NONPOINT SOURCE POLLUTION AND TWO-PART INSTRUMENTS

Renan-Ulrich Goetz, Universistat de Girona

Yolanda Martínez, Universidad de Zaragoza

EAERE 2009 Amsterdam, Preconference Water Economics24.6.2009

Introduction (literature)Ambient environmental Tax

Economic incentives or standards

Two part instruments

Xepapadeas, 1991and 1992, and Segerson, 1988

Shortle and Houran, 2001

Fullerton and Wolverton, 2000 and 2005

Introduction (motivation I)Two part instruments and nonpoint source pollution

The so-called two-part instruments consists of a tax on the contaminating product or input, and either a subsidy for recycling the product at the end of its lifetime, or for employing a clean technology.Generalization of the deposit refund systemReduce the need for monitoring and enforcement.

Introduction (motivation II)Two part instruments and nonpoint source pollution

The objective of this study is to design different two-part instruments that induce the socially optimal level of nonpoint source pollution. The different instruments are analyzed and compared to assess their applicability in practice.

Agriculture pollution and two part instruments

"Precise" presentation of the agricultural production process.

Input or technology cannot be considered as clean or dirty, but rather the way the input is applied.

Technological progress is not embodied in capital or input but in the management practice =>

Accredited verifier Voluntary approaches to

implement good environ- mental practices have often failed (Abdalla et al. 2007)

The model I

Partial equilibrium model

Social planner exists who maximizes the social net benefits (SNB).

Benefits of agricultural production minus the sum of private production costs and the monetary value of nitrate pollution of surface and groundwater resulting from the application of mineral and organic fertilizer

The model II Fixed number of n

identical and perfectly competitive firms that engage in swine production and the cultivation of corn

Swine production generate manure/slurry as a by-product

For corn production farmers combine the inputs: land, water, mineral and organic fertilizer (manure) which can be applied following good or bad practices.

Objectives of the study

Determine the best choice of “technology” from a social point of view.

Design a two-part instrument and compared its applicability and efficiency with those of a tax on emissions while taking account of asymmetric information.

Social net benefit (social decision problem)

( , ) ( )

0 0max ( ) ( )

f w h b g h

b g m w h

f x x n x x x n x

c c c s s sx x x x x

SNB p q dq p q dq

hgghbbhmmhww xxpnxxpnxxpnxxpn

( ) ( ) ( )h h h b b g g m mp x n D n x x x x

,

First order conditions (social problem)

1) ( ) 0f

hc x h s h b bb

x np f n x p x pn D n x

2) ( ) 0f

hc x s h h gg

x np f n x p x pn D n x

3) ( ) 0fc x h h h mmp f n x n x D n xp

4) 0 wc x h whp f n x pn x ( )

5) ( ) 0b gc s hw w m m b b g g h

x x np f n p x n p x n p n n p x n p x D n xp e

Policy design

In the following section we solve the private decision problem in the presence of alternative combinations of two-part instruments. All sets of policy instruments can induce the social optimum.

Farmers' profit (private problem)

,, , ,max ( , ) ( ) ( , ) ( )

b g wc s

m h

h hc f w h s b g f w h b g

x x x x xq q

x xp f t tx x x p x x f x x x x x

( ) ( ) ( ) ( )m m h w w h h h bm hw b bhp x x p x x p x pt t x xt t

( ) ( ) ( ) ( )g g h b b g gg e m m htp x x t x x x x

Situation I(regulator can observe emission)

Farmers maximize their profits with respect to xb, xg, xm, xw and xh; If we set the remaining taxes resulting from adapting the private f.o.c. to the social f.o.c. have to be chosen according to :

and

0,b g mt t t

( ),et D

0.c sq q w ht t t t

Situation II(regulator can observe inputs,

- full information)

Farmers maximize their profits with respect to xb, xg, xm, xw and xh; If we set the remaining taxes resulting from adapting the private f.o.c. to the social f.o.c. have to be chosen according to :

0,c se q qt t t

0 bb Dt 0 gg Dt 0 mm Dt

0c ww q xt t f ( ) 0h b b g g m mt D e x x x

Situation III(regulator can observe inputs,

- limited information)

Farmers maximize their profits with respect to xb, xg, xm, xw and xh; If we set the remaining taxes resulting from adapting the private f.o.c. to the social f.o.c. have to be chosen according to :

