Cost-Effective Nutrient Reductions to the Baltic Sea

Environmental and Resource Economics 10: 341–362, 1997. 341c 1997 Kluwer Academic Publishers. Printed in the Netherlands.

Cost-Effective Nutrient Reductions to the Baltic Sea

ING-MARIE GREN1, KATARINA ELOFSSON2 and PAUL JANNKE11The Beijer International Institute of Ecological Economics, Royal Swedish Academy of Science,104 05 Stockholm, Sweden; 2Ministry of Environmental and Natural Resources, 103 33 Stockholm,Sweden

Accepted 13 December 1996

Abstract. Due to eutrophication caused by heavy loads of nitrogen and phosphorus, the biologicalconditions of the Baltic Sea have been disturbed: large sea bottom areas without any biological life,low stocks of cods, and toxic blue green algaes. It is recognized that the nitrogen and phosphorusloads to the Baltic Sea must be reduced by 50% in order to restore the sea. The main purpose of thispaper is to calculate cost effective nitrogen and phosphorus reductions to the Baltic Sea from the ninecountries surrounding the Baltic Sea. The results show a significant difference in minimum costs ofdecreasing nitrogen and phosphorus loads to the Sea: approximately 12 000 millions of SEK per yearand 3 000 millions of SEK respectively for reductions by 50%. It is also shown that a change from apolicy of cost-effective nutrient reductions to a policy where each country reduces the nutrient loadsby 50% increase total costs for both nitrogen and phosphorus reductions by about 300%. The resultsare, however, sensitive to several of the underlying assumptions and should therefore be interpretedwith much caution.

Key words: Baltic Sea, eutrophication, nitrogen, phosphorus, cost effective

1. Introduction

The Baltic Sea is a common resource for nine surrounding countries: Finland,Estonia, Latvia, Lithuania, Russia, Poland, Germany, Denmark and Sweden. Itfunctions as a source of food, transport, recreation, waste disposal, and so forth.The use of the Baltic Sea for nutrient disposal has, however, implied ecologicaldamage from eutrophication. Eutrophication generates production of algae, someof which are toxic. Further, algaes consume oxygen when decomposed, whichimplies that the supply of oxygen can be eliminated which hampers the survival ofother species and creates sea bottoms without any biological life. The stock of codhas been reduced due to nutrient loads and large areas of the Baltic Proper’s seabottoms are currently without any biological life (Wulff et al. 1990).

A concern for the degrading ecological conditions of the Baltic Sea was, how-ever, manifested already in the beginning of the 1970s by the signing of HelsinkiConvention 1974 and by the subsequent work carried out by its administrative body,HELCOM (Hjort 1992). Starting with monitoring pollutant loads to the Baltic Sea,HELCOM became more action oriented by suggesting different pollution-reductionmeasures. The focus has been on point source polluters, such as construction ofsewage treatment plants (HELCOM 1993). A ministerial agreement has also been

342 ING-MARIE GREN ET AL.

made on reducing the nutrient loads to the Baltic Sea by 50%. The interest in pointsource polluters has been criticized on the grounds that non-point sources accountfor a major part of the total nutrient loads and that the cost of measures directedtowards these sources are relatively low (e.g. Wulff and Niemi 1992). One impor-tant reason for the disagreement is the lack of overview of costs and impacts ofdifferent types of measures in the surrounding countries. The purpose of this studyis an attempt to fill this gap of knowledge by calculating cost-effective nutrient,nitrogen and phosphorus, reductions and associated allocations of nutrient reduc-tion measures. The measures included in the study involve agriculture, sewagetreatment plants, wetlands, traffic, and stationary combustion sources.

Ideally, when calculating cost-effective nutrient reductions we have informationon the relation between nutrient loads to the coasts and the corresponding ecologicaldamage of the Baltic Sea. This relation is likely to differ for various Baltic Sea waterbasins due to variations in the surrounding coasts’ capacity to process nutrientsand to marine water transports of nutrients. Unfortunately, there exist no suchestimates. Therefore, we estimate minimum costs of nutrient reductions to thecoastal waters without any discrimination between the coast lines and water basins.A further limitation of the study is that we estimate only the costs which occurat the sectors directly involved in the nutrient-reduction programs, i.e. dispersioneffects on other sectors of the economy and transaction costs associated with theimplementation of cost-effective programs are excluded. The cost concept alsorefers only to improvements of the Baltic Sea. Thus, other environmental benefits,such as improved water quality within the drainage basin, decreases in acidity fromreductions in airborne nitrogen depositions and reduction in the ground level ozonelayer due to decreased nitrogen oxides emissions, are not included in this study.This study shall therefore be regarded as a first step towards a more comprehensiveanalysis of cost-effective programs.

To our knowledge, there exists no studies of cost-effective pollution reductionsfor water quality improvement at the scale of this study: the Baltic Sea drainagebasin covers an area of about 1 400 000 km2 and inhabits 75 millions of peoplein the nine countries with Baltic Sea coasts. Studies of cost-effective water qualityimprovement were, however, carried out already in the late 1960s for smallerregions (e.g. Kneese and Bower 1968). Since then, sophisticated models of pollu-tant transports have been applied for determining cost-effective allocations ofreduction measures and for simulating impacts of different policy instruments (seee.g. Russell and Shogren 1993). Common to most of these studies is their focuson relatively small regions and the inclusion of only one polluting sector, mainlyagriculture, and one pollutant, often nitrogen or pesticides. This study thereforediffers from other studies with respect to the spatial scale, the inclusion of differenttypes of point- and nonpoint source polluters, and consideration of two pollutants,nitrogen and phosphorus.

