The implications of empirical and 1:1 substitution ratios for consequential LCA: using a 1 % tax on whole milk as an illustrative example

There is an apparent convention within both consequential and attributional life cycle assessment (LCA) to assume a 1:1 substitution ratio between functionally equivalent product systems. However, this convention may not be compatible with the purpose of consequential LCA, which is to model the actual consequences of the decision at hand. This paper explores the implications of the convention using the illustrative example of a 1 % tax on whole milk. A consequential LCA which assumes a 1:1 substitution ratio between two functionally equivalent product systems is compared with the results of an analysis that estimates the actual substitution ratio based on empirical data. Cross-price elasticities of demand for possible competitor products are modelled using a linear approximated almost ideal demand system (LA-AIDS). The results show a 1:0.52 substitution ratio between whole and low fat milk, rather than a 1:1 substitution ratio. Depending on the consequential LCA values for whole and low fat milk, the 1:1 convention could underestimate the greenhouse gas emission reductions from the tax by over 400 %. The results suggest that it is highly important to model actual substitution ratios between competing product systems in order to capture the consequences of the decision at hand. As a subsidiary contribution, the paper also shows the importance of modelling the displacement effects of milk fat co-products, which are generally not considered in the existing LCA literature on milk.