Market power and double-dipping in nutrient trading markets

Heavy loads of nutrients, i.e. nitrogen and phosphorus, cause severe damages in many waters in the world. This paper develops a model for nutrient trading markets for a sea damaged by both nitrogen and phosphorus and faces a dominant polluter of one or both nutrients. The existence of abatement measures with simultaneous impacts on both nutrients raises the need for double-dipping in both markets. It is shown that double-dipping decreases overall abatement costs for reaching predetermined targets, and reduces efficiency losses of market power, in particular when the same agent exercises market power in both markets. An empirical application to the intergovernmental agreement on reducing nutrient loads to the eutrophied Baltic Sea in North-East Europe demonstrates cost savings of approximately 25% from introduction of double-dipping, and that efficiency losses from market power of one dominant country, Poland, can be reduced by 10%.