Guidelines for Cost-effective Agri-environmental Policy Measures

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18 June 2010
9789264086845 (PDF) ;9789264086654(print)

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Improving the environmental performance of agriculture is a high priority in OECD and many non-OECD countries. This will be of increasing concern in the future given the pressure to feed a growing world population with scarce land and water resources. Policy has an important role to play where markets for many of the environmental outcomes from agriculture are absent or poorly functioning.   

This study focuses on the design and implementation of environmental standards and regulations, taxes, payments and tradable permit schemes to address agri-environmental issues. It deals with the choice of policy instruments and the design of specific instruments, with the aim of identifying those that are most cost-effective in very different situations across OECD countries.  

Key conclusions from the study are that: there is no unique instrument that promises to achieve all agri-environmental policy goals; the cost effectiveness of payments systems could be improved by using performance-based measures; and policy mixes need to combine policy instruments that complement and not conflict with each other.

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  • Foreword
    The main authors of this study, which was prepared for the Joint Working Party on Agriculture and the Environment, were Jussi Lankoski and Andrea Cattaneo. The study draws on background papers prepared by consultants: Professor James Shortle (The Pennsylvania State University, United States) and Professor Richard Horan (Michigan State University, United States), who prepared a background paper dealing with policy design for environmental standards, environmental taxes and tradeable permits, and Dr Simon Mortimer and Dr John Finn, who prepared a background paper dealing with the Agri-environmental Footprint Index methodology for the evaluation of agri-environmental policies. The aim of the report is to provide policy makers with a set of tools for the design and implementation of cost-effective policy measures to address environmental issues in the agricultural sector.
  • Executive Summary
    The aim of the Guidelines study is to help policy makers with additional tools to design and implement cost-effective agri-environmental policies. It focuses on environmental standards, environmental taxes, agrienvironmental payments and tradeable permit schemes to address agrienvironmental concerns (externalities). It is important to note that the goal of this study is not to promote any specific policy instrument or instrumentmix in any OECD country but to improve understanding of how different types of policy instruments can be used, in what context, and which key design and implementation issues need to be considered for the success of a given instrument.
  • Introduction
    Environmental standards, environmental taxes, agri-environmental payments and tradeable permit schemes are important tools in the policy makers’ arsenal for managing agri-environmental issues. Applications vary internationally, and have evolved over time as lessons are learned about the merits of alternative approaches for different problems and as the problems themselves change. The scope of agri-environmental problems and issues has expanded over time including recognition that agriculture also contributes to providing environmental services. As a consequence, the types of policy instruments used to address them have expanded with varying degrees of success.
  • Objectives of agri-environmental policy instruments and criteria for policy evaluation
    The fundamental purpose of agri-environmental policy instruments is to achieve environmental policy objectives that would otherwise not be achieved given the absence or poor functioning of markets. Achieving those objectives requires either controlling environmental stress, such as polluting emissions, or inducing farmers to undertake pro-environmental activities to increase the flow of ecological services, such as management of agricultural practices and land to enhance desired wildlife habitat. In either case, achieving the desired end requires changes in producer decisions consistent with the achievement of the agri-environmental policy objectives.
  • Policy design parameters: an overview
    In order to achieve an intended objective, a plan and means to reach it are required. The desired objective can be defined by choices of environmental goals along with the economic goal of cost-effectiveness. The plan then entails choosing and implementing policy instruments to achieve the desired outcome.1 Some general issues involved in developing this plan are outlined in this chapter, with design requirements for specific instruments presented in greater detail in subsequent chapters.
  • Tailoring environmental standards, environmental taxes and tradeable permits
    Due to the focus in this chapter on instruments that effectively provide society with initial rights to environmental quality, the discussion of these instruments focuses on the control of negative externalities. The same instruments could in principle be constructed to also address the provision of positive externalities, but in practice other approaches such as payments or subsidies are used to do this.
  • Design issues for agri-environmental payment programmes
