Nitrogen leaching reduction in Finnish agriculture : Feasible policies with differentiated land productivity classes

Nitrogen is a key nutrient for plant growth and crop production. However, excessive nitrogen fertilizer application may lead to nitrate leaching from soils to surface and ground waters. Nitrogen is a major cause of eutrophication of freshwater and marine ecosystems, including the Baltic Sea, and agriculture is a major source of nitrogen leaching to waterways in general. Because agriculture is a non-point source of diffuse pollution, measuring and monitoring the emissions is difficult and costly. This affects the design and implementation of non-point pollution policies. However, because reducing non-point pollution emissions has so far been limited, policies that counter non-point pollution emissions could reduce surface water pollution and improve water quality. The aim of this study was to examine various nitrogen leaching reducing policy instruments and their effects on farmer profits, social welfare, fertilizer use, land use, and to explore the willingness of farmers to accept different instruments. A theoretical heterogeneous land quality class framework was used to construct and develop an empirical parametric two crop bio-economic model in order to assess the impact and effectiveness of selected policy instruments. Heterogeneity in the model was incorporated by different maximum potential yields with respect to the different land quality classes. Three policy instruments were examined: fertiliser standard, fertiliser tax and emission charge. In addition, the redistribution of the collected fertiliser tax revenue by rebates was also explored and discussed. The results showed that differentiated policy instruments induced the highest social welfare. However, due to the nature of non-point pollution, differentiated policy instruments cannot be utilised and therefore uniform instruments have to be considered. An uniform fertilizer standard input provided the highest farmer profits. However, when tax rebates were introduced in to the policy instrument mix, private profits were the largest under a lump-sum rebate and rebates that were proportionally awarded according to fertilizer use. These higher profits changed instrument preference and acceptability among the producer. The uniform input tax and lump-sum rebate scheme stood out from the other tax rebate schemes, as it effectively reduced nitrogen fertilizer use (and therefore nitrogen runoff), and the lump-sum rebate compensated the farmer for the deemed stringent input tax. The model results indicated that a uniform input tax and lump-sum rebate scheme could be a potential policy instrument to reduce nitrogen leaching. However, further studies should be carried out on the willingness of producers to accept an input tax and rebate scheme