‘Greening’ – a return to compulsory set-aside

Among others, the latest proposal of the EU Commission aims to green the Common Agricultural Policy (CAP). One of the proposed measures looks very much like a new ‘set-aside’ programme. Generally, the programme stipulates that individual farmers have to set aside seven per cent of their arable land. Some exceptions are allowed in case individual farmers already produce environmentally friendly, e.g. organic production, or have already contributed to desired environmental effects. As the proposal is not yet put into legal form, it may be worthwhile to discuss the new measure’s rationale, to evaluate its associated costs and effects on incentive compatibility and to look for alternatives for achieving the objectives.

Rationale of the envisaged programme

The first question that has to be investigated concerns the aim of the measure. Objectives are based on norms and these norms reflect value judgments; of course, the norms of scientists are not necessarily better than those of anybody else. In general, scientists are not competent to assess the rationale of objectives. Nevertheless, scientists can analyse whether a given objective is in line with other officially stated objectives or general principles, which are supposed to be binding for legislation. Moreover, scientists can investigate whether the proposed policy measures are effective and efficient.

The scheme is supposed to contribute to greening the CAP. The term greening has not yet been clearly defined1. However, it includes two aspects: first, farmers should be prevented from producing negative external effects (public bads), such as nitrification of ground water, reduction of biodiversity or causing harm to the climate; second, farmers should get incentives to produce positive external effects (public goods), such as positive effects on the climate or contributing positively to biodiversity. The set-aside measure could be effective in contributing to the objectives, in particular to the improvement of biodiversity. However, some questions remain open:

First, can the effectiveness and efficiency of the policy measure be assessed?

Second, who should decide how much biodiversity is needed? More biodiversity is not necessarily better than less if costs are taken into consideration.

Third, who should decide these issues within the EU’s political and institutional framework?

Fourth and finally, is the set-aside scheme the first best policy to achieve the objectives?

First, a widely accepted principle of good policy says that assessment of policy effects is a precondition for an effective policy. Without quantification of the policies’ effects it is not possible to evaluate their effectiveness; a cost-benefit analysis cannot be applied as a mean for selecting most efficient policy measures, which aim to maximise objective contribution at given costs. The European Court of Auditors (ECA) investigated the effectiveness of agri-environmental measures as a part of Pillar 2 and concluded that the effects of these measures can hardly be identified and are not quantified or even not quantifiable. The ECA concluded that policy makers should abstain from measures of which assessment is nearly impossible.2

The statement by the ECA most likely holds for an EU-wide set-aside programme as Part of Pillar 1. The effects vary most likely across regions; for instance, there might be a strong pressure to improve the environment in some regions and using adequate set-aside schemes would likely yield to significant improvement. In contrast, there might be regions which already have either a high environmental standard or where a uniform set-aside scheme would not improve the biodiversity significantly. Hence, a centralised framework for environmental schemes is less efficient than a regional or even local scheme, i.e. a place-based scheme. People in the regions know better whether a policy measure contributes to their welfare.

The second and third question concerns the principle of subsidiarity. Accordingly, the EU should only be in charge of those matters that can be addressed more efficiently at the community level than at the national level. If set-aside would mainly lead to additional production of public goods, which improve not only the welfare of the national population, but also of the population in other countries of the EU to the same extent, the measure should be located at the EU level. The EU should decide how much biodiversity is needed and should also bear the costs.

Not all the positive external effects attributed to set-aside include EU-wide public goods. The need to reduce the erosion of biodiversity varies across countries and regions. There might be regions where the biodiversity is still intact and nevertheless farmers may not qualify completely or partly to be exempted from set-aside. Hence, this measure is not well targeted; it is not based on an inventory of the status of biodiversity in the affected regions. Obviously, the Commission did not respond adequately to the criticism by the ECA and others. The ECA has pointed to this issue in several reports. In the most recent report, “Is agri-environmental support well designed and managed?”, the ECA wrote, “Targeting of agri-environment payments has been a permanent issue over the last decade”.

