Internalizing the External Costs of Animal-Derived Food in Hungary: Evaluating ETS and VAT-Based Fiscal Measures

This thesis investigates the environmental externalities of animal-derived food, with a particular focus on how fiscal measures, specifically VAT adjustments and Emissions Trading Scheme (ETS) options, could help internalize these costs in Hungary. The study is motivated by the lack of attention to external costs and the persistent pricing gap in the animal agriculture sector, an issue with significant implications for food security and the sustainability of food systems. To address this problem, the research estimates external costs using the environmental pricing methodology and evaluates a range of fiscal policy instruments. The methodology includes regionalizing environmental impact data based on information provided by national authorities; assessing a VAT adjustment scenario using current market prices and price elasticities for beef, milk, chicken, pork, and eggs; evaluating emissions coverage under two ETS designs (downstream ETS and on-farm livestock ETS); and examining a revenue redistribution mechanism in the form of a lump-sum transfer. The findings reveal that the real prices of animal-derived foods, once environmental damages are accounted for, are nearly double their current market prices. The analysis further demonstrates that both VAT adjustments and ETS options can reduce environmental externalities by lowering demand, decreasing the profitability of the sector, and creating incentives to mitigate environmental harm. Additionally, the results underscore that fiscal policies must be assessed carefully and designed with regional specificity to be effective in practice and ensure social equity. Overall, these outcomes provide strong evidence that fiscal policy intervention is needed in the animal agriculture sector in Hungary.