Whats Behind EU Agrienvironmental Programs: Pollution or Politics

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Whats Behind EU Agri-environmental Programs
Pollution or Politics?
Lessons and Trade Implications for Canada

• Kathy Baylis, UBC
• Rural Economy and Alberta Agricultural Economics
  Association Seminar.
• Edmonton, AB, Fri, Nov. 4, 2005

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Introduction

• EU has moved funding from direct price supports
  to Agri-Environmental (AE) programs.
• EU position that some ag. subsidies are needed to
  provide optimal amount of externalities (both
  positive and negative).
• multifunctional nature of agriculture.

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Introduction

• Some (esp. U.S.) argue that these are just
  production subsidies in a nice package.
• Which view is right has implication for future
  trade reforms.

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Question

• What is the motivation behind AE programs in the
  EU?
• Three lenses through which one can view these
  programs.
• Cairns lens,
• Multifunctional lens,
• Cynical lens.
• Each lens is by itself a straw man.
• Goal of paper assign weights to lenses.

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Why do we care?

• Each lens has a different implication for the
  WTO.
• And a different implication for production/trade.
• Other countries (esp. US) considering following
  suit (esp. after cotton case).
• Canada considering AEPs too.

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Outline

• Background on EU Ag Policy reforms
• Brief description of EU AE programs
• Potential motivators for AE programs
• (initial) Regression results
• Conclusions
• Implications for Canada

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Pressure behind EU CAP reforms

• Response
• Development of Pillar 2 (Rural Development),
  switching from production to area subsidies,
  modulation.
• Protection of biodiversity begins in 1980s -
  limited to wealthy northern countries. Agenda
  2000 reforms lead to wider environmental
  protection.
• Compulsory modulation (starting 2005) transfer
  of money from production subsidies to rural
  economy.

• Pressure
• Overproduction from production subsidies gt
  budgetary crises, storage problems, dumping.
• Pollution, food-scares, land-use concerns drive
  general reaction against intensive farming
  (especially livestock, lead by A-R lobby)
• Expansion of EU includes countries highly
  dependent on agriculture (Poland 25 GDP) -
  continuation of CAP impossible.

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Outline of EU Rural Policy

• The EU wants to reduce production and
  pollution, while encouraging the positive
  externalities of farming. Its agricultural policy
  encourages
• Extensification to prevent land abandonment.
• Reduced farming intensity, e.g. organic farming
  and pasture preservation. (Organic farming is the
  only measure within the AEPs to be taken up by
  all member states.)
• Restrictions on livestock intensity.
  Cross-compliance with national Good Farming
  Practices raises the standard for farmers
  claiming Pillar 2 money.
• Policies and payments are set by member states,
  co-financed by Brussels.

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Timeline of EU AEP Development

• 1950s concern over food-security after WWII
  shortages makes agricultural productivity very
  important for both food and fibre but also as a
  means and a symbol for reconstruction and
  integration.
• 1970s-80s Mechanisation and yield increases lead
  to production at unsustainable levels. By 1990s
  CAP takes well over half the EU total budget.
• 1980s As agriculture becomes less important to
  national economies, pressure for change grows.
  Havergate Marshes is first instance of farmers
  being paid to farm less intensively.
• 1985 voluntary protection of Environmentally
  Sensitive Areas (ESAs).
• 1992 MacSharry reforms (adopted 1994) reduced
  price supports but substituted direct payments.
  Allowed the Uruguay Agreement on Ag to be
  approved. Required countries to introduce AE
  measures.

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Agenda 2000

• Agenda 2000 continue replacing production
  subsidies with area subsidies. Rural Development
  Programs, incl. AEPs become compulsory.
• Based on
• The multifunctionality of agriculture. This
  implies the recognition and encouragement of the
  range of services provided by farmers.
• Subsidies to the rural economy to diversify
  income and activities and protect the rural
  heritage.
• Flexible aids for rural development, based on
  subsidiarity and promoting decentralisation,
  consultation at regional, local and partnership
  level.

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Most recent reforms (2003) single farm payment

• Single-farm payments. Most countries start in
  2005/2006, new member states start right away.
  Modulation is the gradual shifting (by about 5
  a year) of money from Pillar 1 to Pillar 2. Now
  compulsory after some years as a voluntary
  measure (taken up almost exclusively by the
  British).
• Commodity price reduction continued.
• Support for rye eliminated, substantial
  reductions in support for rice, butter, skim
  powder. Beef support reduced.
• Support continued for major grains, dairy
  products.
• However prices for EU sugar, dairy products and
  beef remain well above world levels.

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Most recent reforms (2003) single farm payment

• Payments tied to maintaining land in good
  agricultural condition and comply with national
  standards classified as Good Farming Practice.
  This linkage is known as cross-compliance.

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Things to note (differences from U.S. programs)

• Extensification explicitly encouraged
  (anti-abandonment, pasture programs).
• Both positive and negative externalities
  targeted.
• Negative externalities targeted almost
  exclusively result from intensive agriculture.
• Target action not (anticipated) outcome.

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EU AE programs by externality
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Funding Provisions

• Unlike price supports, member states pay 50
  (sometimes 25).
• Large variation in uptake by member state.
• Large variation in programs by member state.

