International Versus National Actions Against Nitrogen Pollution of the Baltic Sea

Environmental and Resource Economics 20: 41–59, 2001.© 2001 Kluwer Academic Publishers. Printed in the Netherlands.

41

International Versus National Actions AgainstNitrogen Pollution of the Baltic Sea

ING-MARIE GRENDepartment of Economics, Swedish University of Agricutlural Sciences, Box 7013, 750 07 Uppsala,Sweden and Beijer International Institute of Ecological Economics, Stockholm(E-mail: [email protected])

Abstract. Large nitrogen loads to the Baltic Sea play an important role for current damages causedby eutrophication: large sea bottom areas without any biological life, low stocks of cods, and toxicblue green algae. In spite of the relatively large supply of biological and physical data on thesea, difficulties remain with respect to linking costs of nitrogen reductions with the dispersion ofassociated benefits among countries. The purpose of this study is therefore to analyse and calculateefficient nitrogen reductions and associated net benefits under international co-ordination of nitrogenreductions and single country actions for two different specifications of marginal benefits: uniformand differentiated. Further, comparisons are made with the current ministerial agreement of 50 percent nitrogen reduction to the Baltic Sea. The empirical results show that total net benefits underinternationally co-ordinated actions are considerably higher than when countries act on their own.Another result is that differentiated benefits give higher total net benefits than uniform, and alsoimply larger differences in net benefits among countries. However, results indicate that uniformmarginal benefits generate net benefits for all countries from co-ordinated actions as compared tosingle country actions.

Key words: Baltic Sea nitrogen reductions, co-ordination, uniform and differentiated marginalbenefits

JEL classification: D61, Q25

1. Introduction

Like many sea and lake common properties, the use of the Baltic Sea as a nitrogensink has been one important reason for the current ecological damages fromeutrophication. An increase in the load of a nutrient limiting biological growthimplies higher production of algae, which, when decomposed, demands oxygen.The decrease in oxygen may then generate sea bottom areas without any biologicallife. Further, there is a change in the composition of fish species. In the case of theBaltic Sea, decreases in the production of commercial fish species occur frequentlyand there are currently large sea bottom areas without life (Wulff and Niemi 1992).Since the Baltic Sea is shared among nine countries – Finland, Estonia, Latvia,Lithuania, Russia, Poland, Germany, Denmark, and Sweden – an efficient nitrogen

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reduction is likely to require joint actions among the countries. The purpose of thisstudy is to analyse and calculate net benefits under different scenarios of policieswhere involved countries either co-ordinate there actions for maximising total netbenefits or act on their own maximising the own country’s net benefits.

The biological conditions of the Baltic Sea have been of concern since thebeginning of 1970s which was manifested in the signing of the Helsinki convention1974. However, the convention mainly regulates polluting activities at the sea suchas oil spills and is therefore of less use for the management of several pollutantswith land based emission sources. The administrative body of the convention,HELCOM, has since the beginning of 1970s been responsible for the co-ordinationof activities monitoring the biological status in different parts of the Sea. Oneimportant step was taken by the ministerial agreement on a 50 percent reductionin the total load of nutrients to the Baltic Sea (HELCOM 1993). The agreementdid not specify any reduction requirements for each of the nine countries. There-fore, net benefits from co-ordinated and single country actions without reductionrequirements are compared with net benefits with a 50 per cent nitrogen reductionrequirement. The imposed nitrogen reduction is then given two interpretations; a50 per cent in total reduction and a 50 per cent reduction for each country.

The early concern on the ecological conditions of the Baltic Sea also resulted inrelatively large funds for natural science research. The 20 years period of naturalscience research has resulted in much data on biological conditions of parts of theSea and nutrient transports between different water basins (see e.g. Edler 1979;Granéli et al. 1990; Larsson et al. 1985; Wulff et al. 1990; Wulff and Niemi 1992).Further, a cost benefits analysis of an improvement of the Sea corresponding to its‘healthy’ conditions, which prevailed prior to the 1960s, has been carried out (Grenet al. 1997b; Markowska and Zylics 1996; Söderqvist 1996, 1998). However, inspite of these studies, difficulties remain with respect to relating benefits to nitrogenreductions in the different countries. The paper therefore applies two differentapproaches of making such linkages; the uniform approach where no distinctionis being made between the location of nitrogen reductions and the differentiatedwhich accounts for the location of the reduction.

There is a large literature, mainly theoretical, with the focus on efficientprovision of an international environmental public good (see e.g., Barrett 1990;Mäler 1991, 1993; Hoel 1992; Kaitala et al. 1995). Only a few of these studiescontain empirical applications of concrete international environmental concerns(Mäler 1991, 1993; Kaitala et al. 1995). Common to this applied literature is theconsideration of dynamic aspects in the application to environmental damagesfrom sulphur emissions, which also constitutes the only spill-over effect amongcountries. Another common feature is their solution for obtaining environmentaldamage estimates, which has been achieved by assuming that marginal environ-mental damage equals marginal abatement cost at the actual levels of sulphurabatement for the involved countries.

