Analyses focus on current issues of particular relevance to Danmarks Nationalbank’s objectives. The analyses may also contain Danmarks Nationalbank’s recommendations. They include our projections for the Danish economy and our assessment of financial stability. Analyses are targeted at people with a broad interest in economic and financial matters.
Credit institutions are well positioned to handle losses resulting from a carbon tax on agriculture
In November 2024, a broad majority of the parties in the Danish Parliament reached a political agreement on a national carbon tax on agriculture. The tax, which will be phased in from 2030, will make climate-impacting agricultural production more expensive and thus create an economic incentive for transition and reducing emissions. This analysis examines the impact of the upcoming carbon tax for Danish banks and mortgage credit institutions, which jointly hold loans totalling kr. 274 billion to the agricultural sector. The analysis shows even without lower emissions among farmers as the tax is introduced the institutions are generally well positioned to handle potential losses on their agricultural lending.
Key messages
Why is it important?
A green transition of society is important for the fulfilment of Denmark’s climate goals in 2030 and beyond. If agriculture does not reduce its emissions, it will be more expensive for the rest of the society to meet its climate goals. With loans totalling kr. 274 billion, upsets in the agricultural sector can potentially affect banks, mortgage credit institutions and financial stability.
Climate change and the green transition of society can generally challenge Danmarks Nationalbank’s objectives of stable prices and financial stability in Denmark. This is why it is important for Danmarks Nationalbank to analyse how and to what extent climate change and different outcomes of the green transition may affect the economy and the financial system.
Main chart
Credit institutions are deemed to be able to handle potential losses on agricultural lending
Note:
Lending to farms in risk of insolvency in 2035 due to the implementation of the carbon tax from the Green Tripartite Agreement. Lending (before impairment charges) is calculated as of the end of 2023 and projected to 2035 based on developments in farms’ financial accounts. The buffers held by institutions to cover loan losses illustrated in the chart consists of already recognised impairment charges, collateral/pledges against underlying assets and annual profit (before tax) in a single financial year (an average of the institutions’ financial statements for 2021-23). Both lending and buffers are calculated as a weighted average across institutions.
Source:
SEGES Innovation P/S, Expert Group for a Green Tax Reform, Danmarks Nationalbank and own calculations.