Fertilizer taxes for controlling agricultural pollution: an empirical assessment. Marita Laukkanen

Transcription

1 Fertilizer taxe or controllin aricultural pollution: an empirical aement Marita Laukkanen (VATT, Government Intitute or Economic Reearch, Finland) Céline Naue (The Univerity o Queenland, Autralia) Abtract Many environmental aement identiy ariculture a the major caue o urace water quality problem in developed countrie. Voluntary incentive baed policie are the mot common mechanim ued to addre the environmental impact o aricultural production, but numerou empirical tudie quetion the cot eectivene o voluntary approache. Thi paper conider tax baed policie or reducin water pollution caued by crop production. We derive a irt bet tax or controllin nutrient export rom heteroeneou arm. The tax i payable per hectare in crop production and varie in repone to dierence in arm peciic actor and ertilizer ue intenity. We alo derive a econd bet uniorm tax policy and compare it to the irt bet policy in an empirical ettin. The empirical example, baed on nutrient pollution rom rain production, employ an econometric model o private land and ertilizer ue deciion, and an ecoloical model o nutrient export a a unction o land and ertilizer ue. Thee method allow u to imulate arm repone to taxe, meaure the conequence o thee deciion or nutrient pollution, and compare the outcome o policy alternative. Keyword: ertilizer taxe, arm ubidie, policy evaluation, nutrient pollution, pollution control. JEL code: Q15, Q18, Q53, Q58 1

2 1. Introduction Many environmental aement identiy ariculture a the major caue o urace water quality problem in developed countrie (Shortle & Abler, 1999). A public concern about ariculturally produced pollution row, o doe interet in deinin policie that will reduce thi pollution. In order to be eective, any uch policy mut reduce arichemical input ue or land in crop production, ince pollution increae with both the amount o input applied in proportion to cropland, and the amount o cropland. The major policy intrument that i currently in ue in the European Union (EU) i national ari environmental proram (AEP), which provide arm with payment or adoptin environmentally more benin production practice, uch a adherin to proram impoed tandard on arichemical ue. The proram are eentially voluntary reulation that provide incentive, but not mandate, or reducin the environmental damae rom ariculture. Empirical tudie on EU AEP impact raie quetion about whether looely deined, voluntary AEP are likely to have ubtantial environmental beneit. Chabé Ferret and Subervie (2013), Laukkanen and Naue (2012) and Puahl and Wei (2009) invetiate the eect o AEP on oberved arm production deciion. While thee tudie ind that the proram in France, Finland and Germany have had ome poitive eect in term o reducin the ue o pollutin input or encourain the adoption o conervation meaure, the eect have been mall in manitude. Indeed, mot economit would contend that directly chanin the inancial incentive to ue arichemical input by increain their price would be an approach preerable to tandard and aociated compenatory payment. Chanin the price o input would allow arm lexibility in chooin their level o input ue. Input price alo have the potential to inluence both the intenity (per hectare input ue) and extent (cropland in ue) o aricultural production. With inormation about production, it i eaible to dein policie to correct ariculture externalitie (Shortle and Horan 2001, Xepapadea 1992). However, optimal meaure (e.. taxe) may have to vary acro arm to addre their heteroeneity. While the importance o local environmental characteritic in determinin ariculturally produced pollution i well known, the ue o dierentiated policie ha been minimal becaue o diiculty o implementation, hih tranaction cot, or political challene in reachin a conenu. Policy maker appear to preer 2