NITROGEN POLLUTION OF THE BALTIC SEA 43

There are both analytical and empirical differences with this study as comparedto these earlier empirical papers. In this paper, a simplification is made bydisregarding the dynamics of the eutrophication damages from nitrogen emissions.This is explained by the current scientific understanding of nitrogen as a flowpollutant in the Baltic Sea (Wulff and Niemi 1992). An extension of the paperis provided by the inclusion of, not only one, but two pollutant transport mediaamong countries. The reason is that, for international waters like the Baltic Sea,two classes of environmental links exist among the countries: air transports andmarine water transports. Another difference is that the calculations are based onexisting estimates of both costs and environmental benefits. Whereas only a fewabatement methods are included in other studies, the costs here are based on anumber of different abatement methods reported in Gren et al. (1997).

The paper is organised as follows. First, the simple model of costs and nitrogentransports is presented. This model is then used for analysing outcomes underfour different policy scenarios, which include co-ordinated and uncoordinatedmaximisation of net benefits with and without the imposition of 50 per centnitrogen reduction to the Baltic Sea. Next, the calculations of benefits and costsfrom nitrogen reduction are briefly described. The calculations of optimal nitrogenreductions and associated net benefits are presented in Section 5. The paper endswith a summary and discussion of the results.

2. The Model

The identification of linkages among countries with respect to the public good char-acter of the Baltic Sea requires an understanding of nitrogen transports. Nitrogenis transported to the Baltic Sea by three environmental media: air, soil, and waterstreams in the drainage basin. These loads are then transported within the BalticSea by marine water streams and affect the biological conditions of coastal watersof different countries.

The environmental damage to a country i, where i = 1, . . ., N countries, isdetermined by the transports of nitrogen to the country, Bi , from all countries bymarine water streams. It is assumed that the transports of nitrogen by marine waterstreams can be described by a matrix where each element eji denotes the share ofcountry j’s nitrogen load that reaches country i. The damage costs of country, i, Vi

is increasing and convex in B, is then written as

V i(Bi) = V i(�jejiBj ). (1)

The total load from each country, Bi , is determined by its direct deposition into theSea, Did , and by the indirect load from land which is transported to the coast, Pi ,according to

Bi = Did + P i. (2)

The direct deposition on the Sea, Did , and the land based transport, Pi , aremeasured as the difference between loads at a certain base year minus nitrogen

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reductions obtained by abatement measures. Following Gren et al. (1997) nitrogenreduction choice options for each country are classified into emission orientedabatement measures and land use measures. Emission oriented measured reducenutrient emissions from sources with deposition on the Baltic Sea and on landwithin the drainage basin which is transported by water streams. Land use measuresdecrease the leaching from a given deposition on land to water streams by, forexample, changing land use from relatively high leaching (e.g. potatoes and oilcrops) to low leaching such as energy forests or grassland and the creation ofnitrogen sinks such as wetland and buffer strips. For notational convenience, onlyone emission oriented option, Ei , and one land use measures, Hil , are included inthe analysis. The application to the Baltic Sea in Sections 3 and 4 considers severalmeasures.

The direct deposition on the Baltic Sea from a country i is determined by itsunregulated level of deposition from different emission sources, Dio, minus thereduction obtained from implementing emission oriented measures in i, Ei . Thetotal direct nitrogen deposition on the Baltic Sea from country i, Did , can then bewritten as

aiB(Dio − Ei) = Did, (3)

where 0 < aiB ≤ 1 is the fraction of nutrient emissions in region i which reachesthe Baltic Sea. We have that aiB = 1 for sources located at the coast, which emitall their nitrogen emissions directly into the Baltic Sea, such as coastal sewagetreatment plants.

In a similar way, the total nitrogen deposition on land within the territory ofcountry i, Diq , is written as

Diq = �jaji(Ejo − Ei) (4)

and 0 ≤ aji ≤ 1, is the fraction of emission from region j which is deposited inregion i. When aii = 1 there is no transboundary transport of nitrogen, such asdeposition of fertilisers and nitrogen effluents from sewage treatment plants. Notethat (aiB + �jaij ) ≤ 1 when the country transports nitrogen to regions outside theBaltic Sea drainage basin.

The land based load, Pi , depends on nitrogen deposition on land, Diq , and on thearea of land; the higher the deposition per unit area of land the larger the leaching.The nitrogen leaching and further transports by soil and water to the coastal watersare determined by several other factors, such as climate, soil, hydrology, andgeology.This also means that the load reduction obtained by land use measuresare functions of Diq and these other factors. We simplify the complicated biogeo-chemical processes by writing the total load from a unit area of land without landuse measures, Pio, and the load from land area with land use measures, Pil , asfunctions of the nitrogen deposition per unit of land, diq = Diq /Hi , where Hi is thetotal area of land in country i. The total land based load of nitrogen from country


i is then written as the total load from land minus the abatement obtained by landuse measures, which is written as

P i = HiP io(diq) − HilRil, (5)

where Ril = P io(diq) − P il(diq),

and Hil is the area of land with land use measures. In general, we will expect thatleaching from all types of land cover, Pio and Pil, are increasing and convex in diq .

