Evaluation of Agri-Environmental Policies for Water Quality Improvement Accounting for Firm Heterogeneity

Graeme Doole, Dan Marsh and Thiagaragah Ramilan ()
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Thiagaragah Ramilan: University of Melbourne

Working Papers in Economics from University of Waikato

Abstract: Policy makers worldwide are interested in the identification of cost-effective policy instruments to reduce diffuse pollution. A large economic model representing heterogeneous farms is used to evaluate a broad set of policies for reducing nitrate regulation within a large catchment dominated by dairy production. A policy instrument that allows the level of abatement to vary among producers according to differences in abatement cost is most cost-effective. The primary goal of 26 kg N ha-1 can be achieved at a cost of $15 ha-1 under this cap and trade policy, while a uniform cap on emissions for all farmers would be more than three times as expensive ($49 ha-1). In contrast, requiring uniform reductions in stocking rate, banning the application of nitrogen fertiliser, and land retirement perform poorly. These instruments are at least three times more costly than a cap and trade policy over all simulated reductions. Moreover, the differentiated policy does not greatly alter the distribution of farm profit, relative to what exists without regulation. The use of a large, complex economic model incorporating disaggregated farms provides unique insight into the economic benefits accruing to a differentiated policy.

Keywords: diffuse pollution; economic model; cap and trade policy (search for similar items in EconPapers)
JEL-codes: D78 Q15 Q53 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011-07-28
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