The Resource Economics of Environmental Absorption Capacity

Hertwich, E. (1996). The Resource Economics of Environmental Absorption Capacity. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-96-156

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Abstract

This paper uses an economic framework to investigate the depletion of heavy metal absorption capacity of soil. Specifically, the Hotelling model for the allocation of exhaustible resources across time is applied to Cadium deposition onto agricultural soil in the Rhine basin. The Hotelling model requires a knowledge of the resource as well as the demand function for the resource. The resource of absorption capacity is limited because above a certain Cd concentration in soil agriculture is not allowed; accumulation of Cd above this maximum acceptable soil concentration is not allowed. The demand function for absorption capacity corresponds to the cost function of avoiding deposition of heavy metals. According to the Hotelling model calculations, 0.2 DM should be spent to avoid the deposition of 1 kg Cd at a discount rate of 5% and 600 DM at 1 %. The optimal level of Cd control expenditure increases at the discount rate. The paper also presents a modified Hotelling model that takes the replenishment of the resource by removal of heavy metals from the soil (leaching and plant uptake) into account. Using a simple donor-controlled outflow model of Cd behavior in soil and a residence time of 1000 years, the optimal initial expenditure level for Cd control in the Rhine basin is determined to be 0.0006 DM/kg (3% discount rate). For the Katowice district, the optimal level is 20 DM/kg. A net input of Cd into the soil of the Rhine basin is allowed for 400 years in the Rhine basin and for 200 years in Katowice. This paper finds the modified Hotelling model to be a useful heuristic for understanding the time dimension of absorption capacity; specific recommendations cannot be derived, however, because they depend on tenuous inputs such as the cost curve for pollution control, the discount rate, and the maximum acceptable soil concentration.

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