Application to the Baltic Sea

value of a marginal change in the area of pollu- tant sinks in country i is higher under coordinated policies as long as there are any dispersion im- pacts of water quality and when positive valua- tions of water quality improvements exists in at least one other country. Under the cost effectiveness approach we have a iIC − a iNC = l − l i P A Li i 12a Eq. 12a is positive or negative depending on the relation between l and l i . These Lagrange multi- pliers are equal to the derivatives of the total and national cost functions for changes in pollutant loads at L and L i , respectively, which implies that Eq. 12a can be rewritten as a IC − a NC = − C L − C L i i A io , E io P A Li i , C = S i C i A io , R io 12b and A io and R io denote the optimal choices of land use- and emission-oriented measures, respec- tively. The relation between a IC and a NC is thus determined by the relation between the interna- tional and national marginal costs for pollutant load reductions at the restrictions L and L i , respectively. Assuming negative and concave cost functions in L and L i , respectively, the differ- ence between a IC and a NC is positive for marginal decreases in L and L i when the marginal cost of pollutant load reductions in country i is relatively low as compared to other countries. Then, an increase in A Li implies cost savings in all coun- tries where pollutant reduction options are more expensive than the cost of the increase in A Li . On the other hand, the national value of a marginal change in A Li is higher when the national mar- ginal cost for pollutant reductions is relatively high. When we instead focus on the role of informa- tion provision, we take the differences between the values of marginal change in the area of pollutant sinks between the efficient and cost ef- fective policies. This difference under coordinated policies is written as a iIB − a iIC = S j V W j j W L j j e ij − l P A Li i 13 and under national policies we have a iNB − a iNC = V W i i W L i i e ii − l i P A Li i 14 Under both international and national policies for maximizing net benefits we have that marginal benefits from pollutant reductions are equal to the marginal cost. Since the Lagrange multipliers l and l i measure the marginal costs of pollutant load reductions at the cost effective load targets, Eqs. 13 and 14 are both zero when the efficient level of pollutant load coincides with the cost effective target. When the efficient loads are higher lower than cost effectiveness targets, the differences in Eqs. 13 and 14 are negative positive. The values of sinks are then lower higher under maximization of net benefits than when costs are minimized.

4. Application to the Baltic Sea

The Baltic Sea has suffered from eutrophication since the beginning of 1970s. Eutrophication may cause an increase in the production of algae, some of which are toxic. When decomposed, all algae demand oxygen which results in oxygen deficits at the sea bottom. This deficiency in turn generates sea bottom areas without biological life, which currently occur in 25 of the deep sea bottom areas of the Baltic Sea Turner et al., 1999. Further, the composition of fish species changes. In the case of Baltic Sea the stock of commercial cod decreases while trash fish stock increases. Nitrogen loads constitute the major source of eutrophication to the major parts of the Baltic Sea Wulff and Niemi, 1992; Elmgren, 1997. In Gren et al. 1997, data on nitrogen trans- port and costs of nitrogen abatement measures used in this study are reported. The relatively low leaching land uses, or pollutant sinks, included are: construction of wetlands, cultivation of catch crops, energy forestry, and pasture. Catch crops refer to certain grass crops which are sown at the same time as an ordinary spring crop, but start to grow when the spring crop is harvested and thus makes use of the remaining nutrient in the soil. Other abatement measures include reductions in use of nitrogen fertilizers, decreases in livestock holdings, improvements in sewage treatment plants’ cleaning capacity, installation of catalysts in cars and ships, and scrubbers in stationary combustion sources. However, as emphasised in Gren et al. 1997, there were several difficulties in finding appropri- ate data on costs and nitrogen transports for these large-scale calculations. In this study, further difficulties appear when finding data on marine water transports of nitrogen, which is required for calculating benefits from nitrogen reduction. Esti- mates of benefits from nitrogen reductions to the Baltic Sea are found in So¨derqvist 1996 and Markowska and Z : ylicz 1996. These studies are designed in order to make appropriate compari- sons between Sweden and Poland of willingness to pay for an improvement of the ecological condi- tions of the Baltic Sea which corresponds to the situation prior to the 1950s. The results from the Swedish study are then transferred to Denmark, Germany and Finland, and the Polish to