Towards A Food System Transition In Germany: A Scenario Analysis Of Vat Reform And Peatland Restoration

Generated Summary

This study provides a forward-looking quantitative analysis of selected policy interventions aimed at promoting a transition toward a healthy, inclusive, and nature-positive food and land use system in Germany. The focus of the analysis is on two sets of policy measures: (i) an indirect tax reform aimed at shifting household food consumption patterns towards healthier and more environmentally sustainable choices, and (ii) a policy reform aimed at reducing greenhouse gas (GHG) emissions from agricultural production on drained peatland in Germany. The study employs a dynamic five-region computable general equilibrium (CGE) model of the German economy linked with a dynamic household microsimulation model to analyze the distributional impacts of the proposed policies. The time horizon for the analysis is 2023-2030, with a baseline scenario established to serve as a reference for comparison. The tax reform scenarios involve changes to VAT rates on meat, dairy, fruits, vegetables, and sugar, and also incorporate compensation payments for lower-income households. The peatland restoration scenarios examine the effects of rewetting agricultural peatlands under different levels of ambition, assessed with regard to their impact on GHG emissions, land use, and economic welfare.

Key Findings & Statistics

• The study considers a tax reform in Germany that raises VAT rates on meat and dairy products by 12 percentage points (from 7 to 19 percent), lowers VAT on fruits and vegetables by 7 percentage points (from 7 to 0 percent), and introduces an excise tax on sugar at 10 percent.
• The study indicates that the domestic meat processing sector shrinks by 1.8 percent and agricultural livestock production by 1.6 percent relative to the baseline due to the tax reform.
• The changes in agricultural production lead to a moderate net reduction in agricultural land use, estimated to be between 67,000 to 88,000 hectares.
• The estimated annual GHG emission reductions from the tax reform are around 0.590 to 0.730 million tCO2e, which is a reduction by 1.2 to 1.4 percent of baseline agricultural emissions.
• The cumulated GHG emission reduction effect over the period 2023 to 2030 amounts to 5.3 million tCO2e.
• The tax reform package is projected to raise the consumer prices of meat, dairy, and sugar products, while reducing the prices of fruits and vegetables.
• In the RewetLo scenario, which reflects the moderate ambitions of Germany’s National Peatland Protection Strategy, 88 kha (6.9 percent) of agricultural peatland is rewetted by 2030 to attain a direct annual emission reduction by 3.5 million tCO2e (-8.2 percent) at private short-run abatement costs of 35 Euro/tCO2e.
• In the RewetHi scenario, 474 kha (36.9 percent) of peatland is rewetted by 2030 to attain a direct annual emission reduction by 15 million tCO2e (-35.2 percent) at marginal private abatement costs between 35 and 49 Euro/tCO2e.
• In the RewetHi+ scenario, 729 kha (55.2 percent) of peatland is rewetted by 2030 to attain a direct annual emission reduction by 19.3 million tCO2e (-45.4 percent) at marginal abatement costs between 27 and 61 Euro/tCO2e.
• The economy-wide marginal social abatement costs range from 15 Euro/tCO2e under RewetLo to 27 Euro/tCO2e under RewetHi+.
• The tax reform raises household consumption of fruits and vegetables by 2.2 to 2.5 percent.
• The tax reform reduces meat consumption by 3.3 to 3.8 percent.
• Dairy product consumption decreases by 3.8 to 4.0 percent due to the tax reform.
• Sugar intake is expected to fall by -1.1 to -1.5 percent.
• The net fiscal space opened up by the tax reform is between 2.0 and 2.4 billion Euros annually.
• The annual additional VAT revenue from final consumption of meat and dairy products amounts to 3.6 – 3.8 billion Euro, and the sugar excise tax raises about 0.3 billion Euro per annum.
• In the joint scenario C, the real consumption of meat products decreases by 3.30 percent and dairy products by 3.83 percent.
• The real consumption of vegetables and fruits increase by 2.47 percent.
• Under RewetHi+, 2030 real GDP is -0.004 percent lower than in the baseline.
• The total reduction in agricultural and processed food exports for 2030 in the RewetHi+ scenario amounts to 0.012 percent of Germany’s projected total 2030 baseline exports of goods and services.
• The total reduction in agricultural and processed food exports for 2030 in the RewetHi+ scenario amounts to 0.012 percent of Germany’s projected total 2030 baseline exports of goods and services.