The economic costs of set-aside

One important aspect of the new measure is the economic costs. Farmers are not allowed to use the land as most of them would like to. Obviously, they incur profits foregone. However, these private costs are not identical with economic costs. The society has to ask what is the income forgone; this is not identical with the farmers’ loss of profit. Moreover, the society also has to identify the overall change in value added due to the implementation of the set-aside scheme. Hence, the value of the production that could be produced on the set-aside area has to be compared with the opportunity costs of factors. Opportunity costs only exist if the specific factors, labour and other variable inputs, can earn an income in alternative employment. Variable inputs exclusive labour could likely be used in other sectors of the economy. This is less likely for labour – especially for family farms in rural regions in which the owner of the farm may not find a part-time job outside agriculture and in which he / she may not be able to restructure his/her farm and adjust the production patterns to his/her fixed labour supply. Hence, the opportunity costs of labour are likely higher for large farms than for small family farms and the costs may be higher in rural areas with a high share of agricultural employment than in urban areas. The economic costs vary across regions and across farms of different sizes without being related to the social benefit of the programme.

The proposed set-aside programme has significant negative side-effects. Less land would be available for the production of food products leading to world-wide higher food prices. It is of course understandable that the EU wants to improve the environment. However, it should be achieved with policy measures which have negative side-effects as little as possible.

Lack of incentive compatibility

Policies are well designed in a market economy if they improve incentive compatibility. The individual decision maker should get an incentive, which leads to actions that are desirable from the point of view of the society at large. Hence, the farmer should pursue those farming activities that contribute to a specific positive change of the environment at the least economic costs. The proposed measure does not lead to such an incentive structure. Instead, the farmer would likely set aside those areas that lead to the least reduction in income without taking into account the potentially positive effects on the environment. It may well happen that the desired effect may only be marginal in those regions where the effects are most wanted by the society. As environmental effects are public goods, the individual farmer may have little knowledge on what should be done from the society’s point of view. Moreover, he may have little interest to place his own interest second to society’s interest. Hence, an effective and efficient scheme to improve biodiversity cannot be based on global incentives which only affect the decision of farmers on what area he may set aside without taking into account the effects on biodiversity. An effective scheme should incorporate interests of those who bear the cost, i.e. the farmers, and those who have an interest in the improvement of biodiversity, i.e. the society.

Alternative policy measures3

A better targeted measure should be based on two approaches: rigorous inventory taking and targeting of that share of direct payments which is supposed to contribute greening the CAP. First, an inventory of the present status of the environment and biodiversity in the regions of the EU should be made available. It is certainly costly to collect this information. However, there may be a cost-saving alternative, the use of collective decisions and actions in the regions. Indeed, the Commission agreed on this approach in general when it responded to a report of the ECA. “The Commission is strongly in favour of collective approaches to agri-environment objectives and contracts. In particular with regard to some objectives, such as developing green infrastructure or building ecological corridors for connectivity purposes, collective actions of several farmers in relevant areas can yield greater environmental benefits than separate actions of individual farmers.”4

It can be assumed that the population in the individual regions has better information on the environmental status than the authorities in Brussels. It can also be assumed that the regions likely know better how to use given funds to improve the situation in the most efficient way and with respect to their preferences. This knowledge should be mobilised, leading to the second approach. If set-aside is used as an instrument, it should be used in the most efficient manner. This will not be the case if set-aside is introduced as a compulsory measure for the individual farms; one would probably get many parcels that are disconnected and not necessarily located at the locations where the contribution to the improvement of the environment would be most effective and efficient. Actually some regions avoid this problem with the given measures by selecting specific ecological compensation areas. This procedure could be generally accepted as a model for using set-aside more effectively.

