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The challenge of reducing agriculture’s greenhouse gas emissions

One of the innovations proposed in the Commission’s communication on the CAP post-2013 is that more resources in both Pillar 1 and Pillar 2 should be devoted to helping agriculture to mitigate and to adapt to climate change.

“Although GHG emissions from agriculture in the EU have decreased by 20% since 1990, further efforts are possible and will be required to meet the ambitious EU energy and climate agenda. It is important to further unlock the agricultural sector’s potential to mitigate, adapt and make a positive contribution through GHG emission reduction, production efficiency measures including improvements in energy efficiency, biomass and renewable energy production, carbon sequestration and protection of carbon in soils based on innovation. “

In terms of mitigation, the challenge for agriculture is to identify cost-effective mitigation measures which can help the agricultural sector to contribute to challenging greenhouse gas emission reduction targets and the long-term decarbonisation of society. A new article by Dominic Moran and his colleagues at the Scottish Agricultural College which appears in the latest issue of the Journal of Agricultural Economics (may be behind paywall) addresses this issue in the UK context and shows just how difficult the task will be.

The UK is committed to a very ambitious climate change target of reducing national emissions by 80% of 1990 levels by 2050 under its Climate Change Act, 2008. Emissions from agriculture contribute around 8% of the national total. Under the Act, an independent Committee on Climate Change has the job of developing emission reduction targets for each sector not in the EU Emissions Trading Scheme. It recognises that abatement possibilities and costs differ across sectors, so it is developing marginal abatement cost curves (MACC) for each sector to help it set these targets in an economically efficient manner. The new article presents a MACC for UK agriculture and describes the assumptions and methodology behind the approach.

A MACC shows a schedule of abatement measures ordered by their specific costs per unit of carbon dioxide equivalent abated, where the measures are additional to mitigation activity that would be expected to happen in a ‘business as usual’ (BAU) scenario. By comparing the unit marginal abatement cost to the shadow price of carbon, the efficient reduction in emissions can be calculated and the appropriate carbon budget or target set for a sector (the procedure is indicated in the figure below which is taken from the article).

UK MACC curve

The UK MACC curve is characterised by a strong polarity. The researchers conclude that their central feasible potential estimate for abatement would be around 17% of 2005 emissions by 2022, assuming a shadow price of carbon of £36/tCO2e, of which around 12% of current emissions might be abated at negative or zero cost. The cost effectiveness of identified abatement measures beyond this point worsens dramatically and in any event does not enlarge the abatement potential significantly – all abatement measures regardless of cost would reduce UK emissions from agriculture by just 22%.

Improved nitrogen management on arable farms, improved animal genetics and both on-farm and centralised anaerobic digestion are the main abatement measures identified as being cost-effective. Interestingly, the potential of carbon sequestration in grassland does not appear to be identified as a potential abatement measure.

The authors attach a number of caveats to their results. Their approach is to build the agricultural MACC from the bottom up, costing each individual abatement measure by adding it as a constraint to a representative farm optimisation model. The advantage of this approach is that it better allows to take account of the diversity and heterogeneity of farm production, but it is also very demanding of data. The authors found that it was very difficult to get up-to-date estimates of the costs of adopting many of the abatement measures they reviewed.

They make the important point that the abatement potential of any stand-alone measure will be influenced by the simultaneous adoption of other measures. For example, if a farm implements biological fixation, then less nitrogen fertiliser will be required, lessening the extent to which nitrogen fertiliser can be reduced. They allow for this by applying an interaction factor each time an abatement measure is implemented which reduces (or sometimes increases) the abatement potential of subsequent measures.

The authors focus on the abatement potential of agricultural production. Their MACC explicitly excludes emissions from energy use and transportation (which are addressed in the MACCs for these sectors). It also excludes conversion of land use to forestry and the use of land to produce agricultural feedstocks for biofuels. In the latter case, the mitigation benefit accrues to the transportation sector when biofuels substitute for fossil fuels (let us recall that the extent of the saving, especially when indirect land use change is factored in, is very disputed).

The methodology explicitly recognises that there is likely to be a gap between the maximum technical abatement potential and the feasible potential, which will depend on the adoption rate of the measure by farmers. Their central estimate quoted above is based on an explicit assumption regarding adoption of the various abatement measures.

