'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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