It is further assumed that there exist cost functions for each class of the nutrientreduction measures, Ci(Ei), and Cil(Hil), which are increasing and convex in Ei

and Hil respectively.

3. Analysis of Alternative Policies

Given the model of nitrogen transports described by (1)–(5) and the cost functions,outcomes under co-ordinated international actions and under national decisionsrespectively are analysed and compared under two different policy scenarios;minimisation of total costs, including nitrogen abatement and water quality damagecosts, and the ministerial imposition of 50 per cent nitrogen reductions.

3.1. CO-ORDINATED INTERNATIONAL ACTIONS

When the actions are internationally co-ordinated, total costs, i.e. abatement costsplus environmental damage costs, are minimised according to

MinEi,H il

�i[Ci(Ei) + Cil(H il) + V i(Bi)] (6)

s.t. (1)–(5)

Ei ≤ Ei∗

Hil ≤ Hil∗,

where Ei∗ and Hil∗ constitute (self-evident) limits to the use of each measure. Forexample, the load of household and industry sewage can not be reduced by morethan a certain percentage of their current load of nutrients. The limit to a certainland use change is the availability of land suitable for that land use. When any ofthese constraints is binding, total costs are reduced by expanding the capacity ofthe measure in question. The solution to (6) is the same as maximum net benefitsof nitrogen reductions, which is the concept used in Chapter 5.

The first-order conditions for cost minimisation can be written as

CilHil + λil ≥ �jV

j ′(eij Ril), (7)

CiEi + λi ≥ �jV

j ′ [eij aiB + �jejiaij Aj ], (8)

Aj = (H jPjo

Ei − HjlRjl

Ei ),

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Subindexes denote partial derivatives, and Vj ′is the marginal environmental

damage. The Lagrange multipliers λi and λil can be interpreted as shadow pricesof the capacities of different nitrogen reduction measures. This means that themeasures in question provide low cost measures, the expansion of which wouldreduce total costs by replacing higher cost measures.

Condition (7) shows that, for an interior solution, the optimal allocation of landarea for land use measures occurs where abatement costs equal benefits from amarginal land use change. The environmental benefit from a marginal increase inthe area of land use measures includes environmental impacts on all countries,which occur by the marine water transports of nitrogen. The corresponding condi-tion (8) for emission oriented measures is somewhat more complicated. The firstterm within the brackets at the right hand side of (8) shows the environmentalimpacts on all countries that occur through the direct deposition into the Sea. Thesecond term includes the reductions in airborne deposition on land in all countries,which are transported by soil and water to the coastal waters of each country, andthen dispersed to the coastal water of all countries by marine water streams. Thislast term, which reflects the second environmental link between countries, consti-tutes the main difference with this study as compared to other applied studies oninternational environmental problems (e.g. Mäler 1991, 1993; Kaitala et al. 1995).

The term Aj at the right hand side of (8) measures the net impact on nitrogenleaching to the coastal water from country j due to a marginal change in emissionin country i. When there are no land use measures, i.e. ∂Ril/∂Ei = 0, a marginalreduction in nitrogen emission implies less leaching from land of all countries jreceiving nitrogen airborne emission from country i. We then have that Aj ≥ 0,which implies that the inclusion of the air borne transports increases the environ-mental benefits from marginal decreases in nitrogen emissions of all countries withtransboundary air transports. However, when ∂Ril/∂Ei > 0, a counteracting impactoccurs through less environmental impacts of land use measures in the countriesaffected by less airborne emissions. In Appendix I it is shown that the sign of Ai

is likely to be positive for a relatively small area of land use measures and highleaching of nitrogen from land without land use measures.

According to a ministerial declaration, the load of nutrients to the Baltic Seashall be reduced by 50 per cent (HELCOM 1993). It is, however, by no meansclear how this agreement is to be interpreted. One interpretation is to reduce totalload from all countries by 50 per cent. This is here defined as the minimisation oftotal costs according to (1)–(6) with the addition of the restriction.

�iBi ≤ B∗ (9)

where B∗ corresponds to 50 per cent of the initial load. When this restric-tion is binding, total net benefits are reduced as compared to the co-ordinatedminimisation of total costs without any nitrogen target restriction.


3.2. NATIONAL POLICIES

When each country acts on its own, it minimises its own total cost, which is writtenas

Min Ci(Ei) + Cil(H il) + V i(B) (10)

Ei,H il

s.t. (1)–(5)

The associated first-order conditions are

CiEi + µi = V i′eii(aiB + �je

jiaijAj ) (11)

CilHil + µil = V i′eiiPHil (12)

The difference between the co-ordinated and national solution is shown by thecomparison of (7) and (8) with (11) and (12). The difference occurs at the righthand sides of (7) and (8) in the summation of environmental impacts over all coun-tries from a marginal change in Ei and Hil respectively. In the national solutions(11) and (12), only the environmental impacts on the own region are considered,directly and indirectly through decreases in transboundary deposition which reducethe load of nitrogen to the coastal waters of other countries and are transportedto the own region. This indirect impact is measured by the second term withinparentheses on the right hand side of (11).

