An application to nitrogen reduction measures

B i = − F i − DF i F i 1 Fc i F i Fc i P i P CH dF i 2 E = i B i = − i F i − DF i F i 1 Fc i F i Fc i P i P CH dF i 3 where Fc i is the critical flow of pollutant i in affected area; F i is the actual flow of pollutant i in affected area; P i is the population in area affected by pollutant i CO 2 -equivalents: 5.25 billion; ni- trogen into lakes and rivers: 250 million, all other pollutants: 7 million = P CH 8 ; and P CH is the pop- ulation in Switzerland 7 million. For a cost-effectiveness analysis that only con- sidered the national effects of emission reduction, no adjustment for international public goods would be necessary. As a consequence, the calcu- lated effectiveness of greenhouse gas and nitrogen reductions would be biased downwardly, since the international benefits of a national emission re- duction would be ignored. In this study, it has been decided to include the international effects of national policies as well. 9 2 . 3 . The relati6e marginal damage of pollutant emissions In Table 1 the pollutants and the corresponding actual and critical flows per year are listed. Since it is assumed that until the year 2002 the agricul- tural measures will realise their full effect, we chose 2002 as the reference point in time. Hence, all actual flows and all emission reductions refer to the year 2002. The critical flows, on the other hand, do not depend on the choice of a reference year. The last column of Table 1 shows the mar- ginal damage per thousand tons of pollutant emission — calculated according to Eq. 1. The last column in Table 1 shows a high mar- ginal damage due to phosphorus emissions. This is mainly due to the relatively low critical phos- phorus flow giving a unit of emission a relatively large weight. At the other end of the scale, the global critical flow of greenhouse gas emissions is very high. This explains why the corresponding marginal damage per unit of emission is low even though it is considered that the total world popu- lation is affected by greenhouse gas emissions. The other factor explaining the relative marginal damage of an emission unit is the ratio of actual and critical flow, which is highest for nitrogen oxide and lowest for chemical oxygen demand. 10 Table 1 also shows that although the ratio of actual and critical flow for nitrogen into lakes and rivers and for carbon dioxide equivalent is the same, the marginal damage differs substantially. Again, this is due to the different critical flows of the two pollutants, giving a thousand tons of nitrogen emissions a much larger weight than the same amount of greenhouse gas emissions.

3. An application to nitrogen reduction measures

We evaluate five measures that both reduce nitrogen pollution substantially and are under political discussion in Switzerland. 11 As an addi- tional measure, an environmental charge on the burning of fossil fuels with a charge rate that is based on the pollutant index is proposed and evaluated. With this measure, an instrument is chosen that reduces pollutant emissions from car traffic comprehensively including emissions of ni- trogen oxide. The measure will turn out to be much more cost-effective than a general carbon dioxide charge. Again, although the emphasis is on nitrogen reduction, all the other emission reductions are 8 Of course, a further spatial differentiation would be desir- able. But since no further information on regional flows and regional critical flows is available, only three regions Switzer- land, North Sea Countries, i.e. France, Belgium, Netherlands, Denmark, UK, Sweden, Norway, Germany and World have been distinguished. 9 A sensitivity analysis with only national effects considered did not change the efficiency ranking of the evaluated mea- sures, although the measure sewage plant see below expect- edly turned out to be much less cost-effective. 10 Chemical oxygen demand is not a pollutant itself but serves as an indicator for dissolved organic compounds in lakes and rivers. 11 Of course, this choice is very country-specific. As an example, catalytic converters for power plants are no political issue because in Switzerland there are almost no power plants that use fossil fuels as input. also taken into account in order to fully evaluate the measures and to prevent a bias towards mea- sures that only reduce one or a few pollutants. 3 . 1 . Extension of sewage plants Existing sewage plants are extended to trans- form ammonia into molecular nitrogen N 2 . The calculations are based on a total nitrogen elimina- tion of 55. Additionally, the measure leads to a reduction of phosphorus emissions and chemical oxygen demand. The cost of this measure consists mainly of capital costs which are calculated on the assumption that an investment of 150 000 CHF t − 1 of yearly nitrogen reduction is needed. 3 . 2 . Low nitrogen oxide burners Heating systems based on oil and gas are re- newed with a new generation of low nitrogen oxide burners. These burners reduce the nitrogen oxide emission by 1.6 g kg − 1 oil. At the same time, their fuel efficiency is increased from 75 to 85, leading to less consumption of fossil fuels. The cost calculations are based on an additional investment of 30 CHF kW − 1 . To assess the future benefit of fossil fuel savings, a yearly real price increase of 2 has been assumed. 3 . 3 . Gas cleaning of waste incinerators An additional gas cleaning system is installed to reduce nitrogen emissions of waste incinerators. The specific emission reduction of this system is 2 g nitrogen oxide per kilogram waste. The invest- ment cost amounts to 25 million CHF per 100 000 t of waste. 3 . 