impact
at each of the tax levels (before behavioural response and adaptation). For this reason, the examples do not take into account that the farmer can, for example, reduce
their tax burden by utilising technological means. In addition, the farmer is expected
to be able to partially pass on the tax burden in higher sales prices, which reduces
the burden.
Table 7.27 shows examples of figures for an average farm across farm types, including turnover, number of livestock and agricultural land. It should be noted thatthe farm types in Table 7.27 do not correspond one-to-one to the emission sourcesin the modelling calculations in Chapter 2, as the model is broken down at the industry level and not by farm type, like the example calculations below. In the accounting data used for the example calculations, a single farm will be assigned to an
overall farm type if it accounts for 50 per cent or more of the total standard output.
For this reason, the economic burden of agricultural products can vary from farm tofarm. For example, a cattle farm in Table 7.27 will typically also have crop production and will therefore be affected by both a CO2-eq tax on cattle and fertiliser usage.
Table 7.27. Description of average farm types (full-time farms)
Crop,
conv.

Crop,
organic

Dairycattle,
conv.

Dairy
cattle,organic

Fattening
pigs,
conv.

Piglets,
conv.

Pigs,
organic

Agriculture

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Number

Unit

2,139

222

1,998

363

876

Revenue

DKK
1,000

5,132

3,734

10,067

10,593Operatingprofit/loss1)

DKK
1,000

1,029

600

1,312

Emissions

Tonnes
of
CO2eq

246

130

- Of whichfrom livestock

Tonnes
of
CO2eq

19

Number ofcows

Yearling

Number ofheifers

775

56

7,599

12,405

17,194 10,655

9,307

1,451

2,057

2,317

1,031

1,280

2,052

1,690

739

849

380

957

26

1,863

1,538

576

702

287

773

1

1

242

199

0

1

0

74

Yearling

1

4

222

187

1

1

0

69

Sows

Yearling

1

0

1

1

62

1,028

214

137

Fattening
pig

Yearling

100

51

40

36

13,363

1,828

3,930

2,453

Area under grain

Hectares

198

107

48

61

163

161

112

135

Area under coarse
feed

Hectares

17

45

136

185

7

7

42

56

Clay soil

Hectares

182

112

45

34

123

115

11

111

Sandy soil

Hectares

134

127

146

227

101

104

179

132

Note: Only full-time farms are included in the table. The operating branches in the table are a selection of the largest
types of operating branches. There are other types of operating branches, such as other cattle, integrated pig farms
and mixed farm types. The other types of agriculture are included in the column with agriculture. Revenue andoperating profit are calculated based on averages over the period from 2017-2021. The number of livestock,emissions and amount of land are calculated based on 2021. Averages in the table are based on a sample fromSEGES weighted up to the representative population in agriculture. Operating profit is calculated before owner
remuneration and after financial expenses.
Source: Own calculations based on SEGES' accounting data.

Table 7.28 illustrates examples of the immediate tax burden for average farms(before adaptation and behaviour) across farm types. This is calculated based ontype numbers from Table 7.27. The examples are calculated for models 1-3.
The immediate tax payment is gradually reduced from model 1 to model 3 as theeffective tax rate is reduced. However, it is limited how much the immediate tax
payment of crop farms is reduced from model 2a to model 3a, as the effective tax
rate for fertiliser usage is unchanged in the two models. Across farm types, theaverage dairy farm has the largest immediate tax payment and thus the largest
negative change in operating profit, which is due to the fact that dairy cattle haveGreen Tax Reform

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higher CO2-eq emissions and thus a larger immediate tax payment as a result of a
CO2-eq tax. It should also be noted that the immediate burden is lower whenrestructuring direct agricultural subsidies (variant b) relative to a fertiliser tax with abase deduction (variant a).
Table 7.28. Example calculations with immediate burden and immediate change in result for different types of
farms
Crop,
conv.

Crop,
organic

Dairy cattle,
conv.

Dairy cattle,
organic

Fattening
pigs,
conv.

Piglets,
conv.

Pigs,
organic

Agriculture

Model 1: Tax of DKK 750 per tonne of CO2-eq on fertiliser, liming and livestock
Immediateburden(DKK 1,000)

185

98

1,539

1,268

554

637

285

718

Immediatechange inoperatingprofit (per
cent)

-18

-16

-117

-87

-27

-27

-28

-56

Model 2a: Tax of DKK 750 per tonne of CO2-eq on fertilisers, liming and livestock, incl. a base deduction of 50 per cent
Immediateburden(DKK 1,000)

92

49

770

634

277

318

143

359

Immediatechange inoperatingprofit (per
cent)

-9

-8

-59

-44

-13

-14

-14

-28

Model 2b: Tax of DKK 750 per tonne of CO2-eq with a base deduction of 50 per cent for livestock and restructuring of the hectare subsidy
Immediateburden(DKK 1,000)

21

16

710

586

226

272

113

301

Immediatechange inoperatingprofit (per
cent)

-2

-3

-54

-40

-11

-12

-11

-24

Model 3a: Tax of DKK 250 per tonne of CO2-eq on livestock and DKK 750 per tonne of CO2-eq on fertilisers and liming, incl. a base deductionof 50 per cent
Immediateburden(DKK 1,000)

88

42

304

249

133

143

71

166

Immediatechange inoperatingprofit (per
cent)

-9

-7

-23

-17

-6

-6

-7

-13

Model 3b: Tax of DKK 250 per tonne of CO2-eq with a base deduction of 50 per cent for livestock and restructuring of the hectare subsidy

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Immediateburden(DKK 1,000)

17

10

245

202

82

97

42

108

Immediatechange inoperatingprofit (per
cent)

-2

-2

-19

-14

-4

-4

-4

-8

Note: Only full-time farms are included in the table. The calculations are based on the effective tax rate and type numbers from Table 7.27.
Note: Operating profit is before owner remuneration and calculated as an average for 2017-2021
Source: Own calculations based on SEGES' accounting data.

Example calculations of effects on bankruptcy risk at different tax levels
An analysis has been made of the consequences of the presented models for fulltime farms on the immediate bankruptcy risk of the farms.
As a starting point, 6 per cent of the total turnover in agriculture is estimated to beamong farms at high risk of bankruptcy. Table 7.29 shows an estimate of the
proportion of turnover in agriculture that immediately moves into farms at high risk ofbankruptcy in each of the models presented. This includes the immediate burden of
the CO2-eq tax and change in capital value (incl. afforestation). Price and volume
adjustments are not taken into account in the calculations.

