Implications of Initial Assumptions in Agri-Environmental Nitrogen Pollution Reduction Policy Design: Quasi-Empirical Evidence from Croatia

This paper aims to extend understanding of potential general equilibrium effects of nitrogen pollution reduction policies in multifunctional agriculture. Under the EU Nitrates Directive, to achieve agricultural nitrogen pollution reduction, a country can choose between (or combine) market and command-and-control measures. To deal with nitrate pollution from agricultural sources Croatia uses measures such as input regulations and management practices, rather than market-based measures. This paper evaluates welfare and macroeconomic effects of selected market and command-and-control based agricultural nitrogen reduction policies within Croatian data based CGE model. The paper highlights the importance of usual theoretical assumptions, i.e. labor market cleaning assumption and the degree of substitutability of nitrogen in agricultural production, for policy prescriptions. Namely, the results suggest that agri-environmental policy prescriptions largely depend upon labor market cleaning assumption and substitutability of nitrogen in agricultural production. The paper also emphasizes current limitations of CGE models for agri-environmental nitrogen reduction related policies evaluation and highlights the methodological and database development needs for future research.