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Issues and options for agri-environmental policy
Land Use Policy 1994 11 (2) X.%87
Issues and options for agri-environmental policy An introduction
Noel Russell
An overview of papers in this special feature is presented, which sets out to interpret agri-environmental policy options within an economic framework. The discussion focuses on the contrast between these policy options, which emphasize positive incentive payments, and environmental policy in the wider economy, where the ‘polluterpays principle’ is taken as an influential guideline. It is argued that positive payments are justified where the rural environment is viewed as a by-product of agriculture which remains external to the market system. On the other hand, clearly negative external effects, such as nitrate pollution, are more appropriately dealt with using penalty-based options. More recent analyses which recognize that producers, consumers and government agencies operate in the face of costly and incomplete information show that a more complex structure of incentives, penalties and monitoring mechanisms could have advantages. Many of the options for agri-environmental policy considered here benefit from these advantages.
There has been a clearly recognizable shift in agricultural policy in the UK and the European Union (EU)’ over the past decade. This shift was motivated by a recognition of the complex interaction between agriculture and the environment, by recurring budgetary crises in the EC’s Common Agricultural Policy (CAP) and by a realization that less intensive farming on some proportion of farmed land would adequately provide for existing and foreseeable food needs. This shift is evidenced by the emergence of a number of policy options which seek to introduce less intensive and more environmentally friendly farming practices, together with tighter controls on farm-based pollution, alongside more traditional agricultural supports. These options for an agri-environmental policy include individually negotiated management agreements, standard area-based payments for environmentally positive activities, and cost-sharing capital grants for conservation investment, all of which are discussed in the papers which follow.* These papers represent a selection from those presented at a one-day conference held in February 1993s and they focus on a number of key issues deserving wider discussion as agri-environmental options are being consolidated into a reformed CAP.
The author is at the Agricultural Economics Department, University of Manchester, Oxford Road, Manchester, Ml3 9PL, UK.
Waters briefly outlines the evolution of these policies and provides an analysis of how they may develop in the future. He points to the emergence of a ‘twin-track’ structure. On the one hand, the notion of cross-compliance4 is being used to support a base-line level of protection and enhancement of the rural environment (through improving environmental facets of the Hill Livestock Compensatory Allowances and Set-Aside schemes), while penalties for farmyard pollution are being increased. This reflects an approach to agri-environmental policy which parallels the regulatory and penalty-based options characteristic of environmental policy in the wider economy. On the other hand, the
The author wishes to thank David Colman and Penny Street for much help and guidance in this endeavour. This paper has also benefited greatly from comments by Lucy O’Carroll and David Colman. All remaining errors and omissions are the author’s responsibility. continued
0264-8377/94/020083-05
on page 84
Summary of issues and options
0 1994 Butterworth-Heinemann
Ltd
83
continued from page 83 ‘The European Community formally became the European Union in November 1993. ‘Many other options are being considered and some have been implemented on an experimental basis. These include liability rules and penalties for farmyard pollution damage, ‘eco-labelling’ of organic food, bidding mechanisms for environmental payments (the CountrysIde Premium Scheme), cross compliance, and conservation land purchase. 3’0ptions for agri-environmental policy’, 13 February 1993, Muriel Stott Conference Centre, University of Manchester. Organized by Noel Russell and Garth Hughes. Sponsored by the Agricultural Economics Society. 4A cross-compliance system requires that farmers who benefit from agricultural support undertake, in return, specified environmentally positive activities. As currently implemented European farmers who benefit under CAP must set aside 15% of their arable area (arable farmers) or meet maximum stocking density restrictions (livestock farmers).