The researchers draw attention to the fact that some of their abatement measures would probably not be recognised for the purposes of calculating the national emissions inventory. This highlights the problem of Monitoring, Verification and Reporting of emission reductions which are dependent on particular management behaviours across tens of thousands of farms. They estimate that not recognising what they call ‘indirect measures’ (measures that reduce emissions indirectly as opposed to a reduction in animal numbers which is seen as a direct measure) would have the effect of reducing the abatement potential in agriculture by around two-thirds. In other words, the cost effective abatement potential that would be recognised in the national inventory would be only around 6% of current emissions – a far cry from the overall 80% reduction sought by the UK government.

The researchers exclude a reduction in animal numbers as a potential abatement measure, on the grounds that this would simply lead to the displacement of production to other countries, with uncertain effects for global emissions. While this is a valid concern, it also highlights the weakness in the MACC approach which concentrates solely on production behaviour and ignores consumption behaviour.

It is very hard to see how we can decarbonise the food system, more broadly defined, without tackling consumption habits and particularly meat consumption. While this is not a call for a move to complete vegetarianism, some reduction in meat consumption in developed countries would seem beneficial to health and absolutely necessary for climate change mitigation.

Note: Front image copyright Thorsten Wagner http://www.flickr.com/photos/7764340@N08/1457879873 and licensed for reuse under Creative Commons licence 2.0.

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Developing country impacts of the next CAP reform

I would like to use this post to draw attention to a recent paper which I wrote for the International Centre for Sustainable Trade and Development which examined how developing countries might be affected by the Commission’s proposals for CAP reform set out in the November 2010 communication. One of the positive features in the communication (and in the accompanying consultation paper for the impact assessment) is the explicit recognition that there is an obligation to consider the impacts on developing countries under the EU’s Policy Coherence for Development commitment.

Impacts of Commission Communication on CAP reform post 2013 on developing countries

The next CAP reform will be politically very contentious because it will affect the distribution of payments (both direct payments and rural development payments) between the Member States. However, I argue in this paper that this internal debate has very limited significance for the EU’s trading partners. The important issues for third countries are proposed changes to (a) market management instruments and (b) the scale and design of direct payments, including rural development measures.

But the Commission Communication has very little to say on market management and market access issues. For example, it is disappointing that the Communication fails to give a clear commitment to phasing out the use of export subsidies after 2013. The Commission sees this as an integral part of the Doha Round negotiations which, like improvements in market access, should wait until there is a successful outcome to the Doha Round.

The main action will be the removal of quotas on milk production after 2015 which will lead to increased production of dairy products and a lower internal EU price. This will tend to keep global dairy products prices below the level they would otherwise reach. Recent trends in EU milk production indicate that quotas are no longer a binding constraint on milk output in an increasing number of Member States, so the impact of their removal will have an even smaller effect than might have been envisaged some years ago. The possible removal of sugar quotas after 2015 also needs to be kept in mind, given its greater ramifications for developing countries both as exporters and importers.

Many developing countries have raised concerns that the sheer scale of direct payments to EU farmers, including decoupled income support payments, could cause more than minimal trade distortion as required for Green Box eligibility under WTO rules. EU figures show that the share of direct payments and total subsidies in agricultural factor income is 28% and 40% respectively for the EU-27, suggesting that much EU agricultural production would not be economically sustainable, at least with current farm structures, in the absence of this support.

The proposed reform will influence this concern in two ways, by altering both the composition of Green Box expenditures and their scale. The targeting and greening of direct payments proposed in the communication could shift direct payments from decoupled income support to environmental and regional assistance programmes which would reduce concerns about their trade-distorting impacts. Although it is unclear how a redefined direct payment would be classified in WTO terms until the precise details are determined, in principle attaching additional conditions or greater targeting to the receipt of direct payments will always lower their trade-distorting impact.

These composition effects will be less important than the decisions made about the overall budget envelope to be made available for the CAP and how this is divided between direct payments and rural development payments, and in turn how the direct payments envelope is divided between the basic income payment, the green payment and the natural handicaps payment. These parameters will not be decided until the very end of the negotiation processes involving both the future of the CAP and the future of the EU budget, and thus will not be known for some time.

