Farmers' costs of environmental regulation: Reducing the consumption of nitrogen in citrus farming

Environmental externalities in agriculture, and the choice of suitable instruments to integrate environmental concerns into agricultural policies, are a matter of interest for the Common Agricultural Policy. In this paper, we use Data Envelopment Analysis techniques to assess the impact on farms' performance of two environmentally-friendly regulations aimed at abating consumption of inorganic nitrogen in Spanish citrus farming: levies on purchased nitrogen and nitrogen use permits for farms. By comparing farms' short-run maximum profits under both unregulated and regulated scenarios a regulation cost index is computed. Our results show that nitrogen overuse is mostly a matter of management inefficiency and that pollution could be reduced by promoting best farming techniques. Instead, if environmental regulations are implemented, regulating authorities should be aware that quantitative limits exercise a lower impact on farms' profits than taxes.