CO2 Pricing in livestock and arable farming

Broeikasgasemissiebeprijzing in de veehouderij en akkerbouw

This study explores whether carbon pricing could help Dutch agriculture meet its climate targets. Commissioned by the Ministry of Finance, Kalavasta examined both a levy system and an emissions trading scheme (ETS) for livestock and arable farming. The central question was: what are the effects and feasibility of a CO2 levy and ETS for the agricultural sector?

Why examine CO2 pricing for agriculture?

The Netherlands is not on track to meet its climate targets. According to PBL projections, current policies fall short of both the 2030 objectives and 2040 targets based on current EU policy. Agriculture (excluding greenhouses) accounts for approximately 18 megatons of CO2-equivalent emissions in 2024, primarily methane from livestock and nitrous oxide from fertiliser use. Unlike sectors such as industry or electricity generation, agriculture has no established carbon pricing framework. The Ministry of Finance sought clarity on whether introducing such a mechanism could accelerate emission reductions while remaining technically and economically feasible. Kalavasta assessed the design requirements, such as legal feasibility, administrative complexity, and measurement methods, alongside quantitative modelling of financial and emissions impacts across different farm types.

How was the analysis conducted?

The study proceeded in two phases. The first phase involved a qualitative assessment of design options: whether to implement a levy or emissions trading system, how to measure emissions, which subsectors to include, and whether to incorporate exemptions or revenue recycling mechanisms. These options were evaluated through expert consultations and tested against criteria of technical feasibility, legal compatibility, and user-friendliness. The second phase used a bottom-up economic model built around farm typologies developed by Wageningen University. For each farm type, the model calculated net financial results and emission savings across various transition pathways. These include e.g. changes in herd size, feeding strategies, manure processing technologies, and fertiliser management. The modelling covered approximately three quarters of agricultural emissions, focusing on dairy, pig farming, and arable sectors while excluding poultry and smaller subsectors. Economic parameters including land, labour, machinery costs, and product revenues were integrated to assess farm-level decision-making under different carbon price scenarios. For analytical purposes, the study used indicative subsector emission targets derived from sector targets for 2030 and indicative targets for 2040 based on PBLs trajectverkenning klimaatneutraliteit.

What do emission reductions and costs look like under carbon pricing?

The modelling reveals substantial variation in both responsiveness and financial impact across subsectors. To reach the indicative emissions target in 2040, a sector-wide levy of approximately €49 per ton would be required. However, pig farming shows remarkably high responsiveness, with the sector cutting emissions by nearly 70% relative to 2022 levels. This sector contributes roughly two-thirds of the total reduction needed. Dairy farming proves less responsive, achieving a 30% reduction relative to 2022. For arable farming, meaningful reductions through pricing alone appear difficult to achieve given limited abatement options available. When the sector targets are translated into subsector targets, a subsector-specific levy of €26 per ton would suffice for pig farming, whereas dairy farming would require a subsector levy between €56 and €76 per ton to achieve its goals.

Emission reductions emerge from two sources: farm exits and transition pathways involving technical measures or herd adjustments. The baseline scenario already projects a significant reduction by 2040 through autonomous exits and government buyout schemes. Under carbon pricing, forced exits contribute additional reductions, particularly among smaller and more emission-intensive farms. Depending on the specific scheme and revenue recycling measures, reduction through transition paths can be stimulated. Financial impacts vary considerably: pig farms face substantial costs but, with sufficient financial support, can access manure processing technologies that provide viable transition pathways; without such support, many would likely exit the sector before these technologies become financially attractive. Dairy farms, even with subsidies, have much fewer abatement options while maintaining similar animal stock levels, leaving them more exposed to carbon costs and with limited pathways to remain viable under carbon pricing. Although Bovaer feed additive may seem promising for dairy operations, its methane reduction falls from 33.7% theoretical to 22% practical effectiveness due to grazing requirements, with the total possible technical emissions savings for dairy farms reaching just 26%. The analysis also emphasizes that aggregate sector figures obscure significant variation at the individual farm level, with costs depending heavily on farm type, size, current practices, and access to capital for investments.

What does this mean for agricultural policy?

The findings reveal that carbon pricing in agriculture is technically feasible but requires careful design choices. Key implementation challenges include measurement methodology: activity data with emission factors builds on existing farm registrations but requires expanded data collection, while physical sensors offer greater accuracy for barn emissions but remain expensive and technically limited for open systems and field emissions. Phased implementation with clear communication about which emissions are included, how they are calculated, and what farmers can do to reduce costs emerges as critical for acceptance. The study highlights fundamental sectoral differences: pig farming shows strong price responsiveness, with some exiting and others using with available manure processing technologies, while dairy farming has fewer options to significantly reduce emissions while keeping a similar animal stock, and arable farming shows no effect. This suggests that uniform pricing may not be optimal, though differentiated rates raise questions about fairness and complexity. The analysis gives some first insights into what a carbon pricing policy for agriculture in the Netherlands would require and what it could realistically achieve within the context of national climate ambition.