Tradeable Nitrogen Abatement Practices for Diffuse Agricultural Emissions: A ‘Smart Market’ Approach

Syezlin Hasan (), Line Block Hansen, James C. R. Smart, Berit Hasler and Mette Termansen
Additional contact information
Syezlin Hasan: Griffith University
Line Block Hansen: The Danish Economic Councils
James C. R. Smart: Griffith University
Berit Hasler: Aarhus University
Mette Termansen: University of Copenhagen

Environmental & Resource Economics, 2022, vol. 82, issue 1, No 2, 29-63

Abstract: Abstract Markets in pollution permits for managing environmental quality have been advocated by economists since early 1970s as a mechanism that can deliver pollution reduction targets at lower cost to regulated entities than traditional uniform command-and control approaches. This study explores whether a ‘smart market’ cap-and-trade scheme between non-point sources can offer meaningful, robust and policy amenable, advantages over alternative approaches for nitrogen management in a realistic setting: 6504 individual farms in Limfjorden catchment, Denmark. The scheme involves multilateral trading of nitrogen emission rights among farms via changes in agricultural land management practices under a catchment-level cap on total nitrogen load. In this, the first exploration of non-point to non-point smart market nitrogen trading in a real setting, we estimate efficiency gains compared to uniform command-and-control regulation, explore the robustness of these gains in the face of non-participation, and reflect on farmers’ potential acceptance of the trading market in comparison with its command-and-control analog: spatially-targeted regulation, implemented via location-specific limits on nitrogen leaching. Results indicate that the smart market has the potential to substantially reduce the cost of meeting the catchment’s nitrogen reduction target. For a 21.5% reduction from baseline nitrogen load, the market delivers cost savings of 56% (DKK273 million, €36.6 million) compared to uniform regulation, with participating farms realising a mean net benefit of DKK 723/ha (€ 97/ha). Market performance is relatively robust against transaction cost; when delivering a 21.5% reduction in nitrogen load to Limfjorden, approximately 70% of the overall efficiency gain could be retained if only 24% of farms engaged with the market.

Keywords: Land use; Diffuse pollution; Leaching; Linear programming; Simulations; Water Framework Directive; Water quality trading (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10640-022-00657-2

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