Implications of the European Council MFF agreement for the agricultural environment

This is a shortened version of a post which was first written for the Institute for International and European Affairs EnvironmentNexus blog

From the perspective of the agricultural environment, there are three elements in the European Council conclusions on the EU’s Multi-annual Financial Framework on 7-8 February which should be noted.
The first element is the general commitment that climate action objectives will represent at least 20% of EU spending in the period 2014-2020 and should be reflected in the appropriate instruments to ensure that they contribute to strengthening energy security and building a low-carbon, resource efficient and climate resilient economy.
As agricultural spending will continue to account for 36% of total MFF spending during this period, it will also have to contribute to this objective. This will require a classification of what spending contributes to climate action objectives. One might speculate, for example, that the Commission is likely to consider the proposed green payment in Pillar 1 as a climate action instrument, in addition to some spending under the Pillar 2 rural development budget.
The second element concerns the proposed allocation of resources to the CAP Pillars 1 and 2, both of which influence how farmers manage their land. The allocation to Pillar 1 determines the size of the proposed green payment, although I have argued in this policy brief that the likely outcome of the negotiations between the Council and the Parliament on the conditions to determine eligibility for the green payment will produce very limited additional environmental benefits.
The Pillar 2 rural development budget funds agri-environment measures although the exact allocation to these measures will not be known until Member State rural development plans are approved by the Commission.
Figures provided to the European Parliament’s COMAGRI at its meeting on 21 February suggest that the budget for direct payments will be reduced by 3.2%, the rural development budget by 11.2% and the allocation for market-related expenditure by more than 40% in the next MFF compared to the current one. While the final phasing-in of direct payments to Bulgaria and Romania should be taken into account in evaluating the reduction in direct payments, the reductions in the rural development budget are still more severe.
Furthermore, although the European Council conclusions stated that Member States could transfer up to 15% of their national direct payment ceilings to rural development, it also allowed for ‘reverse modulation’ such that Member States could transfer up to 15% of their rural development budget to direct payments in Pillar 1. Indeed, this percentage is increased to 25% for those Member States with direct payments below 90% of the EU average. As transferring money from Pillar 2 to Pillar 1 avoids the need for national co-financing, this will prove an attractive option for many Member States. It is highly likely that the actual budget for rural development programmes in the 2014-20 period will fall by even more than in the European Council conclusions.
The third element in the European Council conclusions relevant to the agricultural environment are its specific recommendations on elements of the draft CAP reform regulations. The confirmation of the Commission’s proposal that 30% of each Member State’s national ceiling for direct payments should be used to finance the green payment was not unexpected, but the Heads of State and Government also got involved in the specific details.
Their conclusions specified that the eligibility conditions for the green payment should have a clearly defined flexibility for the Member States relating to the choice of equivalent greening measures. Further, they stressed that the requirement to have an ecological focus area (EFA) on each agricultural holding will be implemented in ways that do not require the land in question to be taken out of production and that avoids unjustified losses in the income of farmers.
Members of the European Parliament have protested that the European Council is trespassing on its co-decision prerogatives by discussing these details of the CAP reform regulations. However, these recommendations will not end up in the MFF regulation on which the Parliament will be asked to give its consent. Instead, they should be seen as a strong political signal on the position to be taken by the Agricultural Council in the trilogue negotiations with the Parliament. On the specific issue of EFAs, the European Council position in fact supports the position of COMAGRI which had already agreed an amendment that land under production could be considered as part of an EFA provided that no chemical pesticides or fertiliser were used.
Existing trends in agri-environment spending
The greater reductions in rural development spending in the European Council conclusions can be seen as a reversal of the Fischler and Fischer-Boel strategy of increasing the relative weight of Pillar 2 spending in the CAP budget through modulation. However, even that strategy had limited success in encouraging more spending on the environment if we examine actual spending figures in the current programming period. Despite a widespread perception, there has been no shift to a greater emphasis on agri-environment measures (AEMs) over time (Table 1).
Table 1. Relative importance of expenditure on direct payments in Pillar 1 and environmental payments in Pillar 2, € million and percent