84
making of payments to farmers for adopting environmentally friendly farming practices through management agreements and through the Environmentally Sensitive Areas and Nitrate Sensitive Areas schemes constitutes the second track and clearly represents a positive incentivcsbased approach to this policy system. The other papers included hcrc focus more specifically on ‘second-track’ options. Other means for providing positive incentives (standard payments and cost-sharing capital grants) are the focus of the Crabtree and Chalmers paper. A broad set of issues illuminating the relationship between these options. their advantages and disadvantages. is discuased. The administrative simplicity of a standard payments system. involving fixed area-based financial transfers to farmers for adherence to a standard (area-based) set of management guidelines, is highlighted. Nevertheless this option may not provide a cost-effective means of promoting environmentally friendly activities over ;I large proportion of land in an area where the costs of these activities vary widely. A more flexible approach, which could only he achieved at higher administrative cost, might be more efficient. It was also emphasized that this option is less suitable where specific detailed restriction of agricultural activity ii required for environmental protection. Capital grants provide a transparent method for subsidizing environmentally positive investment. However. since grant rates of much less than 100% arc administratively desirable, this option is effcctivc only where costs, other than those directly involved in the investment activity, arc small and where there are sufficient private benefits, to the farmer or landowner. to justify meeting the costs involved over and above the grant. The results of a detailed study of the Environmentally Sensitive Areas scheme in six lowland areas arc discussed by Froud. In most cases the specified management guidelines were quite close to existing farming practices in the targeted areas, so the costs in terms of the impacts on production levels and input use intensity were not great. Only in the case of reversion of land from arable production to grassland were major effects observed. It was noted especially that there was no evidence to show that farmers increased production intensity on nonscheme land to maintain productlon levels. Nevertheless overall reductions in output did generate savings in support costs sufficient to finance up to 50% of scheme payments in some areas. The impact on farm incomes was positive in all cases and quite substantial in a number of areas. However, many of the longer-term effects on farming productlvity have not been accounted for. The study also raises questions about the future of this type of scheme within a reformed CAP, despite recent changes suggesting a commitment to this approach. Farmers may hesitate to participate where this may clash with their entitlement for more generally available support payments. Lomas provides a wide-ranging analysis of the legislative background for management agreements and of the evolving framework within which they have been used in one English national park. When introduced under the 1981 Wildlife and Countryside Act, the focus was on individually tailored compensation agreements for those farmers and landowners who backed away from threatened damage to valuable ecological resources. Practical expcriencc has promoted a switch in emphasis from agreements which provide compensation for income reduction and cost increases associated with constraining agricultural
LAND USE POLICY
April 1994
Issues and opfions for agri-environmental
policy
activities, towards agreements which provide positive payments for enhancing environmentally friendly activities on farms. Lomas points out that this switch in the philosophy underlying agreements has important practical implications. In particular it promotes a positive attitude to the rural environment and establishes a partnership between the national park authority on the one hand and farmers and land managers on the other. The higher level of motivation generated within this framework would allow any given level of environmental protection or enhancement to be achieved in a more cost-effective manner.
Externalities
5The role of the polluter-pays principle, for environmental policy in general, has been firmly established. See OECD, The Polluter-Pays Principle, Definition, Analysis and implementation, OECD, Paris, 1975. ‘See, for example, the detailed analysis presented in W.J. Baumol and W.E. Oates, The Theory of Environmental Policy, Cambridge University Press, Cambridge, 1989. ‘The term ‘semi-natural habitats’ is often used to describe a rural environment which is generated and sustained by agricultural activity.
LAND USE POLICY
April
1994
of agricultural production
Though the penalty-based regulatory approach has not been excluded as a basis for options in agri-environmental policy, the papers presented here reflect the greater emphasis which has been placed on those options which provide positive incentive payments. This is in contrast to environmental policy in the wider economy where the polluter-pays principle’ is taken as an influential guideline. How far economic arguments can illuminate this contrast is of major concern here. Environmental policy systems based on pollution charges, pollution permits and, more recently, strict liability rules are generally justified by economists as methods which internalize, within producer decisionmaking procedures, the negative externalities generated by the harmful effects of production activities on the environment (mainly but not exclusively caused by pollution).’ These policy options introduce an effective charging system for use of the environmental resources owned jointly by all members of society. This is one key idea underlying the polluter-pays principle. Clearly positive payments for avoiding environmental damage, according to this notion, would not be justified. However, the simple ‘industrial pollution’ model of environmental damage does not provide a very satisfactory description of the more complex relationship between agriculture and the rural environment. In particular it does not recognize that many highly valued features of the rural landscape and ecology now damaged by modern farming practices have been generated previously and sustained by practices consistent with other agricultural technologies.’ Thus, from what has been a clearly positive and complementary relationship between agriculture and the rural environment, there has emerged what is easily described as a trade-off between food production and ‘production’ of the rural environmental good. In other words, the rural environment has previously been a positive by-product of agriculture which, like other environmental impacts, remains external to market and decisionmaking systems. Providing a positive payment could create an artificial market mechanism for this good similar to that created by penalty-based options for the more general environmental resources. Thus positive payments which provided incentives for positive environmental activities leading to protection or enhancement of the rural environment would be consistent with the polluter-pays principle. On the other hand, the theory of externalities and the polluter-pays principle cannot be used to justify policy options such as the Nitrate Sensitive Areas scheme, which makes positive payments for switching to activities that avoid environmental damage. In this case nitrate pollution is unambiguously a negative externality of agriculture which would be appropriately
dealt
with
using
some
penalty-based
option.
