Does scale matter? Cost-effectiveness of agricultural nutrient abatement when target level varies Antti Iho Presentation at the XIth EAAE Congress August 25

Cost-effectiveness in agri- environmental policy Most economic studies on pollution externalities focus on cost-effectiveness Political agendas often require it (e.g.WFD) A seemingly simple concept with many practical complications Our focus on target level variation’s implications on cost-effectiveness of agricultural nutrient reduction, phosphorus in particular

Motivation: Biological characteristics make the need for agricultural nutrient load reduction often –basin or even –lake spesific Example: inland lake might be –phosphorus or nitrogen sensitive –under heavy or mild recreational use i.e. source of different economic benefits WFD requires cost- effectiveness of supplementary measures Assume many almost identical basins with a variety of reduction targets Can they benefit of each others cost-effectiveness assessments? What are the implications of ”scaling” cost-effective allocations?

CE 1: one measure, two heterogenous parcels ___ =Buffer strip MAC for a gentle slope field ___ =Buffer strip MAC for a steep slope field Aggregate abatement: A g +A s, where A g ≠ A s MAC abatement A g A s λ

CE 2: two measures, single parcel / n homogenous parcels ___ =Buffer strip MAC for all parcels ___ =Fertiliser reduction MAC for all parcels Aggregate abatement: A b +A f, where A b ≠ A f MAC abatement A b A f λ

CE 2: two measures, single parcel / n homogenous parcels As the (marginal) abatement cost functions differ, each measure contribute to total abatement differently at its all levels MAC abatement A b A f λ

CE 3: two measures, single parcel / n homogen. parcels, 2 constraints Aggregate abatement low constraint: A fL +A bL high constraint: A bH + A fH The ratios of abatement per measure differ as target changes MAC abatement A fL A bL A bH A fH λHλH λLλL

The aim To quantify this variation in abatement contributions and to answer: –How severely is the cost-effectiveness property violated when abatement contribution ratios are used as guideline for higher / lower levels –The implication of the WFD requirement for cost- effectiveness analysis for all basins with BAU-gap?

The model numerical, static, deterministic combines biophysical and economic functions on phosphorus processes Costs defined as deviations from profit under private allocation: Phosphorus loss: allows comparisons of costs and abatement achievements between all combinations

Results 1: the abatement contributions for various constraints wetlands buffer strips fertiliser red. 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 10 %15 %20 %25 %30 %35 %39 % Total abatement

Results 1: the abatement contributions for various constraints The contribution of each measure on total abatement, is unique for any total abatement level. 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 10 %15 %20 %25 %30 %35 %39 % Total abatement

Results 1: the abatement contributions for various constraints Hence the contribution ratios cannot be used as guidelines for cost- effective measure allocations for varying total abatement levels. 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 10 %15 %20 %25 %30 %35 %39 % Total abatement

Results 2: Quantifying. Various unit costs for a 10% reduction Horisontal axis: the abatement level, where the contribution ratio is cost-effective at Vertical axis: the unit cost-difference the respective allocation and the cost-effective 10% allocation %15%20%25%30%35%40% cost-effective at €/kg

Results 2: comparing various allocations satisfying the 10% reduction constraint Unit cost of 10% cost-effective reduction of TP: 49€/kg UC of 10% reduction with abatement ratios adopted from –25% cost-effective reduction: 59€/kg –30% cost-effective reduction: 66€/kg %15%20%25%30%35%40% cost-effective at €/kg

Results 2: comparing various allocations satisfying the 10% reduction constraint -Each ratio is thus cost-effective in its ”correct” level of abatement, and -Far from cost-effective on other level of abatement -The intuition behind the result is clear. Policy implications? %15%20%25%30%35%40% cost-effective at €/kg

Policy implications 1: WFD River basin management plans (RBMP) for –target quality –baseline scenario –cost-effective scheme of measures (if needed) Reduction targets unique in scale and type Basins will probably provide assessments considering their limited set of potential measures, thus applicable for other basins only if identical in reduction target type and scale (Inter)national level research should make the results cover as large range of total abatement as possible (e.g. Hart & Brady 2002) to ease the assessment burden of basins How realistic is WFD’s requirement of cost-effectiveness as individual basins have no instruments to induce CE- solutions?

Policy implications 2: Focus of CE- assessment efforts? Cost-effectiveness in water quality management: what is the correct level: –between contries? –industries? –farm level? –internal vs external water quality management? Depends on the target (Baltic vs small lake) The roles of agri-environmental policy in water quality management? Realistic reduction targets?

Policy implications 3: heterogeneity of agri-environmental instruments The resluts suggest the agri-environmental instruments be highly diversified –costs of gathering information –monitoring –transaction costs This is thus demanded not only by heterogeneity of agricultural regions but by also by the diversity of environmental targets.