Cost-effective abatement of pollution from agricultural sources classified in risk classes

Transcription

1 Cost-effectve abatement of polluton from agrcultural sources classfed n rsk classes Thomr Ancev*, Robert Lfran**, and Ncholas Tan* Abstract Water polluton from agrcultural sources s plagued wth uncertanty of varous provenences. In the face of ths uncertanty, catchment management authortes n Australa and elsewhere have been recently attemptng to classfy agrcultural areas n the catchment n so called rsk classes accordng to ther potental to contrbute to ambent water polluton. Ths classfcaton s ntended to be used to ad decson makng n allocatng fnancal assstance to supportng abatement. Ths paper looks more closely at ths classfcaton and provdes a theoretcal representaton of ths approach. In addton, t compares ts cost-effcency to an alternatve mechansm for allocatng funds to abatement n a catchment based on economc optmsaton. It s found that theoretcally, the classfcaton n rsk classes s smply expressng the uncertanty about polluton loadng parameter from a gven agrcultural area n dscrete groups of expected realsatons. Whle ths classfcaton gves prorty for fundng to abatement efforts n areas classfed as hgh-rsk, t s found that ths does not provde a cost-effectve outcome. The paper shows that abatement should be prortsed towards those farmers who can acheve greatest expected reducton of ambent water polluton at least-cost. Key words: abatement, cost-effectveness, water polluton. The fnancal support of ths work by the Envronmental Trust NSW (grant no. 2006/RDS/0008) s gratefully acknowledged. * Agrcultural and Resource Economcs (A04), Unversty of Sydney, Sydney, NSW, 2066, Australa. Correspondng author s Ancev, t.ancev@usyd.edu.au * INRA UMR LAMETA, 2 place Vala, Montpeller, Cedex 01, France. 1

2 1. Introducton Measurng envronmental outcomes from varous actvtes desgned to curb water polluton from dffuse agrcultural sources s dffcult because of the complexty of the underlyng bo-physcal processes. Ths creates a serous mpedment to envronmental decson makng n relaton to reducng water polluton from agrculture. One partcular problem related to ths uncertanty s how to allocate fnancal assstance to landholders to acheve reducton of polluton from agrcultural sources. These ssues are faced by of catchment managers n Australa who are responsble for large catchments that provde essental water supply to large urban conglomerates. A promnent example of ths s the Sydney Catchment Authorty (SCA), whch manages several catchments of total sze of about 16,000 km 2 and caters water to dstrbutors that servce a populaton of nearly 5 mllon people. One of the key concerns for SCA and other catchment management authortes s water qualty. The focus s predomnantly on the dffuse agrcultural sources n the catchments, whch contrbute substantally to nutrent loads n the water bodes as a result of agrcultural practces. In many catchments, ncludng the catchments under management of SCA, phosphorus loadng from agrcultural sources s a key water qualty ssue. In lght of ths, catchment management authortes (CMA) spend sgnfcant funds n supportng abatement actvtes from dffuse agrcultural sources. In allocatng those funds, the managers need to know the effectveness of the abatement actvtes. Ths amounts to assessng the magntude of the reducton of polluton acheved as a result of an abatement actvty beng undertaken by a landholder, whch s fnancally supported by the catchment management authorty. Snce there s wdespread scentfc uncertanty about the polluton fluxes n agrculture and the effects that varous abatement actvtes have on those fluxes, one recent trend has been to classfy agrcultural areas n rsk classes accordng to the estmated potental of those areas to emt nutrents, and to allocate abatement fundng accordngly. Whether or not ths s a cost-effectve strategy s one of the questons that ths paper addresses. As catchment managers are fscally constraned, ther objectve should be to acheve cost-effectve mprovements n water qualty. Ths mples attanng the greatest reducton n ambent polluton concentraton per dollar, or euro, spent on abatement actvtes. The use of a rsk classfcaton system for dentfyng and prortsng agrcultural areas where abatement actvtes should be undertaken presents catchment managers wth a relatvely straghtforward way of mprovng envronmental decson makng under uncertanty. However, despte ts appeal, the cost-effectveness of allocatng lmted abatement budget through the prortsaton of funds to hgh rsk areas s largely unknown. The research reported here focuses on developng key components of a framework that can be used to answer ths queston. Consequently, the am of the paper s to test the cost-effectveness of a system where a gven budget devoted to abatement s allocated based on the prortsaton of agrcultural areas classfed as beng hgh rsk. The specfc objectves are to: a). establsh a lnk between the rsk classfcaton and the underlyng uncertanty posed by the dffuse nature of agrcultural polluton; b.) develop a conceptual framework for representng the problem from an economc perspectve; c). conduct an emprcal analyss of the cost-effectveness of the allocaton rule for fundng abatement based on rsk 2