a5
Issues and oprions for agri-environmental
policy
The economics of information
‘See, for example, the wide-ranging review of some of these analyses in J.J. Laffont and J. Tirole, A Theory of Incentives in Procurement and Regulation, MIT Press, Cambridge, 1993. She basic incentive mechanism operating here is found in many other areas of economic activity. It was first analysed in labour markets as part of the explanation for persistent unemployment. Here it was suggested that employers might pay more than the ‘going rate’ to encourage employees not to change jobs and, in the absence of perfect monitoring, to discourage shirking. See for example G. Akerlof and J.L. Yellen, Efficiency wage Models of the Labour Market, Cambridge University Press, Cambridge, 1986.
86
and incentives
Further insights into the merits of penalty-based policy options relative to those of incentive-based options are provided by some more recent analyses in the economics of information.’ These analyses explicitly recognize that producers, consumers and government agencies operate in the face of costly and incomplete information. This is in contrast to more traditional economic analyses which adopt the simplifying assumption that all individuals involved have access to complete and costless information. When options for agri-environmental policy are examined in this new framework, it is possible to consider explicitly the implications of imperfect information and imperfect monitoring systems on policy effectiveness. Government agencies are assumed not to know farm-level costs of following management guidelines and have to employ a costly monitoring system to determine whether or not farmers receiving payment arc actually following these guidelines. Similarly we may assume that the relationship between farming practices and the rural environment is only imperfectly known. The typical policy agency will then need to establish a monitoring system at non-zero cost to assess what producers are doing and to assess their impact on the environment. In most cases feasible monitoring procedures will provide only imperfect estimates of producer actions and environmental impacts. One key result here is that positive incentive policies may have advantages over other approaches. These policies are especially appropriate when the impacts of particular activities on the environment are clearly observable but the actual activities carried out by a particular producer are observed only with difficulty. A positive payment policy which rewards producers who undertake appropriate activity, together with a monitoring system which has some chance of ensuring that payments are withdrawn when appropriate activities are not undertaken, would provide an effective incentive. Clearly a stronger incentive is provided where payments exceed the cost of undertaking appropriate activities and where monitoring is relatively more effective.” A practicable policy system is therefore one where the expected net returns from accepting payment and meeting scheme conditions exceed both the expected returns from not participating and the expected returns from accepting payment and ignoring the conditions (and taking a chance that payments will be withdrawn). This framework provides an interpretation of differences between alternative options for agri-environmental policy, focusing on differences in monitoring costs and in the structure of incentives. For as noted by Froud, the Environmentally Sensitive Areas example, scheme presents some difficulties for monitoring farmers’ activities (and environmental impacts). This reduces farmers’ expectations that payments will be withdrawn for non-compliance, thus lowering the incentive to comply even after accepting payment. However, incentives to comply will also depend on the extent to which payments exceed compliance costs; the substantial income effect of these schemes may be interpreted as an attempt by policy makers to strengthen the incentives to comply (by increasing the expected cost of withdrawing payments), even with a weak monitoring system. In the case of capital grants it is feasible to closely monitor farmers’ investment activity, but, in general, monitoring subsequent use of the
LAND USE POLICY
April 1994
Issues and options for agri-environmental
policy
