Friday, May 9, 2008

Tax cow burps

A basic principle of environmental economics is that you want to tax negative externalities and subsidize positive ones, a principle we have highlighted already several times on this blog. This is already applied in many countries for activities related to industrial production. It is thus natural to extend the principle to agriculture.

One of the big contributors to greenhouse gas emission in the large quantity of methane burped by ruminants. Thus the idea of taxing cows, as put forward in New Zealand in 2003. There, cows account for about 50% of greenhouse gas emissions, by far no negligible quantity. The idea has, however, been ridiculed as a "flatulence tax", but even if it were cow farts rather burps that would pollute, it makes perfect economic sense, once people understand the principle.

It turns out Estonia just put such a tax in place. Cows there seem to be less a problem than in New Zealand (15-25% vs. 50%), but it is still economically significant. Obviously, farmers are up in arms, understandably as they suddenly have to pay a tax, but the rest of the country should be OK with it, once it understands the purpose of the tax.


Ken Houghton said...

Wait until the price of beef goes up before assuming the rest of the country "should be OK with it." There remains a difference between "should" and "will."

Matt Nolan said...

"Wait until the price of beef goes up before assuming the rest of the country "should be OK with it."

If the choice is between a higher tax bill or higher beef prices relative to other goods I expect that most of the country would be happy with it.

After all, the externality on Estonia by itself is a result of having to pay a Kyoto liability - so someone will have to pay for it.

If you frame it that way I'm sure people would settle down - except the beef farmers :)

Anonymous said...

I wish to concur with Matt. A revenue neutral tax increase allows to reduce some other tax. Once people understand that, they agree heartily to this and other taxes (like gas taxes).