When the demand for food/fuel appeared to be fragile, paying for environmental goods seemed a good way of meeting both rural policy objectives (such as maintaining farm incomes) as well as environmental objectives. With rising demand for food/fuel (some, but not all, stoked by public subsidies for biofuels) leading to higher prices, the cost of meeting environmental objectives has suddenly increased. It is not surprising if the quantity of these goods demanded by the public would fall as a result.

The problem, of course, is that we don’t know if we were in a social equilibrium before the recent price increases with just the right relative amounts of food/fuel and environmental goods being produced, because environmental goods are not valued at conventional market prices. Farmers’ production of environmental goods depends, in part, on governments’ willingness to set aside tax revenue to pay for these goods, and environmentalists will argue that the amounts to date have been insufficient.

Ariel is right to argue that a purpose tailored environmental instrument is a better approach to protect biodiversity than to depend on the unintended consequences of an agricultural policy supply management instrument. This, in turn, requires that there be agreement on the Commission’s expected proposal to at least double the rate of compulsory modulation in the Health Check, because modulated funds are the only way to increase Pillar 2 spending before 2014. The rise in farm prices and farm incomes will make it easier to argue that funds should be shifted from income support payments under Pillar 1 to agri-environment schemes under Pillar 2. But firm evidence of the European public’s willingness to pay a higher price for environmental goods such as biodiversity would also be helpful in order to win this debate.