NONPOINT SOURCE POLLUTION AND TWO-PART INSTRUMENTS Renan-Ulrich Goetz, Universistat de Girona Yolanda Martínez, Universidad de Zaragoza EAERE 2009 Amsterdam, Preconference Water Economics

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 system  Reduce 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),

First order conditions (social problem)

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)

Situation I(regulator can observe emission) Farmers maximize their profits with respect to x b, x g, x m, x w and x h ; 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

Situation II(regulator can observe inputs, - full information) Farmers maximize their profits with respect to x b, x g, x m, x w and x h ; 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 :

Situation III(regulator can observe inputs, - limited information) Farmers maximize their profits with respect to x b, x g, x m, x w and x h ; 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: t b Refund: t b - t g

Situation IV(regulator can observe outputs, and some of the inputs) Farmers maximize their profits with respect to x b, x g, x m, x w and x h ; 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 :

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 limitationWith limitation Private problem Social problem Private problem Social problem Corn production ( ) in tons/ha 13.7 Swine production ( ) per ha Nitrogen applied with bad practices (x b ) in kgN/ha Nitrogen applied with good practices (x g ) in kgN/ha Mineral nitrogen applied (x m ) in kgN/ha Total nitrogen applied (x f ) in kgN/ha Water applied (x w ) in m 3 /ha Total emissions ( e ) in kgN/ha Profits of the farm (in €/ha) (in brackets SNB) (2192.1) (1931.3) (2046.8) (1918.5)

Numerical Results of Taxes and Subsidies with N limits Taxes First-best outcomeTwo-part Instruments Situation I Situation II Tax on Polluting Inputs and Land Situation III Tax on polluting and non-polluting inputs Situation IV Tax on Polluting and Non- polluting Inputs and on Output (€/tons) (€/swine) t b (€/kgN) t g (€/kgN) (t b -t g ) (t b -t g ) t m (€/kgN) t h (€/ha) t w (€/m 3 ) t e (€/kgN) Economic impact SNB (€/ha)

Sensitivity of the taxes w.r.t. changes in the marginal cost of pollution Taxes/Subsidies Marginal cost of pollution (€/kg) (€/tons) €/swine) t m (€/kgN) t b (€/kgN) t g (€/kgN) t h (€/ha) t w (€/m 3 ) 1 Situation II Situation IV Situation II Situation IV Situation II Situation IV

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

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