3 classfcaton, and compare t to the cost-effectveness of alternatve allocaton rule based on economc optmalty. 2. Lterature revew The economc lterature on the treatment of rsk and uncertanty n terms of water polluton from agrcultural sources has been prolfc. An early semnal contrbuton n ths research area was made by Seggerson (1988), where the probablstc nature of the agrcultural polluton problem was specfed and optmalty condtons were derved wth an explct consderaton of the uncertanty about polluton from agrcultural sources. Another stran of lterature that appeared early on dealt wth rsk and uncertanty n terms of probablty of achevng a gven envronmental target and the health rsks assocated wth polluton from agrcultural sources. Ths approach was promnently showcased by Lchtenberg et al. (1989) and Shortle (1990), who bult on an earler work by Beavs and Walker (1983). The fndngs of these early contrbutons, together wth other ssues related to the economcs of dffuse polluton and ts control were summarsed by Shortle et al. (1998). Recently, there has been a revval of the lterature that deals wth the uncertanty related to agrcultural water polluton. The uncertanty about the change n observed water qualty as a result of varous abatement actons has been framed usng the concept of opton prce by Bergstrom et al. (2001). Khana and Fansworth (2006) and Isk and Khana (2002 and 2003) ncorporate uncertanty nto a farmer s decson of whether to adopt an envronmentally frendly technology by applyng the real optons approach to decson makng. In another stran of lterature, Horan (2001) has examned the effect of the probablty of a partcular magntude of water polluton from nonpont sources on the envronmental polcy goals. Gren et al. (2002) offer comparson of cost-effectve allocaton of abatement efforts under alternatve dstrbutonal assumptons (normal vs. log-normal dstrbuton) for polluton emsson from agrcultural sources under alternatve abatement optons. Most recently, a body of lterature was started by Kaplan and Howt (2002) and Kaplan et al. (2003), followed by Farzn and Kaplan (2004). Ths lterature explctly treats the acquston of nformaton as means of reducng the nherent uncertanty present n the water polluton problems related to agrculture. The key pont s that suffcently ntensve collecton of nformaton may n effect transform the non-pont sources of polluton nto pont sources of polluton. Acqurng more nformaton about the processes that govern polluton fluxes from agrculture wll reduce the uncertanty and wll subsequently result n an optmal allocaton of resources to abatement. Typcally, ths lterature has used the metrc of nformaton entropy to measure the uncertanty related to water polluton problems. Ths metrc enables explct valuaton of the effects of nformaton acquston on the level of uncertanty. The current paper bulds on these lterature sources, but contrbutes specfcally by focusng on the economcs of rsk classfcaton approach to fundng abatement of agrcultural polluton n a catchment. 3

