Damage costs of nitrogen fertilizer in Europe and their internalization

Abstract

This paper estimates the environmental impacts and damage costs (‘external costs’) of synthetic nitrogen fertilizer and discusses options for reducing these impacts, including their consequences for farmers and for producers of fertilizer. The damage costs of the fertilizer life cycle that could be estimated are large, about 0.3 €/kgN (compared to the current market price of about 0.5 €/kgN); much of that is due to global warming by N2O and CO2 emissions during fertilizer production and N2O emissions from fertilized fields. Policy options for internalizing these costs are discussed, and the consequences of reduced fertilizer input on crop yield are explored. If the damage costs were internalized by a pollution tax or tradable permits that are auctioned by the government, the economic consequences would be heavy, with a large revenue loss for farmers. However, if it is internalized by tradable permits that are given out free, the revenue loss for farmers is small. The loss for fertilizer producers increases linearly with the amount of external cost that is internalized, by contrast to the loss for farmers which increases quadratically but is very small for a damage cost of 0.3 €/kgN. Expressed as a change in the fertilizer-dependent part of the farmers' revenue (crop yield × crop price – fertilizer used× fertilizer price), the decrease is less than 0.5% for most crops; the losses are larger only for crops with low €/ha revenue. Averaged over wheat, barley, potatoes, sugar beet and rapeseed, the loss to farmers is about 0.1% in the UK and 0.4% in Sweden. The revenue loss for fertilizer producers is larger, about 8% in the UK and 14% in Sweden.