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The cost of flat-rate agri-environmental measures

The Commission’s proposals to require shallow, one-size-fits-all, green measures across the EU as a whole in return for a green payment in Pillar 1 have been widely criticised as overly prescriptive, yielding limited environmental benefits (‘greenwash’), administratively complicated for member states and unnecessarily costly in terms of the trade-off with food production.

I reviewed these criticisms in a recent note for the European Parliament’s COMAGRI (link to appear when the note is published shortly). In the note I favoured a continuation of the past CAP reform trajectory in which a larger share of the CAP budget would be shifted to Pillar 2 in order to allow more ambitious and targeted agri-environmental measures (AEM). The apparent unwillingness of the Council of Ministers to countenance a larger Pillar 2 budget (presumably because of the difficulties created by the need for co-financing as well as due to political opposition from farm groups) is the biggest political obstacle to this approach.

Pillar 2 agri-environment schemes not always effective

However, greening through Pillar 2 is not a panacea, as the recent criticisms of Pillar 2 AEMs by the European Court of Auditors make clear. Also, the academic literature evaluating the effectiveness of Pillar 2 AEMs shows a patchy record at best, despite the considerable investment.

Part of the problem is that AEMs are simplified policies in which farmers are offered a flat-rate payment in return for undertaking management actions which are presumed to have positive impacts on one or more environmental variables (biodiversity, water quality, carbon storage). Failing to exploit the differences in the costs of providing environmental services across farms leads to unnecessarily costly and ineffective schemes.

The cost of policy simplification has been measured in a new study by researchers in the UK, US, Denmark and the European Commission’s Joint Research Centre and published in Ecology Letters. Their point is that it is worth going for more individualised, complex schemes in spite of the much higher administrative costs implied by this approach. Indeed, they conclude that the additional implementation costs that accompany policies that account more fully for variation in the costs faced by landowners would be worth bearing even if they constituted more than 70% of the payments that would otherwise go to farmers.

Methodology

It is worth understanding the reasoning behind this claim. The authors investigate a sample of extensive livestock farms in the Peak District National Park in the UK. They first note the inefficiency of flat-rate payments, which in principle are designed to compensate farmers for income foregone in undertaking management prescriptions. They find that only between 12 and 46% of the payments are justified on this basis, although they also note that these are economically marginal farms and that without the AEM payment many of these farms would have a negative farm income and would be likely to go out of business.

The difficulty for a government agency purchasing environmental services is that they do not know the individual cost to farmers of providing these services. The researchers develop a programming model for the Peak District livestock farms which optimises the farm gross margin subject to meeting varying biodiversity targets (birds were chosen as the policy-relevant indicator of biodiversity). By incrementally increasing the amount of a chosen biodiversity target that farmers are required to produce, the researchers recover trade-off curves relating maximum farm profit to biodiversity change.

Some clear conclusions jump out from their analysis. The cost of achieving a given biodiversity improvement varies across locations. Further, the locations offering low-cost gains to biodiversity vary with the conservation target chosen – some farms could increase skylark numbers at relatively low cost, but other farms would be more cost-effective in increasing linnet numbers, for example. The greater the number of conservation targets required of a farmer, the more limited the opportunities for low-cost gains. Indeed, in some cases the management actions to encourage different species might even be contradictory.

Costs of policy simplification

They then discuss the policy that would purchase the maximum improvement in biodiversity for a given budget. The optimal policy design involves preferentially allocating conservation contracts to regions where biodiversity enhancements can be provided relatively cheaply. It also involves setting payment rates that vary across regions and with the amount of biodiversity produced on a farm to recognise the non-linear nature of the trade-off curves. The maximum biodiversity gain possible with the optimal policy is then compared to the biodiversity gain expected in more conventional simpler AEM schemes. (Note that the researchers do not investigate further heterogeneity among different farms within a region – they confine themselves to exploiting differences in biodiversity trade-offs across regions).

Thus, the optimal policy is compared to a successive series of policy simplifications – no sliding payment to farmers within regions for incremental increases in biodiversity reflecting the non-linear costs of achieving higher biodiversity targets; no price variation between regions; and no preferential allocation of contracts to regions where biodiversity can be produced most effectively. Including all policy simplifications resulted in a 49-100% reduction in the amount of biodiversity provided for a given level of investment. The single most important contributor to this loss is the failure to discriminate pricing spatially so that all farmers are paid at the rate of the most expensive region in which biodiversity is being produced.

Of course, implementation costs would be much higher with these more targeted interventions, but the efficiency gains to be made are so substantial that much higher administrative costs are warranted in order to reap the full potential benefits of AEMs.

Further issues

Despite the regular calls for simplification of the CAP, the message of this paper is that more complex schemes are required if public funds are to be used to encourage more environmentally-sustainable farming in a cost-effective way.

Despite the apparently clear policy recommendations of this study, some implementation questions remain. One is that it assumes that policy makers have a clear objective in terms of the level of environmental services from land management that they want to achieve. We may want to reverse the loss of biodiversity and ecosystem services, but what is the appropriate level? Just how many skylarks and linnets is the ‘right’ number? As there is no market for these environmental services, it is difficult to establish how much additional environmental effort is required.

A second issue concerns the recommendation that efforts should be concentrated in those regions where biodiversity (the environmental good measured in this study) can be produced most effectively. This seems appropriate in the case of some environmental issues, for example, carbon storage. The impact of carbon emissions on climate depends on their aggregate level and not on where they are produced, so it makes sense to protect carbon stocks in soils in those regions where this is least costly.

The issue is less clear-cut in the case of other environmental issues, such as biodiversity. Is it sufficient that biodiversity is protected in some specific regions (presumably those more marginal for agricultural production) while in other regions monocultural crops are planted field boundary-to-boundary? Apart from the minimum standards which all farmers must observe to prevent water pollution, further improvement in water quality may be desired in particular catchments because of their importance for drinking water supplies or for other reasons. It may not always be sensible to choose the cheapest locations.

However, these questions do not invalidate the message of the study which is summarised by Dr Paul Wilson, one of its authors, as follows: “The need for different payments, in different areas, to achieve different environmental outcomes lies at the heart of better designed agri-environmental policy.” It is clearly a different approach to that espoused in the Commission’s plans for Pillar 1 greening.

Photograph of grassland near Sheepcote Valley copyright Paul Gillett and licensed for reuse under this Creative Commons Licence.

This post was written by Alan Matthews.

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