3 olution that are eay to undertand and traihtorward to implement. Hih tranaction cot or lack o political conenu may explain why policy maker may preer policie built around tandard rather than price, and policie that do not vary acro producer very much, i at all. However, in liht o the lare literature on optimal environmental policy dein and the empirical literature on actual environmental policy dein, policy maker would be wie to conider the introduction o more eicient, price baed and dierentiated policie. Inormed policy makin require comparin the ain rom uch policie with the extra tranaction cot they may entail. Thi paper examine taxe to control nutrient pollution enerated by heteroeneou arm. Policy maker can induce irt bet outcome throuh taxe (or permit) that vary acro heteroeneou producer. Such policie require extenive inormation on production unit a well a cotly monitorin. We decribe the optimal policy and compare it with a econd bet policy that i uniorm acro producer. To provide quantitative inormation on the ain rom dierentiated policie, we dicu an empirical example baed on rain production in Finland. We employ an econometric model o private land and ertilizer ue deciion, and an ecoloical model o nutrient export a a unction o land and ertilizer ue. Literature on the cot eectivene o dierentiated veru uniorm policie when land i heteroeneou ha not reached uniied concluion about the relative eiciency o alternative policie. Heland and Houe (1995) ound that in the cae o nitrate leachin uniorm policie do no lead to lare welare loe relative to a ocially optimal olution. Flemin and Adam (1997) alo ound that the ain rom patially dierentiated tax to control roundwater pollution are rather modet. Claaen and Horan (2001) intead howed that in the cae o input taxe the relative eiciency o dierentiated and uniorm taxe can be notable. Xabadia, Goetz and Zilberman (2008) alo demontrated that uniorm policie lead to coniderable eiciency loe in the cae o controllin aricultural tock pollution. The preent paper aument the literature on meaurin the cot eectivene o dierentiated veru uniorm policie by providin quantitative reult that are baed on detailed empirical inormation on both aricultural production and environmental damae. Thi paper proceed a ollow. We irt decribe the economic model and derive the ocially optimal olution. We then deine the irt bet policy, a tax on enerated pollution, that take into 3

4 account the heteroeneity in the aricultural land and produce ocially optimal ertilizer application rate and land allocation. In the ollowin ection we decribe a econd bet policy, in our cae a patially uniorm tax on ertilizer ale. The ret o the paper preent the empirical analyi, includin a decription o the data, underlyin econometric model and environmental production unction, and imulation reult o alternative policie. 2. The economic model Conider aricultural land where rain are produced by proit maximizin arm uin ield o varyin qualitie and three variable input ertilizer, peticide and labor. The applied ertilizer that are not ued by the crop leach into the environment and contribute to nutrient enrichment o urace water. Field vary with repect to oil quality and environmental enitivity. Heteroeneity in oil quality i denoted by,, enitivity ha two component, and, with, and, Heteroeneity in environmental 0 1. Here, repreent a meaure o oil phyical and bioloical ability to promote crop rowth; oil chemical condition, which contribute to both crop rowth and nutrient loadin; and local environmental characteritic, which contribute to nutrient loadin but not to crop rowth. A hiher correpond to poorer oil quality and hiher and to hiher pollution potential. By aumption, the ditribution o, and are known. Their denity unction are denoted by, and. We aume contant return to cale with repect to land. Let w, wp, wl aricultural input ued per hectare (ertilizer, peticide, labor), and r, rp, rl w be the vector o r the vector o input price, and p the product price. The production unction per hectare i y We aume that 0 w k 2 y and that the Heian matrix y *,, w,,,,. D w i neative emideinite ( 2 hd y w*,, h t 0 or all vector h). Nutrient pollution per hectare in rain production i iven by w,,,,. It depend on the applied ertilizer w,,, oil chemical condition,, and local environmental characteritic,. Land let allow, known a et aide, alo pollute. A ertilizer are not applied on et aide, nutrient pollution per hectare in et aide i 4

5 iven by,. Set aide pollute le than rain production,, < w,,,,, w,, 0. The areate pollution rom the reion i iven by ,,,,,,,,, z w L L ddd, (1) where L,, and L,, denote the total land in rain production and et aide with qualitie,,. The monetary damae rom the areate pollution z i iven by mz. 2.1 The ocially optimal olution We aume that a ocial planner exit and maximize the proit rom rain production while takin into account the ocial loe due to arm ource nutrient pollution. Our ocu here i on nutrient pollution and we abtract away rom any environmental deradation pertainin to peticide ue and any biodiverity beneit or other poitive externalitie produced by ariculture. Given that we are analyzin a relatively mall rain producin reion, we aume that input and output price are not inluenced by the reional production deciion or by the production o the externality. The ocial planner deciion problem i iven by py L max w,,,, rw,, ubject to,,,,,,,,, m w L m L ddd w k,, 0, k=,p,l,,, 0,,, 0. L,, L,, L,,, L L (2) To impliy the notation, in what ollow the arument, and o the unction will be uppreed. 5