Table 7.29. Immediate changes in bankruptcy threat, in per cent of revenue
Model 1Model 2aModel 2bModel 3aModel 3b

Crops

6

1

0

-1

-1

Cattle

25

11

10

1

1

Pigs

12

2

2

0

0

Other
livestock

7

0

0

0

-1

Mixed

1

0

0

0

0

Full-timeoverall

15

5

4

0

0

Note: The calculations for changes in the threat of bankruptcy take into account the immediate capital income effectof the introduction of the CO 2-eq tax and technological reduction options. Adjustment is thus not taken into account.
Source: Own calculations based on SEGES accounting data

In agriculture, there are approx. 7,600 full-time farms, of which it is estimated thatapprox. 360 farms are at high risk of bankruptcy to begin with. Table 7.30 shows an
estimate of the number of farms that would immediately become at high risk ofbankruptcy in each of the models presented. This includes the immediate burden of
the CO2-eq tax and change in capital value (incl. afforestation). Price and volume
adjustments are not taken into account in the calculations.
Table 7.30. Immediate changes in threat of bankruptcy, number of farms
Model 1
Crops

Model 2a230

Model 2b90

Model 3a70

Model 3b50

50

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Cattle

590

240

240

20

<20

Pigs

200

30

30

0

0

Other
livestock

<20

0

0

0

0

Mixed

<10

0

0

0

<10

Full-timeoverall

1,040

360

340

70

70

Note: The calculations for changes in the threat of bankruptcy take into account the immediate capital income effectof the introduction of the CO 2-eq tax and technological reduction options. Adjustment is thus not taken into account.
Source: Own calculations based on SEGES accounting data

Example calculation for a tax of DKK 125 per tonne of CO2-eq after adjustment
The following is an example calculation for model 3a, i.e. an effective tax rate of DKK
125 per tonne of CO2-eq for livestock and DKK 375 per tonne of CO2-eq for fertiliser
usage, where the consequences for livestock and crop producers after adjustingproduction are also examined. It should be noted that the threat of bankruptcy does
not mean that the farm is actually going bankrupt. Farms may well be at risk ofbankruptcy for several years. Box 7.13 describes the used definition of the risk ofbankruptcy.
Box 7.13
Definition of threat of bankruptcy
The threat of bankruptcy is defined as a situation in which farms need liquidity but have a debt ratiothat makes this difficult. The bankruptcy situation is thus determined by two factors: the debt ratio
and liquidity. The debt ratio is calculated as the debt's share of the total asset value, while liquidity
corresponds to the result after financing, depreciation, amortisation and owner remuneration, including non-agricultural income. Liquidity is made into a general measure by relating it to gross proceeds(revenue).
Four levels of bankruptcy threat are used: Strongly at risk of bankruptcy, at risk of bankruptcy, somewhat at risk of bankruptcy and not at risk of bankruptcy. 'Strongly at risk of bankruptcy' means a debt
ratio of over 100 per cent (insolvency) and a negative liquidity. However, prolonged negative earnings that erode equity can lead to more farms being at risk of bankruptcy in the future. Conversely,'not at risk of bankruptcy' means that a farm has equity and/or a result that means it is not in immediate difficulty. In between these two situations are 'at risk of bankruptcy' and 'at risk of bankruptcy to alesser extent', which are characterised by combinations of debt ratios and liquidity, which can makefarms vulnerable to declines in earnings or in asset values.
The analysis focuses on how many more farms are threatened with bankruptcy based on the different tax levels. A tax will have an effect on both the debt ratio via decreases in land and other asset
values and on liquidity due to the increased cost.
Full-time farms and not part-time farms are analysed in terms of bankruptcy risk, as full-time farms
are expected to be run professionally, while part-time/hobby farms may have other purposes. This isbased on accounting figures for 2021 from SEGES' accounting database, where a cyclical smoothing of turnover has been made on the basis of the period 2015-21.

The analysis shows that 360 farms, corresponding to approx. 5 per cent of farms,
are at high risk of bankruptcy before a tax is introduced, and these farms accountfor 6 per cent of turnover. Basically, 1,630 farms, corresponding to 21 per cent of
the farms, are at risk of bankruptcy to a lesser or greater extent, and these farms
account for 27 per cent of the turnover.
The immediate effects have been calculated as a result of the following:

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Page 230

Immediate capital effect of a CO2-eq tax: With the introduction of a CO2-eq tax,
farms are expected to experience a capital loss in the form of loss of value ofland and other assets (e.g. machinery and buildings). A significant part of thecapital loss can be expected at the time of the announcement.
Immediate income effect of the introduction of the CO2-eq tax and technologicalreduction options: Agricultural enterprises' costs increase as a result of theCO2-eq tax, and the technological reduction options that are immediately expected to be used in the event of a tax (feed additives, etc.) are included.
Short-term effect with price and volume adjustment: This step includes increases in sales prices and decreases in production volumes. The price andvolume correction is calculated so that it occurs proportionally on all farms. This
will not be a realistic adjustment, but shows in a stylised way how a farm will beaffected by the average volume adjustment (production decline).

2.

3.

The total turnover in agriculture varies over the years, but in recent years it has
been in the region of DKK 80-85 bn. Based on data for 2021, where the businesscycle is levelled out, agricultural turnover in the baseline before the introduction of
the tax is calculated at DKK 77 bn. Figure 7.4 shows an estimate of the expecteddevelopment in total revenue by bankruptcy risk for the immediate capital effect (I),
immediate income effect (II) and short-term effect with price and volume adjustment(III). It can be seen that the share of the total turnover of farms threatened withbankruptcy (6 per cent) is unchanged after the introduction of the tax. Although thetax in isolation has a negative impact on earnings and assets in the form of buildings
etc., there is a parallel increase in asset value in the form of an increase in the land
values of 7.2 per cent, see Table 7.25 in Appendix 7.14, as a result of, among otherthings, subsidies for afforestation, which can have significant effects on the land values, which overall mitigates the impact on bankruptcy risk.
Figure 7.4 Development in total revenue by bankruptcy risk, DKK bn.
80
70
60
50
40
30
20
10
0

Før afgiftI)Immediate capitaleffectII)Immediate income
effectIII)Total effect after priceor volume adjustment

Severely threatened with bankruptcy

Threatened with bankruptcy

Threatened with bankruptcy to a lesser degree

Not in danger of bankruptcy

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Note: The figure shows examples of how the gross dividend is distributed by bankruptcy risk for different scenarios in
the calculations. In step III, price and volume adjustments are taken into account. This results in a volume decline of
DKK 6 bn, which is assumed to be distributed equally across all farms.
Source: Own calculations based on SEGES accounting data

Table 7.31 shows that the share of revenue distributed in farms threatened withbankruptcy is generally unchanged as a result of a tax of DKK 125 per tonne ofCO2-eq.
Table 7.31. Share of total turnover distributed in farms highly threatened with bankruptcy at a CO2-eq tax of DKK
125 per tonne (per cent)
Branches of operation0) Before taxI) Immediate capitaleffectII) Immediate income
effectIII) Total effect after
price and volume
adjustment

Crops

1

3

3

3

Cattle

13

12

12

12

Pigs

3

3

3

3

Other livestock

4

4

4

4

Mixed

0

0

0

0

Full-time overall

6

6

6

6

Note: The table shows the figures for all full-time farms.
Source: Own calculations based on SEGES' accounting data.

