Simulating a Market for Tradable Greenhouse Gas Emissions Permits amongst Irish Farmers

Research into Greenhouse Gas (GHG) emissions from Irish agriculture has focused on two main themes (i) projecting future emission levels and (ii) devising abatement strategies at the farm level such as changes in animal diet, better waste management and or changes in farm management practices. These abatement strategies will have costs associated with them some of which, such as capital investment or reducing livestock numbers, may be substantial. However economic theory indicates that market based solutions such as tradable emissions permits (TEP’s) are the least cost means of achieving desired reductions in emissions. To date within Europe a regulatory approach has been favoured when trying to curtail emissions from agriculture, the Nitrates Directive being a recent example. This paper seeks to compare the impact on farm incomes of a regulatory approach to emissions abatement with a TEP’s approach. In order to do this data from the Irish National Farm Survey is used to construct a farm-level Linear Programming (LP) model for each farmer within the dataset. Firstly a baseline scenario with no constraint on emissions is run. We then enforce a 20 percent reduction in emissions and the impact on farm incomes is measured. The LP model is then used to determine each farmers shadow value for a TEP. These shadow values are then weighted up to estimate the supply and demand and used to simulate a market for TEP’s and the farm income is re-estimated. Finally the implications for farm incomes of both abatement strategies are compared with the baseline scenario.