51
4 The Economics of Eutrophication
• They are well suited when emissions are heterogeneous,
cf. Vatn’s (2005) OPIA framework.
• They are cheap to administer as their transaction costs are
close to zero.
• They produce tax revenues to the government instead of
increasing the strain on government funds as is the case
with many other agrienvironmental schemes.
Unfortunately, input taxes also entail some problematic issues. From an economics theory perspective, it is troubling
that input taxes are not cost-effective. The reason for this is
that the incentive is on economizing with the input use while
cost effectiveness is based on equimarginal costs measured
relative to emissions.
Additional benefits and disadvantages are specific to the
input being taxed. In a eutrophication context, nitrogen fertilizer taxes are particularly relevant. A major disadvantage
is that farmers and fertilizer producers are strongly against
such taxes, which frequently delays their implementation or
leads to insufficient tax levels. Second, they are perceived
as unfair—farmers with excess nitrogen owing to intensive
livestock production escape the tax, even though many studies suggest that intensive livestock production is the major
cause of eutrophication from agriculture (McSweeny and
Shortle 1989, Oenema 2004). There are numerous studies
on nitrogen fertilizer taxes. An early study is Hanley (1990)
while Vatn et al. (2006) is a fairly recent study. Common
features for most of the studies on nitrogen fertilizers are that
they succeed in reducing nitrate leaching and that the social
costs are low, although not cost-effective according to the
definition of cost effectiveness.
A particular concern related to high input taxes relates to
the emergence of illegal markets or smuggling. Although this
may not be a major issue for fertilizer taxes, it is for pesticides: modern pesticides are often highly concentrated and a
liter of pesticide may be sufficient for several hundred hectares. Pesticides are therefore a high-value low-volume commodity, which makes it easy to smuggle from areas where
they are not taxed heavily. This may cause a mismatch between official figures for use and measurements of pesticide
residues, which in turn may cause difficulties establishing
a reliable knowledge base for their environmental impacts.
4.5.5 Regulations Seeking to Solve the
Asymmetric Information Issues 1
As mentioned in Sect. 4.3, it is costly and technically difficult to measure nonpoint source emissions from individual
farm fields. This is a major reason for the widespread use
of procedural regulations in agriculture, and economists’
1
Xepapadeas (2011) provides an updated theoretical review of the information issues of nonpoint source emissions, and ways to cope with
these issues.
interest in input taxes in agriculture, in particular on nitrogen
fertilizers. The theoretical shortcomings of procedural and
input regulations have led economists to search for ways to
assess emissions and hence tax emissions. There are three
main approaches in the economics literature on this issue
that are briefly discussed in the following subsections.
4.5.6 Ambient Taxes
Segerson (1988) proposes to measure water quality in a recipient and issue an ambient tax on all farmers emitting to this
recipient. In an ambient tax, the tax rate for all agents is decided based upon the marginal value of the last unit of emissions. Although this yields a cost-effective solution, it also
means that excess tax revenues are collected. This has given
birth to an own strand of the literature, where one seeks to
reduce the excess taxation while maintaining cost effectiveness. Hansen and Romstad’s (2007) is one of the most recent
papers on this topic. They propose an informational feasible
self-reporting mechanism that is robust to cooperation among
polluters while giving participating firms correct abatement
incentives as well as giving entry--exit incentives that are correct to a first-order approximation. Suter et al. (2009) have
tested ambient taxes experimentally. Contrary to the theoretical papers in this area, they find that firm size matters, suggesting that more work is needed on the theory side.
4.5.7 Teams Approaches
The basic idea in Romstad (2003) is that it is possible to
measure an increase in nutrient concentrations on a segment
of a river or a stream. By offering a contract to all farmers
(the team) behind these emissions, it will in principle be possible to implement emission-based regulations, which would
then result in a cost-effective solution. Farmers are likely to
accept such a contract if they are better off with the contract
than with the standard nonpoint source regulations. Conditions for the team to function are established. An important
driver in the mechanism is that dissatisfied members of the
team can get out of the contract in the next time period. This
exit possibility disciplines team members so that each member meets his or her part of the internal agreement among
team members. A variant of the mechanism has been tested
experimentally (Taylor et al. 2004).
4.5.8 Emission Taxes Based on Bodeled
Emissions
Romstad (2012) suggests base regulations on model estimates
of the environmental impacts. This is possible as environmental assessment models have gradually become reliable and
4 The Economics of Eutrophication
• They are well suited when emissions are heterogeneous,
cf. Vatn’s (2005) OPIA framework.