4 . Agricultural policy 2002 This package of measures includes two issues relating to nitrogen. Firstly, the new WTO-rules lead to falling producer prices and to structural changes in Swiss agriculture, which, until recently, has been heavily protected from international competition. Secondly, an incentive system for integrated production with an equalised nutrient balance is established. The reaction to this pack- age has been calculated with a model describing an income maximizing behaviour of a representa- tive farmer. The comparative static results on the farmer’s nitrate cycle have been derived with the method of linear programming. Furthermore, these theoretical findings have been adjusted to empirical data on nitrate flows to allow for the fact that farmers do not produce on the efficient boundary. Finally, the results have been projected to assess the national impact on the agricultural nitrogen emissions Lehmann et al., 1995. It is forecasted that in the year 2002 96 of all farmers will have established an equalised nutrient balance. 3 . 5 . Carbon dioxide charge A modest carbon dioxide charge increasing the price of gasoline by 10 and the price of other fossil fuels according to their relative carbon con- tent is introduced. To calculate the reaction to such a charge and the loss of consumer surplus, different price elasticities of demand for four groups of polluters are adopted: car traffic, 0.45; road haulage, 0.3; household, 0.4; and industry, 0.5 Wasserfallen and Gu¨ntensperger, 1988; Spierer, 1988. 3 . 6 . Index-based charge on fossil fuels The relative rates of this charge correspond to the relative marginal damage of different fossil fuels as expressed by Eq. 1. The burning of diesel in a truck, for example, produces almost twice as high a marginal damage per unit of energy than the burning of gasoline in a private car. The rates are further differentiated by includ- ing the external cost of traffic noise and traffic accidents. Table 2 shows the external cost rates for passenger traffic and road haulage that have been calculated for Switzerland and are used to determine the index-based charge rate see ECOPLAN, 1991, 1992. With such a differenti- ated charge system, a more cost-effective reduc- tion of emissions than with a simple carbon dioxide charge must result. Since the cost-effectiveness of charges depends on the charge rate higher rates yield a higher Table 2 External cost rates of traffic Traffic acci- Traffic noise dents Passenger traffic CHF 0.024 0.015 km − 1 and person 0.058 0.009 Road haulage CHF km − 1 and t 3 . 7 . First stage results The emission reductions as listed in Appendix A and the data in Table 1 on the actual and critical flows allow us to calculate the effectiveness as presented in the third column of Table 3. In the fifth column of Table 3, the cost-effec- tiveness of all the measures is listed. It shows striking differences in the cost per pollution re- duction, ranging from − 351 to + 149. 12 This emphasizes the importance of including cost con- siderations when deciding upon environmental policy programs. Two measures, agricultural policy and low NO x burners, show a negative cost-effectiveness, i.e. they produce negative cost. These results require some explanation. The measure entitled agricultural policy leads to less agricultural production in Switzerland and consequently to substantial savings of factor cost capital: 655 million CHF, labor: 13 million CHF and fertilizer 216 million CHF Lehmann et al., 1995. Since the production costs in Switzerland are higher than abroad, substituting domestic pro- duction with imports is efficient. 13 The cost of these imports amounts to 255 million CHF. Also, cost-effectiveness, the rate-level of the index- based charge is chosen so as to produce the same effectiveness as the carbon dioxide charge. To assess the cost-effectiveness of the proposed measures, we proceed in two stages. In the first stage, the cost-effectiveness of each measure is derived independently of other measures. This corresponds to a scenario in which each measure is introduced without any of the other policies being realized. The result of this first stage can then be used to rank the measures according to their cost-effectiveness. Since the cost as well as the effectiveness of a measure depend on the policies already intro- duced, it is not possible to sum up the results of the first stage to obtain total cost and effective- ness data on a package of measures. It is rather necessary to calculate a second stage, taking into consideration the sequence of introducing the measures according to their first stage ranking. 12 Since the results can only be interpreted in relative terms, the choice of the currency is of no importance. 13 Note that the environmental effects of additional import have not been taken into account. Table 3 Cost-effectiveness of measures to reduce nitrogen emissions first stage Cost-effectiveness mil- Effectiveness Effectiveness Cost-effectiveness CHF Cost million Measure nitrogen t per ton of nitrogen index-points CHF year − 1 lion CHF per index year − 1 point − 686 1.96 21 000 − 351 Agricultural − 32 667 policy 2002 − 86 4171 1.81 − 37 161 − 155 Low-NO x burners 11 1.37 2132 8 5270 Index-based charge 31 1.37 CO 2 charge 2126 23 14 657 12 259 55 2289 28 0.51 Sewage plants 91 0.61 1835 149 Waste incinera- 49 367 tors it is plausibly assumed that such additional im- ports do not increase agricultural production in the exporting countries, and hence do not increase nitrogen emissions abroad. 