The Lagrange multipliers µi and µil now measure the decrease in country i’stotal cost from expanding a measure’s nitrogen reduction capacity by one unit.These multipliers, and hence shadow price of the measures in question, can beeither higher or lower than λi and/or λil depending on the country’s marginalabatement and marginal damage costs as compared to the other countries’ (Gren1999).

Under national actions with the ministerial imposition of 50 per cent nitrogenreduction in the load to the Baltic Sea, each country has to meet a restriction in theload of each country defined as

Bi ≤ Bi∗ (13)

where Bi∗ corresponds to 50 per cent of the initial nitrogen load in region i. It iswell known that, unless marginal costs are equal for all regions, the costs as definedby (13) are higher than the costs including total load from all countries as expressedby the restriction (9).

4. Nitrogen Reduction Benefits and Costs

Although the nine countries with coasts to the Baltic Sea constitute decision unitsin negotiation processes, the choice of regional division of the Baltic Sea drainagebasin is not a self evident matter. One important reason is the direction of marine

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nitrogen transports which follow a south-north path in the western part of the BalticSea along the Swedish coast, and the upper basins, Bothnia Bay and Bothnia Sea,of the Baltic Sea act as nitrogen sinks (Wulff et al. 1992). This means that thenitrogen load in countries located in the south of the Baltic Sea has an impact onFinland and northern part of Sweden but these countries’ nitrogen loads to theircoastal waters are not transported to southern regions. Thus, it seems desirable todistinguish between southern and northern Sweden. The boundaries of regions inthis study therefore coincide with those of the countries except for Sweden, whichis divided into northern and southern Sweden.

Estimates of benefits from nitrogen reductions to the Baltic Sea are found infour studies; Söderqvist (1996, 1998) contain Swedish and Polish studies, andMarkowska and Zylics (1996) includes Polish and Lithuanian studies. All studiesapply the contingent valuation method, but differ with respect to the use of so-called open ended and dichotomous choice questions. With open ended questions,respondents are free too state their willingness to pay, and a dichotomous choiceimplies that respondents say ‘yes’ or ‘no’ to a given amount. The Lithuanian andone Polish study use open end questions and the Swedish and the other Polish applythe dichotomous choice format. In the following, we use these two latter studiesdue to their similarities in method (Söderqvist 1996). Both these studies askedthe respondents for their willingness to pay for an improvement of the ecologicalconditions of the Baltic Sea, which correspond to the situation prior to the 1960s.The estimated mean willingness to pay per person in Sweden was about ten timeshigher than that of a Polish citizen. In order to obtain benefit estimates for the entiredrainage basin, the Swedish results were then transferred to Finland, Germany,and Denmark and the Polish results to Estonia, Latvia, Lithuania and Russia. Thetransfer mechanism applied was GDP per capita and the estimated total annualwillingness to pay amounts to 31,000 millions SEK.

As is common with many methods for estimating monetary values of changes inthe supply of an environmental good, only one change in the supply of Baltic Seaimprovements is considered. This makes it very difficult to trace marginal benefitsbetween the initial supply and that in the valuation scenario, which is required forthe purpose of this paper. Further, in order to calculate net benefits from nitrogenreductions it is also necessary to relate the benefit estimates to nitrogen reductions.Two questions then have to be answered: the distribution of environmental impactsfrom a marginal nitrogen reduction in each country, i.e. the matrix of the coeffi-cients eij , and the valuation of nitrogen load reductions, i.e. Vi(Bi), in the differentcountries.

Partial information on marine water transports of nitrogen is found in Wulff etal. (1990), where transports between three major Baltic Sea basins – Baltic Proper,Bothnia Sea, and Bothnia Bay. These basins are shared by northern Sweden andFinland. Due to the marine streams there is no transport from these basins backto the Baltic Proper. Therefore, it is assumed that Finland and Northern Swedenreceive 20 per cent of total nitrogen load from all other regions. Further, the loads


from Northern Sweden and Finland imply marine environmental impacts only onthese regions.

Unfortunately, the basin nutrient transport calculations in Wulff et al. (1990)contain no estimates of the transports among regions within each basin, whichmeans that there are no estimates of marine nitrogen transports among the 8 coun-tries sharing the Baltic Proper basin. Therefore, strong assumptions have beenmade which are based on limited information on the coasts of the countries. Whenthe coast lines contain islands and vegetation, more nitrogen impact occurs on thecoast of the emitting country and vice versa. It is regarded that the coasts of Polandand Lithuania are “open”, which implies that most of the nitrogen transported fromthese countries are dispersed in the Baltic Proper. It is therefore simply assumedthat all the nitrogen that are contained in the Baltic Sea from these countries areequally divided among all Baltic Proper countries. For the remaining countries itis assumed that 0.3 of the impact occurs on the own coast and the rest is equallydivided among the other countries.