The paper is organized as follows. We start by presenting the model underly-ing the calculations of cost-effective nutrient reductions to the Baltic Sea. Next,

NUTRIENT REDUCTIONS TO THE BALTIC SEA 343

the data used for the calculations of costs are presented. Cost-effective nutrientreductions are presented in Section 4. This section also includes cost estimates oftwo approaches for obtaining the ministerial agreement on reducing the load ofnutrients by 50%; a cost-effective reduction and a proportional reduction whereeach country reduces nutrient loads by 50%. The paper ends with a brief summaryand discussion of the results. Unless otherwise stated, all results referred to arefound in Gren et al. (1995).

2. The Model

In the following, the model underlying the numerical calculations of cost-effectivenutrient reductions is presented. It is then assumed that the ultimate aim of theBaltic Sea manager is to obtain certain reductions in the nutrient loads to the BalticSea at minimum costs. Although a seemingly simple principle, the manager facesdifficulties when considering the various means of nutrient transports. For example,emissions of nitrogen oxides and ammonia are transported by air, soil, and inlandwater streams before they enter the coastal waters. This transport by several mediaimplies inseparability between different measures reducing the nutrient load to theBaltic Sea. In principle, the nutrient loads to the Baltic Sea can be reduced by threeclasses of measures:

� Measures reducing the nutrient emissions from sources with deposition onthe Baltic Sea and on land within the drainage basin which is transported bywater streams, which we denote by Mr where r = 1, : : : , f different depositionmeasures

� Land use measures, Ml, where l = 1 : : : , g different land use measures, reducethe leaching from a given deposition on land to water streams by, for example,changing land use from relatively high leaching (e.g. potatoes and oil crops)to low leaching such as energy forests or grassland.

� Measures reducing the impact of a given nutrient water transport on the coastalwater by increasing the nutrient retention, Ms with s = 1 : : : , h alternativeretention measures. Nutrient retention is increased by the creation of nutrientsinks such as wetlands and buffer zones.

Within the first class of measures, Mr, we distinguish between reductions in thedeposition from air emissions, fertilizers, manure, and sewage from householdsand industry. For simplicity, we here assume that there is only one measure forreducing nutrient deposition from each type of emission source. The considerationof several measures for reducing deposition from certain sources, such as scrubbersand catalysts in cars for reducing nitrogen oxide emissions, does not affect the mainresults in this section. This is, however, accounted for in the numerical calculations.

The direct deposition on the Baltic Sea from region i, where i = 1, : : : , n BalticSea drainage basins, is determined by its initial deposition from different sources,Dir0

, minus the reduction obtained by implementing deposition measures in i, Mir.


The total direct nutrient deposition on the Baltic Sea from a region, Did, can thenbe written as

�rairB(Dir0

�M ir) = Did; (1)

where 0 < airB � 1 is the fraction of nutrient reduction from source r in region iwhich reaches the Baltic Sea. Note that airB = 1 for sources located at the coast,which emit all their nutrient emissions directly into the Baltic Sea, such as coastalsewage treatment plants.

The deposition on land within region i, Diq, is written in a similar way as

�j�rajir(Djr0

�M jr) = Diq; (2)

where 0 � ajir � 1, is the fraction of emission from source r in region j which isdeposited in region i. When aiir = 1 there is no transboundary transport of nutrients,such as deposition of fertilizers and nutrients from sewage treatment plants.

The deposition of nutrient on land within a region, i.e. Diq, constitutes a potentialfor leaching into water streams which is transported to the coastal water. Thenutrient leaching is also determined by several other factors such as climate, soil,hydrology, geology and land uses. We simplify these complicated processes bywriting the total leaching from land into water streams in a region, Li, as theleaching prior to implementing the land use measures, Lip, minus the leachingreduction obtained by implementing land use measures, Mil. Both initial leachingand the reduction in leaching achieved by land use measures are functions of thenutrient deposition on land, Diq, and the so-called back ground leaching, Gi, whichrefers to the leaching level which is regarded as natural or non-anthropogenic. Thetotal leaching into water streams within region i can then be written as

Li = Lip(Diq +Gi)� �lMil(Diq +Gi): (3)

The final load on the Baltic from a given nutrient leaching, Li, is determined by thenutrient retention during the transport by water streams to the Baltic Sea. Nitrogenretention occurs through three processes; plant assimilation, sedimentation, anddenitrification where nitrogen is transformed into harmless gas. Only the firsttwo processes generate phosphorus retention. Like nutrient leaching, the level ofretention is determined by several factors such as climate, soil, and hydrology. Ingeneral, the retention is higher for sources remote to the Baltic Sea. This meansthat the spatial allocation of emission sources and nutrient reduction measuresinfluence the load to the Baltic Sea. In principle, it is analytically straightforwardto make a spatial division of each region i. However, as is demonstrated in thenext section, lack of data makes associated numerical calculations impossible. Wetherefore make the simplifying assumption that the potential load to the Baltic Seafrom a region i, Pi, can be described by the function Pi = Pi(Li).


