The environmental effectiveness of alternative agri-environmental policy reforms: theoretical and empirical analysis

This paper analyzes alternative agri-environmental policy reforms to reduce nutrient runoff when the government has price support, fertilizer tax, buf fer zone subsidy and acreage subsidy as available instruments. To promote e nvironmental goals, the government is assumed to adjust the tax and subsidy rates so as to keep the farmer's profits constant. This instrument switch reduces the prices of less-polluting inputs and the farmer re-optimizes his production so that it becomes more environmentally friendly. The four alte rnative reforms under study are the following: a reduction of the producer price support or acreage subsidy compensated for by a higher buffer zone su bsidy, and an increase in the fertilizer tax which is compensated for by ei ther a higher acreage subsidy or a buffer zone subsidy. We show theoretical ly that although all reforms reduce the nutrient runoff, the last one is th e most efficient. Our simulations show that at a 30 % abatement level of ni trogen runoffs all policy mixes decrease the average farmer's profits after the re-adjustment, if the end price is not allowed to increase due to decr eased production. The smallest loss in the farmer's profits results from a policy mix which compensates for the higher fertilizer tax by a higher acre age subsidy.