National Bank of Denmark analysis finds credit institutions well placed to absorb losses from Denmark’s agricultural carbon tax

The National Bank of Denmark published an analysis of the planned Danish agricultural carbon tax and its implications for banks and mortgage credit institutions, concluding that the sector is generally well positioned to absorb potential credit losses on DKK 274 billion of agricultural lending, even assuming farmers do not reduce emissions as the tax is introduced. The tax, agreed politically in November 2024, will be levied on greenhouse gas emissions from livestock digestion and manure management and phased in from 2030 to 2035. It will start at a marginal rate of DKK 300 per tonne of CO2e in 2030 and rise to DKK 750 in 2035, alongside a base deduction covering 60% of average emissions by animal type, implying effective rates of DKK 120 in 2030 and DKK 300 in 2035. Under a no-abatement scenario, the share of farms assessed to be at risk of insolvency is projected to rise from around 2% in 2025 to almost 4% in 2035, with loans to such farms totalling around DKK 19 billion or 7% of exposures, although some banks could see more than 20% of their agricultural lending linked to these higher-risk borrowers by 2035. Loss-absorbing capacity is assessed to come primarily from collateral and ongoing profits, with buffers across institutions estimated to exceed potential losses by more than four times. The analysis emphasises that the gradual phasing-in supports loss absorption over several years and gives institutions time to adjust lending and capital planning. It also flags that the estimates may overstate impacts because they assume all farms at risk of insolvency default, no emissions-reducing transition occurs, and institutions’ loan portfolios and buffers remain unchanged.