6 The ocial planner determine the optimal input ue and the optimal land allocation. A olution to problem (2) ha to atiy the ollowin neceary condition: w, 0,, w k py r m L (3) w 0,, p p p py r L (4) w l l 0,, py r L (5) l w 0 k,,, (6) k k py rw rpw prw l lm 13 0, 1L =0,, (7) m 0, L =0,, (8) 2 3 2,,,,,, L L L (9) where the ubcript w denote derivative with repect to input k, and k and,..., are the k 1 3 Kuhn Tucker multiplier aociated with the contraint on the variable input and land allocation. The neceary condition (3) indicate or an interior olution that at every oil quality and environmental enitivity, ertilizer hould be applied up to the point where the value o the marinal product per hectare equal the value o the marinal cot o ertilizer ue and the marinal cot o enerated nutrient pollution. Equation (7) to (9) decribe the optimal land allocation at every land quality,,. Since the rain production and pollution unction are linear in land, the land ue (rain or et aide) that lead to a hiher quai rent minu environmental damae per hectare will be completely preerred. That i, the entire land with qualitie,, hould be allocated to rain production i py r w r w rw m p p l l exceed m, and to et aide otherwie. We are concerned with the hort run, o total abandonin o land i not poible the poible land ue are rain production and leavin land allow a et aide, where the latter alo pollute. 6

7 2.2 Firt bet policy The areate pollution rom the aricultural reion i the reult o the emiion o many individual competitive armer. Since an individual armer doe not conider the nutrient pollution externality, he will chooe hi ertilizer application rate and land allocation to maximize hi net income. Without policy intervention, hi choice will not coincide with the ocially optimal olution. The ollowin propoition deine a tax policy that produce ocially optimal ertilizer application rate and land allocation at every land quality,,. Propoition 1. Suppoe that land allocation and the amount o ertilizer applied per hectare can be oberved at each land quality,, and that the per hectare nutrient pollution depend on oil chemical condition,, and local environmental characteritic,. A ocially optimal olution can then be obtained by a patially dierentiated tax production, iven by *,,,, on each hectare in rain w m w m *,,,,,,,,,. w Proo: A armer private deciion problem i to chooe the land allocation and input ue that maximize hi net income. The areate net income (ANI) o all armer, iven a tax *,,,, on each hectare in rain production, i deined a w ANI,, pyw rwl max,,,,,,,, w,,,, L,, d d d (10) ubject to w k,, 0, k=,p,l,,, 0,,, 0. L,, L,, L,,, L L The irt order condition or ertilizer ue read a 7

8 w,, 0,, w k py r w L (11) The irt order condition or land in rain production and et aide read a,,,, 0, =0,, py rw rpw prw l l w 13 1L (12) 0, L =0,, (13) 2 3 2,,,,,,,, L L L (14) A armer will allocate the entire land with qualitie,, to rain production i py rw rpw prw l l,, w exceed 0, and to et aide otherwie. Comparin the irtorder condition o the private armer problem and o the ocial planner problem how (i) that the optimal private choice o the ertilizer application rate optimal value o w,, w will coincide with the ocially and that (ii) the optimal private land allocation will coincide with the ocially optimal land allocation, provided that the tax rain production i et equal to *,,,, on each hectare in w,,,,, m w m. Q.E.D. The optimal tax produce incentive or ocially eicient input ue at both the intenive and extenive marin (ertilizer application per hectare and land in rain production, repectively). The heteroeneity o aricultural land, reardin oil quality, chemical condition and environmental characteritic, implie that optimal policy dein will vary patially. A policy will only achieve the ocial optimum i it take into account the heteroeneity in the aricultural land. Inorin the patial heteroeneity will lead to ocially ineicient outcome. Notice that the optimal tax per hectare in rain production can be computed baed on inormation on oil chemical condition, local environmental characteritic, and the amount o ertilizer applied per hectare. Inormation on oil quality i not needed. 2.3 Second bet uniorm policy The optimal tax dier acro land qualitie. Furthermore, the optimal tax depend on each arm per hectare ertilizer input. Such a policy would be likely to entail hih tranaction and monitorin 8

