Reducing enteric methane emissions through market-based policy instruments

A recent FAO study compared the effect of reducing enteric methane emissions using different market-based instruments. Using the FAO Livestock Policy Simualtion Model (LPSM) and taking Uruguay’s dairy sector as a case study, the analysis finds out that adopting a policy mix that combines different market-based policy instruments can be more effective in reducing enteric methane emissions than employing a single policy instrument alone.

Nowadays, several technological approaches are available to mitigate enteric methane emissions from the livestock sector. However, technological changes alone cannot generate the necessary incentives to accelerate emissions reduction. The lack of adequate market signals may discourage farmers and producers from adopting those climate and environmentally friendly technologies to reduce emissions.

TheLivestock Policy Simulation Model (LPSM)

The LPSM is a dynamic model designed to conduct ex-ante policy analysis at the country level. The model builds four scenarios to assess the effects of combining different types of policy instruments. The base scenario simulates a business-as-usual projection of the economy without any policy change. The first scenario analyses the effect of a government investment oriented to increase productivity in dairy production systems. The second scenario assesses the combined effect of an investment with an emissions quota, and the third scenario investigates the effect of an investment with an emissions tax.

The case of Uruguay

Uruguay’s  dairy production systems are predominantly grass-based, with only 8 percent of milk produced under confinement conditions.. Uruguay is a signatory country of the Global Methane Pledge and already implement technical solutions to mitigate enteric methane emissions. Those includediet reformulation,availability of low-methane-producing breeds, pasture and forage crops management. However, without strong market signals and incentives, farmers may not be making optimal decisions when adopting emission reducting technologies.

Findings and results

The study shows that employing an “investment alone” scenario leads to high employment generation, household consumption and poverty reduction, but it also generates higher total methane emissions. Combining an “investment with an emissions quota” can help to control the increase in emissions, while contributing to GDP gains and private investment, but it significantly reduces employment. Finally, merging an “investment” with an “emissions tax” leads to the highest control in the rise of greenhouse gas emissions but at the cost of lower performance in other economic indicators.

These results have important policy implications showing that there is no one-size-fits-all solution, and welfare outcomes differ depending on the type of policy instruments employed. A policy mix, which includes a set of different market-based policy instruments, can be more effective than using a single policy instrument alone. The analysis also illustrates the capacity of LPSM to integrate economic, social, and environmental dimensions, while quantifying spillover and trade-offs.

About enteric methane

Methane is a potent greenhouse gas responsible for around 30 percent of the rise in global average temperature; on a 100-year horizon, methane has 25-times the global warming potential of carbon dioxide. Emissions from enteric fermentation, account for roughly 32 percent of global methane anthropogenic emissions. Thus, abating enteric methene emissions from the dairy sector have been considered an effective strategy for reducing climate change induced by short-lived climate pollutants.