The final load of nutrients to the coast from nutrient deposition on land withinregion i is determined by Pi(Li) minus the reduction obtained by retention measures,Mis. It is assumed that the effectiveness of these measures is highest for locationsas close as possible to the water recipient under study (Jansson et al. 1994). Wetherefore assume that nutrient retention measures for the improvement of the BalticSea are located at the coast. The decrease in load from nutrient retention measuresis further a function of the load to the location of the measure in question, whichin our case is Pi(Li), and of several other factors such as water resistance time andclimate. Again, we simplify the complicated retention processes by assuming thatthe reduction obtained by a nutrient retention measure can be described as Mis =Mis (Pi). The total nutrient load from region i to the Baltic Sea can then be writtenas

Bi = Did + P i(Li)� �sMis(P i(Li)): (4)

It is further assumed that there exist cost functions for each of the nutrient reductionmeasures, Cik(Mir), Cil(Mil), and Cis(Mis), which are increasing and convex inMik, where k = r,l,s. The decision problem of the Baltic Sea manager is then tominimize total costs for given targets of reductions in total nutrient loads �B�N

and/or �B�P , where N = nitrogen and P = phosphorus, which is written as

MinM ir;M il;M is

�i[�rCir(M ir) + �lC

il(M il) + �sCis(M is)] (5)

s:t: (1)–(4)

�iBNi

� BN 0

��BN�

�iBiP� BP 0

��BP�

M ir� M ir0

M il� M il0

M is� M is0

;

where BN 00

and BP 0

are the reference nutrient loads and Mik0

, k = r,l,s, constitute(self-evident) limits to the use of each measure. For example, the load of householdand industry sewage cannot be reduced more than a certain percentage of theircurrent load of nutrient. The limit to a certain land use change is the availability ofland suitable for that land use.

We now introduce an index, m, for the two nutrients, nitrogen and phosphorusrespectively. The first-order conditions for cost minimization can then be writtenas

CirM ir + �ir � �m�

m[airBm +�j(Pjm

Ljm � �sMjsm

P jmPjm

Ljm)!ir]; (6)

CilM il + �il � �m�

m[P imM il � �sM

ismP imP

imLimL

imM il ]; (7)


CisM is + �is � �m�

m; (8)

where

!ir = aijrm@Lipm

@Diq� �la

ijrm@Mjlm

@Diq;

and subindexes denote partial derivatives. The Lagrange multiplier �m is inter-preted as the change in total costs from one unit change in the restrictions onnitrogen and phosphorus respectively. In a similar way, the Lagrange multipliers�ik, where k = r,l,s, are understood as the shadow prices of the constraints in thenutrient reduction capacities of the measures.

The expressions within brackets on the right-hand sides of Equations (6) and(7) give the impacts on the nutrient load to the Baltic Sea from a marginal increasein a certain measure. These impacts on the nutrient load can never exceed unity.For example, for any Mir, the nutrient load to the Baltic Sea cannot decrease bymore than the reduction in deposition. For measures located at the coast the impactis unity, such as sewage treatment plants for which airB = 1. From Equation (8)we also note that the impact on nutrient load from a marginal increase in nutrientretention measure is unity, which is due to our assumption that nutrient retentionmeasures are located at the coast.

For a given marginal cost of a measure, larger impacts imply higher use ofthe measure in question. For example, one unit reduction in the nutrient emissionfrom a sewage treatment plant located at the coast implies one unit reduction in theload to the Baltic Sea. One unit emission reduction from a plant located upstreamgenerates a load reduction of less than one unit. Thus, the cost of a marginalreduction in the nutrient load to the Baltic Sea is lower for a measure located at thecoast than if the same measure is implemented upstream in the drainage basin.

The impact on the Baltic Sea of a certain measure can occur through differentchannels, which is most obvious from Equation (6). A measure decreasing thedeposition of nutrient in one region reduces the load of nutrient to the Baltic Seafrom several other regions by �j(@Pjm/@Ljm)!ir, if no land use and retentionmeasures are implemented in these regions. Examples of such deposition measuresare reductions in nitrogen oxides from traffic and stationary combustion sources,and decreases in the application of manure by reductions in the holdings of live-stock. For these measures the coefficients airB and aijr are positive. However, ifland use and retention measures are implemented in the affected regions, the reduc-tion in deposition on land in these regions also reduces the leaching and retentionimpact of their land use and retention measures by �j�s(@Mjms/@Ljm)!i. In asimilar way, a marginal change in a land use measure, Mil, affects nutrient loads tothe Baltic Sea by @Pim/@Mil but also reduces the effects of retention measured by�s@Mism/@Mil.

The first order conditions also show that, when the target is to reduce the loadof both nitrogen and phosphorus, a measure which simultaneously reduces both


nitrogen, and phosphorus will be used more than if the same measure decreases theload of only one of the nutrients. Two classes of measures, land use changes andchanges in manure deposition, imply reductions in both nitrogen and phosphorus.Further, reductions in manure deposition also imply decreases in air emissions. Forthese measures, both �N and �P are positive. Given separability in the impacts onN and P from the multi-acting measures, the minimum cost of simultaneous reduc-tions in nitrogen and phosphorus is lower than the sum of costs of correspondingseparate reductions.

Self evidently, the total minimum costs are also determined by the level ofreduction required, which usually is determined as a percentage reduction in thetotal load of nutrient prior to any measures, such as the Nordic ministers’ agreementof a 50% nutrient reduction. The base level nutrient load will then influence thereduction requirement as measured in quantities and, hence, costs. Although this isin theory a trivial statement, it is mush less trivial to determine the base level totalload in practice. This will be demonstrated in the next section.

