Negative Effects Of Fertilisers On Our Environment

The scope of this report is to examine the negative effects of fertilisers on our environment. It will primarily focus on the Nitrogen Fertilisers, there effects and solutions to combat those effects. Synthetic N fertilisers are one of the biggest cause for eutrophcation. When excess fertiliser runs off to the water, it can causes algal blooms, fish kills etc. Excessive nitrogen in the drinking water also has negative effects on humans. The production and application process is one of the contributing factos to the Greenhouse Gas emissions (GHG) as well. The report touches on the other two primary elements in fertilisers, phosphate and potassium, however, we will not go into detail discussions.

Fertiliser run-offs, mostly nitrogen, is a matter of great concern in Queensland where the run offs from adjacent sugar cane and cattle farms are polluting the water in the Great Barrier Reef. It is a great threat to the ecosystem of the Reef and measures needs to be considered to reduce this pollution and also ways to rehabilitate and conserve the ecosystem of the Reef.

Resultantly, in this report we discuss how an excise policy can help reduce these negative effects of N fertiliser. We look into ways of promoting organic fertilisers and hydroponics with the help of the excise, also keeping in mind that the internalisation of the external cost should be one of the major underlying policy issues. We look into financial rebates and assistance that may be available to farmers opting to use organic fertilisers and switch to hydroponics. Part of the excise revenue should be earmarked for these purposes. We consider regulations that should be introduced to compliment and magnify the effects of the excise. The N-Replacement is a program where the soil is tested and the application of N is confined to only the amount that is required. In the fullness of time, all farmers should have to participate in such programs.

Lastly, we examine the benefits and negative effects of the proposed excise on the manufacturers, farmers and consumers. We will also look at any administrative and compliance issues that may arise with the introduction of the new excise. The role of the proposed excise in helping us meet our commitments under the Kyoto Protocol is also examined.

Introduction

This report is about the effects that fertilizers have on our environment. While the use of synthetic fertilizers has ensured an enormous boom in the agricultural sector, it has had its negative effects on the environment as well. The effects are directly related to issues like global warming and greenhouse gas emissions, and much more. The three major elements of synthetic fertiliser are nitrogen, phosphate and potassium. The damages that fertilisers have on the environment can be divided into three broad categories; natural resources (water, soil and air), wildlife and ecosystem and human health. Nitrogen fertilisers have the worse effect on the environment with phosphate following closely. This report will primarily focus on Nitrogen (N) fertilisers. It is beyond the scope of this report to discuss all the elements in fertilisers and discuss their effects. This is because different elements have different environmental effects and to a varying degree. They all have different use in the agriculture industry as well. However, once the excise model for the N nitrogen is established, a similar model can be used to impose excise on all the other fertilisers.

Nitrogen Fertilisers

When applied to the to soil to nourish farming land, nitrate, a compound of nitrogen, can wash off the agriculture fields by means of rain or irrigation and can leach into the surface or ground water. Ground water is one of the sources of drinking water and excess nitrate in the drinking water can potentially cause cancer, respiratory distress in humans.

In surface water, extra nitrogen may cause eutrophication, process of nutrient over enrichment. This is the primary cause of depletion in the oxygen level in coastal water. Coastal waters that receive an inflow from polluted rivers are the most affected. Eutrophcation is one of the biggest causes for coastal fish kill; it is also responsible for the harmful algal blooms and imbalance in the coastal ecosystems.

In Australia, the Great Barrier Reef is highly affected by diffuse pollutants. Most of it comes from nitrogen fertilizers used in cropping and grazing lands in relatively small areas of the adjacent catchments. According to a research conducted by the CSIRO on the Great Barrier Reef, experts found that … ‘Export of nitrogen and phosphorus is high and increased hillslope erosion rates have resulted in increased nutrient and sediment loads reaching and influencing inner shelf reef and benthic ecosystems. These pollutants are generated from diffuse sources and evidence from other geographical locations suggests that by the time their widespread effects are identified, the reef systems will be irreversibly damaged.’

Lastly, some of the nitrogen from the soil and water enters the atmosphere as nitric oxide and the green house gas nitrous oxide. This has a wide range of negative consequences, starting from acid rain to subtle shifts in dominant species and ecosystem function in forests and grassland ecosystems.