• They are cheap to administer as their transaction costs are
close to zero.
• They produce tax revenues to the government instead of
increasing the strain on government funds as is the case
with many other agrienvironmental schemes.
Unfortunately, input taxes also entail some problematic issues. From an economics theory perspective, it is troubling
that input taxes are not cost-effective. The reason for this is
that the incentive is on economizing with the input use while
cost effectiveness is based on equimarginal costs measured
relative to emissions.
Additional benefits and disadvantages are specific to the
input being taxed. In a eutrophication context, nitrogen fertilizer taxes are particularly relevant. A major disadvantage
is that farmers and fertilizer producers are strongly against
such taxes, which frequently delays their implementation or
leads to insufficient tax levels. Second, they are perceived
as unfair—farmers with excess nitrogen owing to intensive
livestock production escape the tax, even though many studies suggest that intensive livestock production is the major
cause of eutrophication from agriculture (McSweeny and
Shortle 1989, Oenema 2004). There are numerous studies
on nitrogen fertilizer taxes. An early study is Hanley (1990)
while Vatn et al. (2006) is a fairly recent study. Common
features for most of the studies on nitrogen fertilizers are that
they succeed in reducing nitrate leaching and that the social
costs are low, although not cost-effective according to the
definition of cost effectiveness.
A particular concern related to high input taxes relates to
the emergence of illegal markets or smuggling. Although this
may not be a major issue for fertilizer taxes, it is for pesticides: modern pesticides are often highly concentrated and a
liter of pesticide may be sufficient for several hundred hectares. Pesticides are therefore a high-value low-volume commodity, which makes it easy to smuggle from areas where
they are not taxed heavily. This may cause a mismatch between official figures for use and measurements of pesticide
residues, which in turn may cause difficulties establishing
a reliable knowledge base for their environmental impacts.
4.5.5 Regulations Seeking to Solve the
Asymmetric Information Issues 1
As mentioned in Sect. 4.3, it is costly and technically difficult to measure nonpoint source emissions from individual
farm fields. This is a major reason for the widespread use
of procedural regulations in agriculture, and economists’
1
Xepapadeas (2011) provides an updated theoretical review of the information issues of nonpoint source emissions, and ways to cope with
these issues.
interest in input taxes in agriculture, in particular on nitrogen
fertilizers. The theoretical shortcomings of procedural and
input regulations have led economists to search for ways to
assess emissions and hence tax emissions. There are three
main approaches in the economics literature on this issue
that are briefly discussed in the following subsections.
4.5.6 Ambient Taxes
Segerson (1988) proposes to measure water quality in a recipient and issue an ambient tax on all farmers emitting to this
recipient. In an ambient tax, the tax rate for all agents is decided based upon the marginal value of the last unit of emissions. Although this yields a cost-effective solution, it also
means that excess tax revenues are collected. This has given
birth to an own strand of the literature, where one seeks to
reduce the excess taxation while maintaining cost effectiveness. Hansen and Romstad’s (2007) is one of the most recent
papers on this topic. They propose an informational feasible
self-reporting mechanism that is robust to cooperation among
polluters while giving participating firms correct abatement
incentives as well as giving entry--exit incentives that are correct to a first-order approximation. Suter et al. (2009) have
tested ambient taxes experimentally. Contrary to the theoretical papers in this area, they find that firm size matters, suggesting that more work is needed on the theory side.
4.5.7 Teams Approaches
The basic idea in Romstad (2003) is that it is possible to
measure an increase in nutrient concentrations on a segment
of a river or a stream. By offering a contract to all farmers
(the team) behind these emissions, it will in principle be possible to implement emission-based regulations, which would
then result in a cost-effective solution. Farmers are likely to
accept such a contract if they are better off with the contract
than with the standard nonpoint source regulations. Conditions for the team to function are established. An important
driver in the mechanism is that dissatisfied members of the
team can get out of the contract in the next time period. This
exit possibility disciplines team members so that each member meets his or her part of the internal agreement among
team members. A variant of the mechanism has been tested
experimentally (Taylor et al. 2004).
4.5.8 Emission Taxes Based on Bodeled
Emissions
Romstad (2012) suggests base regulations on model estimates
of the environmental impacts. This is possible as environmental assessment models have gradually become reliable and