Where the purpose of the grant facilities is much more difficult.“’ scheme is served only by efficient use of the facilities for conservation, a dual incentive structure is needed: incentives for investment and incentives for subsequent efficient use. For conservation investments this latter set of incentives might be partly provided, as suggested by Crabtree and Chalmers, by the private (possibly non-financial) benefits associated with the facilities. Projects which do not provide this type of benefit, and might therefore be used inefficiently, can be excluded by setting grant rates at less than 100%. Clearly administrative practice is consistent with this notion. The idea that incentives involve non-financial components is important for all the policy options considered here. This is highlighted by Lomas, who stresses the advantages of payments for positive environmental activities over a system of compensatory payments even when encapsulated within identical administrative structures. This may be interpreted as suggesting that there are additional non-financial benefits to participants when they can view themselves as acting in collaboration with other participants and with the government agency.” These benefits provide a stronger incentive for complying with the management guidelines. Finally, where there is unambiguous environmental damage, this framework does not preclude the use of penalty-based policy options. It is not unreasonable to consider analyses which would provide an assessment, for a reasonably complex policy system, of the appropriate balance between monitoring effectiveness, penalties for environmental damage and payments for positive environmental activity. I2 Thus the twin-track approach suggested by Waters could be analysed in some detail. However, a more elaborate framework than that presented here would be required to accomplish this analysis.
Concluding “Cost-sharing investment grant schemes to encourage farm modernization and improve agricultural production efficiency have been available (until recently) since the 1950s. The tried and tested monitoring procedures from these schemes are now available for conservation grants. “The nature of this incentive is more difficult to characterize. It is related to the notion of ‘assurance’ often associated with the analysis of social investment An individual is more willing to participate in a social investment project by being assured of the participation in the project of others. See A.K. Sen, ‘Isolation, assurance and the social rate of discount’, Quarterly Journal of Economics, February 1967, for a detailed analysis of this idea in another context. “The waste handling component of the Farm and Conservation Grants scheme is an example of a policy system which might be analysed in this way. The balance between monitoring of farmyard pollution, penalties for detected pollution incidents, rate of investment grant and monitoring of investment activities would provide a particularly interesting focus for the analysis.
LAND USE POLICY
April 1994
remarks
Agri-environmental policy has evolved in response to concerns that the complex relationship between agriculture and the rural environment has changed, from being characterized by a complementary symbiosis to displaying features of a competitive trade-off. A large number of policy options are being considered (and some have been implemented on an experimental basis), focused principally on the notion of providing positive incentives to farmers and landowners, encouraging a switch to more environmentally friendly farming practices. This has not precluded the use of options providing penalty-based incentives, and where appropriate combinations of positive incentives and penalties. However, the evolving policy system has not been guided by a formal analytical framework and most research in this area has proceeded on an ad hoc basis. What has emerged from jointly considering the papers presented here are some suggestions for the rudiments of such a framework. This framework is based on significant numbers of research studies into the economics of information and incentives, and provides many interesting interpretations of existing options for agrienvironmental policy, even with the overly simplified structure presented here. Further research in this area promises a more general framework, capable of providing an assessment of the appropriate balance between monitoring, incentives and penalties for specific agrienvironmental policy options.
87
Issues and options for agri-environmental policy An introduction
Noel Russell
An overview of papers in this special feature is presented, which sets out to interpret agri-environmental policy options within an economic framework. The discussion focuses on the contrast between these policy options, which emphasize positive incentive payments, and environmental policy in the wider economy, where the ‘polluterpays principle’ is taken as an influential guideline. It is argued that positive payments are justified where the rural environment is viewed as a by-product of agriculture which remains external to the market system. On the other hand, clearly negative external effects, such as nitrate pollution, are more appropriately dealt with using penalty-based options. More recent analyses which recognize that producers, consumers and government agencies operate in the face of costly and incomplete information show that a more complex structure of incentives, penalties and monitoring mechanisms could have advantages. Many of the options for agri-environmental policy considered here benefit from these advantages.
