Cost sharing and free allocation in a nutrient trading system with heterogenous farms : a model of the Lake Rotorua catchment

GNS Science Report 2014/27

We use a nutrient trading simulation model to explore the incidence of costs across heterogeneous farm properties after mitigation actions and trade of allowances.

We compare two approaches to the free allocation of nutrient discharge allowances: a grand-parenting approach and a sector-based averaging approach. We parameterise the model to observations of farms in the Lake Rotorua catchment.

Meeting the final nutrient target of 256 tonnes M/year requires significant land-use and land-management change throughout the catchment, Within each sector, farmers with relatively high baseline nutrient loss are better off under grand-parenting, and farms were relatively low baseline nutrient loss are better off under the sector-based averaging approach. However, final cost sharing also depends on the farmer's ability to mitigate and may not be obvious from direct consideration of the free allocation mechanism.

Modelling allocation in the context of a simulated trading system allows us to consider the scale of associated fairness issues in each sector. We also discuss how the two allocation approaches satisfy potential principles for cost sharing.