Two types of environmental damages, or benefits from nitrogen reductions areestimated, uniform and differentiated. Both estimates makes use of Wulff andNiemi (1992), who suggests that a restoration of the Baltic Sea biological condi-tions would require a reduction on in total loads of nitrogen by at least 50 per cent.The uniform marginal benefits are then calculated simply by dividing total benefitsof SEK 31,000 millions by 500,000 tons of nitrogen, which is the 50 per centdecrease in total nitrogen load to the Baltic Sea. Note that the total load of nitrogento the Baltic Sea includes also deposition originating from countries outside theBaltic Sea drainage basin, which is not considered in this study (Turner et al. 1999).Assuming that one kg of nitrogen reduction has the same value regardless of itslocation, the estimated uniform marginal benefit is then SEK 62/kg N reduction.This uniform approach may be regarded as ethically sound by its equal division ofmarginal benefits among the countries.

Under the scenario of differentiated marginal benefits, distinctions are madedepending on where the nitrogen is deposited. There are two reasons for benefitsto differ with respect to location of nitrogen reductions: willingness to pay forreduced eutrophication differ among countries, and the coastal zones differ withrespect to which nutrient (i.e. phosphorus or nitrogen) is limiting for biologicalgrowth. Marginal benefits of the other regions are assumed to differ with respectto their GDP per capita as calculated in Söderqvist (1996). The estimated willing-ness to pay in different countries ranges from 246 to 3043 per person and year.The calculated value of one kg nitrogen reduction then varies between SEK 11/kgnitrogen reduction and SEK 204.

For all waters, nitrogen and phosphorus should be available in certain propor-tions, the so-called Redfield quotient N/P, in order to avoid damages from algaeblooms. Under balanced condition, the Redfield quotient is 7 (e.g. Elmgren 1984;Larsson et al. 1985). When the quotient is less then 7 the biological growth in thewater is regarded as nitrogen limited and as phosphorus limited when the quotient

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is higher then 7. When only one of the nutrients is limiting biological production,changes in the load of the other nutrient have no impact on the biological growthand, hence, there are no damages from eutrophication. Due to complex interactionsbetween different species and among various parts of a water basin, it is currentlyscientifically unclear how the Redfield ratio is determined in the Baltic Sea arephosphorus limited and the rest of the Baltic Sea is nitrogen limited (Wulff etal. 1990). This means that changes in nitrogen loads probably have no or minorimpacts on the coastal zones of Northern Sweden and Finland. Therefore, marginalbenefits from nitrogen reductions reaching in these two regions are assumed to bezero.

The cost estimates of different nitrogen abatement measures used in this studyare obtained from Gren et al. (1997a). Emission oriented measures included theninvolve: increased nutrient cleaning capacity at sewage treatment plants, catalystsin cars and ships, scrubbers in stationary combustion sources, and reductions inthe agricultural deposition of fertilisers and manure. Included land use measuresare: change in spreading time of manure from autumn to spring, cultivation of socalled catch crops, energy forests, ley grass, and creation of wetlands. Change ofspreading time from autumn to spring implies less leaching due to the fact that, inspring, there are growing crops which can make use of the nutrients. Catch cropsrefer to certain grass crops, which are sown at the same time as the ordinary springcrop but start to grow, and thereby make use of eventual remaining nutrient in thesoil, when the ordinary crop is harvested.

The nitrogen abatement costs are based on econometric estimates for sewagetreatment plants, fertiliser reductions, reduction in nitrogen oxides from reduceduse of gas and oil, and wetland creation (for details, see Gren et al. 1995). Abate-ment costs of all other measures are obtained from engineering data. In order toobtain costs for nitrogen reductions to the coastal waters, further data is needed onnitrogen transformation during the transport from the location of the source to thecoastal waters. As reported in Gren et al. (1997), this turned out to be one of themain difficulties for the calculation of overall nutrient reduction costs. Therefore, alinear relation between emission reduction at the source and impact on the coastalwater is assumed for all measures and regions.

In Table I we present nitrogen loads, own environmental impacts from nitrogenloads, and the two types of marginal benefits. In addition, marginal costs ofnitrogen reductions are presented for comparative purposes.

Polish nutrient emissions are undoubtedly the most important regional sourceof nitrogen loads, and correspond to 1/3 of the total nitrogen load. The relativelylarge load of nitrogen from Germany is explained by the inclusion of air emissions,not only from the drainage basin, but also from the rest of the country.

For most countries, and in particular for Russia, there is a wide range in unitcosts of emission reductions. Common to all countries is that nitrogen reductionfrom increased cleaning capacity at sewage treatment plants is the least costlymeasure, and reduction in air borne emissions is the most costly. The next cheapest


Table I. Nitrogen loads to the Baltic Sea, own national impacts per unit of nitrogenload, marginal benefits and marginal costs of nitrogen reductions (SEK/kg N reductionin 1994 prices).

