Ex-post evaluation of the Danish pesticide tax: A novel and effective tax design

Abstract

Externality taxes are considered a key tool in the climate and environmental policy toolkit. However, externality taxes do not always deliver on their promise due to design flaws and low tax rates. The Danish pesticide tax, which was redesigned in 2013, addresses these flaws by differentiating tax rates according to the harmfulness of products and significantly increasing prices on the most harmful pesticides. This article evaluates the redesigned tax, using a panel data set with pesticide use on 1900 medium-size and large farms two years before and four years after the tax change. We find that the tax has been effective, prompting substitution from more harmful products to less harmful ones, resulting in a 16 pct. reduction in pesticide load. Response to the pesticide tax varies among farms, depending on the crop types grown. The study is highly policy relevant for countries aiming to lower pesticide load, providing empirical evidence that a proper tax design can overcome the low price sensitivity found with previous pesticide taxes in Denmark and elsewhere. Moreover, this study offers a rare example of an ex-post evaluation that builds on detailed farm-level data, following registered pesticide use before and after the tax redesign, which allows for a more precise estimation of the impact of the tax.