3. Nutrient Loads, Transports and Costs of Measures

As demonstrated in the foregoing section, cost-effective nutrient reductions aredetermined by the costs of potential nutrient reduction measures, and their impactson the nutrient loads to the Baltic Sea. These impacts are, in turn, functions ofnutrient transports, leaching, and retention. The matching of costs and nutrientload impacts of potential nutrient reduction measures is, however, far from being atrivial issue. The estimation of costs of most nutrient-reduction measures requiresinformation on the distribution of nutrient loads from different economic sectorsand regions. Unfortunately, there are no published calculations of nutrient loadswhich satisfy our requirements. It has therefore been necessary to undertake owncalculations of the loads of nitrogen and phosphorus to the Baltic Sea from differenteconomic sectors. In this section we present the calculations of nutrient loads, andcosts and impacts of different measures.

3.1. NUTRIENT LOADS AND TRANSPORTS

The choice of the regional division of the Baltic Sea drainage basin must satisfy therequirements of data on both nutrient transports and costs of nutrient reductions. Alimitation of this study is, however, that we include only regions within the drainagebasin. This excludes about 25% of the airborne deposition from sources locatedoutside the drainage basin. The reason for their exclusion is that only countrieswithin the drainage basin are involved in the discussions on Baltic Sea recovery(HELCOM 1993).

In general, data on nutrient transports are available for relatively small drainagebasins while economic data cover larger areas such as counties within a country orentire countries. A number of sources have therefore been used to connect nutrient


Figure 1. Drainage basins of the Baltic Sea.

loads data to related economic sectors. The waterborne transports are calculatedfrom Hallin (1994). Airborne nitrogen deposition and transports between countriesare obtained from EMEP transport matrices (Sandnes 1993). Geographical infor-mation system (GIS) data are used to link data on nutrient loads with economicsectors (Langaas and Sweitzer 1995). The resulting regional division of the BalticSea is shown in Figure 1.

One of the main difficulties within the framework of this project was to findmeasurements on nutrient leaching and retention for all involved regions (Elofsson1995). Unfortunately, only scattered data on nutrient leaching are available fromfield experiments, mainly in Sweden. These results have been transferred to allregions. Very rough estimates of nutrient retention are found in HELCOM nationalplans and topical studies (Elofsson 1995). The calculations of nutrient loads tothe coastal waters are based on these numbers and on estimated emissions fromdifferent sources. In Table I, the calculated nutrient impacts, i.e. the fraction ofdeposition on land within the drainage basin which reaches the coastal waters,


are presented together with nutrient loads from different sources: combustion ofpetroleum products and coal, agriculture, and sewage from households and industry.

The nutrient impact for a region is determined by the share of deposition on landwhich leaches into water streams and the retention rate. The calculated nutrientimpacts vary between 0.02 and 0.13 for different regions. The relatively low sharesfor the Baltic states, Russian regions, and Poland are explained by the high nutrientretention rates, 0.8 for all these regions. It may thus be associated with low coststo improve local waters in these regions but more expensive to improve coastalwaters. Regions with relatively high impacts on the Baltic Sea are Swedish BalticProper, all Finnish regions, Germany and Denmark. The reason is the relativelylow retention rates, 0.25–0.40. This means that, ceteris paribus, costs of marginalreductions in the load of nutrients to the coast are lower for these regions than forother drainage basins.

The total calculated anthropogenic loads of nutrients amount to 728 000 tonsof N/year and approximately 37 000 tons of P/year. When including backgroundleaching and air emission from countries outside the drainage basin, the calculatedtotal nitrogen load amounts to about 1 000 000 tons of N/year (Gren et al. 1995).Other published estimates of nutrient loads vary between 400 000 and 1 400 000tons of nitrogen and 32 000 and 70 000 tons of phosphorus (Hallin 1994; HELCOM1993; Markovska and Zylics 1996). These estimates are based on measurementsof nutrient concentrations at different river mouths along the Baltic Sea coasts.However, there is much uncertainty in our estimates, which implies that, althoughwell within the range of other estimates, they must be interpreted with muchcaution.

The agricultural sector accounts for slightly more than one-half of the total loadof nitrogen and one-third of the total load of phosphorus. The agricultural load ofnitrogen includes deposition of fertilizer and manure. The latter generates ammoniaemissions, directly on the Baltic Sea, and by water streams from deposition on landwithin the drainage basin, which account for 40% of the agricultural load. The directdeposition of ammonia constitutes the main impact, 27% of the agricultural load.The calculated air transports from combustion of oil products and coal also includedirect deposition and water transports which correspond to 17% of total nitrogenload. From Table I we also note that sewage from households and industry areimportant sources of both nutrient loads and account for two-thirds and one-thirdof the total load of nitrogen and phosphorus respectively.

Polish nutrient emissions are undoubtedly the most important sources of bothnutrient loads, and correspond to one-third of the total nitrogen load and one-halfof the phosphorus load. The relatively large load of nitrogen from Germany isexplained by the inclusion of air emissions, not only from the drainage basin, butalso from the rest of the country.

Based on the loads presented in Table I we would thus expect that measuresreducing the nutrient loads from the agricultural sector and decreasing the nutrientcontent in sewage from households and industry will play an important role for


Tabl

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113

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cost-effective nutrient reductions. Further, the large share of Polish nutrient loadsimply the implementation of measures in this country. However, whether or notthis occurs depends also on the costs of different measures and their impacts on theBaltic Sea.