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Background on AE Payments
Total Ag and AE Expenditures
AE as a of total Ag
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Types of AEP measures by Member State, 2002
Source DEFRA (2002)
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Key AEP Stakeholders

• Farmers
• Highly-capitalised intensive farming in northern
  countries (UK, France, Netherlands), but
• agriculture more economically important in
  southern countries (Portugal, Greece).
• Environmentalists
• consumptive (use-value) and non-consumptive
  (environmentalists).
• Rural populations
• includes rural migrants,
• non-farming rural dwellers, making their living
  on the fringes of the rural economy.
• Taxpayers/Consumers
• May want public goods
• But not at any cost
• Care about cost of food

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Farmers

• Maximise profit by balancing income from Pillar 1
  production subsidies and Pillar 2 area payments.
• As modulation takes effect, Pillar 1 money
  switches to Pillar 2, encouraging reduction of
  farming intensity.
• Response depends on degree of change needed, sunk
  costs, adaptability.

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Environmentalists

• Both consumptive and non-consumptive, likely to
  want increasing bio-diversity, delivered through,
  for example, Natura and organic farming
  increases.
• Opposed to intensive farming with its use of
  agro-chemicals and almost any type of
  construction in rural areas.
• Tend to be urban, educated and higher-income.

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Rural Population

• Rural immigrants and non-farming local
  populations.
• Rural immigrants (counter-urbanisation)
  middle-class families leaving urban centres for
  the perceived benefits of rural life (fresh air,
  less traffic, kinder people). Will benefit from
  AEPs and the reduction in farming intensity which
  follows farming life begins to resemble
  story-books. (an end group).
• Non-farming rural populations are those whose
  families have been living in rural areas for some
  generations. Because European rural economies are
  fundamentally agricultural, jobs outside the
  agricultural sector are limited. Will benefit
  from the rural economy stimulation of Pillar 2.

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Taxpayers/Consumers

• Want amenities
• Want to limit government expenditure
• Want food at low(er) cost

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Government

• Assume government maximises a weighted sum of the
  welfare of these groups.
• Need to balance production of true
  externalities versus farmers demand for support
  versus budget constraints.
• Each group will have more or less importance,
  depending on access and size.

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Hypotheses

• AE address existing pollution.
• AE programs address demand for environmental/rural
  amenities.
• AE programs are converted price-supports.
• AE programs are affected by access (lobby
  strength and effectiveness)

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Data

• LHS
• EU AE expenditures/total Ag expenditure by member
  state from 1992 to 1998, 2000-2003.
• RHS
• Pollution/Farm intensity
• pesticide use per ha, N surplus
• permanent pasture
• Farm size
• Farm equipment (sunk costs)
• Demand for env. services
• domestic tourism, measure of Greeness, Internet

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Data

• RHS contd
• Env. Lobby strength
• Proportional Representation.
• Demand for farm support
• Past Ag. Subsidies, cross-compliance, farm
  employment, regional voting.
• Ag Lobby strength
• EU elections, employment in ag, rural pop (sort
  of).

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Results in words

• Pollution
• Those member states with the worst pollution
  problems do not spend the most to address these
  problems.
• Those with the most intensive agriculture spend
  less to address pollution from ag.

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Results contd.

• Demand for Env. Services
• more green member states spend a higher portion
  of Ag. Exp. on AE.
• Env. Lobby strength
• PR seems to make a difference.

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Results contd

• Ag demand
• Evidence that strong ag. lobby prefers
  traditional Ag. Supports.
• No evidence that AE higher in member states with
  higher overall Ag. Exp.

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Conclusions

• AE programs not going to member states with
  greatest environmental need.
• That said, evidence that AE programs are (in
  part) demand-driven, while farmers may be
  somewhat reluctant beneficiaries.
• Evidence that political structure matters.

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Conclusion r.e. three lenses

• Some evidence for multifunctionality lens
  payments are correlated with demand.
• Some evidence for cynical lens payments going
  to farmers who dont have to change much (not
  targeted).
• Not so much evidence for Cairns lens in that
  payments arent substituting for existing farm
  supports.

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Implications for Canada - WTO (a.k.a. wild
speculation by yours truly)

• Perhaps creating new claimant group in EU.
• Implies there may be resistance to future cuts in
  production subsidies.
• Creating niche products (e.g. Natura produced,
  expanding organics), which may have implications
  for Country of Origin labelling, Geographic
  Indicators dispute, etc.

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Production Trade Implications

• Organic premium may fall.
• Subsidies for pasture may encourage (some)
  livestock (at least offset the loss from the per
  head beef subsidy).
• Other production may decrease.
• As U.S. moves in this direction, may decrease
  land retirement programs.

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Lessons? Could we do this here?Would we want to?

• Expenditure on positive externalities linked to
  rural tourism and use value (e.g. PEI, Quebec,
  Foothills, BC Interiour?)
• May be creating tension within rural communities
  between those who want story-book farms and
  those who are production-oriented farmers.
• May be room for a more targeted working land
  program (similar to EQIP in US).
• Some interesting ideas may allow farmers to
  capture willingness to pay (e.g. Natura label).