Slide 1 Technical efficiency in Danish trout farms: Taking pollution into account Implication for future growth and regulation Rasmus Nielsen Environmental and Natural Resource Economics unit Institute of Food and Resource Economics University of Copenhagen

Slide 2 Outline of presentation This is a study on fresh water trout production in Denmark Technical efficiency is estimated using Data Envelopment Analysis (DEA), where pollution of nitrogen (N) and phosphorus (P) is included as an input. A Tobit regression model is used as a second step, testing if the use of different water purification system an the size of the farms influence on technical efficiency Policy implication: Is it possible to have sustainable growth?

Slide 3 European plans to support growth EU implemented a strategic plan for a sustainable development of the European aquaculture sector in 2002-(Revised 2009). Goal: Yearly growth of 4%. Creation of 8,000-10,000 new jobs. No success due to environmental constrains and strong global competition

Slide 4 Danish plans to support growth Danish strategy 2007 – 2015: Raise production from 30,000 to 60,000 tons. Support environmental friendly production. Growth should be sustainable – A decrease in the existing level of pollution per kilo of produced fish To reach the combined goal of growth and a sustainable production, two new water purification systems, a semi- intensive and an intensive, was introduced to Danish trout farming in 2005/2006. The most intensive water purification systems reduce pollution from nitrogen (30%), phosphor (60%), and organic material (90%).

Slide 5 Data Data are available for 2007 (146 farms) and 2008 (146 farms). Only farms producing rainbow trout for consumption are selected. The selected sample accounts for approximately 50% of the Danish production in value and 10% of EU production of fresh water trout Data for the DEA model and Tobit regression 1 Output: Total value of production of fish. 5 Inputs: Total cost of Fish & Feed, Labour, and Capital, and total volume of Nitrogen and Phosphorus Categorical variables are: 3 types of - “Water purification systems” and 4 - “Size classes”

Slide 6 Extensive - water purification systems

Slide 7 Semi-intensive - water purification system

Slide 8 Intensive - water purification system

Slide 9 Hypotheses and model Hypotheses: 1) Technical efficiency is the same for all farms, even though, investment are higher for farms using more intensive water purification systems 2) Size in terms of production volume influence on technical efficiency

Slide 10 DEA model Input-oriented DEA model with variable returns to scale (Coelli et al. 2005): Pure technical efficiency (TE) is estimated in the model. TE measures the farm’s ability to use the lowest possible sets of input to produce a given output. If TE=1 the farm is technical efficient.

Slide 11 Tobit model Tobit regression model (Hoff 2007) Theta is the efficiency scores from the DEA analysis Beta is the regression parameters D is the exogenous variables that influence on farm efficiency - in this case, dummy variables describing 3 water purification systems and 4 size classes

Slide 12 Results: DEA model (Average TE-scores )

Slide 13 Results: Tobit model

Slide 14 Implication Intensive and semi-intensive farms are just as technical efficient as extensive farms, but they pollute less per kilo of produced fish It is, therefore, possible to have growth without increasing pollution and without reducing technical efficiency if farms invest in more intensive water purification systems Why doesn’t everybody use the new water purification systems? Higher investment cost Risk and uncertainty (future prices, production volume, regulation etc.) Farmers have no incentive to reduce pollution The existing regulation does not ensure that the fish farmer can produce more, even though, they pollute less

Slide 15 Implications What is done to support sustainable production? The Danish regulation today is an input regulation based on feed quotas Changing the regulation to an output based regulation on nitrogen can create an incentive for producers to reduce nitrogen pollution per kg of produced fish, if they are allowed to produce more, keeping the existing level of pollution constant

Slide 16 New regulation A new regulation is about to be implemented in Denmark “Green growth” Implementation of output regulation on nitrogen, and Introduction of Individual Tradable Quotas (ITQ) on nitrogen Calculation show that production could be increased by 8-15%, and welfare gains by 40-50% keeping the existing level of pollution constant, if the most efficient farms in terms of production and water purification is the ones producing Future research: Effect of new regulation on production and welfare Who will win the rights to pollute (Aquaculture vs. Agriculture)

Slide 17 Thank you