Nitrogen use and the effects of nitrogen taxation under consideration of production and price risks

Production and price risks affect optimal nitrogen use as well as the effects of nitrogen taxation if farmers’ risk aversion is taken into account. We apply a bio-economic model to investigate the influence of risk aversion on nitrogen use in Swiss maize production. Income risks for farmers are expected to increase in the future, for instance, due to higher price variability caused by market liberalization or by higher yield variability caused by climate change. We investigate the influence of changes in these sources of risks on optimal levels of nitrogen use and its influence on the effects of nitrogen taxation. Our empirical analysis for Swiss maize production shows that risk-aversion leads to lower levels of nitrogen application than for risk-neutral farmers. Furthermore, nitrogen taxes lead to higher reductions of nitrogen use if farmers are risk-averse and these farmers face lower abatement costs. Thus, analyses on the effect of nitrogen taxes that are solely based on profit maximizing behavior may underestimate nitrogen reductions and overestimate abatement costs. Taking expected shocks in price and yield variability into account, we find that these differences between risk neutral and risk-averse decision makers will increase further. External influences on production and price risks can thus influence the effects of agricultural policies on farmers’ decision making. Thus, considering farmers’ risk-preferences as well as potential increases in farmers’ income risks can improve agricultural policy making.