4 3. Analytcal framework Model of classfcaton accordng to rsk To put forward a way of thnkng about the research problems that were outlned above, consder a catchment made up of a number of streams whch converge at the mouth of a dam. These streams receve and carry phosphorus load comng from numerous agrcultural areas located throughout the catchment. The catchment manager focuses ther attenton towards mtgatng ths phosphorus load. The manager has a fxed budget at ther dsposal every year, whch they can use to fund abatement at agrcultural areas n the catchment. Ths s typcally done by contrbutng funds to certan abatement actvtes appled at the ndvdual farm level. However, due to the large degree of uncertanty relatng to the flux of pollutants (phosphorus) from agrcultural areas, the benefts from assgnng fundng to abatement at ndvdual farms are not clear. In partcular, t s typcally not possble to measure how much the applcaton of an abatement actvty at a partcular farm reduces the phosphorus load orgnatng from that farm. One way n whch the catchment manager can try to overcome the dffcultes posed by ths uncertanty s by consderng the rskness of each agrcultural area n terms of ts potental to contrbute towards the polluton of the head dam. To conceptualse ths uncertanty, we follow the work of Kaplan et al. (2003) and defne a polluton loadng parameter for each agrcultural ste wthn the catchment (ndexed by ). The polluton loadng parameter θ descrbes the contrbuton of each agrcultural ste to the concentraton of phosphorus measured n the head dam. The value of ths parameter s determned by scentsts based on bo-physcal and management characterstcs of a gven agrcultural area. The realsaton of the polluton loadng parameter remans uncertan due to the dffuse nature of agrcultural polluton. Ths can be descrbed by a probablty densty functon whch characterses the dstrbuton of the polluton loadng parameter. Usng the expected value, the frst moment of the dstrbuton of the polluton loadng parameter E(θ ), agrcultural areas can be classfed nto rsk classes. Ths expected value s formed from the perspectve of the catchment manager. Areas wth a hgh expected value are classfed as hgh rsk and those wth lower expected values are classfed nto a lower rsk class (e.g. medum, low, etc). Ths can be represented as follows: If k E(θ ) l then ste s classfed as hgh rsk, f l E(θ ) m then ste s classfed as medum rsk, f m E(θ ) n then ste s classfed as low rsk, Currently, the number of rsk classes and the sze of the nterval bounds (k, l,m, n) are determned purely by scentfc judgment wthout an nput from economsts. Ths may be less than optmal, snce both the number of rsk classes as well as the magntude of the nterval bounds wll have a sgnfcant mpact on the cost-effectveness of a rsk based abatement fundng mechansm, and economsts could help nterpretng the 4

5 mportance of these parameters for cost-effectveness. Whle ths s beyond the scope of the present paper, t s of mmnent nterest for future research. Once agrcultural areas have been grouped nto rsk classes, the catchment manager s able to allocate abatement fundng based on ths classfcaton. Ths can be done by weghtng the allocaton of the budget towards hgher rsk classes, whch n effect represents prortsaton of fundng towards agrcultural areas that are perceved to be hgh-rsk. For example, f there are three rsk classes, the catchment manager may allocate the budget n a 60:30:10 proporton between hgh, medum and low rsk classes respectvely. The budget for ndvdual rsk class would then be allocated evenly between agrcultural areas wthn the same rsk class. A verson of ths allocaton mechansm was smulated n the emprcal study reported below to estmate the cost-effectveness of the abatement fundng allocaton rules based on rsk classfcaton. Model based on economc optmsaton From an economcs standpont, the objectve of the catchment manager n dealng wth dffuse source water polluton should be to allocate the budget to the actvtes that wll brng most reducton of water polluton n a cost-effectve manner. If t s assumed that the catchment manager has decded to commt ts entre annual budget earmarked for abatement, the followng problem needs to be solved every year to assure cost effcency: max E( θ ) E( θ a ) a st.. C ( a ) C where C (a ) represents the abatement cost functon when abatement actvty a s θ a refers to the value of the polluton mplemented n agrcultural area, the notaton ( ) loadng parameter for the area gven the abatement actvty undertaken n that area, and C s the budget that the catchment manager has devoted to polluton abatement. Analytcally, ths problem can be solved by settng up the Lagrangan: ( θ θ ) λ( C) max L( a ) = E( ) E( a ) + C ( a ), (2) a and by dervng the frst order condton: E( θ a) C( a) + λ = 0. (3) a a Ths can be further manpulated to get E( θ a) C( a) = λ, (4) a a and subsequently can be used to represent the Lagrange multpler, λ as: E( θ a) λ =, (5) C ( a ) (1) 5

