The Nutella Tax: patronising, protectionist and promoting poverty

Brian Sturgess - September 2013


Speed Read
  • Last year France came close to adopting a 300% rise in the tax on the import of palm oil, justified on health and environmental grounds.
  • The ‘fat’ tax was justified on health and environmental grounds, although there is no evidence that fat taxes are effective.
  • The proposal is being followed by copy-cat measures in Belgium and Switzerland despite the fact that Denmark withdrew a ‘fat’ tax after it failed to achieve its objectives.
  • Since it would discriminate against palm oil producers in Malaysia, Indonesia and West Africa in favour of European vegetable oil producers, the proposal is protectionist.

In late 2012 France came close to adopting a punitive tax on the import of palm oil with a proposal to raise the existing levy from €100 per tonne to €400, a rise of 300%. The proposal sponsored by Socialist Senator Yves Daudigny was justified on the dual grounds of improve French health and to fight deforestation in the tropics. Despite the rejection of the proposed tax whose main purpose is not to raise money, but to change behaviour, it is expected that its Socialist proponents in the Senate will reintroduce a similar measure this year. 

The proposed joint ‘health tax’ and ‘environment tax’ aroused much controversy stirred up by its ill-informed and politically motivated sponsors and supporters. Unfortunately, there is little economic evidence supporting the efficacy of ‘health taxes’ unless they are raised to punitive levels. Denmark has recently abandoned an experiment as unworkable, but combining a ‘health tax’ with an ‘environmental’ based imposition is economically illiterate. It will be argued in this article that both the health and environmental arguments in favour of the tax were equally flawed and that the Senate’s support for the proposal was basically protectionist with the objective of persuading palm oil users to substitute European grown ingredients for palm oil such as rapeseed and sunflower oil. In fact, this hypothesis can be proven when referenced to other efforts that have been undertaken – following the high-profile Nutella Tax issue – in other premier rapeseed-producing countries, notably Switzerland and Belgium. This article examines also the effect of those countries’ attempts at vegetable oil protectionism.

Palm oil is an important ingredient used by Ferrero, the makers of Nutella, a popular brand of hazelnut-chocolate spread so the proposal was quickly labelled the ‘Nutella tax’. An attempt to reintroduce the tax would cause widespread economic damage because despite the media attention on Nutella, which is one of the world’s favourite brands, palm oil is used in a vast range of other consumer products from ice cream to lip stick. If the tax is reintroduced and is set at a level that encourages input substitution the most likely short-term impact would be on the growers of palm oil in Malaysia and Indonesia. In the longer-term it could seriously harm the prospects of new producers of palm oil in Africa, including Francophone nations like Gabon. The tax would not help trim French waistlines, but it would almost certainly damn thousands in the developing world to remain stuck in poverty. 


Using Taxes to Promote Health and Protect the Environment
The social, rather than fiscal, justification for the proposed tax on palm oil in France was based on two separate grounds. The first was that consumption of spreads containing palm oil encouraged obesity in the French population and that enjoyment of these products is injurious to healthy living. The Senate in effect was signalling that by discouraging ‘inappropriate’ corporate and consumer behaviour the proposal was a form of paternalistic ‘sin’ tax. Sin taxes as normally understood are taxes intended to reduce consumption of products considered to be harmful or morally dubious such as tobacco, addictive drugs, prostitution or gambling. The growth of green consciousness, and the active promotion of health by governments around the world, has extended the range of such taxes. The second justification was based on the well-trod NGO promoted argument that the large scale cultivation of oil palm trees contributes to the deterioration of the environment by encroaching on primary rainforests in Malaysia and Indonesia, the habitat of a number of endangered species such as the Orangutan. Both of these are highly contentious issues where most of the available evidence is ignored by the main pressure groups behind the campaigns. 

Before considering the evidence, the underlying hypothesis that taxation can promote healthy consumption patterns or reduce the impact of the consumption of spreads on the tropical rainforest is also based on the economic theory of externalities. According to this body of thought private production and consumption of some products are deemed to have secondary positive or negative social effects so that taxation, or subsidisation by the state, are interventions necessary to bring private and social costs and benefits closer together. Narrowing the gap between the private and the social encourages an increase or a reduction in the economic activity in a way deemed to be more optimal. More particularly, in the case of the use of palm oil in hazelnut-chocolate spreads the argument is that a rise in input costs should encourage producers to switch technique to other ‘healthier’ vegetable oils while the price rises passed on in stores simultaneously persuades consumers to switch to cheaper brands which do not use palm oil such as the brand offerings of Casino and Système U. The so-called Nutella amendment would then be a classic example of what is known in the economics literature as a Pigovian tax, but a very confused example of one since it was justified as trying to promote two separate objectives: promoting health and environmental protection. 


