Agri-environmental policies in the EU and United States: A comparison

Abstract

Agri-environmental policies (AEPs) in the United States and the European Union are examples of payments for environmental services that pay farmers to reduce the negative externalities of agricultural production, while serving as a means to transfer public funds to farmers. We show that despite similar origins, AEPs in the two regions differ both in their specific objectives and in their implementation. For example, AEPs in most member states of the EU-15 have the additional objective of using agriculture as a driver for rural development. This objective is achieved by compensating farmers for the private delivery of positive public goods, such as attractive landscapes, produced by agriculture. The rationale is market failure, and there is empirical evidence that Europeans are willing to pay for such positive externalities. No comparable provision exists in U.S. policy. By contrast, U.S. AEPs focus almost entirely on reducing agriculture's negative externalities, such as soil erosion. Second, we find that U.S. programs are more targeted than their EU counterparts, and take opportunity cost into account. The EU programs, on the other hand, address a wider range of externalities, and are focused more on the paying for a particular farming process than reducing specific negative externalities. The EU takes a broader view of AEPs than does the United States, both in terms of type of activity that can be funded, and by using less targeting by land characteristics, and so the European program could be more easily used as a mechanism for transferring income to producers. Despite this, we find evidence that many of the amenities targeted by the programs are demanded by the population.

Introduction

In the past few years, both Europe and the United States have placed increasing emphasis on programs that compensate farmers for the provision of environmental services (Ilbery and Bowler, 1998). The programs sponsor environmental services targeted at reducing negative externalities, such as nutrient run-off and soil erosion and an increase in positive externalities, such as scenic vistas, or, less tangibly, the spiritual and symbolic value of preserving a farming heritage (Bernstein et al., 2004, Mullarkey et al., 2001). The economic rationale for these programs is that they address a market failure; the provision of such unmarketed environmental services implies that the farmer is deviating from the most lucrative use of the resources at his or her disposal, and should therefore be compensated. AEPs are also used as trade-friendly means to transfer income to producers, for example to encourage farmers to remain on the land even though no output is produced. Despite the parallel growth in AEPs, the two regions have taken very different approaches to paying farmers for environmental services (Baylis et al., 2004, Bernstein et al., 2004). The goal of this paper is to highlight some of these differences, and briefly propose reasons for them. These differences have implications both for how efficiently AEPs provide environmental services, and for their relationship to other farm subsidies.

In the United States, environmental payments have been administered through the Conservation Titles of recent Farm Bills. In Europe, they have been incorporated into Pillar 2 of the Common Agricultural Policy (CAP). Important adjuncts are the cross-compliance provisions associated with the commodity payment section (Pillar I of the CAP) and certain components of the Commodity Title of the Farm Bills. Though compensation for meeting the standards required by cross-compliance would not be classified as “payment for environmental services (PES),” under the definition of this concept adopted by the Center for International Forestry Research (CIFOR, 2005), we consider that cross-compliance linkages, by requiring producers to meet minimum environmental standards before becoming eligible for any farm payments, play an important role in ensuring the efficient delivery of environmental services. To avoid confusion, we will refer below to agri-environmental policies (AEPs) rather than PES, with the understanding that this class of policies – incorporating the Conservation Title, most of Pillar 2 and cross-compliance – may sometimes be broader than the class that satisfies CIFOR's definition as it applies to agriculture. For example, CIFOR's definition requires that the environmental service be ‘well-defined’. AEPs are frequently not well-defined; for example payments may be made for the adoption of a certain technology, even though the nature of the environmental good that adoption would promote may be unspecified. It is also uncertain whether some European AEPs meet CIFOR's conditionality requirement. While the objective for some of the EU programs is to reduce environmental pollution from agriculture, the actions that farmers are paid for do not always produce the environmental objective. For example, while producers may be paid to reduce their use of chemical inputs, the desired environmental service (for example, reduced nitrogen run-off) may not be achieved. In this sense, the payment is not conditional on the environmental service.

In Europe, the shift from direct commodity payments towards agri-environmental and rural development programs has been a cornerstone of the region's response to the Uruguay Round. The linkages between agriculture, the environment and the development or management of rural areas have become encapsulated in the concept of multi-functionality¹. The European Union has taken the position that these additional benefits are typically not marketable and, consequently, would be under-produced relative to the levels desired by society were it not for agri-environmental payments (Ervin, 1999). In the view of some commentators, however, this justification is nothing more than a repackaging of domestic subsidies, pre-Uruguay Round style (Agra Europe editorial, 2001).

The U.S. administration has also used agri-environmental policy as a way to comply with WTO provisions. Funding for conservation programs was substantially increased and new AEPs were introduced in the 2002 Farm Bill. While motivated by concerns similar to the EU's, the U.S. approach to agri-environmental policy is quite different. We suggest that European programs focus on both the positive and negative externalities resulting from agricultural activity. European farmers are rewarded both for the public goods they provide, such as preservation of alpine pastures, and for reducing negative externalities by, for example, promoting organic production. As we explain below, European policy assumes that less intensive farming reduces input use, and therefore negative externalities. This assumption explains the EU's encouragement of methods such as organic farming which require fewer external inputs and therefore are assumed to result in less environmental damage than conventional farming techniques. In contrast U.S. policy pays more directly for the attainment of environmental goals, regardless of the methods used to achieve these outcomes. As an illustration, while EU policy pays farmers to reduce the number of animal units per land area as a means of reducing nitrogen surplus, U.S. policy pays farmers to reduce nitrogen surplus, whether they reduce their stocking rate or they invest in manure storage facilities for their intensive cattle feed-lot.

In Section 2 we compare and contrast agri-environmental policies in the two regions. Specifically, we ask how closely the policies in the two regions represent payments for environmental services, and discuss their efficiency in providing those outputs. We begin by outlining the origins and motivations for the programs, and then discuss various program characteristics, including the services identified, and the mechanisms by which they are targeted. We then move to questions of seller selection and opportunity cost, baseline and additionality, and unintended externalities produced by the policies. Section 3 considers possible reasons for these differences. We conclude with several implications of these differences for the production of environmental services.