ECO 370 Week 4 Environmental Policy Tools Example

A Fertilizer Tax, a Nutrient Trading Market, Field Rules or Payments? Comparing Policy Tools for Nonpoint Phosphorus Runoff in the Maumee Basin on Cost, Certainty and Fairness

[Student Name]

University of Phoenix

ECO/370: Environmental Economics

Week 4 Assignment

[Instructor Name]

[Date]

The cost figures are composites written for a model paper; policy history, theory and research findings come from the sources listed and are stated generally.

After the 2014 Toledo water emergency, Ohio, Michigan and Ontario agreed to seek a 40 percent cut in spring phosphorus loads to western Lake Erie. Weeks 1 to 3 showed why runoff is a market failure and that a well-targeted program to reduce it can pass a cost-benefit test. The remaining question is which tool reduces runoff at the lowest cost with acceptable certainty. The textbook answer, put a price on pollution, runs into a practical obstacle: no one can measure how much phosphorus leaves each field in each storm. This paper compares the tools with that obstacle in view.

The Nonpoint Problem

Factories and sewage plants discharge through pipes that can be monitored, so regulators can set limits or charge per pound. Runoff from fields is nonpoint pollution: it depends on soil, slope, rainfall and timing, and it moves through ditches and drainage tiles in amounts that vary from storm to storm. Shortle and Horan (2001) explained that nonpoint pollution forces policy to target inputs, practices or estimated loads rather than measured emissions, which weakens the precision of every tool.

Tool One: A Fertilizer Tax

A Pigouvian tax charges polluters for the external cost of their pollution (Pigou, 1920). Because runoff cannot be measured, a practical version taxes phosphorus fertilizer, the input. A tax of 10 percent on phosphorus fertilizer would raise its cost and reduce use, and every farm would face the same incentive, cutting first where it is cheapest. But the tax would hit farms with low runoff risk as hard as those with high risk, and it would not touch manure, a major phosphorus source. Phosphorus already built up in soils, called legacy phosphorus, would keep washing off regardless. And because demand for fertilizer is fairly inelastic, a modest tax would reduce use only a little while raising farm costs.

Tool Two: Cap and Trade

Montgomery (1972) showed that a market in pollution permits can achieve a given total at least cost, because sources with cheap reductions cut more and sell permits to those with expensive ones. Water quality trading programs apply the idea by letting wastewater plants, which must meet limits, buy credits from farms that adopt practices estimated to reduce runoff. A plant facing a $40-a-pound cost to remove phosphorus might buy credits from farms that can reduce it for $10 a pound with buffer strips, saving $30 for every pound shifted. Trading programs in the United States have often seen few trades, however, because farm reductions are estimated rather than measured, buyers worry about liability if estimates prove wrong and transaction costs are high.

Tool Three: Rules on Practices

After the 2014 emergency, Ohio prohibited spreading fertilizer and manure on frozen, snow-covered or saturated ground in the western Lake Erie basin and when heavy rain is forecast, and required certification for farmers applying fertilizer to larger acreages. Such rules target the moments when runoff risk is highest and are easy to observe and enforce, since spreading on frozen ground is visible. They are not cost-minimizing in theory, because they apply uniformly, but where monitoring of outcomes is impossible, rules on observable practices may achieve more per dollar of enforcement than a tax or market.

Tool Four: Payments for Practices

Paying farmers to adopt practices, as in Week 3, reverses the polluter-pays principle but is politically feasible and voluntary. Payments can be targeted to the fields that lose the most phosphorus, the key to cost-effectiveness. Their weaknesses are cost to taxpayers, the risk of paying for practices farmers would have adopted anyway and the chance that practices stop when payments end.

Information Programs

A fifth, lighter tool is information. Requiring soil phosphorus tests before fertilizer is applied, and sharing results with farmers, often reveals that fields already hold more phosphorus than crops need, so applications can be cut with no loss of yield. Such programs cost little and face less resistance because they help farmers save money. They work only where farmers were applying more than needed, so they complement rather than replace other tools.

Prices Versus Quantities

Weitzman (1974) showed that under uncertainty about the costs of reducing pollution, the choice between a tax and a quantity limit depends on how damages and costs change with pollution. When damages rise steeply past a threshold, a firm limit is better, because exceeding it is very costly. Lake Erie's blooms appear to respond sharply to spring loads above certain levels, which argues for tools that deliver a reliable reduction, such as targeted practices and rules, rather than a modest tax with uncertain effect.

Comparing the Tools

On cost-effectiveness, trading and well-targeted payments perform best in theory; a uniform tax and uniform rules perform less well. On certainty, rules and targeted payments deliver more predictable practice changes, though the resulting load reduction remains uncertain for all tools. On enforcement, rules on observable practices are cheapest. On innovation, taxes and trading reward farmers who find new ways to cut runoff. On fairness, payments place the cost on taxpayers, taxes and rules on farmers and trading shares it between plants and farms.

A Recommended Mix

The best approach combines tools: keep and tighten rules on application timing and manure management, which are cheap to enforce; target payments to the fields with the highest losses, identified through soil testing and modeling; allow wastewater plants to meet part of their obligations through credits from verified farm practices; and require soil phosphorus testing so that fertilizer is applied only where crops need it. A fertilizer tax could fund the payments, though its political prospects are poor.

Monitoring and Adjustment

Whatever the mix, edge-of-field and river monitoring should track whether loads fall, with targets reviewed every few years. Because nonpoint policy relies on estimates, measuring results at the river is the ultimate test.

Conclusion

Runoff from thousands of fields cannot be metered, so the textbook tools of pollution taxes and permit markets lose much of their precision. Rules on observable practices, targeted payments and limited trading with treatment plants, backed by river monitoring, offer the most reliable path to the phosphorus reductions Lake Erie needs, with each tool covering a weakness of the others.

References

Montgomery, W. D. (1972). Markets in licenses and efficient pollution control programs. Journal of Economic Theory, 5(3), 395-418. https://doi.org/10.1016/0022-0531(72)90049-X

Pigou, A. C. (1920). The economics of welfare. Macmillan.

Shortle, J. S., & Horan, R. D. (2001). The economics of nonpoint pollution control. Journal of Economic Surveys, 15(3), 255-289. https://doi.org/10.1111/1467-6419.00140

Weitzman, M. L. (1974). Prices vs. quantities. The Review of Economic Studies, 41(4), 477-491. https://doi.org/10.2307/2296698