In the long term, volume and price adjustments are expected. The volume adjustment can be done by the individual farms reducing their production or by certain
farms stopping altogether, for example, in connection with a bankruptcy. With lower
production, agriculture can pass on some of the cost increases to the selling price.
For calculation purposes, it is assumed that the price and volume correction takes
place for all farms with a proportional reduction, and that no specific farms take thevolume decline. The scenario includes a reduction in revenue corresponding to 3
per cent in model 3a when price and volume adjustments are taken into account.
Looking at the volume adjustment alone, the reduction in production corresponds toa reduction in the number of farms by 450.
There is great uncertainty about how large a proportion of farms will actually gobankrupt and how the tax will affect the remaining existing farms. A farm can bethreatened with bankruptcy for many years without necessarily going bankrupt. Often, the farm will be bought and continued, and there may therefore be a restructuring or change in production on the individual farm, and thus a bankruptcy for the individual farmer does not necessarily mean a decline in production for agriculture asa whole. Thus, there is not necessarily a direct correlation between the number offarms, the increased threat of bankruptcy from a tax and the structural effect, understood as a structural decline in production as a result of a tax.
Considerations on the debt structure of farms
There is a close correlation between the age of farmers and the debt ratio of farms,
with young farmers typically having higher debt than older farmers, see Figure 7.5.
This may be due to both the fact that younger farmers have invested more in thefarm and that they have had the farm for a shorter number of years after the takeover and therefore have not had as many years to consolidate the farm. If there is nota strong enough correlation between higher debt ratios and increased productiv-

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ity/lower CO2-eq emissions, there is a risk that farms with high debt ratios will become bankrupt with the introduction of a tax. This can increase the risk of bankruptcy among younger/newly established farmers.
Conversely, there may be a tendency for the most productive/climate-efficient farms
to also be among those with the highest debt ratio. This may be because older production facilities have a positive contribution margin and can, therefore, make operations profitable if the debt is low, while it may not necessarily be profitable to invest
in new facilities on the farm in question, e.g. due to a lack of scale. It will often be anolder farmer who runs these farms. Against this background, there may also be acorrelation between age, low debt ratio and age of production facilities. A tax on
CO2-eq emissions can reduce the contribution margin of these plants to such an extent that these types of farms are not profitable, even if the debt is low.
The Expert Group has not had the opportunity to make an assessment of the prevalence of the two illustrated correlations, which is why it is difficult to assess in advance how the structural change will be put together.
Figure 7.5. Debt ratios for full-time farms in 2021 by age of owner
100
90
80
70
60
50
40
30
20
10
0
Debt ratio
Under age 35

Ages 35-44

Ages 45-54

Ages 55-64

Over 65 år

Source: Own calculations based on SEGES accounting data

Geographical impact
The following shows the estimated decline in gross value added across regions foreach of the Expert Group's main models, see Table 7.32. In all regions of thecountry, agriculture accounts for a limited share of production, which is why allmodels have a limited effect on the geographical income balances in Denmark.
Table 7.32. Decline in GVA across regions due to production decline in primary
agriculture
GVA in the starting point

Region:Total(DKK
million)Agriculture(DKK
million)Agriculture's
shareof total

Decline in GVA, share of total GVA, per cent

Model
1

Model
2a

Model
2b

Model
3a

Model
3b

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GVA
(Per
cent)

The cityof Copenhagen

589,800

0

0.0

0.0

0.0

0.0

0.0

0.0

Greater
Copenhagen357,700

100

0.0

0.0

0.0

0.0

0.0

0.0

North
Zealand155,800

300

0.2

0.0

0.0

0.0

0.0

0.0

Bornholm

10,500

400

3.8

0.9

0.6

0.3

0.4

0.2

East
Zealand

68,700

400

0.6

0.2

0.1

0.1

0.1

0.0

West
and
South
Zealand

153,200

4,100

2.7

0.7

0.4

0.2

0.3

0.1

Funen

150,300

2,900

1.9

0.5

0.3

0.2

0.2

0.1

South
Jutland286,600

5,700

2.0

0.5

0.3

0.2

0.2

0.1

East Jutland

332,200

4,100

1.2

0.3

0.2

0.1

0.1

0.1

West
Jutland167,200

7,500

4.5

1.1

0.7

0.4

0.5

0.2

North
Jutland189,600

4,400

2.3

0.6

0.4

0.2

0.3

0.1

Total

2,461,600

29,900

1.2

0.3

0.2

0.1

0.1

0.1

Note: GVA in the starting point is the 2022 figure from Statistics Denmark. The decline in GVA is estimated for 2030.
The calculations do not take into account any change in GVA due to production decline in the secondary industry.
Source: Own calculations.

7.16 Financial Stability
The financial risks associated with a CO2-eq tax have been assessed by Danmarks
Nationalbank in connection with the preparation of this report. It is assessed that
Danish banks and mortgage credit institutions are generally well-equipped to handle
the potential losses that may arise as a result of a CO2-eq tax on agriculture. This isdue to, among other things, a high level of security in the underlying mortgages andongoing earnings.
However, there are differences between the individual institutions' exposures tofarms threatened with bankruptcy. Danmarks Nationalbank finds that individual
institutions may need to utilise their excess capital adequacy to cover potential

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losses. However, this depends on which tax rate is adopted politically, as well as theextent of compensation. If the proceeds of a tax are returned directly to the industry,
the risk of loss for the institutes will be significantly reduced. The overall
methodology behind the analysis is described in Box 7.14.
A gradual implementation of the tax, e.g. from 2027 to 2030, would be favourable
for financial stability. This allows institutions to absorb potential losses over several
years with current earnings, and fewer credit institutions will therefore need to utilise
their excess capital adequacy. In addition, it gives institutions more time to adjust
their capital planning and business model, and agricultural customers more time toadapt their production.

