What does Denmark’s carbon tax mean for NZ?

Talks started in 2022 between the government, conservation groups, and the farming industry.

The tax puts an initial price of about NZ$30 per tonne of carbon equivalent, rising to NZ$70 by 2035. In determining these prices, the group considered the impact of carbon leakage – lower-cost product with a higher carbon footprint being imported and not carbon taxed.

This tax is a part of the broader proposal’s ambition to reduce Denmark’s agricultural emissions and support it in reaching their Paris Agreement climate commitments.

As an agricultural exporter, it's important for New Zealand to consider what the implications might be from this approach.

Denmark takes climate action seriously. The country is ranked fourth in the Climate Change Performance Index (the index leaves the spaces at first, second, or third blank as they deem no countries perform well enough to warrant those places, NZ ranks 34th).

Ambitious target

The country’s 2030 commitment is a 70% reduction from 1990 levels when they sat at 15.2 tonnes per person. The 2022 figures show the country is now below 8 tonnes per person. The reduction has mostly been through transitioning to clean and renewable energy sources, achieving a more than 90% reduction in emissions for that sector since 2005.

While this trajectory looks on track to reach the Paris goal, agriculture has been hard to abate and has seen almost no reduction in emissions in the last 20 years, and makes up close to a third of Denmark’s emissions. Without some systemic change, reductions from agriculture seem unlikely. The proposal in full is expected to reduce emissions by 1.8m tonnes of CO2e in 2030, roughly 6.5% of current national emissions in 2022.

Denmark has stated it will advocate for a European-wide tax on agricultural emissions. This makes sense for Denmark to protect its farmers, and supports the EU’s Green Deal approach. But to do so would also mean that it would make sense to bring agriculture into the EU’s Carbon Border Adjustment Mechanism (CBAM).

CBAM is a tool to protect the EU industry from paying for carbon under their Emissions Trading Scheme (ETS) by requiring importers to pay the ETS equivalent as a carbon tariff to enter the Single Market. Next year the EU is set to outline when different industries will be included in CBAM with start dates through until 2034 – currently it only includes high-carbon industrial products.

Implications for NZ?

So, what are the implications for New Zealand from Denmark’s approach?

Lars Aagaard, the architect of the Danish proposal, was last year quoted as saying the “most success on the European market” should be the lowest carbon producers.

Due to its mostly pasture-based farming approach, New Zealand is one of the lowest carbon producers of agricultural products globally.

However, there are a couple of watchouts here: other countries’ agricultural industries are applying efforts to reducing emissions.

As highlighted in Rabobank New Zealand's just released whitepaper – Maintaining our Emissions Edge - recent government signals are not a sign to relax on emissions reductions. Our competitive advantage, market access, and price premium will almost certainly require continued effort to reduce emissions.

Further, if a CBAM is introduced for agriculture in the EU, the price paid as a tariff to Europe will be the difference between what EU farmers are paying and what is paid for carbon in NZ.

Were NZ to have an ETS this differential might be minimal, and the proceeds of the ETS would remain here. However, if we do not have an ETS, then the proceeds from the differential go to Europe as the price of market access.

Other jurisdictions are also considering introducing CBAMs. The New Zealand Government recently announced agriculture would not be included in the NZ ETS from 2025 and has not set a commitment on pricing these emissions.

Mixing trade policy, agriculture, and emissions pricing can seem complex. I applaud anyone who has read this far! However, the success of our agricultural export sector requires a level of understanding of how these topics influence each other and play out in the market.

Denmark is a good example of a country that has grappled with the complexity and charted a path forward. Will New Zealand do the same?

Nick Swallow is a former New Zealand Trade and Enterprise (NZTE) Trade Commissioner to the UK and Ireland and has a Masters of Sustainability Leadership from the University of Cambridge, completing his dissertation on dairy farming in New Zealand. Nick is currently a director at KPMG working in sustainability, however the views expressed here are his own.