Phosphate Fertilisers

Phosphate is right behind nitrogen when it comes to negative effects to the environment. Fluoride has been and is the worse environmental liability that the phosphate fertiliser industry has passed on to the environment. Despite new advanced air pollution control technology which is resulting in less and less fluoride escaping into the atmosphere, the impact of fluoride emissions is still being felt. Amongst other things, the fluoride in the air has the potential to cause a number of disorders in livestock, The actual production process of phosphate is also harmful to the environment and humans equally.

Potassium Fertiliser

Potassium have not directly been related to any environmental pollution, even though it does have minor affect such as magnesium deficiency in crops and soil in the case of excessive application

As can be seen, the use of chemical fertilisers is very harmful to the environment. In attempting to protect the Great Barrier Reef, the State Government and the Commonwealth has initiated programs like the ‘Reef Plan’, the N – Replacement project. However, these government initiatives have been criticised by a many environmental agencies such as the World Wlidlife Fund (WWF) as being slow to achieve any real results. Government initiatives can only be effective when there is a drive from the general population to support those initiatives. The use of fertilisers in farming is essential to farmers as their profitability depends on the yield of the crops, which is predominantly the result of fertilisers. It is an essential resource to the farmers. In such a situation, the introduction of excise on synthetic nitrogen fertilizer and other chemicals used to maximise crop yield, can be one of the tools to discourage the use of such fertilisers and at the same time promote and the use of more environment friendly, non-chemical fertilisers and other farming alternatives.

Regulation of the Fertiliser industry using excise

Excise tax can be used as one of the tools for the government to influence the agriculture industry and influence the level of demand for synthetic nitrogen fertilizer. By imposing excise, we create an artificial price differential between the synthetic nitrogen fertilisers and its organic counterpart. This has the effect of farmers being more mindful about over application of the N fertiliser and using it sparingly.

In case of blended fertilisers, where all three elements are present, the nitrogen component will be excisable. This is turn will promote the production of fertiliser that have a low synthetic N fertiliser content..

Apart from trying to promote consumption of low nitrogen content fertilizers, excise can also promote higher consumption of organic fertilisers. This can be done similar to the fuel excise system in Australia, where excise is imposed on both organic and synthetic fertilizers, however, a full rebate may be available to the users of the organic fertilisers, making the effective rate of excise for organic fertiliser zero.

In the fullness of time, when all fertilisers are included in the excise system, i.e. nitrogen, phosphate and potassium, differential excise rates may be introduced, where they all have different excise rate depend on the degree of severity of effects each of them on the environment. The idea is that, if an all purpose fertiliser is high in nitrogen than it will have a higher price tag (nitrogen is the most harmful element of the three) as opposed to an alternative blend that is high in potassium; the higher the content of the most harmful chemical (N), the higher the price of the end product.

There is an alternative to introducing fertilisers to the excise system. The government can promote and take active steps to make the agricultural industry consider hydroponic controlled environment agriculture. The principle advantage of hydroponics compared to tradition farming is the isolation of crops from the soil. As there is no soil involved there is no chance of drainage or problems associated with leeching of nitrogen to the ground or surface water. The fertilisers that are not used up by the plants are caught and reused.

Excise rates and underlying reasons

In setting the excise rate, we need to be mindful of the underlying policy objectives. The objectives are:

For the agriculture industry to use fertilisers that are less harmful to the environment.

To the use of alternative organic fertilisers

To promote hydroponics, an alternative method of farming.

Internalise the external cost that the fertiliser industry imposes on the environment

The external cost should be the main element that we should try to internalise via the introduction of the excise tax. ‘Charging consumers or producers for external costs, which should induce them to reduce their activities to the socially optimal level, is known as the Pigouvian prescription. This rule states that efficient consumption or production can be achieved through the tax system by imposing an excise on the activity equal to the marginal cost of the damage caused to other people.’ In trying to internalise the external cost of fertilizer pollution, many governments around the world are considering some form of environment tax. In China, a study was undertaken on the external cost and optimum use of nitrogen fertiliser on the paddy field system of the Dongting Lake are. The research showed that the nitrogen fertiliser application in the region well exceeded the required levels. Such that, an environmental tax was suggested on the excess use of nitrogen fertiliser.