6 whch states that the Lagrange multpler may be nterpreted as a change n the expected value of the polluton loadng parameter gven the abatement actvty undertaken n agrcultural area, per unt of cost expended on that abatement actvty. Ths representaton offers an adequate crteron, whch can be used to allocate abatement actvtes to agrcultural areas. The abatement optons and agrcultural areas that have hgh value for λ should be gven prorty n allocatng abatement. A verson of the problem presented n equatons 1-5 was solved usng a dynamc chance constrant programmng model (Charnes and Cooper, 1959) n the ensung emprcal analyss. 4. Method and data To test the cost-effectveness of the two alternatve approaches to allocatng funds for supportng abatement actvtes n agrcultural areas one based on prortsng accordng to the rsk classfcaton, and another based on economc optmsaton an emprcal analyss was conducted usng exstng data provded by the Sydney Catchment Authorty (SCA), (Davs 1996). Studes conducted by SCA reported that agrculture s the largest source of phosphorous load n ther catchment (Fgure 1). Fgure 1. Composton of phosphorus loads n SCA sub-catchments (export potental) Source: (SCA 2005) The data provded were specfc to the Warragamba Dam catchment (contanng 13 sub-catchments), whch s located 65 klometres west of Sydney and s the cty s man raw water supply. Data from 57 agrcultural areas located across 13 sub-catchments conssted of phosphorus load emssons estmates, and of abatement quanttes and cost data for eght commonly used abatement optons. The data ndcated the sutablty of each abatement opton for a partcular land use practce n a partcular locaton. Usng the avalable phosphorus load estmates, agrcultural areas were grouped nto rsk classes based on the estmated potental to emt phosphorus nto adjacent waterways. Ths was done n order to assess the cost-effectveness of the rskclassfcaton approach of allocatng funds to abatement actvtes. Three rsk classes were defned as follows: 6

7 If E( θ ) < 100 Low Rsk f 100 E( θ ) < 1000 Medum Rsk f E( θ ) 1000 Hgh Rsk, where all values are gven n terms of total expected phosphorus load from an agrcultural area n klograms per year. Followng the classfcaton, an annual budget was allocated between rsk classes n proporton of 60:30:10 to hgh, medum and low rsk classes respectvely. Ths was done to smulate the effect of usng allocaton rules that prortse abetment fundng to areas classfed n the hgher-rsk classes. Abatement funds were then evenly dstrbuted to farms wthn each rsk class. Snce suffcent abatement can not be undertaken n a sngle year due to budgetary constrant, ths process was repeated for consecutve years, untl the specfed target phosphorus concentraton n the dam was acheved, or untl the devoted budget was not exhausted. At the end of the smulaton, the values of the expected phosphorus concentraton n the head dam, and the cost of the expended funds for abatement n agrcultural areas were recorded. As an alternatve to the allocaton of abatement funds accordng to the rsk classfcaton, several optmsaton scenaros were smulated usng a dynamc chance constrant program set up n Mcrosoft Excel. As wth the rsk classfcaton scenaros, abatement funds were reallocated each year over the plannng horzon. Three dfferent optmsaton scenaros were smulated for comparson wth two rsk classfcaton scenaros and for conductng comparatve statcs. The full set of smulated scenaros s presented below n Table 1. Table 1. Descrpton of analysed scenaros by method of allocatng funds for abatement. Scenaro Method of allocaton Budget ($) Mnmum expendture n an area ($) 1 Optmsaton Unconstraned 0 2 Optmsaton Unconstraned Optmsaton 2 mllon Rsk classfcaton 2 mllon Rsk classfcaton 3 mllon Results The results from the emprcal analyss lend support to the expectatons based on the theoretcal analyss. In short, the results ndcate that allocatng a fxed budget by prortsng fundng towards hgher-rsk classes s less lkely to meet the set polluton standard, and n the same tme t s more costly n terms of dscounted streams of expendture on abatement measured as a net present value (NPV) over the plannng horzon, n comparson to the optmsaton scenaros. These results are summarsed below n Table 2. 7

