Tradeable Nitrogen Abatement Practices for Diffuse Agricultural Emissions: A ‘Smart Market’ Approach

Abstract Markets in pollution permits for managing environmental quality have been advocated by economists since early 1970s as a mechanism that can deliver reduction targets at lower cost to regulated entities than traditional uniform command-and control approaches. This study explores whether ‘smart market’ cap-and-trade scheme between non-point sources offer meaningful, robust and policy amenable, advantages over alternative approaches nitrogen management realistic setting: 6504 individual farms Limfjorden catchment, Denmark. The involves multilateral trading of emission rights among via changes agricultural land practices under catchment-level cap on total load. In this, the first exploration smart market real setting, we estimate efficiency gains compared command-and-control regulation, explore robustness these face non-participation, reflect farmers’ potential acceptance comparison with its analog: spatially-targeted implemented location-specific limits leaching. Results indicate has substantially reduce meeting catchment’s target. For 21.5% from baseline load, delivers savings 56% (DKK273 million, €36.6 million) participating realising mean net benefit DKK 723/ha (€ 97/ha). Market performance is relatively against transaction cost; when delivering load Limfjorden, approximately 70% overall gain could be retained if only 24% engaged market.