The environmental effectiveness of alternative agri-environmental policy reforms: theoretical and empirical analysis

Abstract

This paper analyzes alternative agri-environmental policy reforms to reduce nutrient runoff when the government has price support, fertilizer tax, buffer zone subsidy and acreage subsidy as available instruments. To promote environmental goals, the government is assumed to adjust the tax and subsidyrates so as to keep the farmer’s profits constant. This instrument switch reduces the prices of less-polluting inputs and the farmer re-optimizes his production so that it becomes more environmentally friendly. The four alternative reforms under study are the following: a reduction of the producer price support or acreage subsidy compensated for by a higher buffer zone subsidy, and an increase in the fertilizer tax which is compensated for by either a higher acreage subsidy or a buffer zone subsidy. We show theoretically that although all reforms reduce the nutrient runoff, the last one is the most efficient. Our simulations show that at a 30 % abatement level of nitrogen runoffs all policy mixes decrease the average farmer’s profits after the re-adjustment, if the end price is not allowed to in-crease due to decreased production. The smallest loss in the farmer’s profits results from a policy mix which compensates for the higher fertilizer tax by a higher acreage subsidy.;