One alternative would be to allocate 30 per cent of the regional direct payments to the funds. This decision would be in line with the Commission’s argument that 30 per cent of direct payments should be used for provision of public goods. Regions should be allowed using this transfer for producing environmental goods in the most efficient way. The regions should have an incentive to use the money in the most efficient way for reaching the overall community objective(s); if one could assume that people in the regions are interested in getting as great an amount of environmental goods as possible for a given amount of available money. The regions should be in charge of selecting projects from a menu of measures and allocating land to it. The constraint should only be the budget which they have at disposal, possibly augmented by their own contribution. The available budget could be used for renting land but the money could also be used to finance needed capital and setting up costs. Having few connected plots or possibly only one—e.g. for setting up a large biotope or park—would make set-aside much more effective. Moreover, the regions would have incentives to take into account the financial costs of the measures. It would be even more favourable if regions were allowed to use the money for some alternative environmental projects, which are based less on land than is the present proposal by the Commission. To set up effective and efficient environmental schemes, one needs not only land, but also reasonable investment as a joint factor, e.g. setting up a biotope needs land and capital. If farmers were obliged to set aside individual plots, possibly just leaving the land fallow, this would not contribute to the environment in the most efficient way. Hence, the programme would be more effective and efficient if the regions could use specific earmarked funds at their discretion. People could decide what environmental goods they would like to have in regards to the amount of money they will get out of the direct payments system. This change would resolve the lack of subsidiarity of the present Commission proposal. Currently, the proposal fails in subsidiarity. Those who may mainly benefit from the scheme, the non-farming population, are not involved in the decision about what should be done and who should finance it. This deficit in the Commission’s proposal will be healed by the proposed alternative. Citizens would get more value for money.

This framework would take advantage of the regional know-how (information and expertise) and the preferences of the people in the region. It has to be conceded that this proposal does not lead to a perfect situation. It is not assured that the contribution to the biodiversity objective is accurately quantified. But it can be expected that delegating the decisions to the regions will improve effectiveness and efficiency of the measure. In additions, the regions might be more interested in clear regional public goods and less in EU-wide public goods. However, the EU policy is based on the perception that improvement in biodiversity is in the interest of EU citizens. Therefore, monitoring by the EU is needed.

The presented proposal would have another important positive effect: The negative side-effects on EU production would be smaller than with the Commission’s proposal. The impact on world market prices would be less and, thus, the impact on world food security smaller than with the Commission’s proposal.

1 According to Commissioner Ciolos “greening” means improving the environmental performance of the CAP i.e. quality and fertility of soil and biodiversity.

2 ECA, 2011: “It was recommended that the Commission, Council and Parliament should consider how to take into account the principle whereby if a measure cannot be adequately checked, it should not receive public funds”.

3 It is questioned whether the new greening measures should be part of pillar 1. This highly justified question is not discussed at this point. Instead, the EU proposal is followed in this respect.

4 The Commission’s reply to the ECA report in “IS AGRI-ENVIRONMENT SUPPORT WELL DESIGNED AND MANAGED?”

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7 Responses to “‘Greening’ – a return to compulsory set-aside”

  1. Jack Thurston →
    November 4, 2011 at 12:30 #

    Describing the proposed new greening component of Pillar 1 as ‘set aside’ is a useful provocation, though there are certainly those who would say is is sufficiently different from previous set aside policies as to merit its own name.

    You make a strong argument for taking the 30% of the Pillar 1 money that the Commission has earmarked for ‘greening’ and spending this money on higher level agri-environment measures. I know that this would be strongly supported by the environmental NGOs.

    The political reality is that the Commission’s ‘greening’ proposals is more motivated by the need to give the impression of an environmental policy when it is really just an income support policy with some limited, generic, poorly designed environmental conditionality, i.e. greenwashing.

    In the current extremely conservative political climate in agriculture policy, the chances of your proposal for shifting a large portion of pillar 1 money into more targeted and regionalised agri-environment measures do not appear to be great.

    The danger in opposing the greening measures is that we are left with no environmental policy at all – just the old income support. At least the flawed greening measures would give taxpayers something in return for their money. However little, this is more than they get from money spent on income support!

  2. Christophe Bureau →
    November 4, 2011 at 21:00 #

    Ulrich Koester is a well respected economist whose views have helped reforming the CAP. It am surprised that in his critiques of the Commission’s proposal he focuses on the “green” layer of the payment, which would not be my first target. I am not sure I agree with him for several reasons.