Other Important Findings

• The tax reform, in the absence of compensation, is regressive, as the welfare loss, expressed in percentage terms, is higher for lower-income households.
• The implementation of compensatory measures could lead to a positive inclusivity effect.
• The increase in prices for food commodities of German origin relative to the rest of the world induces a rise in German imports and a drop in German exports of agricultural commodities and processed food products.
• In the RewetHi+ scenario, agricultural land use in 2030 rises by 0.0011 percent in Africa, by 0.0010 percent in RoLMI and by 0.0029 percent in RoHI relative to the baseline.
• The results indicate that the land-saving effects arising due to lower imports of animal-sourced foods and feedstocks by Germany from the RoEU are slightly dominated by the increase in land use associated with the rise in imports of fruits and vegetables.
• The joint implementation of the tax reform and peatland restoration appears highly recommendable, as the tax reform generates very small emission reduction effects but moderately strong consumption effects whereas the peatland restoration generates large emission reduction effects and negligible consumption effects.

Limitations Noted in the Document

• The study acknowledges that the modeled scenarios do not account for the complexities of the real world, such as potential trade-offs between health, environmental, and inclusion goals, or the role of multiple policy instruments.
• The analysis uses a CGE model, which relies on various assumptions and simplifications about economic behavior and relationships.
• The study does not consider paludiculture, or the productive use of wet and rewetted peatlands, in its medium-run scenarios to avoid speculative assumptions about the development of commercial value chains and infrastructure investments.
• The study notes the potential for overestimation or underestimation of the costs and benefits associated with the implementation of the tax reform and peatland restoration measures.

Conclusion

The study underscores the potential for a comprehensive food system transformation in Germany through the strategic application of tax reforms and peatland restoration efforts. The analysis reveals that the tax reform package, by altering the relative prices of food items, could lead to a reduction in the consumption of meat and dairy products while increasing the consumption of fruits and vegetables. This shift, in conjunction with a reduction in sugar intake, is seen as a positive step towards more sustainable dietary choices. Moreover, the study highlights the significant potential of peatland restoration to reduce GHG emissions from agriculture and land use, particularly in the RewetHi+ scenario, which demonstrates a substantial reduction in emissions. These findings align with the growing consensus on the need for a holistic approach to food system policy, as advocated by the scientific community. The study’s emphasis on the combined impact of these measures suggests that a well-designed policy bundle could foster positive changes in health, environmental sustainability, and social inclusion. The study reveals a significant opportunity to transform the food system in Germany by promoting healthier diets and by reducing GHG emissions from agricultural production through peatland restoration. The tax reform is shown to be an effective tool for influencing consumer behavior, while the peatland restoration efforts promise substantial environmental benefits. The results indicate that the tax reform, while potentially regressive in the absence of compensatory measures, can be mitigated through targeted income transfers. Simultaneously, the peatland restoration efforts, especially in the ambitious RewetHi+ scenario, offer significant potential to mitigate GHG emissions at a manageable economic cost. By implementing a policy bundle that includes both the tax reform and peatland restoration, Germany could achieve positive outcomes across health, environmental sustainability, and social inclusion dimensions, without imposing undue burdens on low-income households. The study’s findings underscore the importance of considering the interactions between different policy instruments to create a more sustainable and equitable food system, recognizing that the synergistic effects of these measures may be greater than the sum of their individual impacts. The emphasis on a joint implementation strategy highlights the potential for a positive change across all aspects of a sustainable food system.