Zuzana Křístková - Czech University of Life Sciences, Department of Economics

1. Modeling the efficiency of the agri-environmentalpayments to Czech agriculture in a CGE frameworkincorporating public goods approach Zuzana Křístková - Czech University of Life Sciences, Department of Economics Tomáš Ratinger - Institute of Agricultural Economics and Information (UZEI)

2. Presentation Outline • Introduction and the objective of the paper • Description of the methodological approach • Model application and results • Conclusion Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

3. Introduction • The effects of the agrarian policy simulations cannot be captured fully without incorporation of multifunctional aspects of agriculture such as the landscape provision. • In the context of the Czech agriculture, the landscape function is mainly supported by agri-environmental payments directed to permanent grasslands with the extensive livestock production. • The objective of the paper is to incorporate the landscape provision into the CGE model and to assess the efficiency of the agri-environmental payments. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

4. Presentation Outline • Introduction and the objective of the paper • Description of the methodological approach • Model application and results • Conclusion Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

5. Methodological approaches in modelling multifunctionality • EU-based research focused on the integration of bio-physical, land use and economic models: • Uthes, Ittersum and Sieber (2010), Renting, Rossing and Ittersum (2009), Rossing, Zander and Josiem (2009), Parra-Lopez, Groot, Torres et al. (2009) • Incorporation of demand side of multifunctionality in the CGE framework: • Cretegny (2002) - Switzerland, and Rødseth (2008) – Norway. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

6. Applied methodology • The CGE model is built for the economy of the Czech Republic (base year 2006) and provides simulations till 2020. • SAM for the CGE model constructed with the use of the National Accounts, Statistics of Household Accounts and agricultural surveys provided by UZEI. • Public goods in form of landscape provision stemming from extensive beef production on permanent grasslands is incorporated into the CGE model. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

7. Main features of the CGE model • Recursively dynamic CGE model following standard IFPRI structure. • Supply of labour and land fixed; capital stock grows at the rate of net investments (following Tobin q investment function). • Two types of households – farmer and other households maximizing utility modelled by the LES function. • Standard macroeconomic balance of savings and investment. • Government closure determined by a fixed share of governmental budget to GDP. • Both foreign sector closures (for the EU and the RoW) assume fixed foreign savings and endogenously adjusting exchange rates. • Direct payments modelled partially as land subsidies, partially as production subsidies.

8. Incorporation of landscape into the CGE model • Sector of extensive livestock farming is explicitly included in the SAM. • Following Cretegny, supply of landscape (public commodity) is modelled in a joint production function with beef meat (market commodity) • The demand for landscape corresponds to the households´ WTP and is incorporated into the LES (instead of originally intended use of the contingent valuation for CR, parameters for LES determined by certain assumptions) Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

9. Production sectors included in the CGE model Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

10. Gross production i Leontief Linear function of capital Value added i Intermediate Consumption i Depretiation i Value added of secland i Value added of secnlandi Intensive farming (Sec 1-8) Extensive farming (Sec 14) Leontief CES I Leontief CES I CES II Capital $secland Capital Capital $secland Capital $secland Capital $secland Capital-Land Land Land Labour Capital-Land Nested production structure in the CGE model

11. Optimal grassland area with internalized demand for landscape Source: own illustration following Rødseth (2008) Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

12. Presentation Outline • Introduction and the objective of the paper • Description of the methodological approach • Model application and results • Conclusion Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

13. Scenario Description Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

14. Results • The impact of the considered scenarios is evaluated with respect to: • Evolution of grassland size • Demand for landscape • Production of extensive and intensive livestock sector • Total gross agricultural production and GDP Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

15. Impact on the size of grasslands Figure 1. Land employed in the extensive farming sector (‘000 ha) Note: If the provision of landscape is determined purely by the households´ WTP, the optimal landscape size converges to 1,100 mil. ha, which is about 30% less than if the extensive livestock sector is also supported by additional agri-environmental payments

16. Impact on the demand for landscape Figure 2. Demand for landscape by households (bln. CZK) Note: In the absence of additional agri-envi support, demand for landscape referring to optimal subsidy rate would converge to 1.4 bln CZK, which is 50% lower compared to actual subsidy rates. This is mainly attributed to growth of landscape prices.

17. Impact on the livestock production intensity Figure 3. Gross production of beef in extensive and intensive livestock farming (bln. CZK, constant prices of 2006) Note: The longer term size of the extensive livestock sector would stabilize around 1 bln. CZK, which is 22% less than the initial period. With additional governmental support, the size of extensive livestock would reach 1.6 bln CZK.

18. Impact on gross agricultural production Figure 4: Gross value added in agriculture (CZK bln., constant prices 2006) Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

19. Impact on GDP Figure 5: GDP components (average % growth between 2006-2020) Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

20. Conclusions • Incorporating public goods in the CGE model has important capacity to improve insight in the analysis of agri-environmental policy. • The results confirm the theoretical assumptions: • landscape demand increases with growing households´ income • Additional subsidy payments allow households to consume more landscape • It is hard to conclude which subsidy rate is the socially optimal taking into account that under additional governmental subsidies, the households are willing to consume more landscape. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

21. Further research considerations • It is necessary to obtain correct WTP estimates that will significantly improve the valuation of the non-commodity production of agriculture. • The research can be further extended with the incorporation of other sectors with multifunctional activities and the special attributes of the bio-beef meet. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011

22. Thank you for your attention. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122nd EAAE Seminar, February 17 – 18, 2011