The potential gains from a regulatory change allowing for reallocation of marketable nitrogen emission permits under a cap and trade system are analyzed in a dynamic context using Data Envelopment Analysis to formulate linear programming models. In these models new, more environmental friendly farms are gradually introduced to the industry over 10 years. The new industry structure, production, and profitability gains are investigated, and the effect of changing the overall level of nitrogen emission is analyzed. Our results show that there is scope for a more efficient allocation of resources to either increase the production level or to reduce the emission level. This article adds to the literature by extending previous static reallocation models to a dynamic model, which allows for a gradual introduction of new firms. This makes it possible for managers to analyze the effects of reallocating production across firms and time.

JEL Codes: Q22, Q28, D62.