Optimal Abatement of Nitrogen and Phosphorus Loading from Spring Crop Cultivation

Discrete dynamic optimization is applied to examine the difference between socially and privately optimal fertilization patterns and to develop an incentive mechanism for efficient simultaneous nitrogen (N) and phosphorus (P) loading management. The problem formulation accounts for the causal interactions between P and N fertilization, crop yield, P carry-over, and P and N loading into waterways. Our analysis shows that the balance between private and social shadow values of the P carry-over is an essential feature for the design of the input tax-subsidy scheme for both N and P. Numerical analysis carried out for spring barley on clay soils and current damage costs in Southern Finland suggests that the difference between privately and socially optimal steady-state fertilization levels is substantial. The economic losses for the producer from the tax-subsidy scheme internalizing the damage costs are in the range of 18-32% of the profits, even at simultaneously adjusted N and P fertilizer inputs. Our sensitivity analysis indicates that other abatement measures, such as catch crops, are often competitive to fertilizer input reductions. For the producer, the computed break-even level of a subsidy for catch crops is well in line with the current subsidy levels applied in Finland. Acknowledgement : This work resulted from the BONUS BALTICAPP project and was supported by BONUS (Art 185), funded jointly by the EU and Academy of Finland. We would like to thank Risto Uusitalo for constructive comments. All remaining errors are the authors responsibility.