While it is understandable that developing countries are suspicious of the apparent ‘box-shifting’ resulting from the redesign of EU agricultural subsidies, in practice this is very much a secondary issue. The explicit intention of defining different boxes was to encourage countries to move from more trade distorting forms of support to less trade distorting forms. We already see that the EU has moved from a net exporter status of particular products to a net importer status as a result, e.g. in sugar, beef and poultrymeat.

The key barriers to developing country exports remain the high tariffs on imports and the continued resort to export subsidies. To tackle these, agreement is needed in the Doha Round trade negotiations. Compared to the potential gains on offer to competitive developing country exporters from a significant reduction in EU trade barriers, the redesign of direct payments which is the focus of the November 2010 Communication is mostly a sideshow.

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Heads you win, tails I lose

Wyn Grant, Professor at Warwick University and an expert on the CAP, blogs on the subject over at commonagpolicy.blogspot.com. In a blog post this week on ‘The subsidies dilemma’, he notes:

I was recently talking to a journalist from an esteemed weekly who has written on the CAP. He commented that when prices were low, the French (as the main defenders of the CAP) said that subsidies were needed to boost farm incomes. When prices were high or volatile, they were needed to ensure food security. He once asked a French minister if there were then any conceivable market circumstances in which an argument could not be produced in favour of subsidies.

How true, how very true. The rest of Wyn’s post is well worth reading.

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Doha round agreement would leave EU farm subsidies untouched

According to the EU’s recent notification of farm subsidies to the WTO for the marketing year 2007/08, the EU’s trade distorting farm subsidies fell to a record low of 12.3 billion euros.

As the ICTSD reports,

“For the first time ever, the recent figures would put the EU’s overall trade-distorting support below the proposed new ceiling of 22 billion euros that would be established by a Doha Round accord under the terms currently being considered at the WTO. The Doha deal would create a new subsidy cap that limits the total amount of amber, blue and de minimis support that countries are allowed to provide.”

In other words, on the basis of the notification for 2007/08 (the most up to date that the EU has made), a Doha deal would not require the EU to change any of its farm subsidy policies. This comes as little surprise since the EU wave the magic wand of decoupling and ensured that most of the money it pays farmers is theoretically ‘non trade distorting’ and therefore unaffected by WTO disciplines.*

The EU’s notification data indicates that non production-linked support hit a record high of 62.6 billion euros in 2007/08. Add that to the 12.3 billion euros of production-linked (amber box) support, 5.17 billion euros of production-limiting (blue box) support and 2.39 billion euros of ‘de minimis’ support, the grand total is 82.5 billion euros of aid in a single year – quite a sum to have spent supporting agriculture, particularly in a year that saw commodity prices hit record highs. The graph below, compiled by ICTSD, shows the trend over the past decades.

* It’s worth remembering that a Doha deal would have implications for some of the EU’s tariffs on food imports and this would likely to have an impact on the more heavily tariff-protected sectors such as beef, sugar beet and dairy, though a great deal of that depends on the extent of the exemptions granted for ‘sensitive products’.

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Ciolos hearing at the House of Commons

On 13 January, Dacian Ciolos gave testimony to the UK Environment, Food and Rural Affairs Committee on CAP reform.

Emphasis on international competition as a justification for income support

I don’t see how our agriculture can, at the same time, be competitive in the international market and have higher level of standards than farmers in other parts of the world.

But if we don’t have this minimum support for income and compensatory payments, the risk is that a lot of farmers who can be competitive without the crosscompliance rules that we have in Europe but not in other parts of the world-who in normal situations can be competitive-will not be competitive.

Active farmers

Ciolos showed strong commitment to the concept of ‘active farmers’. He stated one minimum requirement clearly. When asked whether he would “expect some agricultural goods to be produced for someone to be defined as an active farmer?”, Mr. Ciolos responded ‘Yes. If not, we cannot talk about agriculture or the farmer.’ But otherwise, he provided little substance on how a practical definition could look like, and he admitted:

We can’t expect to have a common definition at European level. This is why now the objective of the Commission is to come with, let’s say, a negative definition-who is not an active farmer-and then the Member States will define who is an active farmer, taking into account the specific situation at national level.

Cap on direct income support

Mr. Ciolos supported the idea of a cap. But when asked whether there is ‘a danger that the larger farm holdings will simpler reorganise themselves into smaller holdings to get around any cap’, he did not offer much clarification:

Especially with big farms, I don’t think their objective is only to have a big amount of payments from public money. I don’t think that we will have a very important phenomenon of the splitting or separation of farms only to have payments. I think a farmer uses other logic when he decides on the structure of production and farms, and is thinking not only about having a level of direct payments.

