Controlling greenhouse gas emissions in Spain: what are the costs for agricultural sectors?

Abstract

Employing a recursive dynamic computable general equilibrium (CGE) model of the Spanish economy, this study explicitly aims to characterise the potential impact of Kyoto and European Union environmental policy targets on specific agricultural activities up to 2020. The model code is modified to characterise the emissions trading scheme (ETS), emissions quotas and carbon taxes, whilst emissions reductions are applied to all six registered greenhouse gases (GHGs). Compared to a ‘business-as-usual’ baseline scenario, by 2020, GDP and employment fall 2.1% and 2.4%, respectively, whilst the retail price index rises 3.4%. In agriculture, the indices of output (4.3% fall), and supply price (7.7% rise) perform relatively worse, whilst there is a concomitant cumulative fall in aggregate farm incomes of €1,510 million by 2020. The more notable impact in agriculture is attributed to its relatively higher emissions intensity. Consequently, we record an agricultural marginal abatement cost estimate of €86 ton-1 of CO2 equivalent by 2020, which is consistent with other estimates in the literature. In addition, we find that the optimal mix of emissions reductions across specific agricultural sectors is a function of the degree of substitutability of their emitting activities. In light of estimated income losses within the strategically important farm sector, a final simulation contemplates an ‘agricultural cost-neutral’ emissions reduction policy akin to a cross compliance payment between 2013 and 2020. This is found to reduce food price rises, whilst altering the optimum mix of agricultural emissions reductions across specific agricultural activities.