There has been a clearly recognizable shift in agricultural policy in the UK and the European Union (EU)’ over the past decade. This shift was motivated by a recognition of the complex interaction between agriculture and the environment, by recurring budgetary crises in the EC’s Common Agricultural Policy (CAP) and by a realization that less intensive farming on some proportion of farmed land would adequately provide for existing and foreseeable food needs. This shift is evidenced by the emergence of a number of policy options which seek to introduce less intensive and more environmentally friendly farming practices, together with tighter controls on farm-based pollution, alongside more traditional agricultural supports. These options for an agri-environmental policy include individually negotiated management agreements, standard area-based payments for environmentally positive activities, and cost-sharing capital grants for conservation investment, all of which are discussed in the papers which follow.* These papers represent a selection from those presented at a one-day conference held in February 1993s and they focus on a number of key issues deserving wider discussion as agri-environmental options are being consolidated into a reformed CAP.
The author is at the Agricultural Economics Department, University of Manchester, Oxford Road, Manchester, Ml3 9PL, UK.
Waters briefly outlines the evolution of these policies and provides an analysis of how they may develop in the future. He points to the emergence of a ‘twin-track’ structure. On the one hand, the notion of cross-compliance4 is being used to support a base-line level of protection and enhancement of the rural environment (through improving environmental facets of the Hill Livestock Compensatory Allowances and Set-Aside schemes), while penalties for farmyard pollution are being increased. This reflects an approach to agri-environmental policy which parallels the regulatory and penalty-based options characteristic of environmental policy in the wider economy. On the other hand, the
The author wishes to thank David Colman and Penny Street for much help and guidance in this endeavour. This paper has also benefited greatly from comments by Lucy O’Carroll and David Colman. All remaining errors and omissions are the author’s responsibility. continued
0264-8377/94/020083-05
on page 84
Summary of issues and options
0 1994 Butterworth-Heinemann
Ltd
83
continued from page 83 ‘The European Community formally became the European Union in November 1993. ‘Many other options are being considered and some have been implemented on an experimental basis. These include liability rules and penalties for farmyard pollution damage, ‘eco-labelling’ of organic food, bidding mechanisms for environmental payments (the CountrysIde Premium Scheme), cross compliance, and conservation land purchase. 3’0ptions for agri-environmental policy’, 13 February 1993, Muriel Stott Conference Centre, University of Manchester. Organized by Noel Russell and Garth Hughes. Sponsored by the Agricultural Economics Society. 4A cross-compliance system requires that farmers who benefit from agricultural support undertake, in return, specified environmentally positive activities. As currently implemented European farmers who benefit under CAP must set aside 15% of their arable area (arable farmers) or meet maximum stocking density restrictions (livestock farmers).
84
making of payments to farmers for adopting environmentally friendly farming practices through management agreements and through the Environmentally Sensitive Areas and Nitrate Sensitive Areas schemes constitutes the second track and clearly represents a positive incentivcsbased approach to this policy system. The other papers included hcrc focus more specifically on ‘second-track’ options. Other means for providing positive incentives (standard payments and cost-sharing capital grants) are the focus of the Crabtree and Chalmers paper. A broad set of issues illuminating the relationship between these options. their advantages and disadvantages. is discuased. The administrative simplicity of a standard payments system. involving fixed area-based financial transfers to farmers for adherence to a standard (area-based) set of management guidelines, is highlighted. Nevertheless this option may not provide a cost-effective means of promoting environmentally friendly activities over ;I large proportion of land in an area where the costs of these activities vary widely. A more flexible approach, which could only he achieved at higher administrative cost, might be more efficient. It was also emphasized that this option is less suitable where specific detailed restriction of agricultural activity ii required for environmental protection. Capital grants provide a transparent method for subsidizing environmentally positive investment. However. since grant rates of much less than 100% arc administratively desirable, this option is effcctivc only where costs, other than those directly involved in the investment activity, arc small and where there are sufficient private benefits, to the farmer or landowner. to justify meeting the costs involved over and above the grant. The results of a detailed study of the Environmentally Sensitive Areas scheme in six lowland areas arc discussed by Froud. In most cases the specified management guidelines were quite close to existing farming practices in the targeted areas, so the costs in terms of the impacts on production levels and input use intensity were not great. Only in the case of reversion of land from arable production to grassland were major effects observed. It was noted especially that there was no evidence to show that farmers increased production intensity on nonscheme land to maintain productlon levels. Nevertheless overall reductions in output did generate savings in support costs sufficient to finance up to 50% of scheme payments in some areas. The impact