ECONOMICS IS A discipline concerned with the allocation of scarce resources. In theory, markets are a good way to organise economic activity and can provide an efficient allocation mechanism.
When they are perfectly competitive, the market outcome is efficient. The price of the good reflects the cost of producing it, and goods are allocated to those who value them the most, as measured by consumers’ willingness to pay.
In practice however, market failures often lead to inefficient outcomes. Externalities are one of the many reasons why markets fail.
An externality occurs when the production or consumption of a good has an impact on bystanders, in other words on individuals who are external to the market, neither producing nor consuming the good.
The impact on bystanders can be positive or negative, but given they are not participating in the market, they don’t pay for any positive impacts and are not compensated for negative ones. A positive production externality, for example, occurs when firms engage in research and development. The resulting knowledge spillovers can benefit other firms in the industry and beyond.
Young children on long-haul flights are an example of a negative consumption externality; they can negatively impact fellow passengers by crying or kicking the seat in front of them.
When negative externalities are present, the quantity of the goods produced and sold is too high. Without any market interventions, producers only consider their own private costs in deciding how much to produce. Unless they are compelled to do so, the cost to bystanders is not taken into account. The resulting market price no longer reflects the true societal cost of the good, it is too low, and the good is overproduced.
A market-based solution to the problem of negative externalities is to tax the good. This internalises the external cost, increases the price, lowers the quantity consumed, and increases the efficiency of the market.
This is the theory behind the application of carbon taxes to goods such as fossil fuels. Co2 emissions are a classic example of a negative externality. They are a harmful by-product of the consumption and/or production of certain goods, and negatively impact society through climate change.
In recognition of the economic case for taxing goods with negative externalities, the Irish climate action plan includes incremental increases to carbon taxes on fuels, up to €100 per tonne of carbon dioxide by 2030.
There is a lack of economic reasoning however in the current policies in place for the agricultural sector. Globally, food production accounts for over a quarter of global greenhouse gas emissions. In Ireland the agricultural sector is the highest emissions sector, responsible for 37.5% of our total emissions.
In general, meat and dairy products are more carbon intensive than plant based foods, and beef is the most carbon intensive of all agricultural products.
Hannah Daly recently outlined how unstainable beef production is, and how many policies, such as subsidies that make up 139 per cent of cattle farm incomes, are to the detriment of our environment.
It is completely counterintuitive to heavily subsidise a carbon-intensive product such as beef. Given the negative externalities associated with meat production, and particularly beef consumption, many economists would argue that rather than subsidising production, a meat tax is more appropriate.
A recently published paper estimates that the average global environmental external cost of beef production is between US$5.75 and US$9.17 per kilogram, depending on how it is produced.
These figures are actually a conservative estimate as they don’t include the external costs of biodiversity loss and the health effects from livestock-related air pollution. There is a clear case for taxing beef rather than subsidising its production, although public support for taxing meat would likely be low.
A meat tax may not be politically feasible, but subsidies could be diverted into more sustainable food production, albeit such reform would need to be at an EU level. At government level, substantial public funding currently provided for campaigns to increase the demand for meat products, such as Bord Bia advertising campaigns and ministerial trade missions abroad, could be reallocated to more sustainable investments.
A Boston Consulting Group report published last year highlighted that investing in plant based alternative proteins gives the highest emissions savings per dollar invested across all sectors. The report also forecasts that with current trends, these alternative proteins could account for 22% of global protein consumption by 2035.
An ESRI study found that in Ireland almost half of young adults who currently eat meat plan to eat less in the future, and 30% intend to eat a plant based diet.
Consumer demand at home and abroad is shifting towards more sustainable diets, and Government policies should support rather than attempt to slow down this transition. It is inevitable that Ireland will eventually have to move away from intensive animal farming.
We will have to make changes eventually, so why not move early and gain a competitive advantage? Planning for this transition and reallocating funds towards more sustainable plant based food production would allow us to be leaders in this market, while reducing emissions in line with our ambitious targets.
Many governments, including our own, argue that agricultural subsidies are needed to ensure food security. In reality however, subsidies are usually applied in order to provide a competitive advantage in global markets. In Ireland, 85% of beef produced is exported, as are 85% of dairy products.
Not only is the vast majority of the food we produce exported, we are reliant on global food markets to support production. Our reliance on imported animal feed was highlighted recently when Russian ships were allowed to deliver grain to Ireland, receiving a special exemption from the EU ban on Russian imports.
If we really want to ensure we have food security, we need to move towards more sustainable food production. Investment in the agricultural sector should not be focused on maintaining the status quo, but rather on how we transition away from intensive animal farming.
We will no doubt have to do so eventually – why wait until it’s too late?
Dr Emma Howard is an Economist and Lecturer at Technological University Dublin.
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