In Australia, there is not much information available on the external cost of the agriculture industry. However, figures from other country gives us an idea of the external cost imposed by the industry. “A US study estimates the externalised costs of agricultural production (in natural resources, wildlife, biodiversity and human health) to be between $5.7 and $16.9 billion annually is a broad estimate, it is not Australian-specific, nor restricted specifically to agriculture, but it does highlight the need to understand the environmental impacts of agriculture better in the Australian context.

In Europe, the estimated external cost of nitrogen fertiliser is about 0.3 €/kg N, bearing in mind that the market price is of the fertiliser is about 0.5 €/kg N. This effectively means, that if the whole amount was internalised then the price of N fertilisers would rise by about 60%. For the purpose of this report we will use the European figures as, mentioned earlier, there is not much Australian specific data available on the external cost of fertilisers. Now 60% excise on N fertiliser may seem like a staggering figure, however, when this excise is placed is conjunction with other regulation and policies the net effective excise will drop considerably. These issues will be discussed in the next section.

Specific vs Ad valorem rate

The next issue in the rate setting process is to determine if this rate is going to be specific or ad valorem. The choice between the options depends on the underlying policy, i.e. to raise revenue, discourage consumption, improvement of quality etc. Ad valorem tax creates a price differential between similar excisable good base on quality where the high-quality products are dearer than the low-quality products. This is a good tax mechanism if revenue maximisation is the underlying policy objective. However, if the main focus is to reduce harmful levels of consumption of any product, then specific tax is more appropriate. “Specific or volumetric taxation is based upon the number of units sold, irrespective of their value and recognises that the potential for harm falls equally upon consumers or the community irrespective of the price of the item”.

Coming back to the topic in hand, specific tax is the appropriate rate to use as we are really interested on the internalising the external cost of N fertiliser on the basis of $/kg N. If the tax is imposed on the value or the cost of production of the fertilisers, it will not properly reflect the negative effects that the application of N fertiliser has on our environment.

Taxation vs Regulation

It is argued that taxation by itself will not always achieve the desired or complete results. Tax can influence the consumption pattern of consumers to a certain extent but regulations are needed to back up the tax. ‘High taxes on tobacco and drink reduce average and usually also excessive consumption. But a tobacco tax cannot deal in a cost effective way with the effects of passive smoking; (inflexible) bans on smoking in public places are necessary to deal with this externality. Similarly, the alcohol excise is an inadequate instrument to restrain people from getting behind the wheel of their car after they have had a drink. Drink-driving breath tests are better targeted to deal with this situation.’

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Regulations can be in many forms, it can be requirements imposed on the end users, i.e., farmers or it can be regulations on the fertiliser manufacturers. In Germany, farmers are required to calculate and report annual nutrient balances in the soil in order to demonstrate that they have not over or under applied fertilisers. Imposing regulations on the manufacturers may not be of much use apart from quality control. The regulations should focus on the farmers instead, with science based approaches to soil testing, promoting good agricultural practice and optimal use of nitrogen. This approach is in line with the new nitrogen management method ‘N Replacement’ and in time this along with any other similar programs should be made mandatory. Apart from being environmentally beneficial it is also beneficial to farmers as under this method they will need to purchase and apply only the amount of soil that is required by the soil, resulting in cost savings for the farmers.

Another method of regulation, could be the issue of tradeable permits. However, under this system the costs associated is rather uncertain, compared to the excise system. ‘A system of tradable permits guarantees the envisaged quantitative reduction in pollution but at an uncertain cost, while an environmental duty has an uncertain impact on the quantity of emissions but fixes the marginal cost of emission controls for polluters.’

Price elasticity and excise

Fertilisers are a vital part of the agricultural industry. There is a very strong connection between application of fertilisers and crop yield and profitability. Therefore, it will not be wrong to conclude that the demand for fertilisers within the agricultural industry is inelastic. Having said that a 60% excise on N fertiliser is going to affect the farmers the most. Because of the elasticity of demand, the economic incidence of the tax will fall on the farmers, where the fertiliser manufacturers will be able to pass on most of the tax burden to the farmers in form of higher prices. Therefore, it is important to come up with relief policies for the farmers as well, bearing in mind that we are also trying to promote the use of organic fertilisers and hydroponics method of productions at a large scale. This will be discussed in more details in the next section.