Countries 1000 tons National Marginal benefits Marginal

of N load own impact Uni. Diff. costs

Denmark 61.2 0.3 62 204 20–440

Finland 69.3 0.6 62 0 20–680

Poland 245.8 0.1 62 17 7–937

Germany 96.4 0.3 62 193 20–637

Russia 35.1 0.2 62 14 7–1500

Estonia 17.9 0.3 62 22 7– 357

Latvia 31.1 0.3 62 15 7–356

Lithuania 44.5 0.1 62 11 7–500

North. Sweden 48.5 0.6 62 0 20–290

South Sweden 56.6 0.3 62 175 20–375

Total 706.4

measure in all regions is creation of wetlands, followed by cultivation of catchcrops and reduced fertilizer deposition on arable land. Although the unit abatementcosts may not differ much among emission sources, their differences in impacton the Baltic Sea are high. While one kg nitrogen reduction from coastal sewagetreatment plants reduce the load to the Sea by one kg, only a maximum of 0.20 kgreduction is obtained from the same decrease at a source of airborne emissions (seefurther Gren et al. 1995). Differences in impact then increase cost of obtaining onekg nitrogen reduction to the Sea by five times for airborne emissions.

It is also worthwhile mentioning the interdependency between wetlands asabatement measure and the other measures. Similar to the marginal cost increasingimpact on land use measures from reductions in airborne emission shown in eq.(8), land use changes affect the cost of wetland abatement. Reductions in nitrogenleaching from changed land use implies less nitrogen transport to a downstreamwetland site. This implies a higher abatement cost by wetlands, since the effective-ness of a given area of wetlands, for which payments are made, is reduced (seeByström (1998) for derivation of wetland nitrogen abatement costs).

The results in the table also show large differences in marginal net bene-fits obtained by the country reducing the nitrogen emission. A Polish marginalnitrogen reduction generates only 1.5 or 6.2 SEK while the corresponding nationalmarginal benefit in Denmark, Germany, and Sweden range from about SEK 19to 60. Noticing the large Polish nitrogen loads and relatively low marginal costswe would expect a large difference between the solutions under co-ordinated anduncoordinated actions.

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Table II. Net benefits (mill SEK per year) and nitrogen reductions (in %) under alternative policiesfor uniform and differentiated marginal benefits.

Countries Co-ordination National

Uniform Differentiated Uniform Differentiated

Profits % red. Profits % red. Profits % red. Profits % red.

Denmark 702 39 3 534 43 183 28 1 103 39

Finland 2 078 24 0 0 28 20 0 0

Poland 106 48 −1 662 54 75 14 0 0

Germany 2 017 16 4 079 19 271 8 1 194 21

Russia 253 47 −270 48 31 13 0 0

Estonia 1 447 46 351 47 35 37 0 0

Latvia 1 006 49 −22 50 125 39 0 0

Lithuania 12 48 −281 49 1 3 0 0

North Sweden 2 018 40 0 0 437 52 0 0

South Sweden 2 174 47 8 145 48 213 17 265 26

Total 10 829 40 13 855 37 1 551 19 2 562 10

5. Estimated Net Benefits Under Alternative Policy Concepts

In this section, results from the estimation of optimal net benefits under differentactions and policies analysed in Section 3 are presented: co-ordinated and nationalactions maximising net benefits with and without the ministerial restrictions onnitrogen reductions to the Baltic Sea. For all four cases, calculations are made forthe uniform and the differentiated marginal benefits. The algorithm applied for allcalculations is GAMS (Brooke et al. 1992)

From the analytical presentation and the description of nitrogen loads and trans-ports, and marginal costs on nitrogen reduction measures, we would expect Poland,Russia, Estonia, Latvia, and Lithuania to make relatively small net gains under co-ordinated actions. The reasons are their relatively low marginal costs. This wouldbe accentuated when switching from uniform to differentiated marginal benefitsbetween the countries. These expectations are confirmed by the results presentedin Table II.

The results show that total net benefits increase by about 5 times when nationalactions are replaced by international co-ordination of nitrogen reductions. In spiteof the differences in net benefits between the countries, the total nitrogen reduc-tions under the two marginal benefits schemes are similar, 40 and 37 percent underthe uniform and differentiated marginal benefits respectively. Under both types ofnational actions, the total nitrogen decreases are lower and correspond to about 1/5or 1/10 of the initial nitrogen load.


Nitrogen reductions are higher under both co-ordinated and national actionswhen marginal benefits are uniform as compared to when they are differentiated.The reason for the higher reduction under national policies is that marginal benefitsfrom nitrogen reductions equal marginal cost at higher reduction levels, whichcan be seen from Table I. Under co-ordinated actions, the slope of total marginalbenefits under uniform marginal benefits is less steep, in fact zero, than the corre-sponding slope with differentiated marginal benefits. The reason for the slightlylarger reduction with uniform benefits is that total marginal benefits then equaltotal marginal cost at a larger reduction level.

The results in Table II also indicate an increase in total net benefits under co-ordinated actions by about 1/3 when differentiated marginal benefits are appliedinstead of uniform. Under a differentiated benefits scheme optimal allocation ofmeasures between countries depends on the nitrogen marine transports among thecountries, so that countries with highest marginal benefits receive relatively largenitrogen load reductions. This can be seen from the table by comparing the countrynet benefits under the two marginal benefits schemes. The net benefits of Denmark,Germany and Sweden increase considerably while those of the other countries’decrease. Under national actions and uniform marginal benefits, all countriesundertake some nitrogen reductions. Only Denmark, Germany, and Sweden wouldcarry out nitrogen reductions when marginal benefits are differentiated.