Deposit: tb Refund: tb - tg

0,c se q qt t t

0 bb Dt 0 gg Dt 0 mm Dt

0c ww q xt t f ( ) 0h b b g g m mt D e x x x

Situation IV(regulator can observe outputs,

and some of the inputs)

Farmers maximize their profits with respect to xb, xg, xm, xw and xh; If we set the remaining taxes resulting from adapting the private f.o.c. to the social f.o.c. have to be chosen according to :

0,e m ht t t

1( ) ( ) 0

sb q b mt t D

1

( ) ( ) 0sg q g mt t D

0w

f

mw x

x

Dt f

f

0c

f

mq

x

Dt

f

( )( ) ( ) ( ) ( ) ( ) ( ) 0

( )s w

f

mq x w b b m g g m

x b g

Dt D e f f x x D x D

f x x

Numerical Study

Illustration of the previous theoretical analysis with real data from a region located in the north-east of Spain – part of Aragon

40 % of the total Spanish swine population can be find here

Data based on a representative farm of the region (aragonese extension service, 2005 and 2007) see table 1 and 2 of the paper

The production and emission functions were estimated and specified as quadratic functions (based on data generated with a process orientated biophysical model, EPIC)

Cost /emissions for good and bad practices (Iguácel and Yagüe, 2007)

Damage function = water treatment costs

Results for Private and Social Problems with and without N Limits

Variables

Without limitation With limitationPrivate problem

Social problem

Private problem

Social problem

Corn production ( )in tons/ha 13.7 13.7 13.7 13.7

Swine production( )per ha 115.5 100.25 67 66.02

Nitrogen applied with bad practices

(xb)in kgN/ha 431.5 190.4 250 152.4

Nitrogen applied with good practices

(xg)in kgN/ha 0.0 183.6 0.0 94.3

Mineral nitrogen applied (xm)in kgN/ha 0.0 0.0 61.7 53.2

Total nitrogen applied (xf)in kgN/ha 431.5 374 311.7 300

Water applied (xw)in m3/ha 6470 6470 6323 6323

Total emissions (e)in kgN/ha 211 180 166.6 90

Profits of the farm (in €/ha)

(in brackets SNB)2466.4

(2192.1)2165.3

(1931.3)2263.3

(2046.8)2035.5

(1918.5)

Numerical Results of Taxes and Subsidies with N limits

TaxesFirst-best outcome Two-part Instruments

Situation I

Situation IITax on

Polluting Inputs and

Land

Situation IIITax on

polluting and non-polluting inputs

Situation IVTax on Polluting and Non-polluting Inputs

and on Output

(€/tons) - - - 24.669(€/swine) - - - 0.593tb (€/kgN) - 0.210 0.210 0.023tg (€/kgN) - 0.072 -0.137 (tb-tg) -0.114 (tb-tg)tm (€/kgN) - 0.123 0.123 -th (€/ha) - -10.139 -10.139 -tw (€/m3) - - - -0.002

te (€/kgN) 1.30 - - -Economic

impactSNB (€/ha) 1918.5 1918.5 1918.5 1918.5

Sensitivity of the taxes w.r.t. changes in the marginal cost of pollution

Taxes/SubsidiesMarginal cost

of

pollution

(€/kg)

(€/tons)

€/

swine)

tm

(€/kgN

)

tb

(€/kgN

)

tg

(€/kgN

)

th

(€/ha)

tw

(€/m3)

1

Situation II

- -0.095 0.161 0.056 -7.799

-

Situation IV 18.976 0.456 - 0.018 -0.088

--0.002

1.5

Situation II

- - 0.142 0.242 0.084 -11.699 -

Situation IV

28.464 0.684 - 0.027 -0.132 - -0.003

2.5

Situation II

- - 0.237 0.426 0.139 -19.498 -

Situation IV

47.440 1.140 - 0.045 -0.220 - -0.004

cqtcqt sqt

Conclusions

Two part instruments are capable to reproduce the first-best solution

Reduction in enforcement and monitoring costs

Asymmetric information problem, accredited verifier

Proposal for the economic incentives for the application of good environmental practices

Breitbildtestmuster (16:9)

Test Seitenverhäl

tnis

(Sollte kreisförmig angezeigt werden)

16x9

4x3