    First, I think that the choice of Ulrich’s words is a bit biased. The Commission’s proposal, i.e. the ecological conditions for getting the “green” layer of the payments (“Payment for agricultural practises beneficial for the climate and the environment”) is not a compulsory “set aside program”. My understanding is that farmers have no obligation to set land aside in the sense that they have no obligation to request the corresponding payment. I am aware that this is a controversial issue (it is unclear whether or not the requirements for green layer might prevent you from getting the basic payment and the wording of the proposal is particularly confusing, especially when you compare the French and English versions). But my understanding of the proposal is that if you don’t want to comply with the requirements for the green layer you will not get it, period. Nobody forces you to set aside land. I may be wrong, but rather than an obligation of set aside, I see this green layer is a way to get something out of taxpayer’s money. More defendable than dumping direct payments on farmers without any public good in return as the current SFP.

    Second, I tend to think that Ulrich underestimates the current cost of biodiversity erosion. He is right to say that all policies should be subject to cost-benefit analysis and should try to achieve their aims as efficiently as possible. Potentially, it is 30% of 42 billion euro a year that could be granted to farmers under this green payment. Obviously this requires knowing what we pay for. But the biodiversity problem is so dramatic that one can hardly afford delaying action much further(see BirLife’s figures on the decline of farmbirds over the last 20 years). Regarding cost benefit analysis, more research is needed on the value of ecosystem services. But the evidence already available is compelling. Economic estimates value pollinating services at billion euros, the pest-control services provided by bats even higher (Gallai et al,Ecological Economics 68, 1, 810–821; Boyles et al, Science April 1 2011). In brief, the long term costs of the dramatic fall in biodiversity are enormous. If ecological reserve is a best way to protect it, we should definitely replace some of the current SFPs by these green payments. The question should not be whether 30% is too much, the question should be “why the 70%?”.

    Third, I could argue that calling the European Court of Auditors as for support is particularly misplaced. In various recent reports (including on dairy quotas, sugar, etc) the ECA has erred in the field of flawed economics, calling for EU self-sufficiency (and even regretting export subsidies that compensated the poor competitiveness of some EU exports). The ECA has lost a lot of its credit and I don’t see how it can be taken as a reference for sound economics. But let us consider Ulrich’s argument, that the ECA calls for targeted an efficient measures. Isn’t the “ecological focus” of the Commission’s proposal in its article 32 , i.e. a rather simple and targeted measure, more cost efficient than the complex, hard to enforce agri-environmental schemes?. If that were the case, it would be particularly coherent with the ECA’s recommendations.

    I agree with Ulrich that this measure could raise the cost of food if the green payment was sought by most EU farmers. I don’t want to call him guilty by association, but I am not fully at ease to see him using the very same argument that the farm lobby uses to fight environmental programs, especially when those lobbies who bash the greening of the CAP on behalf of food prices are those who defend biofuel mandates and biofuel subsidies (if you want to deal seriously with the rising cost of food, start taking a look at these programs). And as far as the food security argument is concerned, there is no orthogonality between food production and conservation. If you want food security in the long term, you need to protect, soil, biodiversity and water.

    Regarding Ulrich’s final argument, that subsidiarity is more efficient, I share his point of view in general. But in a previous post, I described how, in France, we are happy to have some non elected Eurocrats impose on us environmental regulations that our local authorities who would never dare enforcing on their own. Some of my Greek and Italian friends seem to think the same. Germany may be different, with one of the largest percentage of its surface protected by environmental programs in Europe. But it is still one of three worst countries in Europe regarding the number of threatened species, suggesting that subsidiarity to regions is no panacea.

    The Commission’s proposal will be fought by farm lobbies. I don’t see much chance for the “green” layer of payments to survive the Council and the Parliament. Still, I see it as one of the most interesting aspects of the Commission proposal. It clearly deserves more analysis, but it would not be my first target.

