Does scale matter? Cost-effectiveness of agricultural nutrient abatement when target level varies

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

2. 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

3. 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? Motivation:

4. 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: Ag+As, where Ag ≠As MAC λ abatement AgAs

5. CE 2: two measures, single parcel / n homogenous parcels • ___ =Buffer strip MAC for all parcels • ___ =Fertiliser reduction MAC for all parcels • Aggregate abatement: Ab+Af, where Ab ≠Af MAC λ abatement AbAf

6. 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 λ abatement AbAf

7. CE 3: two measures, single parcel / n homogen. parcels, 2 constraints Aggregate abatement • low constraint: AfL+AbL • high constraint: AbH+AfH • The ratios of abatement per measure differ as target changes MAC λH λL abatement AfL AbLAbHAfH

8. 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?

9. 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

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

11. 1,0 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 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.

12. 1,0 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 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.

13. 50 45 40 35 30 25 €/kg 20 15 10 5 0 10% 15% 20% 25% 30% 35% 40% cost-effective at 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

14. 50 45 40 35 30 25 €/kg 20 15 10 5 0 10% 15% 20% 25% 30% 35% 40% cost-effective at 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. 50 45 40 35 30 25 €/kg 20 15 10 5 0 10% 15% 20% 25% 30% 35% 40% cost-effective at 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?

16. 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?

17. 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?

18. 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.