Would a Carbon Tax Work for the Beef Market?
A study finds unique challenges posed by agriculture.
- By
- March 03, 2025
- CBR - Climate Change
Cattle are significant emitters of the greenhouse gas methane, and in South America, ranchers often destroy vast swaths of carbon-dense Amazon rainforest to raise them, making the industry even more emissions intensive.
While a carbon tax is a textbook solution to such a problem, it’s difficult to implement one efficiently in the beef market because of some challenges that are unique to agriculture, according to Chicago Booth’s Tomás Domínguez-Iino. Addressing these challenges could help turn carbon taxation into a more useful tool in the fight to reduce greenhouse gas emissions—but would be difficult, he explains.
To study the issue, Domínguez-Iino homed in on Argentina and Brazil, which together represent roughly a fifth of the world’s beef production and 30 percent of global beef exports. The demand for commodities and animal protein has risen globally, particularly in China, where a growing middle class has a taste for beef. And much of that demand is being met by South Americans ranchers.
The supply chain in the region, as is the case in most other locations, is long and fragmented. It starts with small breeders, who sell weaned calves to “backgrounders” who raise the animals until it’s time to off-load them to feedlots. That’s the last step before meat-packers, which slaughter the animals and prepare their meat for sale.
The beef business has two main sources of emissions. The first is related to land use: Some ranchers, and especially breeders, clear forestland for their operations, which releases carbon into the atmosphere, particularly when large, established trees are felled. The second is that cows themselves are a major source of methane gas, which contributes to climate change. The principle of a carbon tax is to shift incentives, and this research studies whether a tax could be used to reduce the environmental damage specifically related to land use.
In theory, the amount of tax paid reflects the amount of environmental damage caused, making harmful products more expensive to produce and consume. A carbon tax on gasoline, for example, leads drivers to buy less gas and reduces the demand for fossil fuel. For practical and political purposes, a carbon tax on beef would likely be levied at the end of the supply chain, on packers, Domínguez-Iino writes. But a lot of environmental damage occurs at the start of the supply chain. Would a tax at the end of the chain filter back upstream and make it more expensive to clear rainforest?
Domínguez-Iino gathered data from 1995 to 2017 on the number of cattle being raised at the municipality level, market prices for those cattle, deforestation rates, and the export of beef products. From there, he constructed a model of agricultural supply and demand that would predict the likely effects of a carbon tax.
The problem’s on the farm
In agriculture, most emissions occur before commodities leave the farm for processing, according to the research. In beef production, more than 90 percent of emissions can be traced to land-use change (including deforestation) and on-farm sources such as methane from cows. This complicates the implementation of a tax levied at the end of the supply chain.
Brazil has more than 2.4 million ranchers (breeders, backgrounders, and feedlot operators), most with fewer than 50 head of cattle, the research points out. But nearly 70 percent of the cattle are bought by just three large packing companies. This funnel-like structure would distort the pass-through effect of a carbon tax, he argues, outlining two main complications.
First, while a tank of gas produces the same emissions regardless of where it’s burned, the cattle market’s emissions have a lot to do with location. Ranching is far more harmful in and around the Amazon than it is in the agricultural areas of southern Brazil, where vegetation is less carbon-dense.
Secondly, the big packers have more market power in the remote Amazon region than they do in the south. There’s less competition among packers, and even if packers drive down the prices they pay to suppliers, it’s harder for ranchers to quit the business in favor of, say, farming soybeans. Somewhat counterintuitively, this means that in the Amazon, packers would be able to avoid passing through a carbon tax efficiently, the research finds. In the south, where competition is more robust, a carbon tax would likely be fully passed along the supply chain and ultimately affect behavior upstream. But in the Amazon, packers can afford to bear part of the tax in order to avoid depressing cattle prices further and losing market share.
“A lot of the tax will be passed through to farmers in the competitive markets, where production is cleaner. Very little will be passed to farmers in the Amazon, where production is much more carbon intensive,” Domínguez-Iino says.
For a carbon tax to work in this market, there would need to be a way to impose a higher tax on beef that was raised on deforested land, he writes. Packers facing a steep enough carbon tax wouldn’t want to pay all of it and would be more likely to pass the costs back upstream. For that to happen, packers and regulators would need to be able to identify which Brazilian beef was deforestation free, which could be accomplished through certification.
“A certification process would work similarly to that of fair-trade coffee, but with environmental sustainability goals rather than a fair-wage objective” says Domínguez-Iino.
However, it’s hard to implement such a process in long, fragmented supply chains. Currently, a packer can identify when an animal comes from a deforestation-free feedlot, but it doesn’t necessarily know if that animal was bred on deforested land—and incentives aren’t in place to streamline the supply chain.
So could a carbon tax work in the cattle market? “I think it really depends on how credibly certification could be implemented,” Domínguez-Iino says. Technology could potentially be harnessed to better track the steps in the supply chain—for example, satellite imagery could be used to monitor deforestation. But until then, when it comes to reducing emissions in the cattle industry, direct regulation is the more efficient option.
Tomás Domínguez-Iino, “Efficiency and Redistribution in Environmental Policy: An Equilibrium Analysis of Agricultural Supply Chains,” Working paper, October 2024.
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