A Dynamic Economic Analysis of Nitrogen-Induced Soil Acidification in China

This paper studies the environmental value of nitrogen fertilizer in a rapeseed-rice double-crop system in China to address the issue of nitrogen-induced soil acidification in China’s farmland. Previous literature always regarded the acid rain as the most important contributor to soil acidification. Thus, previous literature seldom linked soil quality with nitrogen leaching but studied acidification as a side product of air pollution. However, the latest scientific evidences show that China’s soil acidification is mainly caused by over-applied nitrogen fertilize because nitrogen leaching creates extra soil acidity in the entire production process. Hence, the first contribution of this study is that it analyzes soil acidification itself as an environmental externality induced by human behavior rather than an indirect consequence of air pollution. The second contribution is that this study solves for the optimal nitrogen management as an alternative way to solve for the problem of acidification while previous literature only focused on lime application. Theoretically, this study uses a dynamic optimization model to solve for the optimal nitrogen application and the steady state soil pH by maximizing the long-term profit of a two-season agriculture production subject to an acidity growth function. In China, the market price of nitrogen fertilizer only reflects its value in agricultural yields but ignores its environmental value. The steady state analysis compares the optimal nitrogen management that considers the environmental value of nitrogen and the myopic management that ignores its environmental value. There are two theoretical results. First, at the steady state, nitrogen application under the optimal management is greater than the myopic management if the total value of the marginal product of the soil pH at the steady state for an entire rotation is negative. If there is no externality generated by the nitrogen at the steady state, there is no difference between the optimal and myopic management. Second, for an increment of the optimal soil pH value, the marginal decrease of the optimal nitrogen application in season 2 is no greater than the marginal increase of the nitrogen application in season 1 adjusted by the absorption rate. Thus, for any increment in the optimal soil pH value, the total nitrogen application of a rotation increases. Hence, the myopic nitrogen management leads to an inefficient soil pH at the steady state for a long-term agricultural production. Empirically, it firstly uses a Seemly Unrelated Regression robusted by Bootstrap and Monte Carlo to estimate the production functions and acidity growth function using soil monitoring and agricultural production data from the World Bank Soil Monitoring Project in Anhui China (2001-2010). Then, following the first order conditions, it finds the numerical solutions for the optimal nitrogen management. The theoretical model shows that ignoring the environmental externality (myopic behavior) increases nitrogen applications and results in a lower steady state soil pH. The empirical results are consistent with theoretical finds. First, the myopic total nitrogen application of a rapeseed-rice system is only 15.74 kg/ha more than that of the optimal management. However, the myopic steady state soil pH is 0.77 units lower than that of the optimal management, which leads to a huge difference in agricultural production. Hence, nitrogen allocation between seasons is as vital as the total nitrogen application in preventing acidification. Second, the social value of nitrogen fertilizer that contains both production and environmental value is 4.92 RMB/kg, which is about two times of its average market price in 2013. Hence, the market price that ignores the environmental value gives the wrong incentives in fertilizer investment. Third, this study measures the market value of soil pH, which is 40.80 RMB/ha. Hence, agricultural inefficiency is created when myopic fertilizer investment decreases future soil pH productivity. This inter-disciplinary study highlights the importance of considering the environmental value of nitrogen fertilizer in a long-term agricultural production. It provides two policy implications to prevent soil acidification in China. First, the government could set the price of nitrogen based on both its production and environmental value. Second, the government could set up a soil monitoring and punishment system based on the value of soil pH to motivate farmers to apply the optimal nitrogen management. These two approaches are more feasible in China than lime application because Chinese farmers do not have the habits of using lime due to institutional reasons. The future direction of this study is to investigate the impacts of these institutional reasons on shaping nitrogen fertilizer and lime application habits in China.