Small farms

The idea is not to increase direct payments for small farms, but to make them simpler, and then to propose a lot of instruments-like training, investment and organisation of production groups-in order to integrate the small farms more into the market than at present.

We propose to generalise decoupled payments in all Europe and to maintain coupled payments only in some specific regions, for some specific products.

Financial allocation within the first pillar

Q: ‘How do you envisage money being shared between the two main elements of the new direct payments-that is, basic income support and the greening component?’

We are analysing several scenarios, but I think we can go up to maybe one third of the direct payments being linked to the production and delivery of public goods of greening.

Q: ‘Are you considering basing the payment for greening activities in Pillar 1 on objective criteria, such as the additional cost of delivery or the environmental benefit?’

I can see that this part of the greening payments is exactly the level of the production costs for a farm that decides to integrate this measure. The objective, in fact, for us is to use this part of the payments to incentivise a farmer to do more, not only to have a payment in exchange.

Further remarks

The oral evidence shows nicely the broadly practiced art of claiming, at the same time, that the CAP creates no distortions in the international economy (‘I don’t think that we can now say that we influence the level of prices in countries in the south.’) and that similar levels of payment are needed within the EU to avoid distortions (‘Here we can have a distortion in the market if categories of farms have different treatment.’).

Mr. Ciolos denied again that there is any conflict between supporting the delivery of public goods and the standard of living of farmers.

Of course, I don’t think there’s a contradiction between these two objectives, but it will depend on the resources that we have for the Common Agricultural Policy.

I don’t think that there is a tension in the CAP between ensuring good standards of living of farmers and the delivery of public goods if the first Pillar of direct payment is reformed

He furthermore repeated the idea that agriculture is more affected by governmental regulation than other sectors:

It’s the only sector, I think, in Europe that has to play an economic role and plays a part in the market but, at the same time, has to integrate a lot of rules imposed by society. The automotive industry, the textile industry and other industries do not integrate a lot of expectations from people in the way that agriculture does.

I am sure that a list of the costs of regulatory compliance in the automotive industry with all its safety requirements and environmental standards would be quite long. Also, remember the compliance challenge for the chemical industry under REACH. And all the emission standards that affect industrial production in the EU (and which do not apply to imports). And all the legislation on work safety, healthy working conditions, employee rights and job security that affect large companies much more than small farms.

A last point:

I also remind you that the discussion in Doha was not blocked because of the resistance of the European Union, but because of the resistance of the other partners

It’s true: the recent stalemates have not been directly provoked by the CAP. But weak and conservative signals on agriculture from the EU at the beginning of the Doha-Round did quite a bit in bogging negotiations down. With a clear and early commitment from the EU that substantial agricultural liberalization is on the negotiating table, the Doha negotiations might have take a different path.

You can download the transcript here. Please note: The transcript is not yet an approved formal record of these proceedings. Any public use of, or reference to, the contents should make clear that neither members nor witnesses have had the opportunity to correct the record.

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Food for thought against food security concerns

World food prices are on the rise again. In December 2010, they exceeded the dramatic peak they had reached during the global food crisis in 2007/08. Add to this threatening megatrends, such as population growth and climate change, and think of recent news about the severe drought in Russia or the once-in-a-century flooding in Australia, both major staple food exporters. Who wouldn’t get an uneasy feeling that the specter of famine might come to haunt Europe again?

The European Commission has concluded in its communication on the post-2013 CAP that the CAP must preserve the EU’s food production potential, ‘so as to guarantee long-term food security for European citizens’. Similarly, ministers of agriculture from 22 member states claim in their Paris Declaration that ‘only an ambitious, continent-wide policy can safeguard Europe’s independence’.

Surprisingly, however, there are no scenarios and no calculations to substantiate this perceived threat. Only the Department for Environment, Food and Rural Affairs (Defra) has conducted a Food Security Assessment. The lessons are clear-cut: there are no discernible dangers for the UK. In a recent working paper, I have looked at the entire EU.

