In this paper, we use cost minimization to calculate marginal abatement costs for reducing greenhouse gas emissions and nutrient runoff from Finnish agriculture with various measures, such as reducing fertilization or herd size and widening buffer strips. Whether the coeffects of the studied water protection or climate mitigation measure on greenhouse gas emissions or nutrient runoff, respectively, are accounted for or not, affects the marginal abatement costs. For example, if fertilization is reduced to lower greenhouse gas emissions, it simultaneously reduces nutrient runoff without any additional effort from the farmer. If the reduction in nutrient loading, expressed in monetary terms, is added to the farmer’s private abatement costs of reducing fertilization, the costs decrease.
The abatement costs considering the coeffects (referred to as the social abatement cost) are lower than the private abatement costs if the measure implies cobenefits. In the case of codamages, the effect is the opposite: social abatement costs are higher than the private abatement costs. Accounting for the coeffects therefore creates a gap between optimal abatement levels determined based on private abatement costs or social abatement costs. The size of this gap depends on how great the coeffects are.
This finding affects optimal policies directly. For example, a tax an all greenhouse gas emissions is set at the level where private marginal abatement costs are equal to the marginal benefits of reducing emissions. Now, if there are cobenefits, then the social marginal abatement costs are lower than the private abatement costs. The point where marginal costs and benefits intersect moves further, meaning that the socially optimal level of emission reduction is higher than the private one. This implies a higher level for the emission tax. In the case of codamages, social marginal abatement costs are higher than the private abatement costs. The point of intersection for marginal costs and benefits moves closer to the origin indicating a lower level for emission reductions in the social optimum compared to the private optimum. This implies a lower level for the emission tax.
The work is part of the BONUS GO4BALTIC project, funded jointly by the EU and national funding institutions (Academy of Finland).
Reference: Lötjönen S. and Ollikainen, M. 2019. Multiple-pollutant cost-efficiency: Coherent water and climate policy for agriculture. Ambio 48(11):1304-1313. https://doi.org/10.1007/s13280-019-01257-z