crops, only 73 teragrams of nitrogen made it to the harvested crop (Zhang et al. 2021). This means that almost two-thirds of all nitrogen applied to crops gets wasted. The European Union Nitrogen Expert Panel recommends nitrogen use efficiency of around 90 percent as an upper limit, indicating that a vast amount of the nitrogen that is poured into fields is getting wasted.

In sum, there exists an optimum level of nitrogenous fertilizer application that can vary with field conditions and combinations of other inputs. Policies intended to help increase productivity but without careful consideration for local conditions can inadvertently exacerbate the unbalanced and ineffective use of nitrogenous fertilizers. Subsidizing the wrong type of fertilizer or subsidizing fertilizers in areas where fertilizer use is already well above levels that maximize its value can impose substantial costs on productivity and provide lower returns to farmers, leading to wasted fertilizers and government spending.

# Water Quality

The massive increase in nitrogen fertilizers has, in turn, impacted many of the world’s water bodies. As described earlier, because of excess use and inefficiencies in application, not all nitrogen applied on fields is absorbed by crops. Runoff of excess nitrogen increases concentrations of nitrate and nitrite in the waters. These can lead to cyanobacteria-related algal blooms. Conspicuous to the eyes, cyanobacteria can be deadly— they can emit neurotoxins and hepatotoxins such as microcystin and cyanopeptolin, which are toxic to humans, animals, and other aquatic life (Damania et al., 2019). Previous remote sensing analysis has shown that the world experienced on average nearly two such episodes of massive cyanobacteria-related algal bloom per year in 421 of the world’s largest lakes between 2002 and 2012, highlighting the recurring problem of fertilizer overuse, agricultural runoff and subsequent deterioration in water quality (Damania et al., 2019).<sup>15</sup> Large algal blooms can devastate ecosystems, often resulting in hypoxia or dead zones, a condition that arises when water bodies lack sufficient oxygen. The legacy effects of nitrogen pollution on the environment can also endure decades after nitrogen inputs have ceased, with long time lags between the adoption of conservation measures and any measurable improvements in water quality (Van Meter et al. 2018; Basu et al., 2022). Not surprisingly, according to the FAO, in many countries the biggest source of water pollution today is agriculture — not cities or industry — while worldwide, the most common chemical contaminant found in groundwater aquifers is nitrate from farming (Mateo-Sagasta et al., 2017).

The results in Table 2 show that an increase in agricultural fertilizer use leads to substantial deterioration in water quality such that there is a strong and positive impact of nitrogen fertilizer use on the concentration of nitrogen in water. These estimates are robust across multiple specifications with elasticities ranging from 0.16 to 0.34, suggesting that a 10 percent increase in nitrogen fertilizer leads to a 1.6 to 3.4 percent increase in the concentration of nitrogen pollutant. These pollution elasticities are consistent with estimates from prior econometric literature that find adverse effects of nitrogen fertilizer use on water quality in country-specific settings (Paudel and Crago, 2021).<sup>16</sup>

> 15 Although the dominant source of nitrogen pollution in the water is the agriculture sector, many other diverse sources also contribute to its proliferation from livestock waste, fossil fuel combustion to untreated wastewater. As cities grow and become denser, the threats of nitrogen leaching from below-ground septic tanks, human sewage, urban wastewater, and urban stormwater runoff are also expanding.

> 16 The authors construct an empirical model on determinants of ambient water quality using over 2.9 million pollution readings and find that a 10 percent increase in the use of nitrogen fertilizers (kg) leads to a 1.47 percent increase in the concentration of nitrogen (mg/l) across the U.S. water sites.

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