on farm incomes was positive in all cases and quite substantial in a number of areas. However, many of the longer-term effects on farming productlvity have not been accounted for. The study also raises questions about the future of this type of scheme within a reformed CAP, despite recent changes suggesting a commitment to this approach. Farmers may hesitate to participate where this may clash with their entitlement for more generally available support payments. Lomas provides a wide-ranging analysis of the legislative background for management agreements and of the evolving framework within which they have been used in one English national park. When introduced under the 1981 Wildlife and Countryside Act, the focus was on individually tailored compensation agreements for those farmers and landowners who backed away from threatened damage to valuable ecological resources. Practical expcriencc has promoted a switch in emphasis from agreements which provide compensation for income reduction and cost increases associated with constraining agricultural
LAND USE POLICY
April 1994
Issues and opfions for agri-environmental
policy
activities, towards agreements which provide positive payments for enhancing environmentally friendly activities on farms. Lomas points out that this switch in the philosophy underlying agreements has important practical implications. In particular it promotes a positive attitude to the rural environment and establishes a partnership between the national park authority on the one hand and farmers and land managers on the other. The higher level of motivation generated within this framework would allow any given level of environmental protection or enhancement to be achieved in a more cost-effective manner.
Externalities
5The role of the polluter-pays principle, for environmental policy in general, has been firmly established. See OECD, The Polluter-Pays Principle, Definition, Analysis and implementation, OECD, Paris, 1975. ‘See, for example, the detailed analysis presented in W.J. Baumol and W.E. Oates, The Theory of Environmental Policy, Cambridge University Press, Cambridge, 1989. ‘The term ‘semi-natural habitats’ is often used to describe a rural environment which is generated and sustained by agricultural activity.
LAND USE POLICY
April
1994
of agricultural production
Though the penalty-based regulatory approach has not been excluded as a basis for options in agri-environmental policy, the papers presented here reflect the greater emphasis which has been placed on those options which provide positive incentive payments. This is in contrast to environmental policy in the wider economy where the polluter-pays principle’ is taken as an influential guideline. How far economic arguments can illuminate this contrast is of major concern here. Environmental policy systems based on pollution charges, pollution permits and, more recently, strict liability rules are generally justified by economists as methods which internalize, within producer decisionmaking procedures, the negative externalities generated by the harmful effects of production activities on the environment (mainly but not exclusively caused by pollution).’ These policy options introduce an effective charging system for use of the environmental resources owned jointly by all members of society. This is one key idea underlying the polluter-pays principle. Clearly positive payments for avoiding environmental damage, according to this notion, would not be justified. However, the simple ‘industrial pollution’ model of environmental damage does not provide a very satisfactory description of the more complex relationship between agriculture and the rural environment. In particular it does not recognize that many highly valued features of the rural landscape and ecology now damaged by modern farming practices have been generated previously and sustained by practices consistent with other agricultural technologies.’ Thus, from what has been a clearly positive and complementary relationship between agriculture and the rural environment, there has emerged what is easily described as a trade-off between food production and ‘production’ of the rural environmental good. In other words, the rural environment has previously been a positive by-product of agriculture which, like other environmental impacts, remains external to market and decisionmaking systems. Providing a positive payment could create an artificial market mechanism for this good similar to that created by penalty-based options for the more general environmental resources. Thus positive payments which provided incentives for positive environmental activities leading to protection or enhancement of the rural environment would be consistent with the polluter-pays principle. On the other hand, the theory of externalities and the polluter-pays principle cannot be used to justify policy options such as the Nitrate Sensitive Areas scheme, which makes positive payments for switching to activities that avoid environmental damage. In this case nitrate pollution is unambiguously a negative externality of agriculture which would be appropriately
dealt
with
using
some
penalty-based
option.
a5
Issues and oprions for agri-environmental
policy
The economics of information
‘See, for example, the wide-ranging review of some of these analyses in J.J. Laffont and J. Tirole, A Theory of Incentives in Procurement and Regulation, MIT Press, Cambridge, 1993. She basic incentive mechanism operating here is found in many other areas of economic activity. It was first analysed in labour markets as part of the explanation for persistent unemployment. Here it was suggested that employers might pay more than the ‘going rate’ to encourage employees not to change jobs and, in the absence of perfect monitoring, to discourage shirking. See for example G. Akerlof and J.L. Yellen, Efficiency wage Models of the Labour Market, Cambridge University Press, Cambridge, 1986.
