Rethinking the mineral fertilizer subsidy scheme to promote environmental protection in Italy

Abstract

Nitrogen fertilizers are essential inputs into modern agriculture, however the use of large amounts of mineral fertilizers in Italy caused, in the last three decades, severe environmental impacts such as eutrophication of waters and soils, loss of biodiversity, and drinking water pollution including human health risks. To date, regulatory instruments, such as the Nitrate Directive applied to reduce and manage mineral fertilizers showed scarce results in terms of environmental protection. Meanwhile the EU Common Agricultural Policy (CAP) subsidy scheme continues to encourage intensive agriculture and the national fiscal policy includes VAT reduction to 4% for mineral fertilizers. The aim of this paper is to propose a reform of direct and indirect fertilizers’ subsidies considering multiple fiscal options to adjust and eliminate some harmful incentives. The elimination of direct subsides shows the ability to generate a financial effect of €252.54 million per year. As for indirect subsidies for chemical fertilizers, their fiscal remodelling by bringing back the VAT rate from 4% to 22%, has the ability to generate revenues for the state of €597.40 million. The proposed subsides reform has the capacity to generate a significant revenue for the state amounting to €849.94 million every year, which may be used for investments in organic farming and sustainable agriculture practices.