Study on the effect of a VAT reduction on milk and milk substitute products from 19% to 7% on consumption, tax revenues and climate
The German government has committed to reducing greenhouse gas emissions in the agricultural sector by 5.1 million tonnes of CO2 equivalents, or about 8 percent, between 2021 and 2030. The Federal Ministry of Food and Agriculture sees animal husbandry as a decisive lever in this regard. In parallel, more and more people have been replacing cow's milk in their diet with substitute products made from oats, soy or other plants in recent years. Against this background, there are many calls from politics and society to reduce VAT on plant-based milk alternatives in Germany, including from the Federal Environment Agency.
Nevertheless, the effects of such a reform have not been sufficiently quantified so far. This study therefore examines the impact of a reduction in VAT on plant-based milk alternatives from 19 per cent to 7 per cent on consumption, the climate and tax revenues.
Methodological approach
To evaluate the effect of the VAT reform we use our tax and consumption model. In a first step, using price elasticities, we calculate how a VAT cut would change consumption behaviour. In a second step, we then calculate how this change would affect tax revenues, greenhouse gas emissions, land use and water consumption. For comparison, a business-as-usual scenario is used, which forecasts market development without tax reform based on the current market trends of recent years. Finally, a comparison of these two scenarios shows the effect of a VAT reform.
The most important facts in brief
- While a VAT reform on plant-based dairy alternatives would lead to a decrease in tax revenues, it would also reduce future climate impact costs.
- Thus, the decrease in tax revenues in one year would amount to about 40 million euros.
- The reduction in future climate-related costs due to reduced CO2 emissions of around 62.4 million euros, on the other hand, would exceed these. These costs can arise from emitted CO2 and the associated damage, for example from extreme weather conditions.
- Therefore, the reform seems to be efficient from an economic point of view.
- Furthermore, water and land consumption would also be significantly reduced, with a decrease of 72 billion l and 1.1 billion m² respectively.