14 Of course, such a policy is accompanied by distributional effects. Basically, the consumers win and the farmers lose. The opposition of the politically strong group of farmers is the reason why such an economically profitable policy has not already been realized. The measure entitled low-NO x burners yields negative cost because the — yearly — saving of en- ergy of 479 million CHF exceeds the capital cost of 324 million CHF. The question arises as to why such burners are not installed without any political decree. The reason is an incentive prob- lem. In Switzerland, 70 of the population are tenants living in apartments that are — for the most part — rent controlled. In this situation, the owners of the apartments have no incentive to install new heating systems because it is the ten- ants alone who would benefit from the energy saving measures undertaken. Table 3 also shows that an index-based charge on fossil fuels is almost three times more cost-ef- fective than a charge based on carbon content only, i.e. the same pollutant reducing effect can be reached at three times lower cost. With the elastic- ities given above, a loss of consumer surplus of 261 million CHF results. However, these costs are almost compensated by a reduction of external accident and noise cost of 253 million CHF. Compared with these numbers the calculated ad- ministrative cost of 4 million CHF is of minor importance. It is noted once again that with either of these charges a greater effectiveness can be achieved with higher charge rates. Higher rates, however, lead to higher cost-effectiveness because the shadow price of the environmental restriction increases. When applying a more stringent critical green- house gas flow of only 25 of the actual flow, the effectiveness of the two measures intended to reduce the burning of fossil fuel is approximately doubled, and hence they become twice as cost- effective. However, the sensitivity analysis shows that the ranking of the measures does not change even when the critical flows of carbon dioxide equivalents are changed substantially. The measures entitled sewage plants and waste incinerator appear at the bottom of the order in Table 3. Both measures are typical end-of-the- pipe policies with high capital cost. However, it cannot be concluded that end of the pipe mea- sures are generally inefficient because in this study only a restricted selection of the measures is con- sidered. In another study Ma¨der and Schleiniger, 1995, the catalytic converter of gasoline exhaust in cars, for example, showed a very good cost- effectiveness. The last column in Table 3 shows that the relative cost-effectiveness of the measures changes when only the nitrogen reduction is considered. 15 As expected, the cost-effectiveness of the two charges on fossil fuels decreases since these two measures are not particularly intended to reduce nitrogen pollutants alone but a wide range of other pollutants too. With this restricted assess- ment of ecological effects, the carbon dioxide charge is less cost-effective than the sewage plants measure. This switch in the efficiency order em- phasizes the importance of considering all ecolog- ical effects when evaluating different measures. 3 . 8 . Second stage results Table 4 gives the results of the second stage calculations, considering the altered effectiveness of measures when other policies are already real- ized. Because of its inefficiency compared to the index-based charge, the carbon dioxide charge is no longer considered. As a rule, the cost-effective- ness of measures introduced after other measures are already in place decreases in comparison with the first stage results of Table 3. This is due to the decrease in the actual emission flow resulting in a 15 Note that the efficiency ranking of measures with negative cost-effectiveness is somewhat complicated. In our example, the agricultural policy measure is still preferred to the low-No x burner measure since it yields both higher effectiveness tons of nitrogen reduced and lower cost. 14 This assumption only holds for a small country like Switzerland. Table 4 Cost-effectiveness of measures to reduce nitrogen emissions second stage Effectiveness Cumulative cost mil- Cost million Measure Cumulative effective- Cost-effectiveness mil- CHF per year ness index points index points lion CHF per index lion CHF per year point − 686 − 686 Agricultural 1.96 1.96 − 351 policy 2002 Low-NO x − 155 − 841 1.81 3.77 − 86 burners 11 − 830 Index-based 1.18 4.95 9 charge − 802 0.51 5.46 Sewage plants 55 28 91 − 711 0.52 5.98 175 Waste incinera- tors lower effectiveness see Eq. 1. Looking at Table 4, it can be seen though that the two measures, low-NO x burners and sewage plants, have not changed in their effectiveness as compared to Table 3. The reason is that these two measures reduce pollutants that are not decreased by more cost-effective measures. Therefore, the actual flow of these pollutants does not change in stage two. Now that the interdependencies of the measures are considered, a cumulation of the cost and the effectiveness is possible. Because of the large cost savings of the two most efficient measures, i.e. agricultural policy and low-NO x burners, the total cost of all the measures is still negative. Hence, with an appropriate compensation of the losers in this policy package, it is possible to reach a Pareto improvement. It is noted that this conclusion can be derived without the need to monetarise the effects of lower pollutant emission. The results in Table 4 can also be presented as a marginal abatement cost curve. In Fig. 2, the cumulative effectiveness on the horizontal axis is graphed against the ascending cost-effectiveness of the measures on the vertical axis, giving rise to a stepwise marginal cost curve. It is noticed that in our example the more efficient measures are also more effective, i.e. they produce a larger absolute amount of pollutant reduction with the exception of the two least efficient measures that yield almost the same effectiveness. This is mainly coincidental and can only to a small extent be explained by the decreasing flow of actual emissions leading to lower effectiveness of less efficient measures.

4. Conclusions