Environmental cost of soil erosion in Sri Lanka: tax/subsidy policy options

The on-site and off-site impacts of land degradation, particularly in the form of soil erosion, pose a serious problem in many developing countries. In Sri Lanka, the implementation of wide-ranging policy reforms and institutional changes designed to move the country toward an outward oriented market economy, have strengthened concerns about environmental degradation and the sustainability of the country’s natural resource base. The environmental impact of many of the policy reforms and economic changes are determined by complex economy-wide, inter-sectoral interactions. A computable general equilibrium model incorporating soil erosion is developed to analyse the impacts of various policy reforms in Sri Lanka. Our analysis establishes three important results. First, economic losses from soil erosion in Sri Lanka are substantial. Second, trade liberalisation reforms increase national income and marginally reduce soil erosion. Third, while trade liberalisation has a positive impact on soil erosion, complementary policies which directly target soil erosion, such as tax/subsidy incentives, are needed to minimise social losses from soil erosion.