8 Table 2. Performance of the rsk classfcaton and optmsaton scenaros aganst a phosphorus concentraton standard for the head dam of 0.01 mg/l. P concentraton (mg/l) Standard met (yes/no) Cost expended (NPV $) Cost/kg P removed (NPV $) Plannng horzon (years) Scenaros Optmsaton scenaros Yes 3,477,722 4, Yes 3,762,674 5, Yes 3,864,468 5,183 3 Rsk classfcaton scenaros No 7,248,632 11, No 10,872,948 14,347 5 It can be seen that all three optmsaton scenaros performed very well n relaton to meetng the set polluton standard. In contrast, the two rsk classfcaton scenaros were both found to fall short of meetng the set polluton standard. For scenaro 4, the phosphorus concentraton n the head dam was 36 per cent above the allowable standard, and for scenaro 5 the phosphorus concentraton n the head dam was 10 per cent above the standard. Further, as fundng allocaton s guded by rules whch treat all areas wthn a rsk class as equally rsky, fundng can not be drected toward areas at whch abatement would be most cost-effectve. Addtonal neffcency s ntroduced by the nablty of the rsk classfcaton system to account for the mportance of ste locaton n the transportaton of phosphorus load to the head dam. In addton to the falure to meet the set concentraton standard, both scenaros n whch abatement fundng was prortsed toward hgher-rsk areas were more costly than the correspondng optmsaton scenaros. Total costs for each of the three optmsaton scenaros were estmated to be less than $4 mllon n terms of net present value (NPV), as opposed to the two rsk classfcaton approaches for whch the total cost were estmated at $7 mllon (NPV) and $10 mllon (NPV) respectvely. Further, the use of a fundng rule based on rsk classes leads to much hgher average costs than what can be acheved under an economc optmsaton approach. Average costs per unt of phosphorus removed at the dam wall for the two rsk class scenaros were estmated at $ and $14 000, whch n both cases was more than double the estmated average cost fgures under the optmsaton scenaros. 6. Summary and concluson Dffuse nutrent polluton from agrcultural areas, n partcular phosphorus, remans a key concern for water managers worldwde. As a result, catchment management authortes are spendng sgnfcant sums of publc fundng to address the ssue through the support of varous abatement optons on farms. However, the allocaton 8

9 of ths fundng s problematc, due to the nherent uncertanty related to polluton of dffuse nature. One way n whch ths uncertanty has been addressed s by groupng agrcultural areas nto groups based on ther potental to contrbute to ambent polluton levels. Ths s done through classfcaton of agrcultural area n rsk-classes n relaton to the pollutant n queston, n ths case phosphorus. The desgnaton of agrcultural areas nto rsk classes presents catchment management authortes wth the opportunty to create relatvely smple rules for allocatng a fxed budget based upon ths rsk classfcaton. Typcally, ths s done by assgnng prorty towards hgh rsk class areas. Although these budget allocaton rules may seem ntutve, ther economc performance, n terms of cost-effectveness has yet to be fully understood. The lack of research n ths area was a key motve for the work reported n ths paper, whch was undertaken to set up a framework for analysng the problem of cost-effectvely allocatng lmted fundng to reduce dffuse pollutants from agrcultural areas classfed n rsk classes. An analytcal framework was presented establshng a way of thnkng about the ssues surroundng the problem of allocatng a fxed budget to agrcultural areas classfed by rsk. A rsk classfcaton system was explaned, and ts use n determnng a smple allocaton rule whch prortses fundng towards hgh-rsk areas was demonstrated. As an alternatve, an economc optmsaton model for allocatng funds for abatement to agrcultural areas was presented. Usng data provded by the Sydney Catchment Authorty, an emprcal smulaton was undertaken to compare the cost-effectveness of the two alternatve budget allocaton systems: rsk classfcaton and economc optmsaton. It was found that followng a budget allocaton rule whch prortses fundng towards hgher rsk areas does not result n a cost-effectve outcome. The results ndcate that when allocatng a budget based on rsk classfcaton, a catchment manager s unable to satsfy an exogenously set polluton standard, despte spendng more than they would n any of the comparable optmsaton scenaros. The fndngs of ths paper show that basc cost-effectveness analyss s stll relevant n the cases when the uncertanty about water polluton from agrcultural sources s packaged n a form of classfyng those areas n rsk classes. The key economc message, that allocatng resources to abatement actvtes so that the expected reducton of polluton per monetary unt spent s greatest, stands frmly n ths case too. 9

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