3.2. COSTS OF MARGINAL NUTRIENT REDUCTIONS TO THE BALTIC SEA FROMDIFFERENT MEASURES

The choice of measures for the calculation of cost-effective nutrient reductionsis regulated by the ease of obtaining data on costs and nutrient load impacts.Admittedly, to our knowledge, there is no nutrient reduction measure for whichthe required data are available for all regions within the drainage basin. Therefore,several assumption have to be made, which are briefly explained in this section.For a further description we refer to Gren et al. (1995). We also present costs ofmarginal reductions in the nutrient loads to the coastal waters of different measures.

Following the classification of measures into three categories in Section 2, thenutrient reduction measures included in the calculation of cost effective nutrientreductions are:� Deposition measures: increased nutrient cleaning capacity at sewage treat-

ment plants, catalysts in cars and ships, scrubbers in stationary combustionsources, and reductions in the agricultural deposition of fertilizers and manure.Reduction in agricultural deposition of nutrient is achieved by decreased useof fertilizers and decreases in the holdings of livestock.

� Land use measures: change in spreading time of manure from autumn tospring, cultivation of catch, crops, energy forests, and ley grass. Change ofspreading time from autumn to springtime implies less leaching due to the factthat, in spring, there are growing crops which can make use of the nutrients.Catch crops refer to certain grass crops which are sown at the same time asthe ordinary spring crop but start to grow, and thereby makes use of eventualremaining nutrient in the soil, when the ordinary crop is harvested.

� Retention measures: restoration of wetlands as nutrient sinks.The costs of catalysts in cars and ships and installation of cleaning technologiesin stationary combustion sources are obtained by engineering estimates. Suchestimates have also been made for the costs of reducing livestock holdings, whichare assumed to consist of foregone profits from cattle, pigs and chicken respectively.

Costs of fertilizer reductions are calculated as associated decreases in profits,or producer surplus, by means of input demand functions which are estimated byeconometric methods. Costs of reductions in the use of fertilizers are then calculatedby simply integrating the inverted demand functions. Linear fertilizers, nitrogenand phosphorus, demand functions are estimated for the three regions of Finlandand Sweden, and for Denmark and Germany. Due to lack of data on market prices,fertilizer demand functions cannot be estimated for the other regions. In order toobtain cost estimates for all regions, the results from the Swedish Baltic Proper


region is transferred to Poland, Russia and the Baltic countries since this region ismost similar to these with respect to soil and climate conditions.

Linear cost functions for nitrogen and phosphorus reductions by constructionsof new sewage treatment plants and/or expansion of existing plants are estimatedby means of plant data for Sweden and Poland. The Swedish results are transferredto Finland, Denmark and Germany, and the Polish cost estimates to the other Balticregions.

The impacts on coastal nutrient load of measures reducing the deposition on landwithin the drainage basin are assumed to correspond to the nutrient impact sharepresented in Table I, which vary between 0.02 and 0.13 depending on region. Due tolack of data it has been very difficult to determine the maximum capacities of severalnutrient-reductions measures. Arbitrarily assumptions had to be made which resultsin maximum reductions corresponding to one-third of the total agricultural loadsand loads from emissions of petroleum and coal products. The maximum reductionof sewage from households and industry is assumed to correspond to technologicalconstraint and to the location of the population. In general, it is more easy toconstruct sewage treatment plants for densely than for sparsely populated areas dueto difficulties in constructing pipelines net works. Based on very rough estimates ofthe population allocation, it is assumed that nutrients from sewage can be reducedby, on average, 60%.

Except for changes in spreading time of manure, the costs of land use measuresare calculated as the difference in profits between the land use measure and the mostprofitable alternative land use. The cost of changes in spreading time of manurecorrespond to the expenses for storing manure during a period of six months.There is no comprehensive information on the nutrient-reduction impact of thesemeasures (Elofsson 1995). Based on a few field experiments, it is simply assumedthat the leaching is reduced by 0.2–0.5 depending on nutrient and region. Thecapacity limits of these measures are based on the production of manure and onthe area of land suitable for the land use measures (Elofsson 1995).

Cost functions for wetland construction are obtained from econometric esti-mates based on Swedish experiences from constructions of wetlands for the purposeof nitrogen abatement. Based on investigations of wetlands nutrient sink capacity,it has then been assumed that the wetland nitrogen and phosphorus retention varybetween 0.1 and 0.5 of nutrient inputs depending on location (Janson 1994). Afurther assumption is that wetlands are constructed where they have been locatedprior to the conversion, mainly, into arable land. The reason for this assumptionis that restored wetlands are regarded to be more effective than construction onland where there have been no natural wetlands. The area available for wetlandrestoration then correspond to the area of drained wetlands (Wittgren et al. 1991).

In Table II, we present calculated costs of marginal reductions in the loads ofnitrogen and phosphorus to the coastal waters. The marginal costs of fertilizerreductions are presented at their mean values. According to the estimates presentedin Table II, reductions in depositions constitute relatively low cost measures for both


Table II. Annual costs of marginal nutrient reductions to the coastal waters of measures reducingdeposition (Deposition) and leaching (Land use), and increasing retention (Retention), SEK/kg/N andP reductions to the coastal water.

