4.1 Market-based instruments
Fiscal measures, known as market-based instruments, are designed to influence the consumption patterns of various food products, as discussed by Röös et al. (2021). These instruments include specific taxes, subsidies, or changes in fees/charges (adjustments in VAT), strategically implemented to modify the relative prices of certain foods. The goal is to make healthier and more environmentally sustainable options more affordable compared to unhealthy choices. This approach is intended to align prices more closely with the true societal and environmental costs, as highlighted in studies by Macura et al. (2022), Perino and Schwickert (2023), Kihlberg (2021), and Säll and Gren (2015). Generally, taxes on goods and services tend to increase consumer prices, whereas subsidies have the opposite effect, leading to lower prices for consumers, a point reiterated by Röös et al. (2021).
Subsidies are financial mechanisms that should be strategically deployed to encourage positive externalities, such as biodiversity enhancement through farmland pollination or advancements in education and research, rather than to mitigate negative externalities. Negative externalities, such as carbon emissions contributing to climate change or nutrient emissions from agriculture causing eutrophication, should be addressed through ‘sticks’ (punishment)—either economic instruments like taxes and fees or legal measures including bans, tailored to the specific characteristics of the externality in question. Positive externalities, on the other hand, justify the use of subsidies ‘carrots’ (reward), as seen in the support for childcare and schools, which promote societal benefits. However, misapplication of subsidies to negative externalities, such as the substantial support given to agriculture despite its significant role in nitrogen emissions leading to water eutrophication, represents poor governance. This approach not only exacerbates the problem but also traps us in a cycle of funding compensatory actions indefinitely, as exemplified by the EU’s Common Agricultural Policy (CAP) subsidies. This dichotomy between positive and negative externalities, and the appropriate use of subsidies, is crucial for effective policy-making and governance (Indeed 2024).
Taxes on food products
The practice of taxing unhealthy products like tobacco, alcohol, or sugar is not a recent development. Traditionally, these taxes have primarily served fiscal purposes, namely generating revenue to fund public expenditures. Their use to encourage specific behaviours, such as healthy eating habits, is a relatively new development (Jensen and Smed 2017). In 2010, the Danish government increased taxes by 25 percent on a range of products based on sugar content (including ice cream, chocolate, sweets, and soft drinks) and decreased taxes on sugar-free soft drinks (Ecorys 2014, Capacci et al. 2012). In 2013, Denmark chose to abolish both the soft drink tax and the recently implemented fat tax, which had been in place from 2011 to 2012 (Capacci et al. 2012).
In recent years, a substantial number of modelling and experimental studies have been carried out to explore the impact of fiscal policies on potential consumption and health outcomes (Jensen and Smed 2017). These studies typically focus on price elasticity and consumer reactions to changes in relative prices – looking at how much the demand for product changes in response to a price change (Capacci et al. 2012). Research indicates (in combined analyses) that a 10 percent tax on sugar-sweetened beverages is associated with an average decrease in demand of 5 to 10 percent (Afshin et al. 2017; Green et al. 2013; Teng et al. 2020). This suggests that fiscal measures like taxation can be effective in reducing the consumption of unhealthy and environmentally unsustainable foods, as higher prices generally discourage the purchase of taxed items (Perino and Schwickert 2023; Säll and Gren 2015; Vellinga et al. 2022). Some researchers suggest that modest tax rates may not lead to significant changes in consumption but can generate significant tax revenues. These revenues could be used to finance alternative health and nutrition initiatives (Capacci et al. 2012).
The degree to which changes in consumption due to a food tax impacts the consumption of foods and public health improvements remains a topic of debate. Academic literature on this subject is often inconclusive and at times presents contradictory evidence (Ecorys 2014). The varied outcomes of studies on this topic are primarily due to uncertainties related to the scale of substitution effects and the challenges in precisely determining demand responses to food taxes. These challenges stem from the complexities in directly linking tax changes to shifts in prices and demand. Moreover, external factors such as the cost of raw materials also play a significant role in influencing both price and demand, adding to the complexity of these assessments. In Finland, for example, where during the reintroduction of the sweet tax, rising costs of sugar and milk were also factors affecting the prices of confectionery and ice cream (Ecorys 2014).
Regarding substitution effects, when there is a decrease in demand due to taxes, consumers might either switch to less expensive brands of the taxed product (brand substitution) or choose different, untaxed products (product substitution) (Ecorys 2014). An example of this is seen in the case of carbonated soft drinks, where taxation may prompt consumers to turn to alternatives like high-sugar energy drinks and flavoured waters, or to diet versions of the soft drinks. A potential solution to address this issue is to apply taxes or subsidies to a range of food products simultaneously, such as including substitute beverages in the taxation scheme (Smed et al. 2007).
When there are readily available alternatives that are taxed less or not taxed at all, product substitution tends to occur. A positive example of this is the Danish tax on saturated fat which resulted in decreased consumption of taxed products and an increased use of less taxed alternatives like olive oil and vegetable oil, which was the desired effect (Ecorys 2014). This tendency to substitute also depends on the consumers’ adaptability, which can differ based on various factors including age, family structure, and educational level (Jensen and Smed 2017).
A Norwegian study modelling use of taxes and subsidies concluded that this would work well for some food groups, but that a shopping leakage across borders (i.e. to Sweden with lower food prices) would reduce effectiveness of taxes and compromise food security (Abadie et al. 2016).
Research focusing on the impact of taxes on saturated fats, fibre, and sugar across different societal segments reveals that these effects are more significant among low-income groups than in other segments of the population, due to their lower price elasticity (Gren et al. 2021; Klenert et al. 2022; Smed et al. 2007). Although food taxes might lead to regressive financial impacts, disproportionately impacting poorer households, their health benefits are anticipated to be progressive. This means that lower-income families are more likely to alter their diets in response to fiscal measures (Capacci et al. 2012; Jensen and Smed 2017). Regarding age demographics, young people tend to decrease their consumption of saturated fats as prices rise, while middle-aged individuals show a higher sensitivity to price changes in their sugar consumption. This was highlighted in a simulation study examining the effects of sugar and fat taxes and fibre subsidies in Denmark (Smed et al. 2007).
The Danish Council on Climate Change recommends that the Danish Government implements a consumer tax on foods with a high carbon footprint such as meat and dairy products. This tax should reflect the climate impact of different products (Klimarådet 2021). In Norway, the introduction of cost-effective taxes on red meat was among the instruments proposed by the Norwegian Green Tax Commission in 2015 (NOU 2015). In both cases, these proposals have sparked public debate, but they have not resulted in implementation. The attempts to introduce, adapt, abolish, and reintroduce taxes as a fiscal measure in the last 30-40 years in the Nordic countries demonstrate some ambiguity. As the example from Denmark taxing saturated fat illustrates (Box 1), there are numerous representatives from the food industry, who are not convinced of the unequivocal support for taxes in promoting health benefits for citizens.