Overview of costs and benefits associated with regulation in Scottish agriculture

4. Scottish Statutory Instrument 2003 No. 51 The Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2003

Abstract

The 1991 Nitrates Directive aims to reduce the level of nitrates in water that originates from agriculture. The directive has been transposed into Scots law through a number of regulations of which the Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2003 is the latest. These regulations cover the actions farmers should take to prevent, or at least minimise, the loss of nitrate from the farm to the water environment. Two Scottish RIAs have been undertaken. While both RIAs try to assess the economic costs, they do not quantify the economic benefits. As a result, the level of confidence in the usefulness of the Scottish RIAs is only moderate. The partial RIA completed in 2007 by Defra for England also fails to properly quantify the benefits of lower nitrate levels. The recently published House of Commons review of the Nitrates Directive in England also raises concerns about the analysis underpinning the regulation, though accepts that action must be taken to make England compliant with the directive. Stakeholders differ in their viewpoints on the regulation, with the NFUS mainly concerned with the financial burden on livestock farmers. However, farmers in Scottish NVZ's will be eligible for capital grant support through the SRDP. All stakeholders agreed that given the recent large rise in fertiliser prices, promoting the financial benefits of nutrient management plans should be a priority.

4.1 Introduction

Farmers use organic and inorganic (bagged) nitrogen because of its positive impact on yields and profitability. However, much of the nitrogen that is not taken up by plants is either lost to atmosphere via volatilisation or runs off or leaches into water courses and aquifers which adversely impacts on drinking water, the aquatic environment and recreational activities.

To correct the market failure caused by the external costs of nitrate pollution the EU Nitrates Directive 91/676/ EEC was introduced in 1991. This directive aims to reduce the level of nitrates in water that originates from agriculture. The detail of the directive requires Scotland to:

• Identify and designate as Nitrate Vulnerable Zones ( NVZs) the catchment areas of polluted waters (four NVZs ⁶ currently exist in Scotland);
• Establish a voluntary code of good practice for all farmers throughout Scotland;
• Introduce action programmes in the NVZs that are required in addition to the code of good practice, to reduce nitrate pollution;
• Review every four years the extent of the NVZs and how successful the action programmes are in reducing nitrate levels.

The directive has been transposed into Scots law through a number of regulations of which the Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2003 is the latest. These regulations cover the actions farmers should take to prevent, or at least minimise, the loss of nitrate from the farm to the water environment. There are three main requirements for farmers:

• Prepare and use a fertiliser and manure plan each year;
• Apply nitrogen fertilisers strictly in accordance with defined periods, quantities and conditions;
• Provide and maintain adequate storage capacity for manures.

Scottish farmers and stakeholders were most recently consulted about action programme measures in 2006. This consultation formed part of the normal four yearly cycle of legislation review, though the UK was in breach of the directive because the allowed level of N applied to grassland was too high and the (winter) closed period too short. The expectation is that changes agreed following the current consultation process, will be introduced in 2009.

4.2 Analysis

This section reviews a number of studies completed to assess the impact of agriculture on nitrate levels in water.

First Scottish Regulatory Impact Assessment - 2002

Oglethorpe et al (2002) completed this, the key impact assessment for this regulation, in December 2002. For the four Scottish NVZs, this RIA assessed the impact of three "action programme" options for reducing nitrates on the farm types most affected by this regulation.

• Option 1 covered the minimum requirements (see box) that farmers had to follow to meet the regulation;

Record keeping	Kept for at least five years An annual fertiliser and manure plan
N application limits	Grassland = 250kg organic N/ha Non-grassland = 170kg organic N/ha
Closed periods	Moray et al NVZ grassland 15 Sept - 20 Feb other land 1 Sept - 20 Feb All other NVZs grassland 15 Sept - 15 Feb other land 15 Sept - 15 Feb
Other restrictions on N application	Must not be applied when soil is waterlogged, flooded, frozen hard or snow covered to steeply sloping fields to uncropped areas, hedges and water courses unevenly and inaccurately
Storage of slurry/manure	Storage capacity must be sufficient to hold all slurry/manure that cannot be applied because of closed periods

• Option 2A was based on Option 1 plus a range of further measures including sowing winter cereals early and direct drilling of crops;
• The previous option was further extended in Option 2B by assessing the impact of substituting autumn sown cereals with winter stubbles and spring sown barley.