Nitrogen PhosphorusRegion Deposition Land use Retention Deposition Land use Retention

Sweden 20–1780 31–830 55, 390, 530 42–2346 526–6600 260, 683Finland 20–3092 51–254 59, 390, 530 42–1490 710–6080 260, 683Russia 7–4710 45–326 16, 20 24–1216 404–4314 198, 273Poland 7–2733 30–202 15 24–568 246–1662 203Latvia 7–1000 86–632 16 24–1518 784–6191 413Estonia 7–835 82–606 22 24–1402 766–5408 1010Lithuania 7–1441 72–566 14 24–1916 712–6696 320Germany 20–2977 20–122 50 42–1184 414–2964 202Denmark 20–982 38–314 26 44–1996 360–2610 270

nutrients. The least costly measure is an increase in the sewage treatment plants’capacity to clean nutrients. However, we also find very expensive measures withinthis category, which are reductions in airborne emissions. The reason for their highmarginal cost is that only a small fraction of the air emission reductions reachthe Baltic Sea. This fraction varies between 0.02 (Russia) and 0.14 (Denmark).The variation in marginal costs is lower for land use and retention measures. Thecalculation also indicates that wetland restoration is a relatively low cost measure.

4. Costs of Reductions in Nutrient Loads to the Baltic Sea

As mentioned in the introductory section, the ultimate aim of reductions in nutrientloads to the Baltic Sea is to obtain decreases in damages caused by eutrophication.In general, eutrophication occurs due to increases in the load of that nutrient whichlimits biological production. It is currently regarded that nitrogen is the limitingfactor for the major basins of the Baltic Sea, which is the background for therecommendation of at least a 50% reduction in the load of nitrogen (Wulff et al.1990). However, it is also known that the production of the toxic blue green algae isfavoured by reductions in nitrogen since it has the ability of fixating nitrogen fromthe air. In order to avoid the expansion of toxic algae, reductions in phosphorusloads are thus also required. However, in spite of a debate during the last 20 years,the necessary proportional reductions in both these nutrients is still unclear. Sincewe are unable to have an opinion in this debate, we apply simple nutrient reductionscenarios.

As shown in the foregoing section, there is much uncertainty in the data under-lying the calculations. Therefore, we will present results from sensitivity analysisof changes in assumptions concerning nutrient transports impacts and costs ofdifferent measures. It is also shown that the total costs increase considerably if a


Figure 2. Minimum costs of N and P reductions.

cost-effective programme is changed to a policy where each country reduces itsnutrient loads by the same percentage.

4.1. COST-EFFECTIVE NUTRIENT REDUCTIONS

In this section, minimum costs are calculated for three different scenarios: reduc-tions in either nitrogen or phosphorus and reductions in both nutrients by the samepercentage. GAMS software is used for the estimation of the numerical model(Broke et al. 1992). The calculated minimum costs of reductions in either nitrogenor phosphorus loads to the coastal waters are illustrated in Figure 2. We note fromFigure 2 that the costs of reducing the load of nitrogen are higher than the costsof corresponding decreases in phosphorus loads. At the 50% reduction levels, thecost of nitrogen reductions is about 5 times as high as the cost of phosphorusreduction. One important reason for this difference is that a relatively large shareof the sources of phosphorus, sewage treatment plants, are located at the coastalwater which implies relatively low costs of marginal reductions in the phosphorusloads to the Baltic Sea.

Common to reduction of both nutrients is the relatively rapid increase in costsat reduction levels exceeding 40%. At the 50% reduction level in total loads ofN and P from the countries included in this study, the annual minimum costs areapproximately 12 000 millions of SEK and 3 000 millions respectively (ECU 1 =SEK 8.42, September 11, 1996). This nitrogen reduction correspond to about 40%


Figure 3. Separate and familiar N and P reductions.

in the total nitrogen load including all deposition. A 50% reduction in the totalnitrogen load would require about 60% reduction from the 9 countries includedhere, the cost of which amounts to approximately 40 000 millions of SEK. If thereare options to reduce emission from other countries the cost of a 50% reduction intotal load reduces to about 33 000 millions of SEK (Gren et al. 1996).

At the 50% reduction level, the cost-effective allocations of measures differbetween the nutrients, which is illustrated in Figure 4. Sewage treatment plants,restored wetlands and measures directed towards the agricultural sector eachaccount for approximately 30% of a cost-effective nitrogen reduction by 50%.Measures reducing nitrogen air emissions play a minor role. The undoubtedly mostimportant measure for a cost-effective phosphorus reduction is sewage treatmentplants, which accounts for about two-thirds of the total required reduction.

As shown in the foregoing section, land use and retention measures and livestockreductions imply reductions in both nitrogen and phosphorus loads. When one ofthese measures is implemented for reducing the load of one of the nutrients,reductions are obtained in the other nutrient ‘free of charge’. As shown in Section2, under simultaneous regulation of nitrogen and phosphorus, the double actingmeasures become relatively less costly than measures reducing only one of thenutrient. Total costs for various reduction levels are then lower for simultaneousthan for separate decisions on N and P. The differences in costs for these twostrategies are shown in Figure 3.


Figure 4. Cost-effective nutrient allocations.

The difference in costs is low for reduction levels below 40%. This is becausethe total costs of separate reductions are relatively small at these reduction levels.At 50% reduction level the difference is approximately 400 millions of SEK peryear.

4.2. SENSITIVITY ANALYSIS

From Section 3 it is obvious that much uncertainty underlies the data used forthe calculation of cost-effective nutrient reductions. In this section we thereforepresent the impacts on costs for reducing the load of nutrients by 50% of changesin assumptions concerning nutrient loads, transports and costs.