EU food production per capita has constantly increased in the past and far outstrips dietary energy requirements. The share of income that households spend on food has steadily declined. By now, food prices are so low compared to income that even a 10-fold increase in the farm gate price of staple crops would be far off from provoking food scarcity in the EU. Forecasts predict roughly stable or increasing production quantities for the EU – even in the case of subsidy and tariff cuts. The expected main effect of climate change during the coming decades will be to shift production from southern to northern Europe without significantly curtailing overall production.

If food prices rose dramatically, the EU could increase the agricultural area used for growing cereals; in particular, by cutting back on biofuel and livestock production. Furthermore, agricultural labor and capital input could be multiplied. An additional measure would be to enhance investments into agricultural productivity.

The EU does thus not depend on imports for its food security. Still, it’s interesting to have a closer look at EU food imports. Since food prices are so low compared with EU wealth that the EU could afford sufficient imports even if prices rose tenfold (always speaking of basic staples, not caviar and passion fruit), only export restrictions could impair the EU’s import potential. A number of considerations show how unlikely this threat is.

Agricultural markets are becoming thicker: world food trade has increased by 230% between 2000 and 2008 according to the FAO. The greater the volumes, the more food can still be bought on the world market if a given amount of supplies is interrupted.

Export concentration has been low, or at least decreasing, during recent decades in the most important agricultural markets, as Defra notes in its Food Security Assessment. The concentration of countries’ share in world food exports matters because export restrictions are more lucrative and can be more easily upheld if most of the market is in the hands of one or few suppliers.

A significant share of EU imports comes from highly reliable exporters: the US, Switzerland, Canada, Australia and New Zealand. These countries could greatly expand their exports to the EU if the need arose. The other main source of exports to the EU, South America, is decently stable. The figure below shows the market shares of key exporters to the EU (it stems, as the following figures, from the DG Agri MAP newsletter).

Food is a homogenous good if the issue is not taste but calories. If exports of wheat were seriously curtailed, they could be replaced by rice, maize and other grains. Export restrictions are therefore less harmful to importers and less attractive to exporters.

Food is mostly traded on a spot market and can be easily transported. Food thus differs greatly from oil and gas where imports hinge on long-term contracts, pipelines and suitable refineries.

Food production in major exporting countries can be more easily increased than energy production (beyond currently available capacity) as the latter depends on long-term capital investments. If some suppliers restrict their exports, it is thus easier for their competitors to pick up market shares.

No prolonged and encompassing phases of export restrictions have occurred since the Second World War. Export restrictions taken during the 2007/08 price spikes were usually of short duration and limited to one or a few products.

The EU imports relatively little staple food. Most agricultural imports are either feedstuff (soya), ‘luxury’ products (coffee, tea, tobacco, sugar, exotic fruits, meat, food preparations) or products with multiple non-food uses (palm oil). The figures below show this at a highly aggregated level and for the main imported products.

All readers are cordially invited to discuss these issues at a lunch seminar at ECIPE in Brussels on January 26.

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Commission's home truths on the CAP

