A method of integrated economic and environmental modelling of agricultural production effects in Denmark is presented in this paper. The method combines a partial-equilibrium sector model for Danish agriculture; farm account statistics; a GIS-based procedure for spatial disaggregation of the agricultural production structure; a procedure for calculating farm economic output, and a nitrate loading model. The method is applied by analysing two alternative nitrogen tax policies in terms of their effects on farm value added, nitrate leaching, and nitrate loading of coastal waters. The tax policies are a per-unit tax on nitrogen in commercial fertilisers; and a per-unit tax on nitrogen in commercial fertilisers and purchased animal feed stuff. The cost-effectiveness of these two tax instruments is analysed by comparing the costs of reducing nitrate leaching by 20 per cent using the two policy measures. Results suggest that: (1) there are large differences between nitrate leaching from pig, cattle, plant and part time farms, (2) predicted spatial patterns of nitrate leaching and loading exhibit considerable spatial variations, (3) abatement costs are larger in the combined tax scenario and varies significantly between farm types.