9 cot, and may be politically diicult to implement. Policymaker may thereore preer econdbet policie that call or le inormation and dierentiation acro arm. In the cae at hand, policymaker may be unable to oberve ertilizer input at the ield level, and to adjut taxe to itepeciic condition. Intead, they may be able to tax ertilizer ale, by monitorin and taxin ertilizer eller. Such a tax will be patially uniorm. Propoition 2. For each level o areate pollution, z, there i a unique patially uniorm input tax z U that achieve z. U Proo. Conider irt a particular allocation o land and a uniorm input tax. A private armer U irt order condition or ertilizer ue now become py r 0. Totally dierentiatin the w irt order condition yield dw U d 1 py ww 0 (where y i the econd derivative o y with ww repect to w ). Thu, or each hectare o land in rain production, per hectare ue o ertilizer i decreain in the input tax. The marinal quality o land in rain production under the tax, denoted by m, i determined by py rw rpw prw l l w 0. Totally dierentiatin thi d w m expreion yield 0 (recall that a hiher correpond to poorer land quality). Thu, U d py the amount o land in rain production i alo decreain in the input tax. Thereore, there i a unique, decreain relationhip between the input tax and areate pollution, iven by m 1 1 dz dw w,,,, L,, U dd d d w d w m,,,, Lm,, dd d m, Lm,, dd U d 00 (15) Q.E.D. 9

10 3. Empirical analyi We next turn to an empirical analyi o policie to reduce arm ource nutrient pollution in Finland. Nutrient enrichment o urace water i viewed a a major environmental problem in the country. The adjacent Baltic Sea uer rom evere nutrient related deradation o water quality, with intenive ariculture the laret ource o nutrient (e.. Helcom 2010). The primary policy currently aimin to reduce urace water pollution rom ariculture i the Finnih arienvironmental proram (FAEP), compriin eentially voluntary reulation with payment to encourae reduction in ertilizer ue. Laukkanen and Naue (2012) produced tructural model etimate o rain producer input demand and land allocation unction (with output and input price and per hectare arm payment a exoenou variable). We ue their etimate to predict arm ertilizer ue and land allocation under dierentiated and uniorm policie. We next decribe the tructural model o rain arm deciion on ertilizer ue and on land allocation briely; or a more detailed decription, we reer the reader to Laukkanen and Naue (2012). 3.1 Underlyin econometric model Laukkanen and Naue (2012) aume that arm maximize total proit and that they conider input and output price and aricultural upport payment rate (per hectare) to be exoenou. The arm in their ample produce dierent type o rain crop (barley, wheat, oat and rye) that are areated into a inle output. Farm proit i iven by K l p q l r w l. (16) k k p p k 1 with l the land allocated to rain, l et aide, and per hectare ubidy rate or rain and or et aide, p rain price, q per hectare rain yield, w k the kth component o the input vector, r k the correpondin input price, p the FAEP pecial ub proram ubidy rate, and l p the land area devoted to a peciic conervation practice under the pecial ub proram. Only a 10

11 ubet o arm ha contracted to devote land to peciic conervation practice and receive payment throuh the FAEP pecial ub proram ( l p p ). Becaue the purpoe here i to analyze the impact o price and arm payment on arm production deciion, it i important to control or the act that a proportion o arm receive the FAEP pecial ub proram ubidy and or the amount received, ince thee may have direct implication or arm input ue, land allocation, and rain yield. 1 The unit ubidy rate and are the um o the CAP arable area and leavored area, Finnih national crop production, and FAEP eneral ari environmental ubidy rate to each land ue. The repreentative arm i aumed to chooe land allocated to rain and etaide a well a the quantitie o input that maximize proit under the contraint on total land: l l le l (where l denote total land area o the arm). Laukkanen and Naue (2012) peciy a quadratic proit unction, which provide a lexible approximation o the true proit unction. The actor demand and output upply unction are then derived rom the indirect proit unction uin Hotellin lemma. The input demand or ertilizer i iven by J r pr r rr rr r j j p p j1 w p r r l J = (rain, et aide); (17) and the land allocated to rain production by r r J p p p jj ' j ' c j ' 1 l r r p l, (18) where p, r, rp, and denote normalized price o rain, ertilizer, peticide and ubidie to rain and et aide (with the price o labor a a numeraire). Laukkanen and Naue etimate the proit unction imultaneouly with the demand unction or ertilizer and peticide, the equation or land allocated to rain and et aide, and total rain output. In order to control or poible correlation between unoberved armer peciic eect 1 In order to control or a poible election bia due to only ome arm reiterin in the FAEP pecial ub proram, Laukkanen and Naue (2012) irt run a irt tae random eect Tobit rereion with the amount o the pecial ub proram ubidie received by the arm a the dependent variable. 11