While the Commission’s Communication on the future of the CAP after 2013 is less remarkable for what it says than what it leaves out, one of the accompanying documents is a fascinating read, and reveals much about how the Commission regards the future of the EU’s €55 billion-a-year farm policy.
Despite its unpromising title, the Consultation Document for Impact Assessment shows there are at least some people in the DG Agri bunker who are engaging their brains on the future of the CAP. What’s more, the document hints we might expect something altogether more radical and ambitious when the Commission’s legislative proposals are made later this year.
Most striking about the document are the home truths told about the state of EU agriculture – admissions that one would rarely, if ever, hear uttered in public by a Commissioner or a senior DG Agri official.
First, European farming is in a parlous economic state and ‘the current policy has a strong focus on income support’. According to the document’s authors, farming is chronically unprofitable and the imperative of “short term survival dominates the perception of many farmers”, making it very difficult to reorient policy towards greater economic and environmental sustainability. Income support measures not only dominate the policy but are unfair, insufficiently targeted and ‘hard to justify to the general public’.
Second, food security concerns advanced by farm unions and others are misplaced. All but the very poorest Europeans can afford to feed themselves perfectly adequately and are likely to be able to do so for the foreseeable future. Food security may be an issue for people in the Global South living on less than $2 a day, but not for relatively wealthy Europeans. The dominant food policy worry for Europeans is over-consumption and the authors pulls no punches in blaming the food industry and the mass media for the marketing of “unhealthy food stuffs (soft drinks, highly processed foods)” that contribute to obesity, diabetes, cardiovascular disease and cancer.
Third, while much rhetoric is devoted to the public goods provided by farming, the reality is that agriculture does as much to despoil the environment as it does to enhance it. Agriculture is using more water than ever, particularly in southern Europe where it is a particularly precious resource. A quarter of EU soils suffer from unsustainable erosion and almost half have low organic matter content. Biodiversity is declining across the continent, and farmland wildlife is suffering the most. Agriculture contributes upwards of 10 per cent of EU greenhouse gas emissions, yet is exempt from the Emissions Trading System. (On the positive side, fewer agrichemicals are being applied than in the recent past).
In considering the farm income question, which is rapidly emerging from the shadows as the fundamental justification for the CAP, the Commission authors make a basic but fundamental error that has been previously discussed on this blog. They equate income-from-farming with the incomes of farm households. While income from farming may be ‘lower than that of the rest of the economy’, it doesn’t follow that incomes of farm households are necessarily any lower than non-farming households. At least a third of farmers have non-farm incomes (and yet more have a spouse with a non-farm income). This ought to be taken into account in deciding whether farm households need a dedicated, EU-funded income support policy. More time should be spent on the question of whether farmers should continue to enjoy an EU-funded income support policy that is not offered to any other sector of the European economy.
The document concludes by proposing three objectives for the future CAP and five scenarios for the future of the CAP. The objectives are:
1. Maintaining agricultural production capacity throughout the EU (but don’t tell anyone at the WTO!)
2. Preserving natural resources and the countryside
3. Contributing to the vitality of rural areas
The five proposed scenarios to be analysed in detail in the full impact assessment are as follows:
1. ‘Adjustment scenario’ – gradual change in line with previous reforms of the CAP.
2. ‘Integration scenario’ – a thoroughly revised policy framework to address three objectives via substantial changes to both the first and second pillars of the CAP.
3. ‘Re-focus scenario’ – phase out the income support and market management elements of the CAP in favour of a less expensive policy targeted on sustainable growth, environmental conservation and climate change (economic and social policies would be hived off from the CAP to the EU’s existing cohesion policy).
4. Status quo
5. No policy
The document is open for consultation until 25 January 2011 and respondents are invited to address eleven questions listed at the very end.

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Commission’s home truths on the CAP

While the Commission’s Communication on the future of the CAP after 2013 is less remarkable for what it says than what it leaves out, one of the accompanying documents is a fascinating read, and reveals much about how the Commission regards the future of the EU’s €55 billion-a-year farm policy.

Despite its unpromising title, the Consultation Document for Impact Assessment shows there are at least some people in the DG Agri bunker who are engaging their brains on the future of the CAP. What’s more, the document hints we might expect something altogether more radical and ambitious when the Commission’s legislative proposals are made later this year.

Most striking about the document are the home truths told about the state of EU agriculture – admissions that one would rarely, if ever, hear uttered in public by a Commissioner or a senior DG Agri official.

First, European farming is in a parlous economic state and ‘the current policy has a strong focus on income support’. According to the document’s authors, farming is chronically unprofitable and the imperative of “short term survival dominates the perception of many farmers”, making it very difficult to reorient policy towards greater economic and environmental sustainability. Income support measures not only dominate the policy but are unfair, insufficiently targeted and ‘hard to justify to the general public’.

Second, food security concerns advanced by farm unions and others are misplaced. All but the very poorest Europeans can afford to feed themselves perfectly adequately and are likely to be able to do so for the foreseeable future. Food security may be an issue for people in the Global South living on less than $2 a day, but not for relatively wealthy Europeans. The dominant food policy worry for Europeans is over-consumption and the authors pulls no punches in blaming the food industry and the mass media for the marketing of “unhealthy food stuffs (soft drinks, highly processed foods)” that contribute to obesity, diabetes, cardiovascular disease and cancer.

Third, while much rhetoric is devoted to the public goods provided by farming, the reality is that agriculture does as much to despoil the environment as it does to enhance it. Agriculture is using more water than ever, particularly in southern Europe where it is a particularly precious resource. A quarter of EU soils suffer from unsustainable erosion and almost half have low organic matter content. Biodiversity is declining across the continent, and farmland wildlife is suffering the most. Agriculture contributes upwards of 10 per cent of EU greenhouse gas emissions, yet is exempt from the Emissions Trading System. (On the positive side, fewer agrichemicals are being applied than in the recent past).