Option 1 was estimated to result in lowest level of costs according to the Oglethorpe RIA. For all options the bulk of the capital cost was significant (£13.95 - 19.93m) mainly because of the big investment in slurry storage needed to meet the extended closed period on farms with intensive livestock enterprises.

By comparison, Option 1 had a significantly lower annual cost (£5.20 - 7.16m) than the other two options (2A = £17.58 - 42.63m; 2B = £30.55 - 33.15m), mainly because of the consequences of changing to lower margin crops. For all options, the above costs include the cost to government (£0.608m) for policing the regulation.

Regarding the costing of the options, two notes of concern arise. First, the actual method of costing extra storage is muddled. Both this and the subsequent 2006 RIA include both a one-off capital cost for building storage plus an annual cost for repaying this cost over 10 years (a Farm Waste Management Plan costing £1,000 was also added as an up front cost). In short, amortising (repaying) the loan over the life of the investment was sufficient.

The second concern is the rather narrow assumption about the (high) level of new storage required. Even the best case scenario assumes that at least 70% of (livestock) farms require storage at an overall capital cost of £13.95m. Even at the time this RIA was completed many dairy farms in the Nithsdale NVZ would already have significant storage capacity. While the report's authors note that their remit did not allow for "a detailed assessment of the number or state of middens in NVZs", the sensitivity analysis should have been wider. Moreover, no attempt was made (though the possibility was noted) to estimate how relatively inexpensive modifications might improve the efficiency of existing storage capacity. For example, enclosing downpipes to divert clean roof water safely into watercourses.

The benefits were simply expressed in terms of annual reductions in tonnes of N leached. Implementation of Option 2B was estimated to reduce annual N leaching by 4,258 - 8,358t compared to a saving of 2,135 - 4,270t for Option 1. While Option 2A could result in N savings of up to 5,886t, the savings might be much lower (1,499t) if poor autumn establishment means re-drilling the crop in the spring.

As a result of the RIA, the decision was taken to apply the regulation based on Option 1. Given the higher cost tags estimated for Options 2A and 2B, the impact on the agricultural industry was minimised, especially given the availability of financial support and training to help farmers in the NVZ's meet the restrictions. Although the RIA did not place an economic value on the benefits of reduced nitrates in water, there is a clear benefit,

Second Scottish Regulatory Impact Assessment - 2006

Barnes et al (2006) completed a further RIA as part of the required four year review of the Action Programme. Further research in Great Britain since the previous RIA found that the risk of run-off or leaching on N from agricultural soils was higher than previously judged. So this RIA appraised the impact of extending the Action Programme in four ways:

1. Reducing the organic manure deposition limit on grassland;
2. Extension of closed periods for some types of organic manures;
3. Requirement for farmers to complete a manure management plan;
4. Stricter limitation on application of fertilisers.

The first change impacts mainly on cattle and, especially, dairy farms. The number of dairy and cattle farms that will exceed the new, lower limits, will rise significantly. The impact on the small number of pig and poultry farms is limited. The RIA estimated the cost of extra slurry storage to meet the tighter limit at £0.95 - 1.435m, with the lower estimate based on 70% of farms covered for five months and the upper estimate for all farms for six months.

On the same basis, the annual maintenance cost ranged from £0.13 - 0.192m, plus £0.338m for transportation. In addition, assuming that the investment is funded by debt, the cost of servicing and repaying the capital over three years was estimated at £0.116 - 0.176m. As with Oglethorpe's RIA, the calculation of the extra storage costs was open to question and no account was taken of lower cost measures that could improve existing storage capacity.

By comparison, the impact of extending the closed periods was substantially more with capital cost for extra slurry storage of £12.694 - 21.162m using the same periods and coverage of farms noted above. Similarly, the annual maintenance charge ranged from £1.264 - 2.081m, while the cost of debt ranged from £1.552 - 2.59m a year based on a three term.

Regarding the third proposed update of the Action Programme - completion of a Manure Management Plan - the expected costs were in £5.34 - 5.94m range. While the last change, limiting the application of fertilisers through better targeting to crop requirements, incurred no extra cost, simply better optimising of fertiliser applications to local conditions. This latter point is very important especially given the recent large rise in fertiliser costs.

