Schou, J.S. & Martinsen, L. 2006. NERI Technical report No. 591. 57 pp.

 

Summary

This report analyses the economic consequences of revised standards for environmental approval of agricultural livestock farms.

 

In the fall of 2005 and the winter of 2006 a comprehensive advisory study was conducted as part of the preparatory work related to the ongoing revision of current standards for environmental approval of livestock farms. The study was commissioned by the Danish Nature and Forest Agency, and was carried out in several groups comprised of representatives from research institutions as well as NGOs. The present report represents the output of the work by the advisory group on economics, which was focused on assessment of the costs associated with the proposed revisions of the regulations. The proposed revisions concern the imposition of ammonia emission reduction requirements, along with a decrease in the limit for when changes on livestock farms need environmental approval. The proposed decrease is from 250 livestock units (LU) to 75 LU.

 

The analysis encompasses three different scenarios representing different levels of ammonia emission reduction requirements in relation to expansions of livestock farms. The identification of the scenarios, as well as of the baseline to be used for comparison, was done by the ammonia- and technology advisory groups. The scenarios are presented in table A. For each scenario separate ammonia reduction requirements, expressed by means of of percentages compared with best stable systems, are specified for different stable systems and livestock types. In addition, for each scenario separate cost assessments are made for the case where the regulation is assumed to apply to the whole farm and the case where it is confined to apply to the expansion.

 

 

 

Table A. Scenarios.

 

 

	Requirements for reductions in ammonia emissions for all systems based on semi-liquid manure	Requirements for reductions in ammonia emissions for all livestock except cattle on deep litter systems	Requirements for reductions in ammonia emissions for cattle on deep litter systems reductions
Scena-rio I	Requirements equivalent to best stable system based solely on semi-liquid manure.	Requirements equivalent to best stable system based solely on deep litter for all livestock except cattle.	Requirements equivalent to best stable system for cattle based solely on deep litter.
Scena-rio II	Requirements equivalent to best stable system plus an additional 30% reduction in ammonia emissions.	Requirements equivalent to best stable system plus an additional 15% reduction in ammonia emissions.	Requirements equivalent to best stable system plus an additional 10% reduction in ammonia emissions.
Scena-rio III	Requirements equivalent to best stable system plus an additional 60% reduction in ammonia emissions.	Requirements equivalent to best stable system plus an additional 30% reduction in ammonia emissions.	Requirements equivalent to best stable system plus an additional 10% reduction in ammonia emissions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The conducted analysis can be split into five steps as depicted in figure A.

 

 

Step 1	Assessment of the expected number of environmental approvals up to 2015
Step 2	Identification of relevant emission reduction technologies
Step 3	Cost of implementing the technologies
Step 4	Aggregate cost of the scenarios
Step 5	Sensitivity analysis and derived effects

 

Figure A: The five steps of the analysis.

 

As the environmental approval relates to the farm level the first step of the analysis is an assessment of the expected number of farms to be affected by the revised approval procedure. The number of farms to be affected depends on where the limit, in the form of the farm size, for when an environmental approval is required is set (e.g. the current limit of 250 LU versus the proposed limit of 75 LU) and of the expected structural changes within the agricultural sector. Accordingly the point of departure of the assessment is an extrapolation of farm structure and livestock production from 2004 to 2015. Subsequently the assumption is made that all farms larger than 75 LU in the period from 2005 to 2015 will undergo at least one change that demands an environmental approval. In step 2 the relevant reduction technologies, including their effect on ammonia emissions, are identified based on a gross list prepared by the ammonia-/technology advisory groups. Subsequently the financial- as well as the welfare economic unit costs of the technologies are calculated in step 3. In step 4 the technologies are related to the scenarios and the attached reduction requirements. Underlying the choice of technologies is the criteria that the required reductions should be obtained at the lowest possible costs, while also being functional and widely applicable. Based on the linking of technologies and scenarios the aggregate costs of each scenario are calculated. Finally, in the last step of the analysis, the sensitivity of the results to changes in some of the central assumptions underlying the analysis is investigated.

 

In Table B the results of the analysis is presented in the form of the estimated annual financial- as well as welfare economic costs associated with the three different proposed scenarios for environmental approval of pig and cattle farms larger than 75 LU. In relation to the applied technologies it is noted that air cleaners, acidification and cooling of manure are assumed to be the technologies applied at pig farms, while the required reductions on cattle farms are expected to be obtained through changed feeding systems and fast spreading of deep litter combined with acidification and manure scrapers. The aggregate financial costs for all farms larger than 75 LU amount to 270, 547 and 725 M DKK per year equivalent to average reduction costs of 39, 68 and 76 DKK/kg N for scenario I, II and III, respectively; although it for scenario III should be noted that the set reduction target cannot be met for cattle on semi-liquid manure systems. Alternatively, if it is assumed that the regulation will only apply to expansions, the financial costs of the scenarios are reduced markedly to 27, 131 and 142 M DKK per year for the three scenarios. In relative terms this implies that the share of aggregate costs for all farms over 75 LU which can be ascribed to actual expansions varies from 10% (scenario I) to 24% (scenario II).

 

Table B. Estimates of annual financial as well as welfare economic costs of the three scenarios for environmental approval requirements; estimates refer to all livestock units on cattle and pig farms larger than 75 livestock units (1.644.000 LU, of which 330.000 LU relates to expansions).

 

 

	Financial costs		Welfare economic costs
	All LU	Proportion ascribable to expansions	All LU	Proportion ascribable to expansions
Scenario I	270 M DKK	27 M DKK	279 M DKK	28 M DKK
Scenario II	547 M DKK	131 M DKK	569 M DKK	138 M DKK
Scenario III	725 M DKK	142 M DKK	753 M kDKK	148 M DKK

 

 

 

 

 

 

 

 

 

 

 

Note: The value of secondary environmental effects is not included in the estimates.

 

In terms of the distribution of aggregate costs across stable systems, livestock types and farm sizes the analysis revealed that the greater part of the costs relates to livestock on systems based on semi-liquid manure (which encompass about 80% of the total livestock production), and that pig farms bear about 75% of the costs.

 

In relation to the sensitivity of the results to changes in the assumptions underlying the analysis, it is found that exclusion of the somewhat uncertain extra yield associated with acidification, in combination with using revised estimates of the cost associated with work effort and distribution of straw, implies that the estimated costs increase by 15-20%. Likewise, the results were found to very sensitive to changes in the initial distribution of LU among “best stable systems” and “other stable systems”.

The effect of varying farm sizes was investigated in relation to implementation of acidification. The analysis showed that the costs of implementing this technology are associated with significant scale effects. It also showed that differences in the level of earnings between farm sizes imply that farm size come to play an important role in relation to the ability to cover the costs of implementing a given technology. In this context it is noted that the analysis is static in the sense that it is based on the assumption that the livestock production remains unchanged. Considering that any rational farmer will adjust to the changed environmental standards, this assumption is hardly realistic. In particular two adjustment strategies appear to be relevant: 1) termination of production, or 2) concentration of production on larger farms. Which strategy will be chosen depends, among others, on the emission reduction standards and on the possible subsidy schemes for investments in environmentally friendly technology accompanying the legislation. These aspects yet remained to be determined at the time of the analysis, why the issue cannot be dealt with any further. It is though noted that the different strategies may give rise to different secondary effects, such as negative secondary effects in supply- and manufacturing industries (in the case that production is terminated) or potential positive secondary effects for the technology industry (in the case that production is concentrated and investment in environmental technologies are required).

 

 

 

Full report in pdf-format (1,374 kB).