Box 7.14
Summary of Danmarks Nationalbank's analysis of financial risks associated with the introduction of a CO2-eq tax on agriculture
Danmarks Nationalbank's calculations are based on, among other things, accounting data from a
proportion of Danish farms for the period 2019-2021. The derived consequences of a CO2-eq tax,
such as a drop in asset prices on land and buildings, are based on calculations in GreenREFORM,
which is an environmental and climate economic model for the Danish economy developed byDREAM.
The analysis consists of calculating the exposures of banks and mortgage credit institutions to farms
threatened with bankruptcy as a result of a CO2-eq tax. At the same time, the institutions' ability tocover potential losses on lending is assessed. A portion of the potential loss on loans to farms threatened with bankruptcy will already be recognised as impairment losses reserved to cover expected
losses on the loans. At the same time, the institutions have a significant security in the underlying
mortgages. Credit institutions have two additional defences against potential losses. Firstly, the institution's current earnings can cover the loss. If current earnings are not sufficient, the institution willthen utilise its excess capital adequacy. Excess capital adequacy is the excess capital that an institution has available over and above the capital requirement that the institution is required to hold by theauthorities.

7.17 Description of Export Elasticities
This section explains how export elasticities in the calculations are determined andthe magnitudes of the elasticities used in the sensitivity analyses.
The size of export elasticities is important as the demand for output from a given industry is often dominated by the reaction of foreign trade when dealing with a small
open economy like Denmark. Industry-specific elasticities describe the reaction inexports, and the reaction in imports is described by substitution between Danish
and imported goods and services from the same industry in the outermost branching of the consumption functions. 78

Kirk, J. S. and Hansen, K. H. (2023). "Elasticiteter og markedsvilkår i GrønREFORM" (Elasticities and market conditions in GreenREFORM)

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Fontagné et al. (2022)
The Expert Group has chosen to base its impact assessments on Fontagné et al.
(2022). 79 The export elasticities from Fontagné et al. (2022) are based on a tariffstudy and should reflect the long-term elasticity. Fontagné uses IV cross-sectional
analysis to estimate trade elasticities at the product level, where tariffs are the instrument for price differences. Tariff rates generally vary between 0-20 per cent andcan thus be compared to the relevant cost shocks in the Expert Group's models.
Data covers tariffs and trade flows in the period 2001-2016 between 189 exporting
countries and 152 importing countries across 5,052 product categories (HS6grouping). As tariffs are very consistent over time, these estimates can be considered true structural long-term assessments.
Figures 7.6 and 7.7 show that Fontagné's estimated elasticities are generally between 3 and 10.
Figure 7.6. Fontagné distribution of export elasticities for all industries

Note: The graph shows the distribution of export elasticities in Fontagné et al. (2022).
Source: Fontagné, L., Guimbard, H., and Orefice, G., (2022) 'Tariff-based product-level trade elasticities', Journal ofInternational Economics.

See, for example, Fontagné, L., Guimbard, H., and Orefice, G., (2022) 'Tariff-based product-level trade elasticities',
Journal of International Economics.

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Figure 7.7. Fontagné distribution of elasticities for agriculture

Note: The graph shows the distribution of export elasticities in Fontagné et al. (2022) for agriculture and foodproduction.
Source: Fontagné, L., Guimbard, H., and Orefice, G., (2022) 'Tariff-based product-level trade elasticities', Journal ofInternational Economics.

The export elasticities for goods-producing industries are determined based on export elasticities (on 6-digit product codes) from Fontagné et al. (2022), which areweighted together to industry level based on the distribution of each industry's exports on the same products as in the national accounts. The industry-specific average export elasticities for agriculture and the food industry are shown in Table 7.33.
Table 7.33. Average export elasticities of the agriculture and food industry in the Expert Group's impact assessments
Average elasticity

Export share

Crop production, conventional

5.36

21.5%

Crop production, organic

5.36

21.1%

Horticulture

7.50

17.2%

Cattle farming

8.11

2.6%

Pig farming

6.41

26.9%

Poultry

6.41

17.2%

Dairy

5.46

50.7%

Bakery

6.67

21.2%

Other food industry

6.93

36.9%

Slaughterhouse, cattle

5.69

53.1%

Slaughterhouse, pigs

12.10

61.3%

Slaughterhouse, poultry

5.84

27.6%

Note: The export elasticities shown are weighted together to industry level based on export estimates at product level. The export estimates at the product level maska large underlying variation. Note also that the estimates for the animal industries are largely the same for organic and conventional producers, which is why only one
overall estimate is reported for these despite the division in GreenREFORM.

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Source: BACI database80 and Fontagné, L., Guimbard, H., and Orefice, G., (2022) 'Tariff-based product-level trade elasticities', Journal of International Economics

The average export elasticities mask a large underlying variation in export elasticities
at the product level. In the dairy industry, for example, the average elasticity is 5.46,
which means that drinking milk has an estimated export elasticity of close to 10 (lower
market power) compared to butter and cheese, which have estimated export elasticities of around 3 and 5 (higher market power). Meat powder, residual products (suchas tongues), etc. all have an elasticity above 20. However, weighted together, theexport elasticities will be between approx. 5-10. Only 9 per cent of Danish agricultural
exports are estimated to have an export elasticity above 15 and 2 per cent above 20
in Fontagné et al. (2022).
The variation can partly be explained by differences in transport costs and shelf life,
as it can be seen that milk powder and meat powder have the highest elasticity values for dairies and slaughterhouses, respectively. In addition, differences in brandand bulk goods can also explain parts of the variation, as, for example, milk andmeat powder must be described as bulk goods.
The size of the average export elasticities harmonises well with the general level ofgoods export elasticities and the empirical literature in general. See, for example,
Hertel et al. (2007)81 and a review of the literature by Boehm et al. (2023)82 and Anderson et al. (2004)83.
As the Expert Group's estimated export elasticities are assessed to be structural/long-term, a certain amount of inertia in the consumption reaction should, inprinciple, be taken into account based on the expectation that the short-term elasticity is smaller than the long-term. The Expert Group has not had access to data on
the speed of consumption reactions for food exports and has therefore disregarded
export inertia in the calculations. In the MAKRO modelling, work is underway to estimate export inertia for the Danish economy as a whole, but these are not necessarily accurate for food exports, which are expected to have faster consumer reactions than other exports (of medicine, furniture, machinery, etc.). If the preliminary
assumptions from MAKRO's export inertia are used in the Expert Group's assumptions, this would result in a maximum decrease in reductions in 2030 of 0.2 million
tonnes in model 1, 0.1 million tonnes in model 2 and less than 0.1 in model 3. Export
inertia is thus not considered to have significant implications for the models in practice, but will need to be addressed in the future model development in GreenREFORM.