Estonia, Lithuania, Latvia and Russia. The results show an annual willingness to pay of 31 000 million Swedish crowns SEK. As is common with many methods for estimat- ing monetary values of changes in the supply of an environmental good, only one change in the supply is considered. This method makes it very difficult to trace marginal benefits between the initial supply and that in the valuation scenario, which is required for the purpose of this paper. A linear relation between nitrogen reductions and benefits has therefore been assumed, which im- plies a constant environmental marginal benefit, and, further, that this is the same for all regions. The marginal benefit is obtained simply by divid- ing total benefits by 500 000 tons of N, which corresponds to a 50 decrease in total nitrogen load to the Baltic Sea. This level of nitrogen reduction is suggested by Wulff and Niemi 1992 in order to obtain the ecological conditions corre- sponding to the 1950s. The estimated marginal benefit is then SEK 62kg N reduction. Information on nitrogen marine transports is obtained from Wulff et al. 1990 where trans- ports between three major Baltic Sea basins — Baltic Proper, Bothnia Sea, and Bothnia Bay — are calculated. According to the results, 20 of the nitrogen load to the Baltic proper is transported to the northern basins, i.e. Bothnia Sea and Bothnia Bay. These northern basins are shared by Finland and northern Sweden. Due to the marine streams there is no transport from these basins to the Baltic Proper. Therefore, it is assumed that Finland and Northern Sweden re- ceive 20 of total nitrogen load from all other regions. Further, the loads from Northern Sweden and Finland imply marine environmental impacts only on these regions. Unfortunately, the basin nutrient transport cal- culations contain no estimates of the transport between regions within each basin, which means that there are no estimates of marine nitrogen transports between the eight countries sharing the Baltic Proper basin. Therefore, arbitrary assump- tions have been made which are based on some information on the coasts of the countries. When the coast lines contain islands and vegetation, more of nitrogen impact occurs on the coast of the emitted country and vice versa. It is regarded that the coasts of Poland are very ‘open’ in the sense that they contain little vegetation which can contain nutrients. It is, therefore, simply assumed that all the Polish nitrogen load entering the Baltic Sea is equally divided between all Baltic Proper countries. For the remaining countries it is assumed that 0.3 of the impact occurs on the own coast while the remaining part is equally divided by the other countries. In Table 1, the calculated nitrogen loads, mar- ginal costs and benefits for each region in the drainage basin are presented 1 USD = SEK 7.99, December 17, 1998. In addition, the area of each drainage basin is given. The largest single country is Sweden which covers about one-quarter of the total Baltic Sea drainage basin area. Poland is the country with the highest nitrogen loads to the Baltic Sea and accounts for about one-third of the total load. The total calculated anthropogenic load of nitro- gen from the drainage basin amounts to 706 000 tons of N, which corresponds to approximately 70 of the total load which also includes back- ground leaching and air deposition from sources located outside the drainage basin Turner et al., 1999. Other published estimates of nitrogen load vary between 400 000 and 1 400 000 tons of nitro- gen HELCOM, 1993; Sta˚lnacke, 1996. These estimates are based on measurements of nutrient concentrations at different river mouths along the Baltic Sea coasts. However, there is much uncer- tainty in our estimates, which implies that, al- though well within the range of other estimates, they must be interpreted with much caution. The last two columns present marginal costs and benefits, respectively, from reductions in the nitro- gen load to the coastal waters of the Baltic Sea. The estimates of marginal costs show that the costs of pollutant sink measures are neither the lowest nor the most expensive options. The low cost emission reduction options are decreases in nitrogen fertiliz- ers and improvements of the cleaning capacity at the sewage treatment plants. The most expensive measures are reduction in air emissions, which is explained by their low impacts on the Baltic Sea. The marginal benefit measures the impact as mea- sured in monetary terms in that country. For example, a reduction by 1 kg N of Danish nitrogen loads generates a benefit of SEK 18.6 for the Danish people. Water quality exports to other countries sum to SEK 62 − 18.6 = 43.4. The lowest own marginal benefit is obtained in Poland, which is due to our assumption of an ‘open’ coast. Values of a marginal increase in the nitrogen sink area are calculated for different types of pollutant sinks by means of non-linear programming Brooke et al., 1992. The results show that the values of marginal increases in the area of wetlands