12 and ome o the explanatory variable, they apply the Within tranormation to all variable and etimate a Seeminly Unrelated Rereion Equation (SURE) model. 3.2 Data The data ued in the analyi comprie arm level record on phyical and inancial variable or aricultural production, obtained rom bookkeepin record that provide the Finnih data or the European Commiion Farm Accountancy Data Network (FADN). The record are collected annually and contain inormation on crop area, crop yield, expenditure on ertilizer and peticide, work hour, proit (the proit variable i a meaure o arm net reult, i.e. it doe not include alarie earned by amily member workin on the arm) and compenatory payment received, includin ari environmental payment, or a total o ome 900 arm each year. The analyi in Laukkanen and Naue (2012) pan the year , that i, rom Finland econd year in the EU to the lat year when crop peciic CAP arable area payment were ued. 2 The inal ample ued in the analyi include non oranic arm that had ome land allocated to rain crop; and that attributed a maximum o 30% o their total variable cot to animal production. The reultin data comprie 331 arm and 1,549 obervation (an unbalanced panel). 3.3 Damae rom nutrient pollution Deradation o the quality o urace water in the Baltic Sea, the main recipient o nutrient pollution rom Finland rain area, i overned by the joint preence o nitroen and phophoru. Indeed, valuation tudie enerally addre water quality improvement that are attributable to the combined eect o reduction in nitroen and phophoru load (e.. Söderqvit 1996, 1998, Markowka and Zylicz 1999, Koeniu 2010). Accordinly, we peciy a damae unction whoe arument i a compoite meaure, the um o nitroen and phophoru load. Thu, environmental damae i connected to a compoite nutrient load z NP, deined a znp zn zp, (19) 2 The bookkeepin data do not have entrie or ari environmental upport or 1995, Finland year o acceion to the EU. The EU inle arm payment wa introduced in Finland in The inle arm payment i baed on the land that arm manae or own, not on the crop that they produce. 12

13 where zn i the nitroen load and z P the um o diolved and particulate phophoru load (the two ocal orm o phophoru). Unortunately, data available on the damae rom water quality deradation (beneit o water quality improvement) only permit u to peciy a linear damae unction. Koeniu (2010) conducted a choice experiment to ae Finn willinne to pay (WTP) or water quality improvement aociated with reducin nitroen and phophoru load to the Baltic Sea. The etimated annual WTP or reducin Finland nitroen and phophoru load by 7,986 and 525 ton per year, relative to the level, raned rom 652 million euro or a multinomial loit to 945 million euro or a random parameter loit model, with 95% conidence interval o ( ) and ( ) million euro. We computed a contant marinal beneit by dividin the annual national WTP by the annual nutrient load reduction underlyin the choice experiment, meaured in term o the um o nitroen and phophoru load reduction. We ued the reult rom Koeniu random parameter loit model. The correpondin contant marinal damae rom nutrient pollution enterin the Baltic Sea, denoted by m, i 111 euro per k o compoite nitroen phophoru load (in 2005 price). 3.4 Firt bet policy: computation baed on the econometric model etimate The optimal policy i a per hectare tax baed on the pollution enerated by rain production, above that enerated by et aide. The optimal tax i iven by * w,,,, m w,,,, m,. The tax on enerated pollution provide correct incentive or both per hectare ertilizer ue and optimal land allocation. With the tax * w,, on each hectare in rain production equation (17) and (18) become J r pr r r rr rr r *,, / l j j p p j1 w p w r r r l J=(rain, et aide); (20) and the land allocated to rain production by ' ' r r *,, / J p p p l j j c j ' 1 l r r w r p l. (21) 13

