Agriculture, Economics, Environment, Natural resource management, Water

261 – Agricultural water pollution

Agriculture is a major source of pollution in many rivers, lakes and coastal waters. The problems are nutrients, mainly nitrogen (N) and phosphorus (P), and sediment, causing eutrophication and turbidity.

I’ve been involved in various pieces of economic analysis looking at possible strategies to reduce these problems, including work on the Gippsland Lakes in eastern Victoria, rivers in central Victoria, Lake Karapiro in New Zealand and currently the Great Barrier Reef.

What have we learnt?

Firstly, reducing pollution to low levels can be very expensive. Even if the cost is moderate per hectare of agricultural land, it adds up if changes are needed over large areas, as they often are. For example, we estimated that it would cost at least a billion dollars over 25 years to reduce phosphorus flows into the Gippsland lakes by 40 per cent (Roberts et al., 2012).

lake_karapiroSecondly, there is a lot of heterogeneity in the cost of reducing pollution. There is heterogeneity between the costs of different methods of pollution reduction, and heterogeneity in the cost of some methods in different parts of the catchment.

This means that it can really pay off to have a system or a policy that targets pollution reduction to the cheapest options in the cheapest places (‘cheapest’ meaning best bang for the buck, not just lowest cost irrespective of effectiveness). If a policy doesn’t account well for cost heterogeneity, it will achieve much less pollution reduction than it potentially could for a given budget.

There is a tendency for the most cost-effective interventions to be relatively close to the water body, rather than further away. This is not always true, but it is a trend.

Next, we generally observe increasing marginal costs as the pollution reduction target gets more ambitious. Small reductions can often be achieved quite cheaply, but costs increase at an increasing rate as the pollution-reduction target goes up.

Life gets even more complicated if you are trying to manage more than one pollutant at a time. For example, Doole et al. (2013) looked at strategies to reduce both phosphorus and sediment. The two are somewhat correlated, but even so, if you just targeted sediment reductions, you probably wouldn’t achieve worthwhile reductions in P. This is partly because, in the region we studied, it’s much cheaper to reduce sediment than phosphorus.

Also, the most cost-effective strategy to reduce P is different from the most cost-effect strategy for sediment, so it’s important to understand the relative importance of the two pollutants (or three, in some cases).

The challenge for environmental managers is how to factor these insights into the planning of their strategies. The environmental benefits of doing so can be really substantial, compared with designing strategies on the basis of biological and physical considerations only, although that is quite common in practice (i.e. just focusing on biology and ignoring the economics). What’s required is systematic analysis that also factors in project costs (including maintenance costs and compliance costs) and likely farmer behaviour in response to the policy or project.

The work we did on the Gippsland Lakes is a good example of an approach that is reasonably simple (it’s spreadsheet-based) but comprehensive enough to do a good job.

Further reading

Doole, G., Vigiak, O., Roberts, A.M. and Pannell, D.J. (2013). Cost-effective strategies to mitigate multiple pollutants in an agricultural catchment in North-Central Victoria, Australia. Australian Journal of Agricultural and Resource Economics 57(3), 441-460. Journal web site ◊ IDEAS page

Doole, G. and Pannell, D.J. (2012). Empirical evaluation of nonpoint pollution policies under agent heterogeneity: regulating intensive dairy production in the Waikato region of New Zealand, Australian Journal of Agricultural and Resource Economics 56(1), 82-101. Journal web site ◊ IDEAS page

Roberts, A.M. Pannell, D.J. Doole, G. and Vigiak, O. (2012). Agricultural land management strategies to reduce phosphorus loads in the Gippsland Lakes, Australia, Agricultural Systems 106(1), 11-22. Journal web site ◊ IDEAS page