Panel Paper: The Effect of Downstream Tax on Upstream Externality: Evidence from Food Waste Pricing

Friday, November 8, 2019
Plaza Building: Lobby Level, Director's Row J (Sheraton Denver Downtown)

*Names in bold indicate Presenter

Seunghoon Lee, University of Chicago

Food production constitutes a quarter of the global anthropogenic greenhouse gas (GHGs) emissions, but levying a carbon tax on food to account for the true social cost of carbon is seemingly infeasible. An indirect but more politically attainable alternative is taxing downstream externality—in this case, food waste—instead. Acuff and Kaffine (2013), for instance, showed that upstream social benefit of waste reduction from less GHGs is as large as downstream social benefits. Considering that more than 30% of the total food produced is discarded globally, there is ample opportunity for downstream taxing. Also, food waste itself is a major source of methane—one of the most potent GHGs—so reducing it is valuable on its own.

Most of the earlier studies on waste management abstracted away from the upstream externalities—important exceptions are Walls and Palmer (2001) and Acuff and Kaffine (2013), which developed a theoretical model and simulation results, respectively. This paper departs from earlier works and provides the first empirical evidence of the effect of downstream corrective tax policy on upstream externality using a policy implemented in South Korea. Also, this paper fills the gap in the scientific literature on climate mitigation in the food and agricultural sector by presenting a policy instrument in action.

I built a data set which tracks each municipality’s food waste price policy and fee structure between 2010 and 2016. The data was then combined with an administrative food waste quantity data (for downstream) and grocery consumer panel data (for upstream).

The policy in question is a nation-wide expansion of food waste unit based pricing (UBP) in 2013, which aims at curbing the negative externality from uneaten food. Following the central government’s initiative, an average local government levied 5 cents per kilogram as food waste fee. Exploiting the staggered adoption of the policy and the difference in fee scale over time and municipality, the first part of this paper shows that the policy reduced food waste 30% on average at the mean fee level. To study the policy impact on GHGs at the upstream, this paper aggregates each household’s food purchase by its carbon intensity and estimates the policy impact on the carbon intensity of the overall food basket. Using the rich consumer panel dataset, I then explore the potential mechanisms for upstream responses: substitution in favor of storable food items and reduction in the quantity of the food purchased are of particular interest.

In the final section, I estimate the social welfare changes from the policy by considering both downstream and upstream changes in GHGs as a result of the policy.