The Case of Denmark
The use of the price mechanism through taxes or subsidies to encourage producers and consumers to substitute away from palm oil towards allegedly ‘healthier’ ingredients and products classifies the proposal as a type of health tax. Taxation to reduce obesity in a population can only be justified on Pigovian grounds if the intervention is effective so that the benefits outweigh the costs. The economic efficacy of health taxes is weakened by the availability of substitutes for consumers. The case of Denmark is instructive where the imposition of a ‘fat tax’ was a spectacular failure which was withdrawn after one year. In October 2011, the country introduced a fat tax on butter, milk, cheese, pizza, meat, oil and processed food if the item contains more than 2.3% saturated fat. In November 2012, the Danish Tax Ministry announced it would abolish the tax because it had failed to change eating habits, had been costly to implement and it had encouraged cross border trading to Germany and Sweden with a potential negative impact on local businesses and employment. 

A recent study by health economists at Oxford University on the evidence from the imposition of health taxes on products across the world found that substitution in consumption meant that impact of taxation on health was complicated and that taxing a narrow range of products was far less effective than including a broader range. They also found that a ‘fat tax’ would have to raise the prices faced by consumers by as high as 20% to have any significant effect, but that a broader public policy aimed at subsidising healthier dietary alternatives such as fruit and vegetables would have a more significant effect on reducing obesity. Putting aside the fact that raising food prices by this much is regressive which would impact unfairly on lower income groups, the introduction of a palm oil tax in France would have been extremely narrow falling on one category of trans fat leaving others unaffected. Furthermore, it has been estimated by the Association Sante Environnement France (ASEF), an association of over 2,500 doctors in France, who supported the amendment that the impact of the tax would have been to raise the price of a kilo of Nutella by €0.06, a rise of only 1% well below the 20% threshold estimated above. Such is the brand loyalty towards Nutella by French consumers that such a price rise would have if anything an infinitesimal impact on sales volume rendering one of the stated objectives of the tax on obesity to be completely ineffective. Furthermore, if the real reason for a heath tax in France was to reduce the consumption of saturated fats, butter and cheese should not have been exempt from the bill. Furthermore, unlike butter and cheese, the health case against palm oil has been largely discredited on scientific grounds. 


‘Copycat’ proposals in French-speaking Europe
The poorly-thought through nature of the Nutella tax, as described, has not stopped others from imitating the proposal. In Belgium, two Senators – Cindy Franssen and Sabine de Bethune – have proposed a major restriction on palm oil, to only 2g per 100g of product. This proposal is more proscriptive even than the Nutella Tax, as it would lead to a de facto prohibition on many products in Belgium, including Nutella. The Belgian proposal fails for the same reasons as set out previously, relating to the Nutella Tax – namely that is has no economic justification, would lead to price rises and poorer consumer choice, and is discriminatory in the sense that other saturated fats such as butter and cheese are not targeted.

In addition, the proposal from Senators Franssen and de Bethune commits a more fundamental nutritional error, in conflating palm oil with trans fats. Palm oil does not contain trans fats, which have been proven to have dangerous effects on human health. In fact, it is the European vegetable oils – rapeseed and sunflower – that can produce trans fats when partial hydrogenation occurs. This proposal – like the Nutella Tax – is an example of the poor regulation that occurs when protectionist sentiments are placed above factual information in the order of priority.

Another such example can be found in Switzerland, another major rapeseed-producing country. Proposals from some local Swiss politicians, including the Canton of Fribourg and the local MP Dominique de Buman, have also been aimed at banning, restricting or discriminating against palm oil: again, with the aim of favouring local rapeseed. Swiss Federal authorities have been quick to dismiss the measures, clearly recognising not only the inherent flaws, as outlined here, but also the potential for conflict with existing EU and WTO rules. The Federal Council’s position has been supported by substantial research work that illustrates the dangers for Switzerland – and indeed other countries – of falling prey to the protectionist temptation to promote local rapeseed by attacking foreign (imported) oils.

The temptation of other countries to follow the Nutella Tax example is evident – but the increasing rate of failure of such taxes, including the recent withdrawal of Denmark’s saturated fat tax, should be a salutary lesson. When the proposal is founded on faulty principles, bad science, and protectionism, the chances are that it will fail. Governments, take note. 


