(Bloomberg) -- Denmark’s plan to tax agriculture emissions will lead to rising impairment charges for some of the nation’s financial institutions but won’t threaten financial stability, the central bank in Copenhagen said.
A few “medium-sized” banks are most exposed to a higher risk of losses from loans to farmers, who “already have a vulnerable economy and must pay the additional tax for their CO2 emissions,” Nationalbanken said in a financial stability report on Tuesday.
It comes after the Danish government and a broad majority in parliament last week agreed to adopt a tax on livestock emissions at the end of the decade, which the cabinet said would be the world’s first such levy.
The agriculture industry “will of course be affected” by the new tax, Ulrik Nodgaard, a deputy governor with the central bank told Bloomberg last week, adding that the proportion of businesses threatened with bankruptcy is expected to rise. Still, the hardest-fit farmers “make up a relatively small part” of the industry and of the banks’ loan portfolio, he said then.
The Danish central bank also anticipates that policymakers will have to increase levies on industries already subject to a carbon tax. In total, the higher taxes are expected to lead to about 700 million kroner in new impairment charges annually by early 2030s.
“Even if politicians suddenly became very ambitious in raising CO2 taxes, it’s difficult to see a scenario where there would be a significant spill-over effect on the banks’ lending books,” Nodgaard said.
Denmark’s fiscal watchdog has warned that the plan comes with uncertainty because it involves unproven technologies, while the tax on livestock will only be fully phased in by 2035. This may require the government to take more measures later to meet its climate target, it said last month.
The plan, which will also introduce 43 billion kroner ($6 billion) worth of subsidies to support farmers’ green transition, received backing from key industry and environmental groups earlier this year following months of negotiations. The plan is estimated to reduce emissions by 1.8 million tons of CO2 at the end of the decade.
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