The Impact of EC Nitrogen Taxes on Agricultural Competitiveness and Welfar: Simulations with the World Trade Model TEPSIM

In this paper the attempt is made to estimate the trade and welfare effects of nitrogen taxes in the European Community. The world trade simulation model TEPSIM was developed for this purpose. TEPSIM differs from conventional agricultural trade models in that it is not limited to agricultural output markets but explicitly considers 12 agricultural inputs. Thus, the model is not only suitable for the simulation of environmental policies in agriculture but also gives valuable insights into the intensification and specialization effects of current agricultural policy reforms. The results of the study reveal that the implementation of nitrogen taxes in the EC would lead to a loss in comparative advantage for agriculture in Europe. At the same time this policy would induce conventional welfare gains in the EC if the tax level did not exceed 44 percent. However, at that tax level the relative change in mineral nitrogen demand would be very low ( 13.5 percent). Higher nitrogen taxes, on the other hand, would induce net welfare losses in the Community. While these losses would increase exponentially with the tax rate, the decline in nitrogen use is not even linear. Thus, the implementation of extreme taxes would have high economic costs without inducing profound improvements in the ecological area