Revealing the abatement costs of soil erosion: a cost frontier approach

An effective design of environmental policies often requires knowledge about the pollution abatement costs (PAC) of the regulated entities, though PAC are usually unknown to the regulator. In this article, we propose a non-parametric cost function model that reveals firms’ cost of inputs assigned to pollution control and that shows how environmental regulations affect the optimal input-mix of firms. Our model is illustrated using data from 89 crop farms in Austria. We reveal farms’ costs associated with their participation in an agri-environmental scheme that provides payments for cover cropping and mulch or direct seeding aiming to reduce soil loss, as well as nutrient run-off in ground and surface water bodies. We find that the abatement of one ton of soil loss increases variable costs by 535 Euros, on average. Savings in fertilizer expenditures are off-set by increases in other cost components (e.g., labor, machinery and energy). Average (marginal) abatement costs decline from 1,553 Euros/t of soil loss (3,258 Euros/t) for farms located in environments with low erosion risk to 134 Euros/t of soil loss (263 Euro/t) for farms with moderate to serious erosion risk. The results suggest that the cost-effectiveness of the program could have been improved by setting targeting criteria (e.g., soil erosion rates) for eligibility and allocation of funds.