Exemptions/exception for the excise system and why

There should be exceptions, where the tax incidence for the farmers should be nil. Exemptions should be available to farmers in the form of a rebate. As one of the policy issue is to promote the use of organic fertilisers. Farmers should be entitled to a full or partial rebate depending on if the fertilisers are solely organic or substantially organic. Organic fertilisers are largely derived from plan plants or animals. Substantially organic fertilisers are product where some synthetic fertilisers have been added to boost the nutrient content of the fertiliser.

A rebate should also be available for farmers who pre dominantly practices or are in the process of adopting hydroponics method of production. There are two reasons behind this exemption. First of all, the nitrogen used in hydroponics has no effect on the environment. The plants are grown in a controlled environment, usually in a greenhouse, therefore, there are no emissions, run offs or leeching. This effectively means there are no external costs associated with the application of nitrogen fertilizer under this system. Secondly, the biggest drawback of converting to hydroponics from the traditional method of agriculture is the high capital set up costs associated. Since we are trying to encourage more and more farmers to consider hydroponics, it only makes sense to provide some sort of relief to them in the form of ongoing rebate to compensate for the high set up costs.

Lastly, a partial rebate should also be available to farmers who are participating in recommended programs such as the N- Replacement program. The N-Replacement program has the potential of reducing nitrogen inputs by almost one – third. The government can only have this rebate available till the program is fully tested and made mandatory. Till then farmers should be rewarded for voluntary participation in the program.

Positive and negative effects from this new excise

Positive effects

Lower demand for synthetic N fertiliser – The introduction of the excise on the nitrogen fertiliser will lower the demand for it. As discussed earlier, because of the low price elasticity of demand, the fertiliser manufacturers will be able to pass on most of the tax burden to the farmers in the form of higher price. Higher prices will mean that farmers will now be more mindful when it comes to the application of the fertiliser. More and more farmers will be forced to practice good farming methods, only applying the amount that is required in order to save on cost of fertilisers.

Less emission, leaching as a result – As farmers starts to pay more attention to the wastage level and apply the optimal amount of nitrogen required to replenish the soil, there is less leeching and emission.

Influx of excise revenue – One of the unavoidable effects of imposing excise duty is the inflow of revenue. The revenue that comes in from this particular excise should be hypothecated. It should be used to finance projects that will aid in cutting down the use of N fertiliser application. Some of the funds should also be earmarked for providing assistance to farmers switching to hydroponics.

Helps the government to meet other policy issue – As the application rate of the N fertilisers reduce, it helps the government meet other environmental related policies, such as Australia’s commitment under the Kyoto Protocol. This will be discussed in more details in the next setion.

Negative effects

Higher cost of production for the farmers, which may be passed on consumers – As discussed earlier, the imposition of excise will mean that the farmer will pay a higher price to purchase the fertilisers. Even if optimal applications of N fertiliser methods are implemented, there would still be an increase in the cost of production for the farmers. This in turn would mean that the increased cost of production for the farmers will be passed on to the final consumers in form of higher prices for fresh fruit, vegetable etc.

Loss of revenue for the fertiliser manufacturers – There will a significant loss of revenue for the fertilizer manufacturers, as they are the one who are actually liable for the excise payable. They will pass on the bulk of the tax to the agriculture industry, however, they will still loose out of a significant amount of profit.

How will this new excise interact with Australia’s commitment under the Kyoto Protocol

Under the Kyoto Protocol, Australia is committed to reduce its greenhouse emissions to 108 percent of the level we were in 1990. This target has to be achieved by 2012 (2008 -2012 is known as the first commitment period). According to a report on climate change, in 2008 the emissions for the agriculture sector are projected to be 77 Mt CO2 of emission over the Kyoto period. This is a 4% decrease on the 1990 level. Most of the decrease is, however, attributable to the drought. Therefore, introduction of this new excise will ensure that there is a significant reduction in greenhouse gas emissions.