The database is documented in BACI: International Trade Database at the Product-level: The 1994-2007
Version80

Hertel, Thomas, Hummels, David, Ivanic, Maros, Keeney, Roman, (2007) ‘How confident can we be of CGEbased assessments of Free Trade Agreements?’, Economic Modelling.

81

Boehm, Christoph E., Andrei A. Levchenko, and Nitya Pandalai-Nayar. "The Long and Short (Run) of Trade Elasticities." American Economic Review 113.4 (2023): 861-905. Note that Boehm et al. (2023) themselves find significantly lower elasticities.

82

83

Anderson, James and Eric van Wincoop. 2004. “Trade Costs.” Journal of Economic Literature 42 (3):691–751.

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Figure 7.8. Estimates of export elasticity by product group, primary and food industry (Expert Group's central estimates based on Fontagné et al. (2022))

Note: The graph shows the distribution of export elasticities in Fontagné et al. (2022) for agriculture and foodproduction in relation to the Danish export shares of total Danish agricultural and food exports.
Source: Fontagné, L., Guimbard, H., and Orefice, G., (2022) 'Tariff-based product-level trade elasticities', Journal ofInternational Economics. BACI: International Trade Database at the Product-level: The 1994-2007 Version

Feenstra et al. (2018)
In previous publications84, GreenREFORM has estimated the export elasticities forgoods-producing industries at detailed product level (6-digit product codes), basedon Feenstra's method.85
Figures 7.9 and 7.10 show that the average export elasticity for dairies and slaughterhouses masks a large underlying variation in export elasticities at the productlevel. Figure 7.9 shows that almost 50 per cent of dairy exports consist of cheese,while butter and milk powder account for around 10 per cent of exports. Figure 7.10
shows that approx. 2/3 of slaughterhouse exports consist of fresh and frozen pork.

See "Elasticiteter og markedsvilkår i GrønREFORM" (Elasticities and market conditions in GreenREFORM), and"Estimering af udenrigshandelselasticiteter i MAKRO" (Estimation of foreign trade elasticities in
MACRO), Kronborg, Poulsen and Kastrup 2020 for documentation of the estimation method

84

Feenstra, R., Luck, P., Obstfeld, M. and Russ, K. (2018), 'In Search of the Armington Elasticity', Review of Economics and Statistics 100(1), 135-150. and Feenstra, R. C. (1994), ‘New product varieties and the measurement of international prices’, American Economic Review 84, 157–177.

85

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Figure 7.9. Estimated product-specific export elasticities for dairies(Feenstra's method)

Note: The graph shows the distribution of export elasticities in Fenstra et al. (2018) for agriculture and food production
in relation to the Danish export shares of total Danish agricultural and food exports.
Kilde: Feenstra, R., Luck, P., Obstfeld, M. and Russ, K. (2018), ‘In Search of the Armington Elasticity’, Review of
Economics and Statistics 100(1), 135–150, and Feenstra, R. C. (1994), 'New product varieties and the measurementof international prices', American Economic Review 84, 157-177. "Elasticiteter og markedsvilkår i GrønREFORM"(Elasticities and market conditions in GreenREFORM), and BACI: International Trade Database at the Productlevel: The 1994-2007 Version

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Figure 7.10. Estimated product-specific export elasticities for slaughterhouses(Feenstra's method)

Note: The graph shows the distribution of export elasticities in Fenstra et al. (2018) for agriculture and food production
in relation to the Danish export shares of total Danish agricultural and food exports.
Kilde: Feenstra, R., Luck, P., Obstfeld, M. and Russ, K. (2018), ‘In Search of the Armington Elasticity’, Review of
Economics and Statistics 100(1), 135–150, and Feenstra, R. C. (1994), 'New product varieties and the measurementof international prices', American Economic Review 84, 157-177. "Elasticiteter og markedsvilkår i GrønREFORM"(Elasticities and market conditions in GreenREFORM), and BACI: International Trade Database at the Productlevel: The 1994-2007 Version

Feenstra's method calculates averages (moments) over time. Therefore, the estimated elasticity can be interpreted as a weighted average of the short and longterm ('medium-term'). The data used (BACI) covers the period 1995-2020 (25years). Thus, the effect may be lower than the "pure" long-term elasticity. Fontagné
et al. (2022) use an IV cross-sectional analysis to estimate trade elasticities at the
product level, where tariffs are the instrument for price differences. As tariffs arevery consistent over time, these estimates can be considered true structural longterm assessments. For the agricultural sector, Fontagné et al. (2022) find estimatesthat are approx. 20-30 per cent higher than Feenstra's method.
A new study by Boehm et al. (2023), The Long and Short (Run) of Trade Elasticities,
estimates export elasticities based on event studies of tariff changes. They generallyfind low elasticities (in the order of 2 in the long run) and generally argue that
Feenstra and previous studies overestimate trade elasticities by not including bilateral fixed effects.86 Their cross-sectional estimates (excluding bilateral fixed effects)of trade elasticities are between 4-7 (consistent with Feenstra, Fontagné and otherprevious studies). However, the lower estimates for bilateral fixed effects may also
be due to a general attenuation bias increase in the event study specification.87

Including bilateral fixed effects means that a constant for the countries' existing trade between each other is included in the regression to account for unobservable constant bilateral trade preferences between the countries.
This will need to be taken into account in its estimation if there is a correlation between trade preferences and tariff
levels, as it will lead to omitted variable bias. These challenges will arise, for example, if you have scenarios where
consumers in a given importing country have very strong preferences for a product from a specific exporting country, causing the importing country's policies to set a lower tariff on these products.

86

Attenuation bias describes a situation where one's estimates tend towards 0, due to the signal vs. noise ratio increasing as more variables (in this case, fixed effects) are increased. See e.g. https://towardsdatascience.com/biased-model-coefficients-part-1-2722128b9e1c.

