The welfare impacts of carbon taxes and labels on food demand

Food production and consumption account for a third of global greenhouse gas emissions (Crippa et al., 2021) and, therefore, offer a large mitigation potential. Policies such as carbon taxation and carbon labelling can contribute to correcting such externalities by encouraging consumers to substitute away from carbon intensive food products. We employ data from a survey-based, randomized experiment simulating an online supermarket, administered to a representative sample of the UK population. Using a structural demand system based on the Exact Affine Stone Index model with censoring, we estimate the greenhouse gas emission reductions and welfare effects associated with a range of demand-side policy scenarios, combining carbon labelling and carbon taxation. Our results show that the application of carbon labels leads to a 5.6% decrease in the carbon content of the average food basket. A £60 tax per tonne of CO2e on the most carbon intensive products would yield a 9.9% reduction in the carbon footprint, while also decreasing consumer welfare by £79 per person per year. Respectively, these policies would yield a decrease in emissions corresponding to about 2.7% and 4.7% of the GHG emissions of the UK. Combining carbon taxation and carbon labelling allows to reach the same CO2e emissions reduction as the carbon tax, with only a £28 tax rate per tonne of CO2e, thereby reducing welfare losses to £34 per person per year. These findings imply that carbon taxation and carbon labelling can be combined in order to abate greenhouse gas emissions, while limiting the negative impacts on welfare