What’s Behind EU Agri-environmental Programs: Pollution or Politics?

1. What’s 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

2. 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. BPRS, 2005

3. 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. BPRS, 2005

4. 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. BPRS, 2005

5. 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. BPRS, 2005

6. Background on EU Ag Policy reforms Brief description of EU AE programs Potential motivators for AE programs (initial) Regression results Conclusions Implications for Canada Outline BPRS, 2005

7. Pressure Overproduction from production subsidies => 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. 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 behind EU CAP reforms BPRS, 2005

8. 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. BPRS, 2005

9. 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. BPRS, 2005

10. 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. BPRS, 2005

11. 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. BPRS, 2005

12. 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’. BPRS, 2005

13. 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. BPRS, 2005

14. BPRS, 2005

15. EU AE programs by externality BPRS, 2005

16. BPRS, 2005

17. 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. BPRS, 2005

18. Background on AE Payments Total Ag and AE Expenditures AE as a % of total Ag BPRS, 2005

19. Types of AEP measures by Member State, 2002 Source: DEFRA (2002) BPRS, 2005

20. 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 BPRS, 2005

21. 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. BPRS, 2005

22. 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. BPRS, 2005

23. 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. BPRS, 2005

24. Taxpayers/Consumers • Want amenities • Want to limit government expenditure • Want food at low(er) cost BPRS, 2005

25. 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. BPRS, 2005

26. 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) BPRS, 2005

27. 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 BPRS, 2005

28. Data • RHS cont’d • 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…). BPRS, 2005

29. BPRS, 2005

30. BPRS, 2005

31. 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. BPRS, 2005

32. Results cont’d. • 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. BPRS, 2005

33. Results cont’d • Ag demand: • Evidence that strong ag. lobby prefers traditional Ag. Supports. • No evidence that AE higher in member states with higher overall Ag. Exp. BPRS, 2005

34. 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. BPRS, 2005

35. 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 don’t have to change much (not targeted). • Not so much evidence for Cairns lens in that payments aren’t substituting for existing farm supports. BPRS, 2005

36. 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. BPRS, 2005

37. 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. BPRS, 2005

38. 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). BPRS, 2005