Financing the climate transition : the green deal hits the farm sector, another path is needed

When the European Commission presented its proposals to apply the Green Deal to agriculture, Farm Europe took the lead to point out what they implied for the EU: lower production, higher food costs, less food security, lower exports, lower revenues.

That analysis was widely shared. It was followed by a strong reaction from farmers’ organisations and political representatives, in particular in the European Parliament.

The Commission heard the criticisms and has either withdrawn or shelved the initial proposals. Farmers were therefore shielded from the economic damage that would result from applying contractionary policies to address environmental and climate challenges without properly taking into account the need to combine economic and environmental performance.

Farm Europe stressed that the way to address those challenges was through more investment and innovation on technologies and practices that reduce the environmental footprint without sacrificing growth and revenues.

Unfortunately, the sector is at the brink of being hit by the application of the Green Deal to the rest of the economy.

A structural loss of competitiveness 

Farmers have been warned that the price of fertilisers for 2026 would go up sharply due to the application of the CBAM – the Carbon Border Adjustment Mechanism. The CBAM is to be imposed as of 2026, and it will initially apply to imports of cement, iron and steel, aluminum, fertilisers, electricity, and hydrogen.  

The CBAM is an import tax to ensure that the carbon price of imports is equivalent to the carbon price of domestic production. The CBAM is thus linked to the EU Emission Trading System (ETS) and it is specifically designed to protect the domestic market from imports from countries where there is no carbon emissions price.

It reflects the philosophy of the Green Deal which is to increase production costs of high carbon intensive products, undermining their competitiveness, rather than incentivizing low carbon solutions. The focus is to “green” the offer rather than the demand. In most of the sectors, this strategy is leading to a dead-end, as companies take the risk to invest in green products, without guarantees on a corresponding market. They face a major financial risks as the current situation of the automotive sector is showing.

According to the French institute Arvalis for the French wheat producers (AGPB), the production cost of soft wheat was 240 €/t on average between 2019 and 2024, with a range from 180 to 320. The fertilisers cost varied from 25 to 60 €/t (i.e. 13 to 23 % of the total cost). The CBAM cost would represent 5 to 10 % of the production cost and between 35 and 200% of the net revenue of the average typical French farm over the recent years. It could result in an increase between €13 and €24 per ton of cereal produced in the EU, and €16 to €31 per ton of oilseeds, which is simply unbearable.

In Italy, according to Coldiretti and Filiera Italia, over the past six months, the price of fertilisers has increased by 17%, and it is expected to rise by a further 2–3% in the coming months, on the top of previous increases since the war in Ukraine started. A further rise resulting from the application of the CBAM is expected, estimated at up to 15%. 

Not only a short term challenge

Recently the Commission made some reassuring declarations to the effect that she would stabilise the price of fertilisers. The Commission envisions as a first step to eliminate import tariffs, thus reducing the price of imports that account for close to half of the EU needs. If this first step were to come short of stabilising prices, the Commission floated the possibility of suspending the application of the CBAM for fertilisers.

The problem with this approach is that whilst aiming to soften only partially farm input costs, it sacrifices the EU fertiliser industry, and does not address the real issue at stake : a true competitive business model for financing the climate transition of EU agriculture. The issue is not only a short term price issue, but a medium to long term strategy to lay down the foundation of a value chain from fertilisers to cereals, located in the European Union, competitive on global market. The EU cannot afford to lose export markets, which are even more strategic as Russia uses wheat exports as a geopolitical asset.

EU domestic fertilizers industry has lost a significant share of its production capacity due to the gas price increases that followed the invasion of Ukraine by Russia and the sanctions that were applied against the aggressor; and the gradual application of the ETS that increased the price of CO2 emissions. According to the sector, it lost 7 million tonnes of Nitrogen production capacity, and an additional 2.7 million tonnes are stopped — which means that they could eventually be available to operate again.

If the measures envisioned by the Commission are applied, the industry would suffer the full blast of tariff free imports from producers who do not pay for their CO2 emissions. It would expose domestic producers to “reverse carbon leakage” as imports of high-carbon fertilisers would increase.

It is not in the interest of the EU to be even more dependent upon imports for their key inputs, and certainly it is not in the interest of the EU to be even more dependent upon third countries to ensure its strategic autonomy and food security.

Fixing the fertilization problem at its root

Therefore, Farm Europe urges the Commission to take a immediate and holistic approach that leaves no strategic sector exposed and shape a new business model for a credible and sustainable decarbonation strategy for agriculture and the fertilizer sector together. This challenge is directly connected to EU strategic autonomy and to its geopolitical influence in the world. How to reduce emissions in the fertiliser sector should be fundamentally revised. Measures should be taken without delay in order to avoid detrimental impact on EU farmers in 2026. 

The immediate remedy is to exclude fertilisers from the application of the ETS, which would automatically exclude the sector from the application of the CBAM. An ad hoc decarbona-tion strategy for the farmers and the fertilisers industry altogether should be defined, fo-cusing on the demand, via true incentives rather than trying to create an artificial offer with-out market. 

The path to reducing emissions in the production of fertilisers could be pursued through a balanced mix of incentives to encourage lower emissions and increase the production of green fertilisers. 

A key component should be to allow farmers to sell carbon farming credits (emission reduction) to ETS companies who need allowances. As a crucial element of agriculture emissions comes from the use of fertilisers, farmers could buy certified low-carbon fertilisers, generate emission reduction carbon credits on a voluntary basis. The additional price of green fertilisers would be covered via the ETS market without agriculture being include in this market as a sector, neither fertilisers as the decarbonation strategy. This approach would be exclusively focusing on incentives for farmers, whilst generating a true demand for the EU fertilizers companies. In addition, a target of a 5% incorporation mandate for green fertilisers could be considered, offering the possibility to use biomethane.

Those incentives should be limited to EU-produced fertilisers, as it is essential to guarantee the veracity of certification. Unfortunately, the experience with certification of imports has shown that it is prone to fraud, and so far, the Commission has been unable to stop massive fraud occurring in imports of biofuels.

In the meantime, the use of organic fertilisers should also be incentives via a targeted revision of the Nitrate directive allowing to go beyond the limits of nitrogen application from manure to 170 kg N/ha/year depending on local conditions. 

Those initial proposals could be the backbone of an ambitious strategy to be set on the occasion of the fertilisers action plan which is due to be presented later this year.