Again, the assessment of benefits was limited, in the 2006 RIA. Only in the case of the second change - extension of closed periods resulting in lower purchases of bagged N - was an actual economic value (£0.07 - 0.25m) calculated. Given current fertiliser prices this benefit would be significantly higher. The difficulties of placing an accurate economic value on the health and environmental benefits of lower nitrate levels are appreciated. However, an absence of such estimates means that the RIA is not a complete cost-benefit assessment.

One further point is worth highlighting. The coefficients used to calculate the N content of manures will be updated to the advantage of farmers (to take account of gaseous losses of N before spreading), with the change reducing the overall level of N produced from a given number of livestock. It is understood that following an extended consultation process, the above changes will be implemented at the start of 2009.

Partial Regulatory Impact Assessment for England NVZs - 2007

This partial RIA was completed to assess the impact of revising the NVZ Action Programme and extend NVZ coverage in England. This English RIA is effectively the equivalent of the second Scottish RIA completed by Barnes et al. But with the significant added requirement of assessing the impact of extending NVZ coverage in England from the prevailing 55%, to 70% and 100%. In short, a decision was required on whether to extend NVZ coverage to 70% or all of England. In addition, this RIA considered the impact of adding a requirement to grow a cover crop as part of the revised Action programme. Importantly, the old RIA template was used rather than the new one introduced on 14 May 2007.

The English RIA presented more precise cost-benefits for each of the options under consideration. This was possible because economic values were estimated for the reductions in nitrates expected from the options. The Environment Agency (2007) estimates that water pollution caused by agriculture in England & Wales causes £445-872m of damage. These costs are based on both direct measures (eg, the cost of water companies treating drinking water treatment) and indirect measures (eg, willingness to pay for cleaner rivers for informal recreation). That said, the RIA summarised the benefits simply in terms of the percentage reduction in nitrate (phosphorous and ammonia) levels.

Unsurprisingly, the cost to the agricultural industry of reducing nitrate pollution was lowest if the revised Action Programme was applied to 70%, not all of England. The cheapest way of reducing nitrate losses was achieved by the most targeted Action Programme. That is, using the flexibility provided by Article 5 of the Directive, the Action Programme is adapted to take account of conditions specific to the individual member state. For this RIA, the English used this flexibility to adjust the length of closed period based on soil type and rainfall. Taking advantage of this flexibility produced the pollution reductions similar to the other options but at a lower cost to the industry. Consequently, it was the option recommended for implementation in England.

A particularly useful part the English RIA was the section on mitigation measures. Full details of these measures (and their economic impact) are found in the report completed by Entec (2007). Amongst a range of mitigation measures, this study did examine the benefits of measures taken to reduce the volume of stored slurry. Collecting roof rainwater, separating dirty water from slurry and installing floating covers on tanks and lagoons, were deemed the most cost-effective.

House of Commons report on implementation of the Nitrates Directive in England (2008)

The Environment, Food and Rural Affairs committee of the UK Parliament has recently published a report on the proposals for reducing English agriculture's impact on water pollution. Taking evidence from a wide range of stakeholders in addition to all available analysis, including the partial RIA covered above, they produced a long list of conclusions and recommendations. The most pertinent ones are summarised below.

• The committee is concerned about both the scientific basis of the directive (i.e. the 50mg/litre limit) and the approach taken to implement the directive ^7,8.
• There is insufficient evidence from testing water to assess how effective the current Action Programme has been in reducing nitrate pollution. But because of legal action by the European Commission, changes must be made to make England compliant with the directive.
• Specifically, this means implementing the 170kg N/ha limit for grassland. But a derogation application should be made as quickly as possible to return to the current higher limit.
• The preference of Defra to introduce a measure - cover crops - not required under the directive, for universal use, should be dropped. Instead, farmers should be encouraged to use cover crops voluntarily as part of best practice.
• Defra should not adopt a whole territory approach, but continue to designate specific NVZs. Whether the upland parts of river catchment areas should be included, is a matter that Defra should re-examine. The committee also recommends that the option to de-designate land from a NVZ be made available.
• Given the high cost of the proposed new Action Programme on the farming industry, particularly livestock and dairy farmers, and the lack of grant aid available to help with these costs ⁹, the industry should press the UK government for more favourable tax allowances for building slurry storage. Furthermore, Defra should review how it can better inform and help farmers meet the demands of the updated programme.

