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ENVIRO-ECONOMIC ANALYSIS OF PHOSPHORUS NONPOINT POLLUTION

John V. Westra and Kent Olson

No 20653, 2001 Annual meeting, August 5-8, Chicago, IL from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: The state of Minnesota seeks to reduce phosphorus loading to the Minnesota River by 40% from current levels. The state agency charged with achieving this reduction has indicated each watershed should reduce its current phosphorus loading by 40%. We hypothesized that policies targeting specific practices or regions would have a smaller negative impact on farm income than policies requiring every nonpoint polluter to reduce its contribution by 40%. Using a stylized version of one major watershed in the river basin as an example, we analyzed the cost-effectiveness of various nonpoint pollution reduction policies. We simulated current and alternative farming systems (designed to reduce phosphorus loading by changing tillage or fertilizer practices) in distinct regions within the watershed using a biophysical process model. For each system, estimates of phosphorus loading from biophysical simulation were combined with production cost and return estimates to create an enviro-economic model of the watershed. Additionally, risk premiums were estimated and included with cost estimates for each alternative system. We used a positive math-programming (PMP) version of the enviro-economic model to analyze nonpoint pollution reduction policies (pollution standard, phosphorus effluent tax, conventional tillage tax, and phosphorus fertilizer tax). When regions and practices within the watershed could be targeted for achieving the pollution reduction standard, 13,500 fewer hectares (6% reduction from the baseline cropland level) were farmed. When the same standard was uniformly applied to all regions (not targeted), cropland decline by 40,500 hectares (20%). Under either scenario, cropland was removed from production, implying some producers may exit farming. Cropland reductions resulted in farmers losing $2.8 million (5% reduction from the baseline income level) in income with targeting, while not targeting caused farm income to decline by $11.4 million (21%). This finding illustrates how difficulty it is to reduce nonpoint pollution if one does not focus on specific regions. An effluent tax of $74 per kilogram of phosphorus reaching the river was needed to reduce phosphorus loading by 40% from current levels. With this tax rate, watershed farm income declined by $14 million (25% reduction from the baseline income level), $11 million of which were revenues from the effluent tax. Neither the conventional tillage tax nor the phosphorus fertilizer tax achieved a 40% reduction in phosphorus loading. This finding illustrates the difficulty of reducing nonpoint pollution by focusing only on one practice. Under a pollution-reduction standard, our results indicated it is more cost effective to reduce nonpoint pollution by targeting particular regions or practices in a watershed compared to not targeting. Specifically, producers farming on cropland susceptible to erosion in close proximity to water who switch from conventional tillage to conservation tillage and reduce phosphorus fertilization levels to those recommended by the state extension service will appreciably reduce phosphorus nonpoint pollution loading potential. Efforts to target those producers could minimize potential losses in farm income in the watersheds and the river basin.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Date: 2001
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