In considering the farm income question, which is rapidly emerging from the shadows as the fundamental justification for the CAP, the Commission authors make a basic but fundamental error that has been previously discussed on this blog. They equate income-from-farming with the incomes of farm households. While income from farming may be ‘lower than that of the rest of the economy’, it doesn’t follow that incomes of farm households are necessarily any lower than non-farming households. At least a third of farmers have non-farm incomes (and yet more have a spouse with a non-farm income). This ought to be taken into account in deciding whether farm households need a dedicated, EU-funded income support policy. More time should be spent on the question of whether farmers should continue to enjoy an EU-funded income support policy that is not offered to any other sector of the European economy.

The document concludes by proposing three objectives for the future CAP and five scenarios for the future of the CAP. The objectives are:

1. Maintaining agricultural production capacity throughout the EU (but don’t tell anyone at the WTO!)

2. Preserving natural resources and the countryside

3. Contributing to the vitality of rural areas

The five proposed scenarios to be analysed in detail in the full impact assessment are as follows:

1. ‘Adjustment scenario’ – gradual change in line with previous reforms of the CAP.

2. ‘Integration scenario’ – a thoroughly revised policy framework to address three objectives via substantial changes to both the first and second pillars of the CAP.

3. ‘Re-focus scenario’ – phase out the income support and market management elements of the CAP in favour of a less expensive policy targeted on sustainable growth, environmental conservation and climate change (economic and social policies would be hived off from the CAP to the EU’s existing cohesion policy).

4. Status quo

5. No policy

The document is open for consultation until 25 January 2011 and respondents are invited to address eleven questions listed at the very end.

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EU budget debate advances

The likely size of the EU budget in the next financial perspective period (the length of which still remains to be decided, whether 2013-2000 or 2013-2024) became a little clearer last month with the publication of a letter to the President of the European Commission signed by five Member States including France, Germany and the UK as well as the Netherlands and Finland.

This called for an increase in payment appropriations over the 2013 by no more than the rate of inflation, thus maintaining the size of the EU budget constant in real terms. The letter called for commitment appropriations to increase by less than the rate of inflation. It is significant that the letter did not call for a cut in the absolute size of the budget, which has been happening in some Member States.

Proposing the new financial perspective is the prerogative of the Commission, which will make its proposal in July this year. And Commission officials were careful to downplay the significance of the letter, as it is important that the Commission does not appear to be taking its cue from the member states.

Maintaining the EU budget in real terms would imply that its importance as a share of EU GDP would fall over time, assuming real growth in the EU economy. This position is opposed, in particular, by some of the new Member States led by Poland which seek to retain the same share of the EU budget in EU GDP over time, which would see a real increase in its resources.

However, as reported by Euractiv, not all the new Member States seem to feel equally strongly about this. What seems more important for these countries is to maintain the flow of funds under cohesion policy and to bring about a more equal distribution of CAP payments. These issues are more important than the overall size of the budget per se.

This may not be an impossible circle to square. Remember that CAP payments are fixed in nominal terms. Assuming an annual inflation rate of 2%, then an EU budget fixed in real terms would have 14% more nominal resources to play with at the end of 2020. This could allow meeting the new member state demands without affecting the (nominal) transfers currently received under the CAP by the old Member States.

Such an outcome would, of course, be an extremely conservative and status quo-oriented response to the challenge of designing an EU budget fit to underpin the Europe 2020 strategy, but it does suggest that the parameters of the debate are narrower than is sometimes assumed.

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Biofuels: is the game up?

The EU Commission’s report on indirect land use change related to biofuels and bioliquids released just before Christmas has made the continuation of the EU’s renewable energy in transport targets extremely problematic. Indeed, it is hard to see how this policy can survive in the New Year without some extremely clever footwork by the Commission.

Further studies recommended

The report was mandated by the Directives setting out the EU’s renewable energy targets, which required the Commission to review the impact of indirect land use change on greenhouse gas emissions and to address ways to minimise that impact, including proposing a concrete methodology to incorporate emissions from carbon stock changes caused by indirect land-use change.

