How farmers could benefit from fertilizer taxes


Some of the worst water quality problems result from nutrient leaching and runoff from agricultural lands.  Nitrogen and phosphorus applied to cropland and not absorbed by crops in the process of photosynthesis will, one way or another, one day or another, end up in the water.  The same goes for animal waste. The nutrients cause algae blooms, reduced concentrations of dissolved oxygen, and diminished fisheries and ecosystem health (called eutrophication). 

While there has been some effort to deal with these problems, I know of no great success stories, and water quality continues to decline in the Mississippi, the Gulf of Mexico, and the Chesapeake, the Great Lakes, and countless other water bodies.

One obvious remedy would be to tax fertilizer.  This would be a nearly Pigouvian solution.  Better would be to tax runoff and leaching directly, but that’s basically impossible for practical reasons.

The obvious but rarely stated problem is that it would probably require an extraordinarily large tax to have any real influence on the quantity of fertilizer used.  And politically powerful farmers would cry foul, which is why this kind of tax will probably never happen.

But I wonder: What would the incidence of a fertilizer tax, broadly applied, really be?  Agriculture is fairly competitive.  And demand for agricultural commodities is nearly vertical—about as inelastic as anything.  The econ 101 analysis would suggest that burden of the tax would fall mainly on consumers.  That is, food commodity prices would go up enough to compensate for most all of the tax.

Now, I’ve seen some economists propose fertilizer taxes on a graduated scale.  If fertilizer is applied at a sufficiently low rate, no tax would be levied, but the tax would then rise sharply with higher application levels (which is where most runoff and leaching comes from).  This would be a little harder to monitor, but probably not too bad.  If done this way, the total tax bill would cost farmers far less, but cause the same reduction in fertilizer use.  And farmers would still get the full compensating price increase, since less output would be collectively produced.

I think it’s possible—indeed, very probable—that the induced rise in commodity prices would more than compensate farmers for the fertilizer taxes they would have to pay under the graduated tax system.  That is, a statutory tax on farmers could cause their profits to go up.

Anyway, I don’t think anyone has made this point or emphasized it very well.  And it’s an important one, at least politically speaking, because maybe farmers could get on board with a tax that actually benefits them.  I’m not sure if it would save the Chesapeake Bay or Great Lakes from eutrophication, but I bet it would do a lot more good than anything else that’s been tried.

Update: Of course, this is no free lunch: consumers would pay in higher food prices.

Comments

  1. Yeah. Higher food prices. Probably okay for westerners. Though the shift in spending patterns could threaten other sectors by ricochet... And, of course, it might be a bit tough for some of the poorer people.

    NB: I am not saying we don't do it. I am just pointing out a bit more emphatically than you did that it's not an unalloyed good.

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    1. Frederic Marl: I agree with you. Indeed, it seems to me this is the key tradeoff, food prices vs the environment. I may be wrong, but my sense is that most of the ag/environment people don't typically see it this way.

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  2. Michael,
    But on a global scale, aren't India and China most responsible for fertilizer overuse? Like your idea but the political will might be a problem. It would also help the precision ag industry out quite a bit.

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    1. I'm not so sure. We apply fertilizer at extraordinary rates here in the USA. Developed nations are struggling to boost application rates effectively to boost their yields. I would guess that developing nations struggle more with point sources of water pollution; here, we've dealt with the point sources but struggle with nonpoint ag sources. Also, I believe world's biggest dead zone is in the Gulf of Mexico, following from nutrients coming out of the Mississippi.

      Political will is always a challenge when it come to the dreaded T word. But that view doesn't seem to work here. If I'm right and a graduated tax would actually increases farm profits, why the political resistance? I'd like to think our government cares about poor people struggling to feed themselves in developing countries, but I rather doubt it.

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  3. "Better would be to tax runoff and leaching directly, but that’s basically impossible for practical reasons."

    Though slightly different (urban vs. agricultural, and storm sewer related), Maryland is beginning to try exactly this. Every property owner will be assessed a new tax based on the amount of hard surface (roof, parking, etc) on their property. Similar taxes are in place in Virginia, DC, Maryland and Pennsylvania.

    http://baltimore.cbslocal.com/2013/04/14/surface-tax-will-cost-md-property-owners-every-time-it-rains/

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  4. Mike -
    California is actually heading this direction and the SWRCB just approved a tax on nitrogen. It's surely second best and it is distoritonary on the input prices, but as you note Pigovian taxes on the actual runoff would be a technical mess. The alternative, tradable permits markets, have also generally been a measurement nightmare and have mostly failed for similar reasons (I'm most familiar with the Arkansas Water Bank in CO, but there were efforts on the Tar-Pamlico as well - Dana Hoag worked on that about 10 years back). Anyway, my gut feeling is that the best hope is to control the offending input. Stepping from a uniform tax (the current CA policy) on the input to a graduated tax might be easier in a fertigation environment, but it is by no means infeasible.

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  5. What about trade? Isn't the US a huge food exporter? That part of demand isn't going to be inelastic -- higher production costs in the US would allow currently less competitive countries to take over some (large) amount of that demand, leaving US agribusiness pretty unhappy. Or are you proposing a worldwide tax? Or a US tax with tariffs/subsidies to neutralize its trade effect (sounds hard to get past the WTO)?

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    1. Yes, we export a whole lot of grains--about 70% of world exports for corn, and probably pretty close to that for soybeans and soy-related products. Indeed, that's what gives this view some bite. I'm pretty sure demand over the relevant range is very inelastic. If it weren't, the small changes in USDA crop forecasts wouldn't have any influence on prices, despite those small production changes being buffered almost entirely by inventories.

      WTO would let a green program like this pass. Heck, it would be easy to justify with the benefit/cost analysis. Besides, who would complain? WTO is where foreign farmers go to complain about dumping. This is the opposite of that. Poor people don't get much of a hearing at the WTO (which, admittedly, is too bad...) If I were a dictator implementing this policy I'd use the tax revenues for foreign food aid.

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  6. Though slightly different (urban vs. agricultural, and storm sewer related), Maryland is beginning to try exactly this. Every property owner will be assessed a new tax based buying runescape gold

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  7. No free lunch? What is the decrease in the noted negative externalities? To me, these are pretty delicious and nutritious. (And the higher taxes on consumers, of course, have as a direct counterpart either additional government services or decreases in other taxes.)

    But more generally, why not eliminate even more of the appalling negative externalities that emanate from industrial agriculture and advocate for the fertilizer tax being realized via a carbon tax. That would be contributing to a much more important conversation.

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