Notes: Two measures of agri-environment expenditure are shown in this table. AEM expenditure refers only to expenditure on agri-environment measures, while all Axis 2 measures include natural handicap payments to farmers in disadvantaged areas, Natura 2000 payments, and afforestation payments as well as AEM payments. Annual expenditure is from Q4 of the previous year to Q3 of the year shown. It represents payment claims declared by Member States. The 2000-2006 figures may not be fully comparable due to methodological differences between the two programming periods. Shares labelled (1) are the ratio of the chapter heading to the sum of direct payments and the chapter heading. Shares labelled (2) are the ratio of the chapter heading to total Pillar 2 expenditure. Note that some member states have used the Article 68 provision which allows Pillar 1 money to be used to support agri-environment measures so total agri-environment spending in the 2007-2011 period is slightly underestimated.
Sources: 2000-2006 figures DG Agriculture Rural Development in the European Union 2007; 2007-2011 figures are from DG Agriculture Financial Reports for the EAGF and the EAFRD for the respective years.

Year-to year comparisons are made difficult because direct payments are annual payments where changes from year to year reflect policy decisions, mainly the decision to phase in direct payments to the new Member States after their accession in 2004 and 2007 respectively. Pillar 2 payments show a different rhythm as they are linked to programming periods and payments reflect issues to do with policy implementation as much as policy change.
Pillar 2 payments made fell in 2007, the first year of the current programming period, because of the time taken for approval of new programmes and to enter into contracts with farmers and others to spend the money. Within Pillar 2, AEMs are less affected by this disruption because payments continue to be made to farmers who enrolled in AEMs in the previous period and because AEMs are among the first measures that are implemented in rural development plans at the beginning of a programming period.
Thus, we observe the relative importance of Pillar 2 expenditure increasing over time, but within Pillar 2 the relative importance of AEM expenditure is decreasing year on year in the current programming period. With two years to go, the 2007-11 annual averages may provide a reasonable guide to the final outcome.
Within the rural development budget, there is a strong environmental focus. According to the Rural Development Programmes submitted by Member States, 45% of the European Agriculture Fund for Rural Development funding for the 2007-2013 period (some €43 billion) has been allocated to Axis 2 measures (‘improving the environment and the countryside’). Around half of this funding, €22 billion, will be spent on agri-environment measures; €472 million will be spent on Natura 2000 measures on farm land; and €111 million on Natura 2000 measures on forestry land. The actual expenditure figures in Table 1 show that, if anything, Axis 2 measures have been even more important to date and AEM expenditure has maintained its projected share of around 50%.
However, the bottom line is that the relative importance of Pillar 1 and Axis 2 payments has not changed in the current programming period compared to 2000-2006. Indeed, based on expenditure figures to date, the share of AEM expenditures has declined compared to the previous programming period both with respect to Pillar 1 and Pillar 2 payments, even if the absolute amounts, in nominal terms, show an increase. The further cuts in Pillar 2 spending contained in the European Council MFF conclusions suggest that this trend will only continue in the coming programming period.
The future of environmental payments in the CAP

The continued importance of Pillar 1 payments in the CAP shows how entrenched the support is for these payments. This was evident already in the watering-down of the Commission’s modulation proposals during the 2008 Health Check negotiations. This is mainly because of the importance of direct payments in providing income support to EU farmers.
Recognising this as a political reality, environmental NGOs decided to support the Commission’s strategy to green the Pillar 1 payments despite some initial misgivings about the level of ambition implied by the Commission’s three greening measures.
The apparent failure of this strategy will undoubtedly lead to a post-mortem on how best to encourage more environmentally-friendly farming practices across the Union. In this debate, the option of transferring funding for agri-environment measures from DG Agri to DG Environment should be considered.
If those who control agricultural spending are so unwilling to embrace the philosophy of ‘public money for public goods’, then it is time to give a more direct say to those who are charged with implementing an environmental mandate.
Photo credit: Basher Eyre under Creative Commons licence