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However, the focus in Boehm et al. (2023) is not the level of elasticity so much as
the time response function. From this, it can be seen that the long-term effect occurs after about 7-10 years and that the short-term elasticity is about half of thelong-term elasticity. Since Feenstra's method is interpreted as a weighted averageof the short and long-term, the Boehm et al. time response function implies that
Feenstra's elasticities can be increased.
On this basis, the Expert Group has chosen to use the Fontagné et al. (2022) estimate as a basis (weighted according to Danish export shares), but at the same time
include a sensitivity analysis with estimates based on Feenstra, see Section 2.7. The
Expert Group notes that there are no significant differences in the impact assessment in this sensitivity analysis.
Empirical studies on the size of export elasticities
Table 7.34 provides an overview of estimated export elasticities for the food industries. In general, the weighted elasticities vary in the range of 5-1088 across estimations.
Table 7.34. Overview of the literature on export elasticities in the food industry.
Hertel et al. (2007) (GTAP)

Expert Group / Fontagné(2022)

Feenstra et al. (2018) /GreenREFORM (2023)

Export elasticity
Crop production, conventional

2.6-8.9

5.36

4.14

Crop production, organic

2.6-8.9

5.36

2.97

Horticulture

3.7

7.50

3.14

Cattle farming

4.0

8.11

3.89

Pig farming

4.0

6.41

4.01

Poultry

4.0

6.41

8.47

Dairy

7.3

5.46

5.36

Bakery2.6-8.9

6.67

9.66

Other food industry

2.3-6.6

6.93

5.60

Slaughterhouse, cattle

7.7-8.8

5.69

4.98

Slaughterhouse, pigs

7.7-8.8

12.10

4.98

Slaughterhouse, poultry

7.7-8.8

5.84

4.98

Source: "Elasticiteter og markedsvilkår i GrønREFORM" (Elasticities and market conditions in GreenREFORM), Fontagné, L., Guimbard, H., & Orefice, G. (2022).
Tariff-based product-level trade elasticities. Journal of International Economics, 137, 103593 and Hertel, Thomas, Hummels, David, Ivanic, Maros, Keeney, Roman,(2007) ‘How confident can we be of CGE-based assessments of Free Trade Agreements?’, Economic Modelling.

Import elasticities
The elasticity of substitution between Danish produced and imported consumption
is determined based on the "rule of two", whereby the import elasticity of substitution
is set to the same as the export elasticity for the supplying industry divided by 2.
See previously issued memo "Elasticiteter og markedsvilkår i GrønREFORM" (Elasticities and market conditions inGreenREFORM), and "Estimering af udenrigshandelselasticiteter i MAKRO" (Estimation of foreign tradeelasticities in MACRO), Kronborg, Poulsen and Kastrup 2020 for documentation of the estimation method

88

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There is good empirical evidence for the 'rule of two'. This is similar to the approachin the MAKRO and REFORM model, and implies that consumers have a preference
for domestically produced goods. Feenstra (2018)89 finds that the rule of two can
only be rejected for 20 out of 98 products, Hilberry and Hummels (2012)90 emphasise that the rule of two is frequently used in CGE models, including GTAP. In Section 2.7, sensitivity analyses are performed without the rule-of-two.

89

In Search of the Armington Elasticity, Feenstra et al. (2018).

"Elasticiteter og markedsvilkår i GrønREFORM" (Elasticities and market conditions in GreenREFORM), Kirk and
Hansen, and "Estimering af udenrigshandelselasticiteter i MAKRO" (Estimation of foreign trade elasticities in
MACRO), Kronborg, Poulsen and Kastrup 2020 for documentation of the estimation method

90

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7.18 Other Model Results
Tax base and immediate burden
Table 7.35 shows a comparison of the immediate burden per animal group for models 1-3.
Table 7.35. Tax base and immediate burden divided by animal groups
Tax base

Immediate burden
Model 1m tonnes

Model 2

Burden per animal
Model 3Model 1

DKK million

Model 2Model 3

DKK per animal

Dairy cows

3.08

2,200

1,100

375

4,200

2,100

700

Other cattle

1.44

1,025

525

175

1,000

500

175

Fattening pigs

0.98

700

350

125

25

25

0

Yearling sows

0.41

300

150

50

325

150

50

Piglets

0.23

175

75

25

5.00

2.50

0.75

Horses

0.15

100

50

25

600

300

100

Sheep

0.04

25

25

0

350

175

50

Broiler chickens

0.03

25

0

0

0.25

0.00

0.00

Lambs

0.02

25

0

0

125

50

25

Hens

0.02

0

0

0

1.25

0.50

0.25

Deer

0.01

0

0

0

900

450

150

Goats

0.01

0

0

0

375

175

50

Ducks, geese
and turkeys

0.00

0

0

0

3.75

1.75

0.50

Pheasants (hens)

0.00

0

0

0

25

25

0

Pheasants(chicks)

0.00

0

0

0

0.50

0.25

0.00

Ostriches

0.00

0

0

0

3,250

1,625

550

Overall

6.43

4,575

2,300

775

25

0

0

Note: Immediate burden and burden per animal are given in the 2023 level. Immediate burden is rounded to the nearest DKK 25 million, while burden per animal isrounded to the nearest DKK 25, except for piglets, broilers, chickens, ducks, geese, turkeys and fanatics (chickens) where burden per animal is rounded to thenearest DKK 0.25. It is assumed that the taxes are continuously indexed with the general price level.
Source: Own calculations based on Climate Status and Outlook 2023.

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Yearly effects tables
This section presents tables of the models' public costs and CO2-eq effects on anannual basis from 2025-2035.
Table 7.36. Yearly economic and CO2-eq effects
Model 1

2025

2026

2027

2028

EconomyTax of
DKK 750
per tonneof CO2eq1)
Peatland2)
Subsidy
for afforestation
Tax on Fgases
and other
regulations
Total

2029

2030

2031

2032

2033

2034

2035

Avg.

