A Dynamic Economic Analysis of Nitrogen-Induced Soil Acidification in China

This paper studies the environmental value of nitrogen fertilizer in a rapeseed-rice double-crop system in China to address the issue of nitrogen-induced soil acidification in China’s farmland. Based on scientific evidences, over-applied nitrogen fertilizer contributes greatly in producing extra acidity through nitrogen leaching. The market price of nitrogen fertilizer only reflects its value in agricultural yields but ignores its negative environmental externality. This study analyzes soil acidity as a negative externality produced by nitrogen residual theoretically and empirically. Theoretically, this study uses a dynamic optimization model to solve for the optimal nitrogen application and the steady state soil pH by maximizing the long-term profit of agriculture production constrained by an acidity growth function. Empirically, it firstly uses Seemly Unrelated Regression robusted by Bootstrap and Monte Carlo to estimate production functions and the acidity growth function. Then, following the first order conditions, it finds the numerical solutions for the optimal soil management. The theoretical model shows that ignoring the environmental externality (myopic behavior) increases nitrogen applications and results in a lower steady state soil pH. China’s National Soil Monitoring Data provides consistent empirical results. First, the myopic total nitrogen application of a rapeseed-rice system is only 15.74 kg/ha more than that of the optimal management. However, the myopic steady state soil pH is 0.77 units lower than that of the optimal management, which is a huge difference of soil pH. Hence, nitrogen allocation between seasons is as vital as the total nitrogen application in preventing acidification. Second, the social value of nitrogen fertilizer that contains both production and environmental value is 4.92 RMB/kg, which is about two times of its average market price in 2013. Hence, the market price that ignores the environmental value gives the wrong incentives in fertilizer investment.  Third, this study measures the market value of soil pH, which is 40.80 RMB/ha. Hence, agricultural inefficiency is created when inappropriate fertilizer investment decreases future soil pH productivity. This inter-disciplinary study highlights the importance of considering the environmental value of nitrogen fertilizer in a long-term agricultural production and provides policy implications to correct fertilizer investment incentives in order to achieve agricultural sustainability.