14 The per hectare tax * w,, i divided by the price o labor, r l, to obtain a normalized value compatible with the etimated input demand and land allocation unction. In the analyi o the alternative tax policie, the ubidy vector j, J=(rain, et aide), include all other area baed arm payment (the CAP arable area and le avored area, Finnih national crop production) to each land ue, but the FAEP ari environmental ubidy rate are et to zero. The pollution eneratin unction or each land ue i N N j,, w j + DP + ln DP,,, j w N j e DP j w j PP j w j. (22) The pollution eneratin unction account or the two ocal orm o phophoru, diolved (DP) and particulate (PP). For more detail on the pollution unction and or the calibration o it parameter, we reer the reader to Laukkanen and Naue (2012). In the empirical application, i a location and nutrient peciic parameter decribin the proportion o ield ede pollution tranported into the Baltic Sea, and i oil phophoru content. To obtain the optimal land ue and ertilizer ue or each arm in our ample, we inert * w,,,, m w,,,, m, into (20) and (21) and olve thee equation or w and l. 4. Policy imulation We ue the etimated land allocation, input demand and proit unction rom the econometric model to predict arm land allocation, ertilizer ue, and proit under dierent policy cenario. Thee imulation etimate chane in input ue and land allocation at the arm level, iven hypothetical exoenou chane in policie aectin input and land ue incentive. Areatin the individual repone yield an etimate o chane in overall armin practice in Finland rain production area, and in nutrient load rom crop area into the Baltic Sea, under alternative policie to control ariculturally produced pollution. We imulate three policy cenario. All the imulation are counteractual in the ene that we conider a policy context without the ari environmental payment currently in place in Finland. That i, the imulation et the FAEP ari environmental payment to zero. Thi approach allow u 14

15 to compare the welare ain rom the alternative tax policie relative to no ari environmental reulation, a tratey line with previou reearch. The No policy imulation provide a benchmark with which to compare chane in land allocation and input ue under the alternative tax policie. Apart rom the FAEP arienvironmental payment, the No policy cenario ue the hitorically oberved value o all variable, includin input price. The Optimal Pollution Tax cenario imulate the eect o the optimal pollution tax decribed in Propoition 1 on arm ertilizer ue and land allocation deciion. Thi irt bet tax i arm peciic, payable per hectare in rain production, and chane in repone to arm ertilizer ue. The Uniorm Fertilizer Tax cenario predict the impact o a uniorm ertilizer tax. The tax i applied to the price o ertilizer. The level o the tax (12.5%) i choen uch that the nutrient load and the monetary damae induced by nutrient pollution i the ame a under the irt bet tax. In each cenario, we irt predict land allocation and ertilizer ue or each arm in our ample. We then ue the predicted land allocation and ertilizer intenity a input in the pollution eneratin unction (22) in order to quantiy the impact each policy alternative on nutrient pollution. Finally, we areate the individual deciion to obtain an etimate o nutrient pollution tranported rom the ample o arm into the Baltic Sea, and evaluate the damae induced by nutrient pollution in monetary term by couplin the imulated nutrient load reduction with Koeniu (2010) etimate o the marinal damae o nutrient pollution. The main output o our policy imulation are hown in Table 1. 15

16 Table 1. Policy imulation reult (total on our ample, 1,539 obervation) Variable No Policy Optimal Tax Uniorm Tax Total rain area (ha) 62,407 60,006 61,504 Total et aide area (ha) 6,249 8,650 7,152 Total ertilizer ue (1,000 k) 35,669 34,534 32,528 Fertilizer ue (k/ha o rain area) Total nutrient load (1,000 k) Total damae (1,000 EUR) 106,045 99,100 99,100 Total damae induced by nutrient load i the hihet under the No Policy cenario, a one would expect. Our indin indicate that the optimal policy would lead to a 7% decreae in total damae compared to the no policy cenario. Etimated ertilizer application rate under no policy would be 595 k per hectare. I a ertilizer tax o 12.5% i applied to the price o ertilizer, we etimate ertilizer application to decreae to 536 k per ha. At the ame time, the land in rain production would decreae and et aide increae, leadin to a 7% reduction in the total nutrient load. The ertilizer tax wa choen uch that the total damae induced by nutrient pollution would be the ame under the optimal, patially dierentiated tax and the uniorm tax. When the optimal tax on pollution i implemented, the per hectare ue o ertilizer decreae le than under the uniorm tax cenario but the rain area decreae more. 5. Concluion Over one hundred reional or national conervation cheme have been introduced in the EU ince the Ari environmental Reulation came into orce in By 2002, one quarter o the aricultural area in the EU wa reitered in an ari environmental proram. The proram are eentially voluntary reulation that provide incentive, but not mandate, or reducin the environmental damae rom ariculture. Critic arue that many o the ari environmental proram in the EU, a well a in the US, are merely a trade riendly way to eae the tranition rom production to non production payment under the World Trade Oranization Green Box. Thi paper conider alternative, price baed policie. Followin the approach preented in Xabadia, Goetz and Zilberman (2008), we irt derive an optimal, patially dierentiated tax on 16

