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Report No. 1/96

The Impact of the Removal of Farm Fuel Tax Rebates On CO2 Emmissions and Farm Income In Central Canadian Agriculture.  By Varghese Manaloor and Tülay Yildirim. October 1996.

Modern day agriculture is dependent on the intensive use of direct energy (gasoline, diesel, electricity, and natural gas) and indirect energy (fertilizer and pesticide) inputs. In particular, the substitution of capital for labour has increased the reliance of agriculture on non-renewable energy use.  An external shock in the prices of these inputs, due to market forces or government policy, can effect the use of these inputs and the resulting carbon dioxide (CO2) emissions.  Canada's commitment to the international community to stabilise CO2 emissions at 1990 levels brings about the possibility of introducing economic instruments such as energy taxes, carbon taxes, and the removal or redirection of the current subsidies in order to meet these targets. The Climate Change Task Group (CCTG) listed these measures as potential tools to change the current incentive structure and, hence, the energy-use patterns.  In this study, the impacts of the removal of the provincial farm-fuel tax rebate program on CO2 emissions, net farm income, and government tax revenue were analysed for Central Canadian agriculture.  In order to asses the impacts of various policies, information on the responsiveness of inputs to price changes, and the degree of substitutability between input pairs is necessary.  A translog cost function is used in this study to investigate substitution possibilities between energy and non-energy inputs for Central Canadian agriculture.  Direct energy and indirect energy inputs were found to be complements in production.  Direct energy is a substitute for labour and machinery inputs.  Land and fertilizer and labour and machinery input pairs are substitutes.  The estimated own-price elasticities indicate that all inputs are price inelastic.  Direct energy is the least responsive to own-price changes.  The removal of provincial farm fuel tax rebate programs would increase average fuel prices paid by farmers by 44.65 percent from their 1993 levels.  This will lead to 7.32 percent and 5.97 percent reduction in direct and indirect energy use, respectively, which would result in a 6.91 percent reduction in CO2 emissions from Central Canadian agriculture. The cost of producing the same level of output is estimated to increase by 1.65 percent, which translates into a 8.6 percent, or $187,506,000, decline in net farm income.  Government revenues are expected to increase by the total amount of rebates that are currently in place, but will stay short of the predicted decline in farm income. In summary, the removal of provincial farm fuel tax rebate programs would reduce CO2 emissions by 6.9 percent from 1993 levels. This policy change, however, results in net economic loss amounting to $79,685,000.

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