It is interesting to note that no country is a net looser from internationallyco-ordinated actions under uniform marginal benefits. When comparing the netbenefits under co-ordinated actions with the net benefits from national actions,all countries make net gains. When marginal benefits are differentiated, Poland,Russia, Latvia and Lithuania become a net loser.

Since the optimal nitrogen reductions are less than 50 per cent, the impositionof a 50 per cent nitrogen reductions will decrease total net benefits, which can beseen from Table III.

Co-ordinated decreases by 50 per cent generate total net benefit of 2,527millions of SEK, which corresponds to about 1/4 of the net benefits under co-ordinated actions without nitrogen reductions requirements. Another difference isthat several countries now become a net loser: Denmark, Poland, and Lithuaniaunder uniform marginal benefits and Finland, Poland, Russia, Latvia, Lithuania,and North Sweden for differentiated benefits. Thus, Poland, Russia, and Lithuaniabecome net losers regardless of the specification of marginal benefits.

The total net benefits when each country reduces its load by 50 per cent arealmost −30,000 millions of SEK. The large total net loss is explained by the veryhigh increase in costs for German reductions. This, in turn, is due to the highmarginal cost of reductions in air emissions and a large share of air emission ascompared to total nitrogen load on the Baltic Sea from Germany. The results inTable III also indicate that a majority of the countries face negative net benefitsfrom country restriction in the load by 50 per cent.

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Table III. Net benefits (mil. SEK per year) and nitrogen reductions (in %) imposed 50% nitrogenreductions.

Countries Co-ordinated actions National actions

Unif. ben. Diff. ben. Unif. ben. Diff. ben.

Profits % red. Profits % red. Profits % red. profits % red.

Denmark −123 48 3 258 48 −578 50 2 075 50

Finland 1 714 38 −1 419 36 −613 50 −4 501 50

Poland −3 414 59 −5 069 61 −502 50 −1 541 50

Germany 108 23 3 674 22 −25 090 50 −21 141 50

Russia 165 52 −511 51 62 50 −180 50

Estonia 411 56 13 52 31 50 −7 50

Latvia 690 61 −580 60 33 50 −460 50

Lithuania −849 61 −1 251 59 105 50 −91 50

North Sweden 2 296 44 −869 16 −224 −1 007} 50 } 50

South Sweden 573 61 7 502 62 −3 064 −1 867

Total 2 527 50 4 746 50 −29 840 50 −28 720 50

However, the estimated benefits as calculated by Söderqvist (1996) can beregarded as quite high. The estimated mean WTP amounts to SEK 3000 per year.This corresponds to about 2.5 per cent of the mean disposable income, and onemight ask whether people really are willing to pay that amount for mitigating onlyone class of environmental problems. The difficulties associated with obtainingappropriate value estimates from the contingent valuation methods are well known,and documented in, among other, the NOOA panel on contingent valuation (Arrowet al. 1993). The same calculations as above have therefore been carried out formarginal benefits that are reduced by one half. The results, which are presented inAppendix II, show a considerable decrease in net benefits in all cases. For example,total net benefits are reduced by 2/3 for co-ordinated actions and Poland becomesa net loser.

It is important to note that these estimates are sensitive to several other assump-tions. For example, sensitivity analysis in Gren et al. (1997) shows that total costsof nitrogen may be doubled when a reduced capacity of low cost measures isassumed. Another crucial assumption concerns the linkage of nitrogen reductionsto benefits as measured in monetary terms. Recall also the arbitrary measurementof marine nitrogen transports between countries. A change in these transport para-meters might result in considerable changes in allocations of nitrogen reductionsand net benefits.


6. Summary and Discussion

The main purpose of this study has been to calculate net benefits from reductionsin the load of nitrogen to the Baltic Sea under alternative reduction policies and fordifferent empirical specifications of marginal net benefits. Four different policieswere analysed: co-ordinated and national actions respectively where a ministerialagreement on 50 per cent nitrogen reduction was either included or excluded. Inaddition, marginal benefits were distinguished with respect to consideration of thelocation of reduction: uniform and differentiated. The uniform approach appliesthe principle of equal marginal benefits regardless of the location of the nitrogenreduction. The differentiated approach accounts for differences in marginal benefitswith respect to willingness to pay and the biological impact of nitrogen reductionsin different regions.

The analysis showed indicated that difference in solutions between the co-ordinated and national actions is determined by the two nitrogen linkages betweenthe Baltic regions: the marine and airborne transports of nitrogen. It was shown thatthe consideration of the additional environmental link provided by air transportsis likely to increase the net benefits from co-ordination as compared to nationalactions. The empirical calculations indicated a considerable difference between theco-ordinated and national actions. A switch from uncoordinated to co-ordinatedactions would increase total net benefits by five times. An interesting result wasthat there are no net losers under co-ordinated actions for the uniform specifica-tion of marginal benefits. This result was changed when marginal benefits weredifferentiated with respect to location of the nitrogen reduction.

