Epsilon Open Archive

Abstract

Refunding of climate taxes on consumption of food might reduce the resistance towards the introduction of such a tax, which is necessary to achieve climate targets. This paper examines the implication of refunding a tax on consumption of food in Sweden under three refunding schemes; lump sum, in proportion to agricultural area, and payments for ecosystem services on agricultural land (carbon sink enhancement by restoration of drained peatland, biodiversity provision from increased area of grassland, and nutrient regulation by construction of wetlands). The theoretical results showed that economic and environmental conditions can improve compared with the no tax case under all three schemes, but to different farmer categories. The empirical results from a partial agricultural sector model showed that the introduction of a climate tax corresponding to the Swedish tax of 115 Euro per ton CO2e reduces total emissions by 5% without any refunding of the total tax incomes which amount to 1.391 billion Euro. Refunding with payments for restoration of drained peatlands enhance carbon sink by 5.9 million metric tons of CO2e and results in net benefit of the tax system as a whole but not for all farmer categories.