Apart from gas emission after the application of the N fertiliser, it also emits greenhouse gas during the production process. ‘The production of fertilisers demands much energy and generates considerable greenhouse gas (GHG) emissions. Kongshaug (1998) estimates that fertiliser

production consumes approximately 1.2% of the world’s energy and is responsible for

approximately 1.2% of the total GHG emissions.’ Therefore, when demand falls as a result of the new excise and regulations, the supply will eventually fall as well, with reduced production of synthetic N fertiliser. This, again, will result in reduced level of GHG emissions.

Impact of the new excise on;

Consumers – The excise will mean that the price of end products that are heavily dependant on the N fertiliser will increase. When excise is imposed on a commodity, even though the legal incidence lies with the producers, the ultimate tax burden falls on the end users of the finished product by means of higher price. Therefore, we need to be mindful of that while imposing the excise.

Business – The excise will not affect businesses much. Businesses or in this case, the retail shops are just middle men. Any part of the tax that they do pay in form of higher wholesale prices, they simply pass it on to the consumers.

Government revenues – At first glance, it can be said that government revenue will also increase with this proposed excise. However, if we are to put the revenue aside, hypothecate the funds for the sole purpose of funding programs and assisting farmers in adopting more sustainable methods of farming, then in essence it will not be wrong to say that the government revenue stays the same. There is not extra gain as such from the revenue perspective to the government. ‘Revenue generated from these policies could have an outcome on the effect of these policies, depending on how it is used. If revenues from a tax are added to the general treasury store then the wellbeing of those affected by the tax is negatively affected as modelled, but if the funds are ring-fenced for a relevant purpose such as assisting the fertilizer industry or farmers, then the welfare of those actors is not diminished by as much.’

Administration costs – There should not be any extra cost related to the administration of the new excise. Currently the Australian Taxation office is responsible for the administration of all excisable and excise equivalent goods. The ATO is already well equipped to deal with excise tax. Moreover, under the self assessment regime where businesses calculate there own excise liabilities, the incremental change on administration cost should be minimal. The taxing point should be fixed as the fertilisers are leaving the factory for delivery to wholesalers and/ or the domestic market. This will further ensure ease of administration of the excise tax.

Compliance activities – The compliance activities on behalf of the businesses should be fairly straightforward as well. Under the self assessment system, businesses keep records and fill out their own excise return. Another section maybe introduced to the excise return, where farmers are eligible for a rebate. However, it should all be part of the prevailing excise return system that we currently have.

Recommendation

After examining the effects of synthetic fertilisers on our environment, especially the N fertiliser, it is recommended that the excise tax of 60% at a specific rate should be imposed. It is true that the imposition of the tax may have a large impact on the fertiliser manufacturers and farmers. However, that is the initial impact. Along with the excise, we should also provide rebates for the farmers, who act in accordance with out other policy objective. Farmers who look at alternative organic fertilisers should be entitled to a rebate as negative effects from organic fertilisers are minimal compared to its synthetic counterpart. Further rebates should be available to farmers switching to hydroponics, as the nitrogen content in the nutrient solution has no effect on the environment. Lastly, assistance should be available to farmers who make voluntary participation in good farming practices i.e. take part in practices like the N-Replacement program.

Along with these financial laws, we should also implement some non financial regulations, which will ensure a superior result. Here, the goal is not make sure that the farmers are not applying excessive amount of synthetic N fertilisers to the soil and at the same time moving towards organic fertiliser. The tax will bring about that inclination in the farmers, they will want to apply the optimal amount of synthetic nitrogen in order to save cost on fertilisers and also look into cheaper alternatives which are more environmentally friendly. However, in the fullness of time, we need to introduce regulations, specially the one similar to Germany where the farmers needs to annually record and report the nutrient content of their farming land to the authorities. In the long run we should also make a N- Replacement plan mandatory, after it has been fully tested by CSIRO. We should also ear mark, some of the revenue from this new excise to help fund the programs and any similar programs.

The new proposed excise policy combined with the proposed regulations is a little step towards Australia meet its commitment under the Kyoto Protocol. It is true the tax might hurt manufacturers, farmers and consumers, financially. However, we need to ensure that the external costs caused by the production and application of the fertiliser are being met, so that it reflects on the price. It is the responsible thing to do, to pay the price for the harm that the industry is causing the environment. It is a trade off we have to make to ensure a better world for the next generation. In order to stop global warming, bring balance back to our ecosystem, protect the Great Barrier Reef, it is a small price to pay.