The results are by all likelihood affected, not only by difficulties of measuringincluded parameters, but also by excluded factors. One such factor is the negli-gence of all other environmental benefits than Baltic Sea improvements associatedwith nitrogen reductions. For example, the construction of wetlands implies furtherenvironmental benefits by the provision of biodiversity and may be also recrea-tional values (see Gren 1995). The inclusions of such “extra” environmentalbenefits would increase nitrogen reductions for all regions where these benefitsare positive.

Another important issue is related to the concept of cost of nitrogen reductionsapplied in this study. It would be more appropriate to include, not only the directcosts of the reduction activities, but also their general equilibrium impacts. Asshown in Johannesson and Randås (1996), structural impacts of nitrogen reductionspolicies can be large but the net impact on GDP is small. Further, costs of enforcingnitrogen reduction are not included. In Gren and Brännlund (1995) it is shownthat the cost of enforcing a nitrogen fertilisers charge may correspond to 25 oftotal costs. Since there are large differences in institutions affecting environmentalpolicies among the countries, enforcement costs are likely to differ much, beinghighest in the Baltic states and Poland (Eckerberg et al. 1996). The inclusionof enforcement costs would thus effect, not only total net benefits, but also theallocation of nitrogen reductions between among countries.

56 ING-MARIE GREN

However, although the numerical results must be interpreted with much caution,the empirical results of this study indicate that alternative specifications of marginalbenefits have significant impacts on which country make net gains or losses. Thismay have strong policy implications for implementing co-ordinated actions. Theresults of no net loser under uniform marginal benefits may imply one of the rarecases where all countries gain from co-ordinated actions and is thus self-enforcing(see e.g. Barrett 1994). Admittedly, when marginal benefits are reduced and/orthey are differentiated with respect to GDP per capita in different countries, co-ordinated actions imply at least one net loser. A mechanism for sharing the total netsurplus is then required for the implementation of co-ordinated actions. The designof such a mechanism, or the structure of side payments, will then be quite differentunder the uniform and differentiated marginal benefits schemes [see e.g. Chanderand Tulkens (1995), and Van Egteren and Tang (1997) for alternative designs ofside payments].

Markowska and Zylicz (1996) show that, for differentiated marginal bene-fits, Baltic Sea countries would accept a nitrogen cleaning programme underthe Chander and Tulkens (1992) cost sharing suggestion. Applying this costsharing rule, it is calculated that transfers are required from Denmark, Finland,Sweden, and Russia to other countries, where Poland receives the largesttransfers.

Acknowledgements

I am very much indebted to Karl-Göran Mäler, Huib Jansen, G.E. Halkos, andtwo anonymous referees for their valuable comments. Financial support from theSwedish Council of Agriculture and Forest Research, and Swedish EnvironmentProtection Agency is gratefully acknowledged.

Appendix I: Derivations of Conditions for the Sign of Aj

From (5) and (8), Aj can be written as

Aj = Pjo

Ei (Hj − Hjl) − P

jl

Ei Hjl (A1)

Then

Ai > (<)0 forP

jo

Ei

Pjl

Ei

> (<)Hjl

H j − Hjl(A2)

Thus, according to (A2), Ai > 0 for relatively high leaching of nitrogen from a marginaldeposition of nitrogen on land without land use measures and a relatively small areacovered by land use measures.


Appendix II

Table A1. Net benefits (millions of SEK) and nitrogen reductions (in %), when uniform anddifferentiated marginal benefits are reduced by one half.




Denmark 246 31 1 357 39 8 2 408 32

Finland 800 13 0 0 108 10 0 0

Germany 331 14 1 595 16 0 0 335 26

Poland −417 45 −858 48 0 0 0 0

Russia 145 26 −57 29 0 0 0 0

Estonia 599 22 180 21 7 26 0 0

Latvia 352 36 −41 35 58 29 0 0

Lithuania 25 36 −89 37 0 0 0 0

North Sweden 522 41 0 0 86 39 0 0

South Sweden 887 23 2 959 41 0 0 18 17

Total 3 493 31 5 006 29 267 6 761 8

Table A2. Net benefits (mill. SEK per year) and nitrogen reductions (in %) when marginal benefitsare decreased by one half and 50% nitrogen reductions are imposed.




Denmark −853 31 824 49 −1 159 50 171 50

Finland 35 33 −1 701 13 −2 060 50 −4 501 0

Germany −725 22 1 043 22 −25 949 50 −23 979 50

Poland −4 440 61 −5 060 59 −1 224 50 −1 744 50

Russia −267 51 −613 52 −94 50 −217 50

Estonia 352 60 −365 50 −36 50 −89 50

Latvia 132 53 −782 60 −291 50 −537 50

Lithuania −1 105 −1 288 59 −13 50 −165 50

North Sweden 729 45 −869 16 −536 −1 201} 50 } 50

South Sweden −1 292 54 2 125 62 −3 167 −2 739

Total −7 434 50 −6 686 50 −34 529 50 −34 819 50

58 ING-MARIE GREN

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Documents

International Versus National Actions Against Nitrogen Pollution of the Baltic Sea