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Abstract
In this paper the attempt is made to estimate the trade and welfare effects of nitrogen taxes in
the European Community. The world trade simulation model TEPSIM was developed for this purpose.
TEPSIM differs from conventional agricultural trade models in that it is not limited to agricultural output
markets but explicitly considers 12 agricultural inputs. Thus, the model is not only suitable for the
simulation of environmental policies in agriculture but also gives valuable insights into the intensification
and specialization effects of current agricultural policy reforms. The results of the study reveal that the
implementation of nitrogen taxes in the EC would lead to a loss in comparative advantage for agriculture
in Europe. At the same time this policy would induce conventional welfare gains in the EC if the tax level
did not exceed 44 percent. However, at that tax level the relative change in mineral nitrogen demand would
be very low ( 13.5 percent). Higher nitrogen taxes, on the other hand, would induce net welfare losses in
the Community. While these losses would increase exponentially with the tax rate, the decline in nitrogen
use is not even linear. Thus, the implementation of extreme taxes would have high economic costs
without inducing profound improvements in the ecological area.