  3. Ulrich Koester →
    November 5, 2011 at 10:27 #

    Dear Christophe,

    Thank you for your comments. I like a debate! You make a couple of points which I will address in your order.
    First, I did not say that it is a “compulsory set-aside programme”. My wording was “One of the proposed measures looks very much like a new ’set-aside’ programme”. However, I could have named it as cumpolsary. The loss for farmers will be high if they do not comply. This is true because farmers would lose the whole direct payments and not only the payments for the 7 per cent of arable land. Hence, de facto it is like a compulsory set-aside programme.

    Second, Christophe states that I “underestimate the current cost of biodiversity erosion”. I am not aware that I gave any hint on the current costs of biodiversity. Actually, I do not know where to find an accurate estimate of these costs. The references given by you do not support your implicit logic that EU farmers do contribute significantly to biodiversity erosion. Anyway, I would expect that the biodiversity erosion significantly differs across countries and regions. A measure like the new set-aside would be not well targeted. That was my point. Of course, I can agree to do more for stopping erosion of biodiversity. But do it efficiently.

    Third, this point is very strange. You do not refer to the cited statement of the ECA. Instead you disqualify the ECA by referring to some other results. I thought we discuss about subjects. Do you agree with the quoted statement of the ECA. I wonder if any policy analyst would not agree. By the way, The ECA has published many high qualified reports and actually you agreed on this. Hence, it is not fair to disqualify the ECA by referring to reports where you may not agree or which might even be not convincing.

    Christophe in your final points you seem to agree that this new measure is not well targeted. Hence, let us search for better alternatives. The new set-aside programme is not well targeted and even unmoral as it contributes to higher world market prices for food and even more hunger on this planet without improving biodiversity efficiently.
    Ulrich

  4. Ulrich Koester →
    November 5, 2011 at 10:36 #

    Dear Jack,
    Thank you for your comments. In general you seem to agree with the logic, but you see not that there is a chance of realisation. That is a good point. Should we restrict ourselves to what might be soon or whenever accepted by policymakers? I understand myself as a public economist who has to identify problems from the society’s point of view and has to submit solutions even if the policymakers do not like and do not accept them. I prefer to stimulate the policy debate. It might be that I actually contribute to a change. I give never up the hope.

  5. Alan Matthews →
    November 6, 2011 at 12:03 #

    I would like to highlight three issues arising from the previous exchanges on this topic.

    There remains confusion about the Commission’s intentions with respect to the green payment. The agricultural press support Christophe’s view that farmers can ‘opt-in’ to this payment or ‘opt-out’ without affecting their eligibility for the basic payment. It may well be that this is the final outcome of the legislative process, but the Commission’s intention in the regulation is clearly that every farmer in receipt of the basic payment would also be required to adapt the green measures and thus receive the green payment.

    This interpretation is supported by the different wordings for the different payment layers:

    • Article 29. “Farmers entitled to a payment under the basic payment scheme.. SHALL observe on their eligible hectares.. the [..] agricultural practices beneficial for the climate and the environment..In order to finance this payment, Member States SHALL use 30% of the annual national ceiling.. ”

    • Article 34. “Member states MAY grant a payment to farmers entitled to a payment under the basic payment scheme.. whose holdings are fully or partly situated in areas with natural constraints…Member States MAY decide …to use up to 5% of their annual national ceiling..”

    • Article 36. “Member States SHALL grant an annual payment to young farmers who are entitled to a payment under the basic payment scheme… Member States SHALL use a percentage of the annual national ceiling.. which SHALL not be higher than 2%”. (capitalisations added)

    In other words, for the opt-in payments for farms in less favoured areas and new entrants, the proportions of the national ceiling which can be used are variable, subject to a ceiling. But for the green payment, the proportion to be used is fixed. If the green payment were conceived as an opt-in scheme, then the 30% figure would be inserted as a ceiling, and not a requirement.

