Climate change and regulation of nitrogen loads under moral hazard

Within the European Union, it is agreed that watershed-based management of water quality problems is more efficient than centralised arrangements. In this study, a mechanism for allocating international funds to watershed authorities for nitrogen abatement in the presence of moral hazard is investigated. The results show that when there is a risk of climate change, the cost of moral hazard to the international funding agency can be high if there is a moderate likelihood of climate change and the watershed authority is guaranteed a high minimum compensation.