Further thoughts on CAP greening

Kaley Hart (of the IEEP) and Jonathan Little (on secondment to the European Parliament’s secretariat) have just published a paper which provides a useful summary of the first round of the CAP greening debate over the past 12 months. They argue that, in relation to the individual greening measures, each has a range of potential benefits as well as a set of issues which may serve to constrain this potential. They note that the perceived added cost and bureaucracy involved with green direct payments has been a common theme of the public debates within the Agriculture Council.
The second part of their paper compares the relative merits of different alternative options to the Commission’s proposals. They conclude:

What is clear from this analysis is that there is no perfect alternative approach to greening the CAP, with any choice inevitably involving compromises. The amount of additional benefits delivered from the scale of investment in greening is clearly of paramount importance from an environmental perspective, however, a trade-off has to be made between environmental additionality and administrative simplicity. While it must be accepted that some increased complexity will result from a process of better targeting payments at policy objectives, such as delivering environmental public goods, a useful guiding principle should be to ensure that the level of administrative and control requirements is pitched such that it is proportionate to the amount of benefits derived.

Administrative and control costs have attracted a lot of attention in the debate on the greening proposals, but they are not the only, nor necessarily the most important, cost of greening. The main cost is the reduction in farm gross margins as a result of adopting the greening measures. Thus, the Hart/Little principle would be better formulated as ensuring that the level of total costs is proportionate to the amount of benefits derived.
The paper correctly emphasises that greening has both benefits and costs. Europe’s natural environment, whether soil, water, air or biodiversity, despite recent improvements in some areas, remains under stress. Much more needs to be done to ensure that Europe lives up to its self-declared goals in terms of soil protection, water quality and quantity, climate change and biodiversity.
However, the potential for environmental improvements is not, in itself, a justification for green payments to farmers. The slogan ‘public money for public goods’ which is used to justify paying farmers to compensate for greening practices often confuses negative externalities with public goods. Fundamentally, the issue is about the distribution of property rights in the environment. The paper does not address this explicitly but it is a key element underpinning the CAP greening debate.
Negative externality or public good?
Water pollution with nitrates, for example, is a negative externality; clean water is not a public good that we should pay farmers to provide. The Water Framework Directive correctly recognises that the costs of avoiding water pollution rest with the polluter. Avoiding over-use of water should also be regulated through a pricing mechanism which reflects the relative scarcity of using this resource.
Soil mining and soil erosion are also negative externalities although here the costs are imposed on future generations rather than on neighbours. The benefits of soil health and maintaining soil organic content accrue to farmers. If there is a market failure because of poor farming practices which result in declining soil fertility, this should be addressed by regulation and information/advice rather than by public payments.
The same principle should apply to air pollution, whether nitrous oxide emissions or greenhouse gas emissions. Where there is a negative external cost to society of these emissions, farmers should be asked to pay for these costs in the same way as other sectors, with the design of the charging mechanism taking into account any specific sectoral characteristics which might result in differing transactions and administrative costs.
Where farmers deliberately alter their management practices to engage in carbon sequestration, then payments should flow in the opposite direction and farmers should be remunerated for this activity.
Who should pay for the provision of biodiversity appears to be more ambiguous. At a general level, food production depends on a healthy ecosystem. Thus, it might be argued that farmers are the main beneficiaries of maintaining biodiversity and should bear the cost of measures to secure a more bio-diverse environment.
On the other hand, EU biodiversity policy appears to recognise that farmers have the property right to alter the natural environment as they deem fit, and thus are entitled to compensation for measures such as ecological focus areas which may restrict food production. Individual farmers also undertake deliberate efforts to create habitats, feeding areas for wild birds, etc. which clearly do go beyond good farming practice and which justify remuneration for providing a public good.
Deciding how to green agricultural policy should start by clearly distinguishing what requirements farming as an activity must comply with as part of normal business obligations, and what we are trying to achieve with public payments. At issue is the appropriate balance between regulation and/or taxation to avoid polluting or damaging activities, on the one hand, and payments to farmers who go beyond normal good farming practice to produce genuine public goods.
Photo credit copyright Basher Eyre and licensed for reuse under this Creative Commons Licence.

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2 Replies to “Further thoughts on CAP greening”

  1. Thanks for the post, in particular the
    second part on the often overlooked distinction between public goods and
    externalities. I often feel that this distinction is blurred in policy
    discussions. In the presence of negative externalities, you suggest to follow
    the ‘polluter pays’ principle in setting up mechanisms which internalise the
    externality. If we were to design a policy from scratch, I guess most people
    would support this approach. In the context of the CAP, however, we are not
    starting from scratch. In the case of polluting water with nitrates, farmers
    have implicitly had the ‘right to pollute’ for the past decades. Pigouvian
    taxing or nutrient quotas (as in the
    Netherlands and, partially, in Germany) are an option in this case.

    However, the economic outcome would be
    unchanged if farmers would explicitly obtain the ‘right to pollute’. Water
    firms could then negotiate (a la Coase) with farmers in a given watershed in order
    to avoid pollution by paying farmers. If water services are provided as merit
    goods, public payments could maybe be justified in this spirit.

    A different issue in this context is
    whether we need payments at the EU level for local public goods / local externalities.
    Many of the examples from your post
    (maybe all but biodiversity) are limited in their impacts to spatial
    scales well below the EU level, a point (which you have made frequently in this
    blog) against tackling them at the EU level.

    I have one question on your example on the
    intergenerational dimension of soil erosion. If soil erosion is a negative
    externality against future generations, negotiations in the spirit of the Coase
    theorem would not work because on the parties is not yet born. Does this
    convert the negative externality back into a public good (or bad, in this
    case)?

  2. Thanks for the post, in particular the
    second part on the often overlooked distinction between public goods and
    externalities. I often feel that this distinction is blurred in policy
    discussions. In the presence of negative externalities, you suggest to follow
    the ‘polluter pays’ principle in setting up mechanisms which internalise the
    externality. If we were to design a policy from scratch, I guess most people
    would support this approach. In the context of the CAP, however, we are not
    starting from scratch. In the case of polluting water with nitrates, farmers
    have implicitly had the ‘right to pollute’ for the past decades. Pigouvian
    taxing or nutrient quotas (as in the
    Netherlands and, partially, in Germany) are an option in this case.
    However, the economic outcome would be
    unchanged if farmers would explicitly obtain the ‘right to pollute’. Water
    firms could then negotiate (a la Coase) with farmers in a given watershed in order
    to avoid pollution by paying farmers. If water services are provided as merit
    goods, public payments could maybe be justified in this spirit.
    A different issue in this context is
    whether we need payments at the EU level for local public goods / local externalities.
    Many of the examples from your post
    (maybe all but biodiversity) are limited in their impacts to spatial
    scales well below the EU level, a point (which you have made frequently in this
    blog) against tackling them at the EU level.
    I have one question on your example on the
    intergenerational dimension of soil erosion. If soil erosion is a negative
    externality against future generations, negotiations in the spirit of the Coase
    theorem would not work because on the parties is not yet born. Does this
    convert the negative externality back into a public good (or bad, in this
    case)?

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