Could ‘nitrogen trading’ help the Great Barrier Reef?
by Professor Jim Smart, Professor Adrian Volders, Assoc. Professor Chris Fleming and Syezlin Hasan
Among the increasing sums of money being pledged to help save the Great Barrier Reef is a federal government pledge to spend A$40 million on improving water quality. The Queensland government has promised another A$33.5 million for the same purpose.
One of the biggest water-quality concerns is nitrogen runoff from fertiliser use. It is a concern all along the reef coast, and particularly in the sugar-cane regions of the Wet Tropics and the Burdekin. The government’s Reef 2050 Long Term Sustainability Plan calls for an 80% reduction in dissolved inorganic nitrogen flowing out onto the reef by 2025.
Our recent research suggests that “nitrogen trading” might be worth considering as a flexible economic mechanism to help farmers deliver these much-needed reductions in fertiliser use.
What is nitrogen trading?
You probably already know about carbon trading, which allows polluters to buy the right to emit greenhouse gases from those with spare carbon credits. Nitrogen trading would work in a similar way, but for fertiliser use.
A nitrogen market could offer a flexible way of encouraging farmers to use fertiliser more efficiently, as well as rewarding innovations in farming practice. It could be a useful addition to existing fertiliser-reduction schemes such as the industry-led Smart Cane Best Management Practice. These are making headway but evidently not enough.
A nitrogen market isn’t going to happen tomorrow, but it could be part of a future in which an annual limit (called a cap) is set on the total amount of nitrogen flowing out from river catchments to the reef.
One way to enforce this cap would be to set a limit on fertiliser applications per hectare. Cane farmers would have to manage the best they could with that fixed amount of nitrogen.
But nitrogen trading would offer more flexibility, while still staying under the same total nitrogen cap. Instead of a fixed limit, farmers would receive a certain number of “nitrogen permits” per hectare of cane. Then, if they wanted or needed to, they could buy or sell these permits through a centralised online “smart market”.
How would it work?
Imagine you’re a farmer with a property that sits on good soil. The amount of fertiliser you can apply to your crop must match the number of nitrogen permits you hold. But you know that, on your good land, you would get more profits if you could apply more fertiliser.
To do this you would have to buy extra permits through the nitrogen market. These extra permits would be worth buying as long as they deliver more than enough extra profit to cover the cost.
The total number of permits is limited by the cap — so buyers can only buy extra permits if other farmers are selling them. So who’s selling?
Putting fertiliser onto a field with poor soil won’t increase your profits as much, because a lot of that fertiliser will just run off before the crop can use it. On a bad paddock, nitrogen permits aren’t worth much in terms of extra crop yield, so you might make more money by just selling them to other farmers with good paddocks. That is why trading happens.
The overall effect of this trading would be to switch a significant amount of nitrogen fertiliser away from less profitable, leaky soils, and onto more profitable, less leaky land. As a result, the total nitrogen cap would be distributed more efficiently across the farming landscape.
For individual farmers, the reward for low-nitrogen farming practice is the opportunity to sell unused permits at a profit. This incentive will help to drive ongoing improvement and innovation.
Our simulations suggest that overall sugar cane profits and production would be higher with trading than they would under a fixed per-hectare nitrogen limit — with the same overall cap on the amount of nitrogen hitting the Great Barrier Reef.
Opportunity for the future?
Will it just mean more expensive regulation, green tape and hassle for farmers? Farmers are already signing up to calculate and record actual fertiliser applications paddock by paddock under the Six Easy Steps nutrient management program.
If we’re in a future where the government is monitoring and managing a fixed nitrogen cap anyway, then not much extra work is needed to set up an online trading market.
So could nitrogen trading help the Great Barrier Reef? Maybe. There’s more thinking still to be done, but nitrogen trading schemes are already operating in New Zealand and the United States.
A firm overall limit on fertiliser use seems to be essential for the reef’s survival. The incentives provided by a nitrogen market could give Queensland’s farmers the flexibility they need to thrive in this nitrogen-constrained future.
Graeme Curwen and Michele Burford of the Australian Rivers Institute at Griffith University contributed to the research on which this article is based.
Listen to an interview with Professor Jim Smart
Originally published at theconversation.com on June 15, 2016.
ABOUT THE AUTHORS
Professor Jim Smart
Professor Smart is Senior Lecturer in Griffith University School of Environment at Griffith University. Jim’s areas of expertise include resource economics, environmental economics and environmental evaluation.
Professor Adrian Volders
Adrian Volders is widely recognised as an innovative leader in catchment management in Australia. He authored the first accredited regional catchment strategy in Australia in the late 1990s before going on to hold a number of senior and chief executive officer positions in the natural resource management and water industries. As a private consultant Adrian has led the development of range of new catchment management tools in terms of water quality and biodiversity offsets and nutrient trading. Adrian holds a PhD from the University of Tasmania and a Masters from Deakin University.
Associate Professor Chris Fleming
An applied micro-economist with teaching, consulting and public policy experience, Dr Fleming is an Associate Professor and the MBA Director at Griffith Business School, a member of Griffith University’s Indigenous Research Unit, and a Senior Associate of MainStream Economics and Policy. Christopher’s research and consulting interests include: social and economic project/program evaluation; the economic determinants of subjective wellbeing; Indigenous wellbeing; natural resource and environmental economics; the economics of crime; the sustainable management of natural resources; and the economics of sustainable tourism. Prior to joining Griffith Business School, Christopher worked as a senior consultant for Marsden Jacob Associates and as a senior advisor within the Sustainable Development Policy Group of the New Zealand Ministry for the Environment. Christopher holds a Bachelor of Arts (Economics) from the University of Otago, a Master of Applied Economics with first class honours from Massey University and a PhD (Economics) from the University of Queensland.
Syezlin Hasan
Syezlin is an environmental economist with a broad range of reseach interests. Her recent research includes:
economic modelling of agricultural land uses;
use of economic instruments to drive behavioural change in economic agents; modelling efficiency via distance function approach development of methodologies for valuing ecosystem services.
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