Effectivity and cost efficiency of a tax on nitrogen fertilizer to reduce GHG emissions from agriculture

The use of nitrogen (N) fertilizer substantially contributes to greenhouse gas (GHG) emissions due to N₂O emissions from agricultural soils and energy-intensive fertilizer manufacturing. Thus, a reduction of mineral N fertilizer use can contribute to reduced GHG emissions. Fertilizer tax is a potential instrument to provide incentives to apply less fertilizer and contribute to the mitigation of GHG emissions. This study provides model results based on a production function analysis from field experiments in Brandenburg and Schleswig-Holstein, with respect to risk aversion by calculating certainty equivalents for different levels of risk aversion. The model results were used to identify effective and cost-efficient options considering farmers’ risk aversion to reduce N fertilizer, and to compare the potential and cost of GHG mitigation with different N fertilizer tax schemes. The results show that moderate N tax levels are effective in reducing N fertilizer levels, and thus, in curbing GHG emissions at costs below 100 €/t CO₂eq for rye, barley and canola. However, in wheat production, N tax has limited effects on economically optimal N use due to the effects of N fertilizer on cropquality, which affect the sale prices of wheat. The findings indicate that the level of risk aversion does not have a consistent impact on the reduction of N fertilizer with a tax, even though the level of N fertilizer use is generally lower for risk-averse agents. The differences in N fertilizer response might have an impact on the relative advantage of different crops, which should be taken into account for an effective implementation of a tax on N fertilizer.