DKK m (2023 level)

0

0

925

1,725

2,400

3,000

2,925

2,850

2,750

2,675

2,625

2,000

-1,175-1,175-1,175-1,175-1,175-1,175-1,175-1,175

0

0

0

-850

-275

-350

-450

-550

-675

-750

-850

-925

-975

-1,050-1,110

-725

0

0

75

75

75

75

75

75

75

75

75

50

-1,450-1,525

-625

75

625

1,150

975

825

1,850

1,700

1,600

475

CO2-eqeffects

m tonnes of CO2-eq

Tax of
DKK 750
per tonneof CO2eq

0.1

0.4

1.4

1.8

2.4

2.7

2.8

2.8

2.8

2.8

2.7

2.1

Peatland

0.0

0.0

0.0

0.1

0.2

0.3

0.6

1.0

1.0

1.0

1.0

0.5

0.0

0.0

0.0

0.0

0.0

0.1

0.2

0.3

0.3

0.4

0.6

0.2

0.0

0.0

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.4

1.4

2.0

2.7

3.2

3.7

4.2

4.2

4.3

4.4

2.8

Subsidy
for afforestation
Tax on Fgases
and other
regulations
Total

Note: Figures have been rounded to the nearest DKK 25 million.
1) The calculations assume that the CO2-eq tax is phased in gradually from 2027 to 2030.
2) A total of DKK 9.4 bn has been set aside for the rewetting of carbon-rich agricultural land. For calculation purposes, the funds are divided equally between
2025-2032, when the set-aside is expected to be carried out.
Source: Own calculations

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Table 7.37. Yearly economic and CO2-eq effects
Model
2a

2025

2026

2027

2028

EconomyTax of
DKK 750
per tonneof CO2eq with abase deductionof 50 percent.1)
Peatland2)
Subsidy
for afforestation
Tax on Fgases
and other
regulations
Subsidiesfor biochar bypyrolysis
Total

2029

2030

2031

2032

2033

2034

2035

Avg.

DKK m (2023 level)

0

0

250

775

1,275

1,550

1,500

1,475

1,425

1,400

1,350

1,000

-1,175-1,175-1,175-1,175-1,175-1,175-1,175-1,175

0

0

0

-850

-275

-350

-450

-550

-675

-750

-850

-925

-975

-1,050-1,110

-725

0

0

75

75

75

75

75

75

75

75

75

50

0

0

-75

-100

-150

-225

-225

-225

-225

-225

-225

-125

-1,450-1,525-1,375

-975

-650

-525

-675

-775

300

200

100

-650

CO2-eqeffects

m tonnes of CO2-eq

Tax of
DKK 750
per tonneof CO2eq with abase deductionof 50 per
cent.

0.1

0.2

1.1

1.4

1.9

2.1

2.2

2.2

2.2

2.2

2.0

1.6

Peatland

0.0

0.0

0.0

0.1

0.2

0.3

0.6

1.0

1.0

1.0

1.0

0.5

0.0

0.0

0.0

0.0

0.0

0.1

0.2

0.3

0.3

0.4

0.6

0.2

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.0

0.0

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.1

0.1

0.2

1.2

1.7

2.3

2.8

3.3

3.8

3.8

3.9

3.9

2.4

Subsidy
for afforestation
Tax on Fgases
and other
regulations
Subsidiesfor biochar bypyrolysis
Total

Note: Figures have been rounded to the nearest DKK 25 million.
1) The calculations assume that the CO2-eq tax is phased in gradually from 2027 to 2030.
2) A total of DKK 9.4 bn has been set aside for the rewetting of carbon-rich agricultural land. For calculation purposes, the funds are divided equally between
2025-2032, when the set-aside is expected to be carried out.
Source: Own calculations

Page 246
Green Tax Reform

Table 7.38. Yearly economic and CO2-eq effects
Model
2b

2025

2026

2027

2028

EconomyTax of
DKK 750
per tonneof CO2eq with abase deductionof 50 percent.1)
Peatland2)
Subsidy
for afforestation
Tax on Fgases
and other
regulations
Subsidiesfor biochar bypyrolysis
Total

2029

2030

2031

2032

2033

2034

2035

Avg.

DKK m (2023 level)

0

0

100

575

1,125

1,375

1,350

1,300

1,275

1,225

1,200

875

-1,175-1,175-1,175-1,175-1,175-1,175-1,175-1,175

0

0

0

-850

-275

-350

-450

-550

-675

-750

-850

-925

-975

-1,050-1,110

-725

0

0

75

75

75

75

75

75

75

75

75

50

0

0

-75

-100

-150

-225

-225

-225

-225

-225

-225

-125

-1,450-1,525-1,525-1,175

-800

-700

-825

-950

150

25

-50

-775

CO2-eqeffects

m tonnes of CO2-eq

Tax of
DKK 750
per tonneof CO2eq with abase deductionof 50 per
cent.

0.1

0.3

1.1

1.3

1.7

1.9

2.0

2.0

2.0

2.0

1.9

1.5

Peatland

0.0

0.0

0.0

0.1

0.2

0.3

0.6

1.0

1.0

1.0

1.0

0.5

0.0

0.0

0.0

0.0

0.0

0.1

0.2

0.3

0.3

0.4

0.6

0.2

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.0

0.0

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.1

0.1

0.3

1.2

1.6

2.1

2.6

3.1

3.6

3.6

3.7

3.8

2.3

Subsidy
for afforestation
Tax on Fgases
and other
regulations
Subsidiesfor biochar bypyrolysis
Total

Note: Figures have been rounded to the nearest DKK 25 million.
1) The calculations assume that the CO2-eq tax is phased in gradually from 2027 to 2030.
2) A total of DKK 9.4 bn has been set aside for the rewetting of carbon-rich agricultural land. For calculation purposes, the funds are divided equally between
2025-2032, when the set-aside is expected to be carried out.
Source: Own calculations

Page 247
Green Tax Reform

Table 7.39. Yearly economic and CO2-eq effects
Model 3a

2025

2026

2027

2028

EconomyTax of DKK
250/125
per tonne ofCO2-eq witha base deduction of
50 percent1)
Peatland2)
Subsidy for
afforestation
Tax on Fgases andother regulations
Subsidiesfor biochar
by pyrolysis
Total

2029

2030

2031

2032

2033

2034

2035

Avg.

DKK m (2023 level)

0

0

150

500

850

1,050

1,025

1,000

975

950

925

675

-1,175-1,175-1,175-1,175-1,175-1,175-1,175-1,175

0

0

0

-850

-275

-350

-450

-550

-675

-750

-850

-925

-975

-1,050-1,110

-725

0

0

75

75

75

75

75

75

75

75

75

50

0

0

-375

-500

-775

-1,150-1,150-1,150-1,150-1,150-1,150-775-1,450-1,525-1,775-1,650-1,700-1,950-2,075-2,175-1,075-1,175-1,250-1,625CO2-eq effects

m tonnes of CO2-eq

Tax of DKK
250/125
per tonne ofCO2-eq witha base deduction of
50 per cent.