Palm Oil and the Environment
The other argument in favour of these proposed taxes on palm oil is that they would encourage a substitution by the manufacturer towards healthier more environmentally friendly ingredients is also unlikely to happen. The makers of Nutella, Ferrero, have claimed that they will not remove palm oil from the brand so a major impact of the tax in France would have depended on a massive substitution by consumers from Nutella to the own label brands promoted by the retailers. This would have no impact on deforestation in the tropics although it could raise agricultural land prices in Europe. A significant move away from palm oil to rapeseed or sunflower oil as an ingredient in foods would require much more land to come under cultivation. Palm oil is the most efficient and sustainable oil crop in the world when compared to other vegetable oils consuming considerably less energy in production, using less land and generating more oil per hectare than other leading vegetable oils such as Europe’s sunflower and rapeseed crops. In fact, historic yields from palm oil amount to 3.74 tonnes per hectare per year, or 9.8, 7.8 and 5.6 times the yields of soybean, sunflower and rapeseed, respectively, but current productivity levels in Malaysia at an average of 4.1 tonnes per hectare and the results of R&D suggest that palm oil yields could rise reducing the land requirements significantly. In addition, palm oil accounts for more than a third of global trade in edible oils while the crop occupies less than 5% of land under oilseed cultivation. 

The amount of land devoted to forests is higher in Malaysia, a major producer of palm oil than in France. Agricultural land in France covers 53.6% of total land area and forest area covers 28.5% of total land area, Malaysia has designated 23.9 % of total land area to agriculture and the Malaysian Government has committed to preserving 50% of its forest cover. Rather than damaging the environment in order to support local conservation efforts the palm oil industry in Malaysia has established the Malaysian Palm Oil Wildlife Conservation Fund (MPOWCF), with US$5.91 million in funding. Such projects provide valuable resources to protect and safeguard ecosystems and wildlife in Malaysia and reflect the industry’s commitment to protecting areas of ecological importance in much the same way that forests are set aside for preservation in France and other European countries. Meanwhile, private companies like Sime Darby have initiated their own conservation programmes/foundations to advance research and finance environmental conservation and enforcement of environmental laws in the country. Pressures on industry revenues from ill-conceived fiscal initiatives would put pressure on the resources available for such initiatives. 


Palm Oil and the Economic Development
The cultivation of oil palm has had a major impact on economic development in Malaysia and Indonesia. Oil palm cultivation can generate high, stable revenues to capital and labour. A study by Hoyle and Levang (2012) has shown that in Sumatra, Indonesia, the average income in a complete financial year of an oil palm plantation is as much as €2100 euros per hectare. This compares with only €200 euros for a rice plantation. The comparison of wages is even more striking. On an oil palm plantation, it is €36 euros per person, per day, but in a paddy field it is €1.7 euros per person per day. Furthermore, small farmers account for a significant share of palm oil production. In Malaysia, these small farmers cultivate 39% of land under oil palms, while the share of small farmer production throughout palm oil producing regions can be even higher. The high yields from oil palms have made the crop one of the best tools for poverty alleviation and rural development, providing small farmers with incomes of as high as US$1,000 - US$2,000 per hectare according to the Centre for Agriculture Research and Development (CIRAD). In Malaysia, support for small farmers has been a cornerstone of the nation’s economic development efforts. The establishment of the Federal Land Development Authority (FELDA) in 1966 and subsequent small farmer development schemes throughout the country has directly contributed to a decline of poverty rates from more than 49% to only 2% in 2011. 

Currently, Malaysia and Indonesia dominate the global palm oil market accounting for around 90% of global production, but there are plans to expand production in Africa particularly in Nigeria and Francophone nations like Cameroon and Gabon. A European protectionist measure disguising itself as a health or environment tax would severely damage these investment plans. The seriousness of this issue is witnessed in the recent court case won in Paris by African growers against the anti-palm oil advertising undertaken by Système U solely to promote its products. Certainly, this was a victory for free trade, but only a minor one in the face of the continuing negative campaign against the vegetable oil. While the impact of palm oil on the environment and upon health are controversial with mixed evidence and a debate inflated by NGO emotion, the impact of oil palm cultivation on reducing rural poverty in the developing world is unchallengeable. 


References
Pigou, A.C. (1920), The Economics of Welfare, Macmillan: London
Baumol, W. J. (1972), "On Taxation and the Control of Externalities", American Economic Review, 62 (3): 307–322.
Hoyle D, Levang P (2012). Le développement du palmier à huile au Cameroun, 16p. http://awsassets.panda.org/downloads/developpmentpalmierhuilecameroun.pdf
McNamara, D.J.(2010) “Palm Oil and Heart Health: A case of Manipulated Perception and Misuse of Science” 240S Vol 29 No. 3(s) Journal of the American College of Nutrition