Cost assessment and cost-effectiveness of policy scenarios

The cost indicators are partly provided by experts from the Agricultural-Economics Institute (LEI) and partly derived from the Agricultural-Economics Institute (LEI) and Statistics Netherlands (CBS) annual publication about the state of the Dutch agricultural sector (‘Land- en tuinbouwcijfers, 2006’). Where possible these cost indicators are calculated specifically for the Dutch Scheldt river basin, but in most cases general indicators derived from a national monitoring network of farm systems.

Policy scenario A: Livestock extensification

The economic costs of reducing the livestock in the Scheldt basin by 10 percent in terms of benefits foregone are calculated based on the average standard gross margin for milk and meat cows (LEI-CBS, 2006). Milk cows have a gross margin of 1690 euro/animal, while the standard gross margin for meat cows is much lower, namely 225 euro/animal. On average this means a standard gross margin of 960 euro per cow per year. Average cow density in the Dutch Scheldt basin is 72 animals per hectare. The total annual costs of reducing grazing intensity in the basin are 3 million euro (Table 13). Discounted over a 15 year time period (2000-2015) using a 4 percent discount rate, this results in a present value of the total cost estimate of almost 37 million euro.

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Table 13: Estimated costs and cost-effectiveness of implementation of policy scenario A in the Dutch Scheldt basin

The total cost estimate is allocated across the different groundwater bodies based on area size.

Table 13 also presents the results in terms of cost-effectiveness based on the reduction of nitrate in shallow groundwater under policy scenario A. For this, the annual costs are divided by the predicted nitrate concentration reduction presented in the previous section. Average cost-effectiveness of policy scenario A across all groundwater bodies is, as we will see, relatively high compared with the estimated cost-effectiveness of the other policy scenarios, namely 386 thousand euro per milligram nitrate reduction in shallow groundwater per year.

However, this cost-effectiveness indicator is highly context dependent as can be seen from Table 13 and varies between 9 thousand euro per milligram per year in the northern creek system and 1 million per milligram per year on clay-peat land.

Policy scenario B: Manure free zones

In total 4,290 hectare agricultural land (grassland and arable land) is set-aside as manure free zones. The economic value of one hectare of grassland is 820 euro, while the economic value of arable land is less than that, namely 445 euro per hectare (expert judgment Agricultural-Economics Institute). We assume that this economic value will be completely lost when implementing policy scenario B. Multiplying these economic values with the total area affected under this policy scenario yields a total economic cost of 2.4 million euro annually.

Discounted over a 15-year period this equals 29.5 million euro.

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Table 14: Estimated costs and cost-effectiveness of implementation of policy scenario B in the Dutch Scheldt basin

Policy scenario B is more cost-effective on average across all groundwater bodies than the previous policy scenario A. Again, spatial diversity is wide. The cost-effectiveness of this policy measure varies between 9 and 800 thousand euro per milligram nitrate reduction per year. The policy scenario is most cost-effective again in the northern creek system of the Scheldt basin.

Policy scenario C: After-crop

The average price of growing after-crop on arable land is estimated at about 85 euro per hectare per year (expert judgment Agricultural-Economics Institute). We assume here that after-crop can be grown on about half of the total area of arable land, i.e. on over 46 thousand hectares in the Dutch Scheldt basin, resulting in a total annual cost of approximately 4 million euro per year (Table 15). Discounted over a 15-year time period at a discount rate of 4

percent, the present value of this annual cost amount is almost 48 million euro.

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Table 15: Estimated costs and cost-effectiveness of implementation of policy scenario C in the Dutch Scheldt basin

Growing after-crop is more cost-effective than establishing manure free buffer zones in the Scheldt basin to protect groundwater quality, but also in this case the area where the policy measure is implemented has an important effect on the cost-effectiveness of the measure. As for the previous two policy scenarios growing after-crop is most cost-effective in the northern

creek system and least cost-effective on clay-peat land (growing after-crop appears to be most cost-effective in the dunes, but there are little to no agricultural activities taking place in the dunes).

Policy scenario D: Optimization manure application practices

Under this policy scenario we assume that it is possible to carry out soil tests and test fertilizer application machinery for 100 euro per farmer (expert judgment Agricultural-Economics Institute). These tests do not have to be carried out each year. We assume that they will be carried out every 3 years, so six times over the period 2000-2015 (2000, 2003, 2006, 2009, 2012 and 2015). This results in a total cost of 600 euro per farmer over a time period of 15 years or 33 euro per farmer per year. In total there are 4,290 farmers in the Dutch Scheldt basin, of which 85 percent owns a fertilizer machine that can be tested every three years.

Hence, the total annual costs of this policy scenario for the whole Scheldt basin are 122 thousand euro. Discounted at a rate of 4 percent, the present value of the total costs for the whole Scheldt basin are 1.7 million euro.

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Table 16: Estimated costs and cost-effectiveness of implementation of policy scenario D in the Dutch Scheldt basin

Given the relatively low costs compared to the previous policy scenarios, this policy scenario is most cost-effective in reducing nitrate concentration levels in shallow groundwater in the

Dutch Scheldt basin. The measure is most cost-effective in the northern creek system, followed by the central creeks and sand soils.

Policy scenario E: Nature development

Converting arable land into nature means that an initial investment has to be made in

redesigning and developing the land. The estimated costs associated with this conversion and redesign is 7000 euro per hectare (Province Zeeland, 2006). As for manure free buffer zones (policy scenario B), we assume that the economic value currently generated by one hectare of arable land (445 euro) will be lost⁴. The converted land will not generate any direct economic market value. Annual costs including the initial investment sum are converted into an annuity in the second column in Table 17. The total annual costs are found by simply multiplying the benefits foregone per hectare (€445) plus the initial investment sum by the total area size.

Total annual costs are about 10 million euro under this policy scenario. The present value of these annual costs over the time period 2000-2015 is 120 million euro.

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Table 17: Estimated costs and cost-effectiveness of implementation of policy scenario E in the Dutch Scheldt basin

4 The purchase price of arable land in the Dutch Scheldt basin (paid by the Province to convert arable land into nature) is between 25 and 30 thousand euro per hectare. This purchase price partly reflects the implicitly discounted present value of arable land and partly a politically negotiated, socially acceptable value. In the cost-effectiveness-analysis we try to use economic values only.

Converting arable land into natural areas is the most expensive way to reduce nitrate

concentration in shallow groundwater. Again big differences are found between groundwater bodies. Converting arable land into nature in the northern creek system costs 41 thousand euro per reduced milligram of nitrate per year, while these costs are as high as 3.7 million euro on clay-peat land.

In conclusion, policy scenario D (optimization of fertilizer application) is most cost-effective in reducing nitrate concentration levels in shallow groundwater in the Dutch Scheldt basin, primarily because of the relatively low costs of this measure (120 thousand euro annually).

Second best is growing after-crop, followed by manure free buffer zones along watercourses.