We introduce a multistep modeling approach for studying optimal management of fertilizer inputs in a situation where soil nitrogen and carbon dynamics and water and atmosphere externalities are considered. The three steps in the modeling process are: (1) generation of the data sets with a detailed simulation model; (2) estimation of the system models from the data; (3) application of the obtained dynamic economic optimization model considering inorganic and organic fertilizer inputs. We demonstrate the approach with a case study: barley production in southern Finland on coarse and clay soils. Our results show that there is a synergy between climate change mitigation and water protection goals, and a trade-off between pollution mitigation and crop production goals. If a field is a significant source of greenhouse gas (GHG) emissions and an insignificant source of water pollution, atmospheric externalities dominate the water externalities, even for a relatively low social cost of carbon (SCC). If a field is a significant source of water pollution, the SCC would have to be very high before atmospheric externalities dominate water externalities. In addition, an integrated nutrient management system appears better than a system in which only inorganic or organic fertilizer is used, although manure is not a solution to agriculture's GHG emissions problem. Moreover, GHG emissions and nitrogen and carbon leaching mitigation efforts should first be targeted at coarse soils rather than clay soils, because the marginal abatement costs are considerably lower for coarse soils.
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