For example, a decrease in nutrient retention during the transport from theemission source to the coastal waters implies that the calculated total load increasesand that measures located upstream become more effective. Given a 50% reductionrequirement, the first impact implies higher reduction as measured in tonnes which,ceteris paribus, results in higher costs. However, the higher effects of measuresreducing the deposition on land within the drainage imply less costs for a givenreduction in the load of nutrients to the coastal waters. The costs also decrease dueto higher effects of restored wetlands and land use measures. Increased capacity inthe availability of low cost options reduces total cost for a given nutrient reductiontarget, since high marginal cost measures are avoided. The impact of changingassumptions concerning cost estimates depends on the size of the sector with


Figure 5. Costs of 50% N and P reductions.

1. Nutrient retention in Poland, Russia, and Baltic States is reduced from 0.8 to 0.6.2. The base case wetland retention capacity is reduced by 25%.3. The base case sewage treatment cleaning capacity is increased by 25%.4. Costs of all air reduction measures are reduced by one-half.

respect to total nutrient loads and on the cost estimates in the base case. Forexample, if the sector is small and the costs are relatively high we would not expectchanging cost estimates to have considerable impacts on total costs. In Figure 5,we present costs of 50% nitrogen and phosphorus reductions for changes in someof the assumptions applied in the base case.

The results presented in Figure 5 indicate that the calculated minimum costs ofboth nutrients are sensitive to assumptions concerning nutrient loads and transports.When the nutrient retention decreases from 0.8 to 0.6 in the Baltic countries, Polandand Russia, the minimum costs of nitrogen and phosphorus decrease by 34% and31% respectively. The cost-reducing effect of upstream located measures is thushigher than the cost increasing impact of higher reduction requirement as measuredin tonnes of nutrient. The calculated nitrogen and phosphorus loads increase by30% and 20% respectively as compared with the base case.

A decrease in the wetland nutrient sink capacity by 25% implies a cost increasefor both nutrient reductions by approximately 35%. When the capacity of a low-cost measure – sewage treatment plants – increases by 25% costs of nitrogenand phosphorus are reduced by 15% and 40% respectively. The higher impact onphosphorus cost is explained by the large share of sewage treatment plants in acost-effective solution. We also note from Figure 5 that, in spite of a reduction


Table III. Allocation of nutrient reductions and costs of a cost-effective and proportional 50%reduction of nitrogen and phosphorus.

Nitrogen PhosphorusOptimal Proportion Optimal Proportion

Region Mill SEK % reduction Mill SEK Mill SEK % reduction Mill SEK

Sweden 1 535 42 1 913 81 19 10 438Finland 1 542 41 1 657 477 32 1 402Denmark 1 007 46 1 859 276 60 162Germany 526 15 43 340 258 55 150Poland 3 221 59 1 119 1 625 58 559Estonia 423 54 303 8 10 531Latvia 1 321 66 261 237 55 193Lithuania 742 58 241 109 52 92Russia 1 637 57 709 134 65 50

Total 11 956 50 51 402 3 205 50 13 577

in costs of measures reducing air deposition by one-half, the total nitrogen costdecreases by only 10%.

4.3. REGIONAL COSTS OF 50% NUTRIENT REDUCTIONS UNDER DIFFERENT POLICIES

The allocations of nutrient reductions and costs on different regions depend on thecosts, impacts, and capacities in different nutrient-reduction measures. As shownin Section 3, we expect Poland to account for relatively large parts of cost-effectivenutrient reductions due to the high shares of nutrient loads and relatively lowmarginal costs of several types of measures. If instead a policy is applied whereeach country reduces its loads of the nutrients by 50%, total costs will increasesince the low cost options in Poland and other countries are not used as muchas possible. In Table III, we present regional and total costs of two policies forreducing the nutrients loads, the optimal policy where costs are minimized fortotal reductions by 50% and the proportional policy where each country reducesits loads of nutrients by 50%.

Common to both nutrient reductions is the considerable difference in total costsbetween the optimal and proportional policies. The main reason is the change innutrient reductions from Poland and Germany in case of nitrogen and to Sweden incase of phosphorus. The high costs of German nitrogen reduction is explained bythe high share of air deposition which is reduced at relatively high costs, which canbe seen from Table II in Section 3. The explanation of the high Swedish phosphorusreduction cost is that the sewage treatment plants already clean at a high capacity sothat expensive agricultural measures must be used for obtaining a 50% reduction.

We also note from Table III that there is a slight difference between nitrogen andphosphorus reductions with respect to the distributions of gains and losses under


the two policies. Common to both nutrient reductions is, however, that Swedenand Finland gain from optimal policies and Poland, Latvia, Lithuania, and Russialose. Under nitrogen reduction, Sweden, Finland, Denmark and Germany gainfrom an optimal reduction and the other countries lose. Sweden and Finland alsobenefit from an optimal phosphorus reduction. In addition, Estonia gains fromsuch a policy. The reason for the increase in costs of a change from an optimal to aproportional policy for Estonia is that the low cost option of restoring wetlands ismore limited than in other countries. In Estonia, only a small fraction of the naturalwetlands have been drained (about 10%). In order to obtain a 50% reduction,expensive agricultural measures must be implemented.

5. Summary and Discussion

The main purpose of this study has been to calculate cost-effective reductionsin the loads of nitrogen and phosphorus to the Baltic Sea. The loads of bothnutrients consist of direct discharges into the Baltic Sea and loads which aredeposited on land and transported by water streams to the Baltic Sea. The directloads include air deposition, and discharges of sewage treatment plants and industrylocated by the coasts. The waterborne transports originate from upstream depositionof nutrients from agriculture, households, industry, and airborne emissions. Theempirical results show that the distribution of these types of emission sources andhence options for reducing nutrient loads have large impacts on the total costs.

