Gains of integrating sector-wise pollution regulation: The case of nitrogen in Danish crop production and aquaculture

•A Computable General Equilibrium model is extended with an externality market for nitrogen pollution permits.•Economic gains of integrating independent regulation of agriculture and aquacultures into a common system are identified.•Common regulation lead to socio-economic gains through reallocation of pollution permits between sectors.•Common regulatory gains are larger than losses of stricter environmental policy that fulfill EU's Water Framework Directive.

This paper extends the Orani-G Computable General Equilibrium model with an externality market. The externality market is modelled with a limited number of pollution permits that are traded between representative firms in different sectors. The model is applied to identify the gains of a common nitrogen regulation system for Danish agriculture crop and aquaculture production. Common regulation across the two sectors is found to increase GDP by euro 32 million, corresponding to 2.2% of their initial GDP contribution. The direct effect in the two sectors is euro 39 million, where the spill-over effect is − 7 million. Full use of recirculation technology in aquaculture entails a further increase in GDP to 106 million. The introduction of a common regulatory system and recirculation technology, simultaneous with a reduction of the common nitrogen cap of 17.6%, corresponding to the current policy objectives, is found to increase GDP by 52 million, 4.1% of their initial contribution. Hence, introducing a common regulatory system and taking advantage of the new technology more than counterbalances the negative socio-economic effect of a cap reduction. The analysis points to the importance of introducing more coherent regulatory frameworks that include all polluters under the same regulatory system.