    A majority of OECD countries offer monetary payments to farmers to encourage them, on a voluntary basis, to implement more environmentally friendly farming practices going beyond those required by regulations, or defined as good farming practices. Most of these agri-environmental programmes offer a single, fixed payment for compliance with a predetermined set of environmental requirements, such as reduced tillage or limits on the intensity and timing of fertiliser, manure and pesticide applications. The obvious problem with this type of fixed-rate payment approach is that heterogeneity in either farmers’ compliance costs or siteproductivity of environmental goods supplied are not taken into account in policy design and implementation. Thus, offering a fixed-rate payment under heterogeneous conditions could reduce the cost-effectiveness of agrienvironmental payment programme.
  • Policy-mixes for the agri-environment
    The OECD study on Instrument Mixes for Environmental Policy (2007d) provides a comprehensive treatment of the economic efficiency and environmental effectiveness of using an instrument-mix rather than a single policy instrument. The main arguments for using instrument-mixes are: i) many environmental issues are multifaceted so that not only the amount of emissions, but also where emissions take place and when they occur are relevant; ii) many instruments can mutually strengthen each other; and iii) sometimes instrument-mixes can also enhance enforcement and reduce policy related transaction costs. However, there are also reasons for restricting the number of instruments in the mix. For example, when several instruments are applied in the mix there could be danger that one instrument hampers flexibility to find low-cost solutions to a problem that another instrument could have offered if it had been implemented on its own. And there are cases where some of the instruments in a mix are redundant and only increase total PRTCs (OECD, 2007d).
  • Agri-environmental policies in OECD countries
    The toolbox of agri-environmental policy instruments applied in OECD countries to achieve their various environmental objectives reflect several issues including: i) the overall policy approach to the sector; ii) the specific environmental issues and their perceived linkage to agricultural activities; iii) the nature of property rights related to the use of natural resources (land, water and vegetation); and iv) societal concerns related to environmental issues. In addition, "suasive" measures are intended to change perceptions and priorities within the farmer’s decision framework by heightening the level of environmental awareness and responsibility.
  • Ex-ante and ex-post evaluation of agri-environmental policies
    A wide variety of different methodologies can be used to evaluate agrienvironmental policies. Both "ex-ante" and "ex-post" evaluations have been used in the policy development process (OECD, 2005a). This chapter focuses on three decision-making aids: cost-benefit analysis, costeffectiveness analysis and multi-criteria analysis. Rational appraisal of agrienvironmental policy requires a comparison of costs and benefits. Benefits may or may not be measured in monetary terms. Where they are not so measured, the relevant methodologies are cost-effectiveness analysis (CEA) and multi-criteria analysis (MCA)1. Where they are measured in monetary terms, the relevant evaluation procedure is cost-benefit analysis (CBA) (Pearce, 2005).
  • Summary and good policy practices
    Improving the environmental performance of agriculture is a high priority in OECD countries. Specific policy measures designed to address environmental issues in the agricultural sector are relatively recent, but are becoming more widespread. These measures vary considerably across and even within countries, reflecting the severity of environmental stress, the potential for providing ecosystem services, and historical and cultural developments that influence policy priorities. Such measures do not operate in a vacuum: they are implemented alongside agricultural income support policies and economy-wide environmental policies, in a wider socioeconomic and technological context. Moreover, possibilities to create markets or quasi-markets are constantly evolving – which are closely linked to property rights – and thus alter the need, focus and type of policy intervention.
  • Annex A
  • Annex B
    The EU approach to cross-compliance includes partial or full loss of payments if the farmer fails to comply with mandatory standards stemming from existing legislation and the maintenance of good agricultural and environmental conditions. Cross-compliance creates a link between several separate policies, amongst them income support and selected statutory standards or requirements. These relate to environment, animal and plant health, public health and animal welfare and identification and registration of animals and are enshrined in existing laws. By introducing reduction of payments due to non-compliance the effectiveness of enforcement of existing environmental laws could be expected to increase.
  • Annex C
    The concern about performance standards meeting overall environmental goals, at least without additional instruments, arises because performance standards conventionally limit only one of two variables that determine ambient environmental conditions (e.g. Sterner, 2003). To illustrate, in a linear water quality model, the ambient concentration of a pollutant in the environment (a) is a weighted sum of the polluting emissions from individual sources (ei, i = 1, 2, …, m), where the weight (..i, also known as a pollutant delivery or transport coefficient) applicable to an individual source is the proportion of its emissions that affect the ambient concentration...
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