Towards true prices in food retailing: the value added tax as an instrument transforming agri-food systems

Abstract

Current crises (i.e., climate crisis, COVID-19 pandemic, Russian invasion of Ukraine, and the resulting energy and food shortages) indicate the need for robust, and sustainable supply chains with regional food production and farmland to secure food supply in the European Union (EU). Recent research shows that organic food is more resilient to supply chain disruptions and price fluctuations. In this context, we examine an approach for the sustainable and resilient transformation of agri-food networks: can an adaptation of value added tax (VAT) levels work as a financial incentive to amplify resilient agricultural practices and sustainable dietary patterns? Within the setting of the amendment of the European framework directive on the use of VAT in 2022, we model the effects of adapting the current German VAT system by (1) reducing VAT on organic vegetarian food to 0% and (2) raising VAT on conventional meat and fish to 19%. Based on historical data on organic sales shares and price elasticities, we project sales shares differentiated by product group for each scenario. Then, we calculate expected tax revenues, changes in consumption patterns, and arising total external climate costs in Germany for both scenarios. Our results show that the overall consumption share of organic food would increase by 21.83% due to the modeled VAT reform compared to the status quo. Despite the VAT reduction to 0% on organic vegetarian products, the measure would yield €2.04 billion in extra tax revenues in Germany per year due to the increased taxation on conventional meat products. We find that annual environmental costs of €5.31 billion can be avoided as a result of lower external climate costs of organic and vegetarian food. Therefore, adjusting VAT rates in the food market can be a political instrument to drive organic food consumption and reduce animal livestock. This supports re-territorialization of agriculture and a more sustainable and resilient European food supply.

Sustainability Science Communication: Case Study of a True Cost Campaign in Germany

“…On the one hand, it is important to approach politicians with well-founded and concrete proposals for action measures but also for the media to take these into the discourse instead of solely reporting on the current status quo. In the area of TCA, for example, Oebel et al [94] examined the possibilities of the value-added tax as a possible lever for transforming the agri-food system. In addition, the animal welfare levy has already been discussed and is being called for by various institutions (Citizens' Council on Change 2024; Borchert Commission 2020) [67,95], which could be considered a further measure.…”