Stakeholder Feedback

The Scottish Government (2007) has collected and analysed the formal positions of stakeholders to proposed changes to the NVZ Action Programme in Scotland. In addition, representatives of NFUS, SRPBA, SNH, SEPA and DairyCo were interviewed (mainly by telephone). The below comments synthesise the responses from both feedback mechanisms.

The NFUS and SRPBA were most concerned about this regulation given its economic impact on farmers and land managers in the four Scottish NVZs. However, both organisations fully appreciated the objective of the regulation, with the SRPBA noting that many of its members are also dependent on rivers as a source of income. The high cost of extra slurry storage (and the need for grant aid) was a major concern for the farming sector. The robustness of the science underpinning the regulation was also questioned by the NFUS, along with the monitoring and testing system.

The broad feeling of the land using sector is that further tightening of legislation is not warranted, and that greater emphasis should be placed on encouraging farmers and landowners on how they can manage their businesses better to reduce diffuse pollution.

Understandably, other stakeholders representing the environmental side of the debate felt that the current legislation required further tightening to comply with Water Framework Directive requirements. The point was made that water pollution is still a problem in Scotland with a high incidence of e-coli outbreaks, and that farm manures and slurries are an important contributory factor. Until proven otherwise, the precautionary nature of this regulation is warranted in their view.

Several stakeholders also questioned the robustness of the RIAs. The environmental sector felt that too much emphasise was placed on the consequences for farming, and that no assessment was made of the costs and benefits to society regarding environmental improvements and tourism. SEPA also felt that the benefits (to farmers) from manure management plans, through efficiency gains, were not well measured. In effect, this analysis was important given the NFUS' judgement that the cost of extra storage greatly exceeds the fertiliser benefits from the extra slurry.

One important area where greater consensus is emerging is on the financial benefits to farmers of using manure better. This has occurred since the consultation process because of the big rise in fertiliser prices. Helping farmers get more out of their manure through more user friendly nutrient budgeting tools and training was generally supported by all sectors. It is understood that the Planning Land Application of Nutrients for Efficiency and the Environment ( PLANET) budgeting tool is currently being reviewed to assess its value in Scotland. A quick comparison with information available in New Zealand, indicates that their dairy farmers have access to easier to use information and nutrient budgeting systems.

A subjective assessment of the costs and benefits of the regulations is given in tables 1 and 2.

Table 1. Subjective assessment of the costs of the regulations ¹⁰

	Action	Scale of cost
Admin	Complete a manure management plan	Low
	Co-operation with inspections	Low
Policy	Upgrade current storage capacity and associated infrastructure.	Low - medium
	Use of options other than improving/building extra storage capacity (eg, transporting slurry, reducing stocking rate, changing enterprise balance).	Low-medium
	Construction of extra storage capacity	Medium - high

Table 2. Subjective assessment of the benefits of the regulations

	Action	Scale of benefit
Private	Lower purchased fertiliser costs.	Low - medium
	Reduced likelihood of point pollution incident.	Medium - high
Social	Reduced cost of treatment by water companies.	Uncertain
	Reductions in animal and human health incidents caused by associated water borne problems (eg, e-coli).	Uncertain
	Improved health of aquatic environment.	Uncertain
	Increased value of sporting use of rivers.	Uncertain
	Increased value of commercial estuarine fishing.	Uncertain

4.3 Conclusions

Has a RIA been done?

Two Scottish RIAs have been completed. The first, by Oglethorpe et al in 2002, assessed the impact of three Action Programme options on the most affected farm types in the four NVZs. Barnes et al completed the second RIA in 2006 as part of the four-year review of the Action Programme.

Do the RIAs quantify costs?

The first RIA quantifies both the non-recurring and recurring costs for farmers plus the cost to the government for enforcing the regulation. The main compliance cost was the one off cost of investment in installing or upgrading slurry storage infrastructure.

The cost of further investment in slurry storage was also the main cost quantified in the second Scottish RIA. Though the completion of the manure management plan was also estimated to be a significant cost.

Do the RIAs quantify benefits?

Neither of the Scottish RIAs adequately quantify the benefits of the nitrates regulation. In the first RIA, the benefits were simply expressed in terms of annual reductions of tonnes of N leached. While the second RIA took a similar approach in that no economic value was calculated to quantify the impact of lower nitrate levels on human and animal health, the environment or sport. The only benefits quantified were actually saved farmer costs that result from saved nitrogen fertiliser and deduction to direct support caused by non-compliance.