    Already, according to the Commission’s impact assessment, the cost burden on farmers in the different Member States of complying with the green measures is very different. In Ireland, for example, with its preponderance of permanent grassland, there will be no cost implications for the majority of grassland farms, and thus the 30% payment is a pure deadweight loss as far as environmental improvement is concerned. On the other hand, Irish arable farms tend to be much smaller than on the continent, and thus much less likely to currently grow three different crops at the same time. Hence, the cost per arable farm in Ireland of implementing the green measures is among the highest in the EU. This already suggests that the instrument is unlikely to achieve its environmental objectives at least cost.

    This would then be exacerbated if the green payment is optional but Member States are required to allocate 30% of their national ceiling to it. In those Member states where a lot of farmers opt in (as in Ireland), the green payment per hectare will be relatively low (abstracting from any differences in the overall national ceiling per hectare after the reform). But in those Member States where relatively few farmers decide it is worth their while to opt in (as perhaps in France), the green payment per hectare could be significantly higher. Even assuming that the biodiversity gains per hectare are the same in Ireland and France, taxpayers might wonder why one farmer gets paid much more than another to produce the same gain?

    But, of course, the biodiversity gains are unlikely to be uniform across all the European land area, and in fact there appears to be limited scientific consensus on how best to protect biodiversity. Should this be by encouraging wildlife-friendly farming (use of particular practices or creation of widespread small scale habitats on individual farms but at a cost in terms of average yields), or by a strategy of ‘land sparing’, i.e. farming existing arable land intensively but then setting aside significant blocks of nature conservation area? Some recent work by Phalan et al in Science that Christophe brought to my attention suggests that the latter strategy could lead to better nature outcomes (Birdlife has a page summarising this debate at http://www.birdlife.org/datazone/sowb/casestudy/227).

    Jean-Christophe argues that Ulrich has underestimated the economic costs of biodiversity loss. Criticising a measure which purports to address biodiversity loss on the grounds that it is economically inefficient without explicitly suggesting instruments which could address the problem more efficiently might give the impression, however inadvertently, that one does not see the problem as a significant one.

    However, Ulrich’s proposal that regions and member states be given more power to decide on what are the appropriate measures in their specific circumstances but subject to EU monitoring seems to go in the right direction – a carrot of 12 billion euro would go a long way to ensuring compliance, but ultimately the EU also can take regulatory steps to force member states to take biodiversity loss seriously as it has done in the case of water pollution.

    At a time when Europe is fighting for its economic survival and there are huge problems with public deficits across the Eurozone and also outside, it is not a good argument to say that a bad half-measure is better than nothing. The economic and budgetary environment in the EU could change dramatically in the next twelve months, and therefore it is important to be ready with sensible proposals which may well have a greater chance of acceptance than might look likely now.

  6. Jack Thurston →
    November 10, 2011 at 14:54 #

    I put the question of whether farmers who did not observe the greening requirements might also lose their basic payment to Roger Waite, the spokesperson for Commission Ciolos. His reply:

    “First of all, our whole concept is that ALL farmers should particpate in the Greening scheme, because if every farmer does a little bit more then we will have a significant effect en masse – and the delivery of public goods across the whole of the EU will be clearer. As far as the penalty system is concerned, the precise rules will be clarified in the implementing rules once we have a political agreement, but the idea is that the penalty should be proportionate. In other words, yes he would lose his Greening payment but probably not much more than that if there a farmer manages a 5% ecological focus area, rather than 7%. However, if this is repeated again and again then the amount of his remaining payment that he loses will increase from year to year. But if a farmer simply ignores the Greening requirements, he will be penalised more severely and more quickly. I underline though that the precise rules will come later. “

  7. Gordon McKinley →
    November 11, 2011 at 22:58 #

    Jack excellent content re “greening” however big point I feel that is being over lookred is that much of the lands with natural constraints are actually doing a great job to reduce the carbon footprint.

    As a hill farmer I have attended meeting where very intensive farmers are getting annoyed that a dilution of their massive SFP per hectacre (some well in excess of £500 per heactare in Northern Ireland )will benefit hill farmers

    Apparently peat lands and mountain/hill lands obsorb approximately 20% of the carbon produced and I am of the opinion in the future farmers managing this type of land must be well rewarded.