The Performance of Compliance Measures and Instruments for Nitrate Nonpoint Pollution Control Under Uncertainty and Alternative Agricultural Commodity Policy Regimes

Following Weitzman (1974), there is ample theoretical literature indicating that choice of pollution control instruments under conditions of uncertainty will affect the expected net benefits that can be realized from environmental protection. However, there is little empirical research on the ex ante efficiency of alternative instruments for controlling water, or other types of pollution, under uncertainty about costs and benefits. Using a simulation model that incorporates various sources of uncertainty, the ex ante efficiency of price and quantity controls applied to two alternative policy targets, fertilizer application rates and estimated excess nitrogen applications, are examined under varying assumptions about agricultural income support policies. Results indicate price instruments outperform quantity instruments. A tax on excess nitrogen substantially outperforms a fertilizer tax in the scenario with support programs, while the ranking is reversed in the scenario without support programs. Key Words: nonpoint pollution policy, policy coordination, uncertainty Building on the seminal work of Weitzman (1974), a small but important literature has emerged on the choice between environmental policy instruments when there is uncertainty on the part of environmental authorities about the costs and benefits of pollution control. Much of the literature (e.g., Adar and Griffin, 1976; Yohe, 1978; Stavins, 1996) is focused on the choice between emissions-based price and quantity controls. Standard results include the finding that the expected net benefits of optimally designed emissions price and quantity controls will generally differ when policy makers are uncertain about pollution control costs, with the difference depending on the relative slopes of the marginal benefits and costs, and sign and size of the covariance between marginal benefits and costs. The emissions-based focus of this research limits its direct relevance to nonpoint source pollution problems since a defining characteristic of nonpoint pollution is that emissions from individual sources cannot be metered at reasonable cost. With unobservable pollutant flows, other constructs must generally be used to monitor performance and as a basis for the application of policy instruments (Griffin and Bromley, 1982; Shortle and Dunn, 1986; Segerson, 1988; Xepapadeas, 1995). Options for nonpoint bases include inputs or techniques that are correlated with pollution flows (e.g., use of polluting inputs such as fertilizers), emissions proxies constructed from observations of inputs or techniques that influence the distribution of pollution flows (e.g., estimates of field losses of fertilizer residuals to surface or ground waters), and ambient environmental conditions (e.g., nutrient concentrations in ground or surface waters) (Braden and Segerson, 1993). With these options, the choice of instruments for nonpoint pollution control involves not only a choice between price or quantity mechanisms (or a mixture), but also a choice between target or bases to which they can be applied. In this paper, we examine the choice between alternative instruments for reducing nitrate pollution from agricultural nonpoint sources. Reducing nitrates in ground and surface waters from agriculture has emerged as a major water pollution control policy objective (U.S. Environmental Protection Agency, 2000). The instruments considered are differentiated according to compliance measures (nitrate inputs, proxies for nitrate losses to the environment) and the types of regulations applied (prices, quantity controls). Each of these instruments is of practical interest, with instances of their use in the United States and Europe (Ribaudo, 2001; Horan and Shortle, 2001; Hanley, 2001). In addition to our interest in the implications of uncertainty for the choice of instruments, we examine the sensitivity of environmental policy performance to other societal choices that affect welfare effects and producer responses. …