are positive in most countries under all four deci- sion frameworks, while they are zero in most cases for the other three types of nitrogen sink areas Table 2. All countries share the feature that the values of marginal increases in wetlands are higher under cost effective decision rules than when net benefits are maximized. As demonstrated in the foregoing section, this is a reflection of the higher nitrogen reduction target under the cost effective approaches see Table 3 for optimal nitrogen reductions, costs and net benefits under alternative decision rules. Another result, which is expected from the analysis in the foregoing section and the numbers presented in Table 1, is that the values are higher under coordinated polices for maximization of net benefits than when each country maximizes its own net benefits. Values are higher under coordination of minimization of costs for low-cost countries with relatively large reductions, i.e. Denmark, Poland, Russia, Estonia, Latvia and Lithuania. The results in Table 2 also reveal that the differences in values for a country can be consid- erable depending on the choice of problem formu- lation. Germany is exceptional due to the large load of nitrogen air transports which are expen- sive to reduce. The requirement of a 50 reduc- tion for each country is therefore very expensive Table 1 Drainage basin area, nitrogen loads, marginal costs and benefits from nitrogen reductions to the Baltic Sea Nitrogen load Marg. benefits Marg. costs SEKkg N Drainage basin area, Region SEKkg N 1000 sq. km 1000 ton Nyear Land as sinks Others 33.3 61 Denmark 22–157 0.1–440 18.6 37.2 0.1–680 41–254 69 Finland 308.0 245 15–101 316.5 0.1–937 Poland 6.2 28.3 96 10–61 0.1–937 18.6 Germany Russia 14–113 328.4 0.1–1500 12.4 35 46.1 18 41–303 0.1–357 18.6 Estonia 65.6 31 43–306 0.1–536 18.6 Latvia 12.4 0.1–500 36–283 Lithuania 45 66.0 278.0 48 101–419 0.1–290 37.2 N. Sweden 0.1–375 30–121 57 147.2 S. Sweden 18.6 706 Total 1571.3 From Sweitzer et al. 1995. From Gren et al. 1997. Table 2 Calculated values for Baltic drainage basin land as nitrogen sinks under alternative decision rules a Region Wetlands Catch crops Energy forests Ley IB NB IC NC IC NC IC NC IC NC 0.70 20.9 7.77 0.40 Denmark 0.04 1.54 0.61 0.92 0.19 Finland 0.30 0.20 0.27 0.07 0.15 0.47 14.4 35.1 1.10 Germany 0.30 Poland 4.07 0.83 0.03 0.03 0.09 Russia 1.97 0.14 0.01 0.01 1.03 1.95 0.01 0.01 0.02 Estonia Latvia 0.03 0.15 2.81 2.00 0.02 0.01 0.13 6.92 1.12 0.03 0.02 0.59 Lithuania N. Sweden 0.24 0.09 0.09 0.07 S. Sweden 0.10 5.12 0.12 0.13 0.03 0.12 a Values are in 1000 SEKha; a blank box indicates zero value; IB, maximization of international net benefits; NB, maximization of national net benefits; IC, minimization of international costs for a 50 total N-reduction; NC, minimization of costs for a 50 reduction in national N-loads. for Germany, which, in turn, gives its very high value of increased wetland area. But, the variation in values is also high for other countries. For example, the highest value is more than 25 times higher than the lowest values in Denmark, Latvia and Lithuania. On the other hand, wetland restoration is a relatively uninteresting nitrogen reduction option in Finland and North Sweden. One important reason is that the nitrogen reten- tion capacity of wetlands, which is dependent on climatic factors, is relatively low in these regions. Another important factor is the relatively large current areas of wetlands in these regions, which implies a rather low value of further increases. The estimated values of wetlands as nitrogen sinks are significant when compared with profits from traditional use of arable land. In Finland, Germany, Denmark, and Sweden profits from high yield arable land vary between SEK 2000 and 6000 per ha, and in the other countries be- tween SEK 500 and 2000 per ha Elofsson, 1997. The value of a marginal increase in the area of wetlands is thus considerable under cost mini- mization decisions. It can then achieve a level which is about three times higher than the highest profit level from conventional crops. Under inter- national coordination of the maximization of net benefits, the values are lower and correspond to, at the most, about one-quarter of the highest profit level Denmark and Estonia. However, the empirical calculations contain several assumptions due to lack of data. Changes in any of these parameters will, by all likelihood, affect the results. One example is provided by the difficulty to obtain information on current area of wetlands. The source used in this paper Jansson et al., 1995, relies on geographical information systems GIS data, which is known to be rela- tively weak in identifying wetlands. When the wetland area is doubled in all countries, the values under the cost effective decisions become zero for Finland and North Sweden and are reduced by at least two-thirds for all other regions Table 4. Further, the values of other nitrogen sink options become zero in all countries except Finland.

5. Concluding comments