Regulating negative environmental externalities of agriculture

1. Regulating negative environmental externalities of agriculture Lecture 20 Economics of Food Markets Alan Matthews

2. Key issues • treatment of adverse environmental impacts as negative externalities • ambiguity of the 'polluter pays' principle • relative advantages and disadvantages of alternative policies to address negative externalities • case studies of the EU Nitrates Directive and greenhouse gas emissions from agriculture

3. Reading • Surveys (Scott, Ribaudo et al) • Policy material on implementing the Nitrates Directive

4. Environmental damage as an externality

5. Polluter pays principle • In the case of negative environmental impacts, there is now general endorsement of the Polluter Pays Principle (PPP) which has been adopted by all OECD countries. • However, the question of what is 'pollution' whose avoidance costs should be borne by producers and how to define 'environnmental benefits' for which producers should be compensated is a social construct which depends entirely on the distribution of property rights in the environment in any society.

6. Who should have the property right? • the preservation of the tropical rain forests as a CO2 sink - should Brazil be required to protect its forests, or should the West be required to compensate Brazil for doing so? • public access to farmland for recreational purposes - should farmers be compensated for giving rights of way on their land, or is this a public entitlement? • wetland preservation - should farmers be prevented from draining important wetlands on their property, or should they be compensated for foregoing their right to improve their land in this way? • traditional farm buildings - should farmers be required to preserve farm buildings of heritage interest, or should the public compensate farmers for so doing? • Farmers are asked to improve the housing of their animals by giving them more space in response to public concerns about animal welfare - should they be compensated by the public or not?

7. Implications of zero liability and full liability rules - either lead to socially optimal output level, but distribution of income very different Regulating environmental bads by assigning property rights The Coase Theorem

8. Difficulties in implementing the Coase solution • transactions costs involved in negotiating solutions would be high where more than two parties were involved, and in practice it may be difficult to identify who all the affected parties are • the optimal solution assumes that there is full information about the environmental implications of different activities which is unlikely • often property rights are not divisible (e.g. landscape amenity values) implying that individual market transactions do not work and the free rider problem makes collective action to pay compensation difficult.

9. Fiscal instruments

10. Drawbacks of fiscal instruments to tackle nonpoint agricultural pollution • Agricultural pollution is not of the 'point' or 'end-of-pipe' variety which allows emissions to be precisely measured. This makes the use of an emissions-based tax infeasible. • Taxing an input rather than pollution itself can lower the costs of tax collection, monitoring and enforcement although it is not necessarily fair. • The effectiveness of taxation in controlling pollution can be limited because of low price elasticies of input demand. • Scott (1997) argues that, even before considering taxation, the removal of fiscal privileges to polluting inputs should be undertaken. • Alternatively, subsidies may be paid to farmers to encourage them to avoid pollution

11. Emissions trading schemes

12. Regulatory approaches • Non-market based approaches are of two types • performance standards. These are regulations based on measuring the observable outcome of the polluter's behaviour, such as limits on the chemical residues in water effluent from a factory or power station. Such emission-based standards are used for point sources of pollution but are rarely practical in agricultural situations because the pollution contributions of individual farms are virtually unobservable. • design standards. These are regulations which govern the way farmers produce food and manage their land. For example, to reduce nutrient runoff, regulations could be imposed on waste management practices and on the level, timing and form of nutrient applications to cropland. • May lead to higher total costs of pollution abatement

13. Case studies • Nitrates Directive 1991 to control water pollution from agricultural sources • Tackling greenhouse gas emissions from livestock production