Jussi Lankoski, OECD - Future EU agri-environment and climate policy – a room for improvement?

FUTURE EU AGRI-ENVIRONMENT AND CLIMATE POLICY – A ROOM FOR IMPROVEMENT?Jussi LankoskiOECD Trade and Agriculture DirectorateEnvironment Division

Seminar on “The CAP after 2020”, Helsinki 19 April 2016

OECD Trade and Agriculture Directorate 2

Context

OECD Ministerial Declaration (7-8 April 2016):Policies need to be transparent (with explicit objectives and intended beneficiaries), targeted (to specific outcomes), tailored (proportionate to the desired outcome), flexible (reflecting diverse situations and priorities over time and space), consistent (with multilateral rules and obligations) and equitable (within and across countries), while ensuring value for money for scarce government resources. “

European Court of Auditors (2011):Regarding EU agri-environmental policy “The Court found that the objectives determined by the Member States are numerous and not specific enough for assessing whether or not they have achieved…In particular very little information was available on the environmental benefits of agri-environment payments.”

OECD Trade and Agriculture Directorate 3

Agri-environmental performance, average annual change from 1998-2000 to 2008-

10

Total facto

r productiv

ity

Production vo

lume

Agricultu

ral land area

Nitrogen balance

Phosphorus b

alance

Pesticide use

Direct o

n-farm

energy consu

mption

Water use

Ammonia emissions

Greenhouse gas e

missions

-12

-10

-8

-6

-4

-2

0

2

4

Finland OECD EU15

Average annual % change

OECD Trade and Agriculture Directorate 4

Some key policy design principles for agri-environment

• Remove policy failures that exacerbate environmental market failures

• Address remaining environmental market failures by responding to following key questions:

• Who to target? – Benefits (B) and (opportunity) costs (C) vary over space → target

on the basis of B/C ratio • What to target?

– Variables that correlate strongly with environmental objective and can be relatively easy to observe, preferably performance proxies (such as EBI)

• Which level of incentives?– Tailor incentives to achieve desired outcome and avoid

overcompensation → improved budgetary cost-effectiveness

OECD Trade and Agriculture Directorate 5

Environmentally harmful agricultural support

OECD Trade and Agriculture Directorate 6

Quantitative illustration of the gains from A-E policy targeting and

tailoring• Data from Finland (distribution of soil productivity and

yields, production costs, distribution of soil textural classes and field parcel slopes, nitrogen runoff, species diversity in semi-natural habitats)

• Focus: commodity production, nitrogen runoff, biodiversity

• Benchmark Scenarios: (i) the private optimum and (ii) social optimum

• Potentially environmentally harmful support measures: (i) price support and (ii) arable crop area payment (without ECC)

• Current policy: “Stylised policy package” including CAP basic payment, LFA, and A-E payment

OECD Trade and Agriculture Directorate 7

Performance of current policy package

Policy scenario

Nitrogen application

barley, kg/ha

Buffer strip size, % of

field parcel

Total commo-

dity production,

kg

Total N-runoff

damage, €

Total biodiv.

benefits, €Total SW, €

Land allocation,

barley : hay

Private optimum

109(95-121) - 438 667 7773 1192 6260 90:10

Social optimum

94(79-105)

3.8(1.2-15.6) 369 012 5270 1539 7699 66:34

Current policy

94(60-100)

10.0(7.3-12.8) 435 276 6062 1401 6650 100:0

Crop area payment

109(95-121) - 456 356 8271 1112 5557 100:0

Price support

114(100-126) - 458 307 8428 1128 5416 98:2

OECD Trade and Agriculture Directorate 8

Can we achieve A-E targets with smaller budget?

Policy scenario

Number of parcels

accepted within the

budget

Average informatio

n rent, €/ha

Budget Total EBI points

€/EBI

Current uniform payment

policy22 73 1976 886 2.23

Current uniform payment

policy with EBI targeting

24 36 1954 1510 1.29

Current uniform payment

policy with EBI/cost targeting

25 38 1941 1541 1.26

Discriminatory price auction

with EBI targeting

94 6 1985 5423 0.37

OECD Trade and Agriculture Directorate 9

What about administrative costs of targeted payments?

PaymentShare of PRTCs of

payment, %

Cost-effectiveness, EUR/EBI point

with PRTCsTargeting

gains ratio

Targeting gains ratio

when PRTCs are

increased by 100%

Uniform payment 5.0 0.95 - -

Auction with EBI targeting 7.0 0.80 8 4

Uniform payment with EBI targeting

5.4 0.84 28 15

OECD Trade and Agriculture Directorate 10

Different payment types suit for different situations

Environmental quality

Opportunity costs

Homogenous Heterogeneous

Homogenous Uniform payment (N,n)

Differentiated payment-cc (N,n)

Heterogeneous

Differentiated payment-eb (N,n)

Auction-eb (N)

Results-based payment-eb (n)

Differentiated payment-cc and eb

(N,n)

Auction-cc and eb (N)

Results-based payment-cc and eb

(n)

N = works with large number of participants; n = suitable for small number of participants; cc = differentiated on the basis of compliance costs;eb = differentiated on the basis of environmental benefits

OECD Trade and Agriculture Directorate 11

Carbon farming • Carbon farming practices refer to:

– soil carbon sequestration through conservation tillage (no-till and reduced tillage), rotational cropping, green fallowing, and afforestation

– reduced GHG emissions through fertilizer and livestock management• Agriculture has potential to contribute to global mitigation effort:

– agricultural soils can offset 15% of global GHG emissions– mitigation costs of soil carbon sequestration practices vary greatly from $3

to $130/t CO2-eq depending on e.g. practice, spatial location etc. • Current CO2-eq offset prices do not necessarily compensate profit foregone of

adopting mitigation practices• Environmental co-benefits are seldom considered, but their consideration would

make adoption of practices more profitable

OECD Trade and Agriculture Directorate 12

US Corn Belt: consideration of co-benefits makes adoption more profitable

Offset scenario and

environmental practice

Acreage response

million acres

Carbon offsets,

‘000 tons

Nitrogen credits,

tons

Phosphorus credits,

tons

Farm profit increase,

USD million

Carbon offsets: switch to no-till 0.8 44.4 - - 18.4

Carbon offsets + water quality offsets: switch to no-till

1.0 49.4 23 83 20.4

Carbon offsets + water quality offsets: Green set-aside

0.05 20.7 1 251 102 1.6

Carbon offsets + water quality offsets: Vegetated field strips

0.6 6.5 5 140 58 12.4

Carbon offsets + water quality offsets: Reduced fertilizer use

4.6 141.2 16 408 418 74.6

OECD Trade and Agriculture Directorate 13

Conclusions • A-E performance has improved over the last decade• But A-E policies still play a minor role and environmental effects

are mainly driven by agricultural support policies and market drivers

• A-E policy needs to address better heterogeneous opportunity costs and environmental benefits → there is a need for improved targeting and tailoring of the policy for improved cost-effectiveness

• Research and piloting: environmental benefit indices, auctions, results-based schemes, GHG mitigation policy design for agriculture