After a two-year investigation, the Commission report has accepted that indirect land use change (ILUC) will reduce carbon savings from biofuels, but it stopped short of immediately recommending new barriers against unsustainable biofuels. Instead, it has delayed the announcement of its biofuels strategy for a further six months in order to undertake additional studies.

During this period it proposes to finalise its impact assessment, focusing on the following four policy options:
(1) take no action for the time being, while continuing to monitor,
(2) increase the minimum greenhouse gas saving threshold for biofuels,
(3) introduce additional sustainability requirements on certain categories of biofuels,
(4) attribute a quantity of greenhouse gas emissions to biofuels reflecting the estimated
indirect land-use impact.

Sustainability criteria

A close reading of the report, in conjunction with the Commission’s existing sustainability criteria, suggests that it will be hard to defend the existing mandatory targets by 2020. The report does not explicitly conclude, as some critics have alleged, that the biofuels policy could actually increase global GHG emissions once ILUC is factored in, but that appears to be implied and it certainly suggests that achieving the existing sustainability criteria will be extremely difficult.

The sustainability criteria adopted by the Commission last June aim at preventing the conversion of areas of high carbon stock and high biodiversity for the production of raw materials for biofuels. They also require biofuels to achieve minimum greenhouse gas emission savings of 35% compared to fossil fuels. This requirement is progressive as it increases to 50% in 2017 and 60% in 2018 for new installations.

As the EU reference figure for GHG emissions from transport fuel is 83.8 kg CO2eq/GJ, this implies that emissions from a sustainable biofuel cannot exceed 54.3 kg CO2eq/GJ in the short term.

Factoring in indirect land use change

ILUC can never be observed, thus calculations of its extent must depend on modelling which is inherently uncertain. The EU report is based on a comprehensive literature review of existing model results, as well as two original modelling exercises. One exercise was undertaken by IPTS (the Commission’s in-house research unit) and uses the AGLINK-COSIMO model which the Commission uses for its medium-term market forecasts. The other exercise was undertaken by IFPRI using the MIRAGE model.

The report contains a table comparing the ILUC emissions for a specific biofuel pathway (maize-ethanol). Ignoring the two outliers, the emissions are concentrated in the range 40-50 kg CO2eq/GJ.

Using a specially developed land conversion module (which essentially shows where the new crop land will come from, taking into account land suitability and distance from existing cultivated areas), the Commission report calculates the GHG emissions from its two independent modelling exercises, assuming scenarios based on incorporating around 8.5% conventional biofuels in transport fuel. It finds that emissions would be 64 kg/GJ for AGLINK-COSIMO, and 34-41 kg/GJ for the IFPRI MIRAGE central scenario.

Assume that the Commission, after its six months reflection, finds that the appropriate quantity of GHG emissions to attribute to ILUC is, say, 45 kg CO2eq/GJ (it would not be appropriate to have a single value given different feedstocks and producing regions, but we use this for illustration). Under its own criteria that biofuels can only count towards the renewables target if they show a GHG saving of at least 35% relative to fossil fuels, then only biofuels with a lifecycle emissions of less than 9 kg/GJ excluding ILUC (54 – 45 kg/GJ) would be eligible. This would exclude the vast majority of current biofuels and would require, if not the scrapping, at least the postponement of the current 10% renewables in transport fuels target.

If the biofuel targets are suspended, at least until second-generation biofuel technology is fully commercialised, this will have a perceptible dampening effect on the outlook for some agricultural prices for the rest of this decade.

UPDATE 30 Dec 2010
Since writing this I have come across a report prepared by researchers at the Netherlands Environmental Assessment Agency as an input to the Commission’s public consultation on ILUC, and which makes the same point that I make in this post from a different perspective. Using the default GHG emission factors in the Renewable Energy Directive, it has prepared a table showing how much ‘headroom’ would be left for ILUC emissions if the Commission’s sustainability criteria were to be met. As can be seen from the table below, the available headroom is well below any realistic ILUC value. It concludes that “Most biofuels with ILUC effects do not fit into a long-term perspective with an 80 to 95% reduction in greenhouse gas emissions. Other technical options, without ILUC effects, such as advanced biofuels and zero-emission vehicles, do.”

ILUC emission factors

Note: Front image copyright Chris Upson http://www.geograph.org.uk/profile/2067 and licensed for reuse under Creative Commons licence 2.0.