17 ariculturally produced pollution, and a econd bet uniorm tax on ertilizer ale. We then ue econometric etimate o Finnih rain arm input demand and land allocation deciion to predict chane in ertilizer ue, rain area and nutrient pollution under alternative tax cenario. A uniorm ertilizer tax o 12.5%, applied to the price o ertilizer, would decreae ertilizer application to 536 k per ha. While our ocu here i on rain armin and we retrict our ample to arm without iniicant animal production, overall a ertilizer tax would alo provide incentive or improved manure manaement: i the price o chemical ertilizer increae, the ditance to which it i proitable to tranport animal manure increae, reducin nutrient pollution related to manure torae. Our etimate were derived under the aumption o contant marinal damae rom nutrient loadin, which i a impliication. However, a the predicted chane in nutrient loadin are not very lare, contant marinal damae provide a reaonable approximation. Reerence Chabé Ferret and Subervie (2013), How much reen or the buck? Etimatin additional and windall eect o the French aro environmental cheme by DID matchin. Journal o Environmental Economic and Manaement, 65(1), Claaen, R. and Horan, R Uniorm and Non Uniorm Second Bet Input Taxe. Environmental and Reource Economic 19(1): Ekholm, P., Granlund, K., Kauppila, P., Mitikka, S., Niemi, J., Rankinen, K., Räike, A. and Räänen, J Inluence o EU policy on aricultural nutrient loe and the tate o receivin urace water in Finland. Aricultural and Food Science 16: Flemin, R. and Adam, R The Importance o Site Speciic Inormation in the Dein o Policie to Control Pollution. Journal o Environmental Economic and Manaement 33(3): Heland, G. and Houe, B Reulatin Nonpoint Source Pollution under Heteroeneou Condition. American Journal o Aricultural Economic 77(4): Helinki Commiion (Helcom) The Extended Summary o the Main Reult o the Fith Pollution Load Compilation (Drat May 7, 2010). (retrieved November 28, 2011). Koeniu, A. K Heteroeneou preerence or water quality attribute: the cae o eutrophication in the Gul o Finland, the Baltic Sea. Ecoloical Economic 69:

18 Laukkanen, M. and Naue, C. (2012). Evaluatin reenin arm policie: a tructural model or aein ari environmental ubidie. Dicuion Paper 40/2012, Government Intitute or Economic Reearch. Markowka, A. and Zylicz, T Cotin an international public ood: the cae o the Baltic Sea. Ecoloical Economic 30: Minitry o Ariculture and Foretery (MAF) The Horizontal Rural Development Proram (In Finnih). (retrieved November 28, 2011). Minitry o Ariculture and Foretery (MAF) Mid term Evaluation o the Horizontal Rural Development Proram (In Finnih, with Enlih ummary). MAF Publication 1/2004. Puahl, A. and Wei, C Evaluatin the eect o arm proramme: reult rom propenity core matchin. European Review o Aricultural Economic 36 (1): Redield, A.C., Ketchum, B.H. and Richard, F.A The inluence o oranim on the compoition o eawater. In: Hill MN (ed.) The Sea, vol 2. Wiley, New York. Shortle, J.S. and Abler, D.G Ariculture and the Environment. In J. van den Berh ed. Handbook o Environmental and Reource Economic. Cheltenhamn: Edward Elar, pp Shortle, J. and Horan, R The economic o nonpoint pollution control. Journal o Economic Survey 15(3): Söderqvit, T Continent valuation o a le eutrophicated Baltic Sea. Beijer Dicuion Paper Serie No. 88, Stockholm, Sweden. Söderqvit, T Why ive up money or the Baltic Sea? Motive or people willinne (or reluctance) to pay. Environmental and Reource Economic 12: Xabadia, A., Goetz, R. and Zilberman, D The Gain rom Dierentiated Policie to Control Stock Pollution when Producer Are Heteroeneou. American Journal o Aricultural Economic 90(4): Xepapadea, A Optimal taxe or pollution reulation: dynamic, patial and tochatic characteritic. Natural Reource Modelin 6(2):