Abatement costs of alternative tax systems to regulate agricultural nitrogen loss

Nitrogen emissions from agriculture are considered an important environmental problem in Denmark motivating consideration of different tax schemes as regulatory instruments. In this paper, input/output behaviour of Danish pig farmers is estimated with farm level panel data using the dual profit function approach, and emission functions for nitrogen loss are derived. With the estimated model we are able to compare cost-effectiveness of a comprehensive Pigouvian tax on nitrogen loss with simpler tax schemes that focus on nitrogen use. We find that both a fertilizer tax and a feed tax generate substantially higher abatement costs than Pigouvian incentives. A tax on nitrogen in all inputs will, on the other hand, only generate a marginal increase in abatement costs. These results are of interest because a tax on all nitrogen inputs is easier to implement than a comprehensive nitrogen loss tax. Our result implies that even a limited administrative cost advantage may make the input tax preferable to implementing Pigouvian incentives through an nitrogen loss tax.