Another factor which determines total costs and allocations of differentmeasures is the multi-impact feature of certain nutrient-reduction measures. Formeasures reducing transboundary transports, such as reduction in nitrogen oxidesby installation of catalysts, impacts on nutrient loads to the Baltic Sea occur throughthree channels: reductions in waterborne transports and direct deposition on theBaltic Sea from the region implementing the measure, and decreases in waterbornetransports from other regions. Another type of multi-impact is that measures likereductions in the deposition of manure, land use changes, and nutrient sinks reducethe load of both nitrogen and phosphorus.

The empirical results indicate a relatively large difference in costs of nitrogenand phosphorus reductions by the same percentage. At the 50% reduction level,annual minimum costs of nitrogen and phosphorus amount to approximately 12 000millions of SEK and 3 000 million of SEK respectively. This difference is partlyexplained by differences in nutrient loads to the Baltic Sea: approximately 730 000tons of nitrogen and 37 000 tons of phosphorus. Another factor is the relatively largeshare of low cost measures for phosphorus reductions with high impacts on theBaltic Sea due to their locations at the coasts. Restoration of wetlands and expan-sion of sewage treatment plants provide low-cost options for reductions in bothnutrients. For nitrogen reductions, certain low-cost measures are also found withinthe agricultural sector, such as reductions in nitrogen fertilizers and cultivation ofcatch crops.


The allocations of nutrient reductions and costs between countries are deter-mined by their total load of nutrients, availability of different measures and associ-ated marginal costs. Countries with relatively low marginal costs and high shares oftotal nutrient loads, such as Poland, will then account for a relatively large share ofthe total reduction requirement. Under a cost-effective nitrogen reduction by 50%,Poland accounts for about 40% of the total nitrogen reduction. The role of Polandis accentuated under a cost-effective phosphorus reduction. The Polish reductionthen corresponds to two-thirds of the total reduction requirement. By definition,total costs increase when there is change in policy from a cost-effective programto a policy where each country reduces its emissions of nutrient loads by 50%. Thecalculations indicate that such as change in policies may increase the total costs ofboth nutrient by about 4 times.

However, mainly Poland but also Latvia, Lithuania and Russia lose from such achange in policies. In order to achieve cost-effective nutrient reductions a relevantquestion is then if these countries will agree on such a policy. There is a largeliterature, mainly theoretical, on the issue of international environmental problems(see, e.g., Maler 1991; Hoel 1992; Germain et al. 1995; Kaitala et al. 1995). Acommon understanding is that, in order to achieve optimal programs, some type oftransfers are needed for compensating the net looser, which, however, is far frombeing trivial to determine. The empirical results in our study show, however, thatthere is a potential for identifying the transfer mechanism, since the differences incosts between the programs of cost-effective and proportional reductions are veryhigh. Another factor promising for such an agreement is that preliminary resultsfrom the estimation of benefits from improvements of the Baltic Sea ecologicalconditions reveal that benefits are higher than costs for all countries except Russiaand Latvia (Gren et al. 1996). Based on this result, a transfer mechanism likely toimplement a 50% reduction in the nitrogen load is suggested in Markovska and_Zylics (1996).

It is important to note that the cost estimates are sensitive to several assumptions,especially those concerning nutrient loads and transports. However, although thenumerical results must be interpreted with much caution, the results of this studyindicate that there are four interrelated factors of importance for Baltic Sea policies:(i) large difference in costs between nitrogen and phosphorus reductions withthe same percentage; (ii) the cost of simultaneous reductions in both nitrogenand phosphorus loads is less than the cost of corresponding separate reductions;(iii) rapid increase in costs at reduction levels exceeding 40%; and (iv) relativelylarge differences in costs depending on underlying assumptions and policies forreductions.

Before concluding, recall the limitations of the study mentioned in the intro-duction. Neither dispersion of costs on other sectors than those directly involvednor transactions costs are included. As demonstrated in Janson and Randas (1996),the inclusion of dispersion effects for nitrogen reductions in Poland, Baltic states,Sweden and Finland, does not, however, affect total costs very much although the


structural impacts are large. The transaction costs, defined as the costs of imple-menting and enforcing policies for achieving cost-effective allocations, are muchmore difficult to identify and quantify. Since there are large differences in institu-tions affecting environmental policies between the countries the transaction costsare likely to differ (Eckerberg et al. 1996). Further, it is quite likely that transactioncosts are higher for measures directed towards non-point sources than towardspoint sources, which may also be owned by the public such as municipal sewagetreatment plants. The inclusion of transaction would thus affect not only total costs,but also the cost-effective allocation of measures in different regions.

The exclusion of dispersion effects and transaction costs implies an underesti-mate of the costs in this paper. An overestimate is due to the exclusion of otherenvironmental net benefits associated with decreases in nutrient emissions. Asmentioned in the introduction, such environmental benefits are improvements ofthe quality of inland waters, decreases in acidity in soil and water, and reductionson the ground level ozone layer. We thus conclude by emphasizing the statementmade in the introduction that this study should be regarded only as a first attemptto get an overview of cost effective programs for the Baltic Sea nutrient clean-up.

Acknowledgements

We are much indebted to two anonymous referee for their useful comments. Finan-cial support from the European Commission Environmental Research Programme1991–1994, Swedish Council of Agriculture and Forest Research, and SwedishEnvironment Protection Agency is gratefully acknowledged.

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Cost-Effective Nutrient Reductions to the Baltic Sea