0.1

0.1

1.0

1.1

1.2

1.3

1.4

1.4

1.4

1.3

1.3

1.1

Peatland

0.0

0.0

0.0

0.1

0.2

0.3

0.6

1.0

1.0

1.0

1.0

0.5

0.0

0.0

0.0

0.0

0.0

0.1

0.2

0.3

0.3

0.4

0.6

0.2

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.0

0.0

0.2

0.4

0.5

0.8

0.8

0.8

0.8

0.8

0.8

0.5

0.1

0.1

1.2

1.7

2.0

2.6

3.1

3.6

3.6

3.6

3.8

2.3

Subsidy for
afforestation
Tax on Fgases andother regulations
Subsidiesfor biochar
by pyrolysis
Total

Note: Figures have been rounded to the nearest DKK 25 million.
1) The calculations assume that the CO2-eq tax is phased in gradually from 2027 to 2030.
2) A total of DKK 9.4 bn has been set aside for the rewetting of carbon-rich agricultural land. For calculation purposes, the funds are divided equally between
2025-2032, when the set-aside is expected to be carried out.
Source: Own calculations

Page 248
Green Tax Reform

Table 7.40. Yearly economic and CO2-eq effects
Model 3b

2025

2026

2027

2028

Economy

2029

2030

2031

2032

2033

2034

2035

Avg.

DKK m (2023 level)

Tax of
DKK
250/125
per tonneof CO2-eq
with abase deduction of
50 percent1)

0

0

50

325

700

875

850

825

800

775

750

550

Peatland2)-1,175-1,175-1,175-1,175-1,175-1,175-1,175-1,175

0

0

0

-850

-275

-350

-450

-550

-675

-750

-850

-925

-975

-1,050-1,110

-725

0

0

75

75

75

75

75

75

75

75

75

50

0

0

-375

-500

-775

-1,150-1,150-1,150-1,150-1,150-1,150-775-1,450-1,525-1,875-1,825-1,850-2,125-2,250-2,350-1,250-1,350-1,435-1750

Subsidy
for afforestation
Tax on Fgases andother regulations
Subsidiesfor biochar
by pyrolysis
Total
CO2-eq effects

m tonnes of CO2-eq

Tax of
DKK
250/125
per tonneof CO2-eq
with abase deduction of
50 per
cent.

0.0

0.2

1.0

1.0

1.1

1.1

1.1

1.1

1.1

1.1

1.1

0.9

Peatland

0.0

0.0

0.0

0.1

0.2

0.3

0.6

1.0

1.0

1.0

1.0

0.5

0.0

0.0

0.0

0.0

0.0

0.1

0.2

0.3

0.3

0.4

0.6

0.2

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.0

0.0

0.2

0.4

0.5

0.8

0.8

0.8

0.8

0.8

0.8

0.5

0.0

0.2

1.2

1.6

1.9

2.4

2.8

3.3

3.3

3.4

3.6

2.2

Subsidy
for afforestation
Tax on Fgases andother regulations
Subsidiesfor biochar
by pyrolysis
Total

Note: Figures have been rounded to the nearest DKK 25 million.
1) The calculations assume that the CO2-eq tax is phased in gradually from 2027 to 2030.
2) A total of DKK 9.4 bn has been set aside for the rewetting of carbon-rich agricultural land. For calculation purposes, the funds are divided equally between
2025-2032, when the set-aside is expected to be carried out.
Source: Own calculations

Page 249
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Decline in production volume and value for the models
Table 7.41. Change in production volumes and value for the models, 2030 effects
Model

Effective tax rate in 2030

Production value

Decrease in production

Decrease in production
value

DKK per tonne of CO2-eq

DKK bnper cent

per cent

Model 1/Tax of DKK 750 per tonne of CO2-eq on fertiliser, liming and livestock
Crop

750

19.8

7.9

7.6

Cattle

750

16.7

20.2

8.7

Pigs

750

16.7

17.7

13.6

Overall

750

53.2

15.0

9.8

Model 2a/Tax of DKK 750 per tonne of CO2-eq on fertilisers, liming and livestock, incl. a base deduction of 50 per cent
Crop

375

19.8

4.8

4.5

Cattle

375

16.7

11.4

4.9

Pigs

375

16.7

11.0

8.4

Overall

375

53.2

8.9

5.8

Model 2b/tax of DKK 750 per tonne of CO2-eq on liming and livestock, and DKK 750 per tonne of CO2-eq subsidy for reduced fertiliser, incl. a basededuction of 50 per cent
Crop

0-375

19.8

0.8

2.6

Cattle

375

16.7

9.8

4.3

Pigs

375

16.7

8.1

6.2

Overall

375

53.2

6.0

4.2

Model 3a/Tax of DKK 750 per tonne of CO2-eq on fertilisers and liming, DKK 250 per tonne of CO2-eq on livestock, incl. a base deduction of 50 per
cent
Crop

375

19.8

3.8

2.9

Cattle

125

16.7

6.5

2.8

Pigs

125

16.7

6.6

5.0

125-375

53.2

5.6

3.5

Overall

Model 3b/Tax of DKK 750 per tonne of CO2-eq on liming, DKK 250 per tonne of CO2-eq on livestock, and DKK 750 per tonne of CO2-eq subsidy for
reduced fertiliser, incl. a base deduction of 50 per cent
Crop

0-375

19.8

0.0

1.1

Cattle

125

16.7

4.7

2.1

Pigs

125

16.7

3.4

2.6

125-375

53.2

2.6

1.9

OverallNote: Production value is stated for 2030, includes intra-agricultural deliveries and is calculated at the 2023 level. It should be noted that for crop producers in the bvariants, a range of 0-375 is specified, as there is still a tax on liming even though there is no tax on applied fertiliser.
Source: Own calculations

Page 250
Green Tax Reform

Table 7.42. Degree of price pass-through in the models, per centTax rate in 2030
Livestock (basededuction, percent)Partial models

Fertiliser (basededuction, per
cent)

Crop

DKK per tonne of CO2-eq

CattleOverall
Pigs

Overall

Per cent (pass-through in consumer prices)

Model 1750 (0)750 (0)

38

62

45

56

Model 2a750 (50)750 (50)

39

58

46

51

Model 2b750 (50)750 (subsidy)

-

55

38

49

Model 3a250 (50) / 125 (0)750 (50)

39

56

42

46

Model 3b250 (50) / 125 (0)750 (subsidy)

-

50

26

41

Note: Partial models are calculated with the same rates as the general models, but where the 3 agricultural branches are taxed separately.
Source: Own calculations.

Expert Group for agreen tax reform