Do the RIAs demonstrate that benefits exceed costs?

The Scottish RIAs contain more focus on quantifying the costs rather than the benefits of the proposed changes. While this is understandable given the difficulties of placing an economic value on lower nitrate levels, it is a major weakness in judging whether costs actually exceed benefits. Therefore the level of confidence in the usefulness of the Scottish RIAs is only moderate.

The English partial RIA completed in 2007 makes a better attempt to value the benefits to society of cleaner water. Though ultimately even this RIA opts to present the benefits simply in terms of estimated reductions in nitrate levels.

Data required to improve assessment of costs and benefits

The fundamental concern with this regulation remains the uncertainty of the science underpinning it. Not only does the agriculture industry question the arbitrariness of the 50mg/litre limit, it also questions the basis for cutting the N limit for grassland to 170kg N/ha. Yet research completed by ADAS, on a Great Britain basis, shows that the closed periods in the original action programme were inadequate. The complex relationship between agriculture and nitrate levels does not help. The House of Commons report concluded that the continued upward trend in some groundwaters (in England) may be the result of agricultural practices dating back decades. Given this level of uncertainty, the precautionary principle underpinning this regulation is justified.

Nevertheless, the economic benefits of cleaner water need better quantification so that the Action Programme can be adjusted appropriately over time. It is not comprehensive enough to simply estimate the lower levels of nitrate that may result from a change in farm practice, an economic value must be calculated for comparison with calculated costs. For instance, the English RIA estimated that the proposed change in closed periods would result in only a 0.5 to 1% change in nitrate level, but would cost pig farmers £40m to comply according to National Pig Association calculations. Nitrates from agriculture do impact upon the environment. But unless this impact is properly costed, it is not possible to reach a political decision about the best course of action.

Whether the majority of Scottish farm businesses would appreciate a more complete cost-benefit analysis is a moot point. Based, in part, on the 2002 and 2006 RIAs most Scottish farms lie outwith a NVZ, and are therefore subject to lower compliance costs. A more rigorous analysis may, or may not, extend the NVZ area.

For Scottish farmers lying within the NVZs, the extra costs of compliance are deemed unfair. However, the Scottish Government is providing funding via the SRDP to help farmers meet any extra costs incurred.

Recommendations for improvement

1. To inform future decision-making concerning Scottish NVZ's, more accurate figures on the economic costs and benefits of previous action are required. Previous analysis of the costs to farmers of compliance were imprecise, while the environmental, health and recreational benefits of reduced nitrates were not valued in economic terms. Gaining this information should be possible through developing the current monitoring system rather than commissioning a bespoke study.
2. Look at opportunities for persuading the EC to revisit the scientific basis of the nitrates directive. The recent UK House of Commons committee called for Defra to work with like-minded countries to push for a fundamental review of the directive.
3. Revisit the current approach used to change farmers' (mis)use of fertiliser and manures. Currently farmers within the NVZs feel that the actions they must take are simply a cost and hindrance to their businesses, and not an opportunity to reduce costs. The recent large jump in nitrogen (and other) fertiliser prices should be incentive enough for farmers everywhere in Scotland to reduce wastage of applied fertiliser and maximise the value of manures if the level of prices remain high or continue to grow. Nutrient management plans are a key tool for saving money and should be promoted as such. The current tools available should be reviewed as a priority.

Does it meet the Better Regulations guidelines?

Transparency: High. Farmers are well aware of the requirements of the original Action Programme, though will require guidance on the changes to be introduced.

Accountability: High. The origin of the regulation with the Nitrates Directive is clear, as to is the responsibility for its application and enforcement in Scotland by the Scottish Government.

Proportionality: Medium. Whether the benefits of the regulation exceed the costs is unclear because the benefits are not quantified. For some farm businesses the capital costs of complying may adversely affect viability.

Consistency: Medium. The original implementation of the regulation by Scotland was, along with the rest of the UK, deemed incorrect by the EC. The subsequent changes introduced including extension of NVZ coverage of Scotland are now well established. The changes to be introduced in 2009 are consistent with the current directive of 1991.

Targeting: High. The regulation applies to agricultural areas identified by water testing as high risk.

References

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