86
and incentives
Further insights into the merits of penalty-based policy options relative to those of incentive-based options are provided by some more recent analyses in the economics of information.’ These analyses explicitly recognize that producers, consumers and government agencies operate in the face of costly and incomplete information. This is in contrast to more traditional economic analyses which adopt the simplifying assumption that all individuals involved have access to complete and costless information. When options for agri-environmental policy are examined in this new framework, it is possible to consider explicitly the implications of imperfect information and imperfect monitoring systems on policy effectiveness. Government agencies are assumed not to know farm-level costs of following management guidelines and have to employ a costly monitoring system to determine whether or not farmers receiving payment arc actually following these guidelines. Similarly we may assume that the relationship between farming practices and the rural environment is only imperfectly known. The typical policy agency will then need to establish a monitoring system at non-zero cost to assess what producers are doing and to assess their impact on the environment. In most cases feasible monitoring procedures will provide only imperfect estimates of producer actions and environmental impacts. One key result here is that positive incentive policies may have advantages over other approaches. These policies are especially appropriate when the impacts of particular activities on the environment are clearly observable but the actual activities carried out by a particular producer are observed only with difficulty. A positive payment policy which rewards producers who undertake appropriate activity, together with a monitoring system which has some chance of ensuring that payments are withdrawn when appropriate activities are not undertaken, would provide an effective incentive. Clearly a stronger incentive is provided where payments exceed the cost of undertaking appropriate activities and where monitoring is relatively more effective.” A practicable policy system is therefore one where the expected net returns from accepting payment and meeting scheme conditions exceed both the expected returns from not participating and the expected returns from accepting payment and ignoring the conditions (and taking a chance that payments will be withdrawn). This framework provides an interpretation of differences between alternative options for agri-environmental policy, focusing on differences in monitoring costs and in the structure of incentives. For as noted by Froud, the Environmentally Sensitive Areas example, scheme presents some difficulties for monitoring farmers’ activities (and environmental impacts). This reduces farmers’ expectations that payments will be withdrawn for non-compliance, thus lowering the incentive to comply even after accepting payment. However, incentives to comply will also depend on the extent to which payments exceed compliance costs; the substantial income effect of these schemes may be interpreted as an attempt by policy makers to strengthen the incentives to comply (by increasing the expected cost of withdrawing payments), even with a weak monitoring system. In the case of capital grants it is feasible to closely monitor farmers’ investment activity, but, in general, monitoring subsequent use of the
LAND USE POLICY
April 1994
Issues and options for agri-environmental
policy
Where the purpose of the grant facilities is much more difficult.“’ scheme is served only by efficient use of the facilities for conservation, a dual incentive structure is needed: incentives for investment and incentives for subsequent efficient use. For conservation investments this latter set of incentives might be partly provided, as suggested by Crabtree and Chalmers, by the private (possibly non-financial) benefits associated with the facilities. Projects which do not provide this type of benefit, and might therefore be used inefficiently, can be excluded by setting grant rates at less than 100%. Clearly administrative practice is consistent with this notion. The idea that incentives involve non-financial components is important for all the policy options considered here. This is highlighted by Lomas, who stresses the advantages of payments for positive environmental activities over a system of compensatory payments even when encapsulated within identical administrative structures. This may be interpreted as suggesting that there are additional non-financial benefits to participants when they can view themselves as acting in collaboration with other participants and with the government agency.” These benefits provide a stronger incentive for complying with the management guidelines. Finally, where there is unambiguous environmental damage, this framework does not preclude the use of penalty-based policy options. It is not unreasonable to consider analyses which would provide an assessment, for a reasonably complex policy system, of the appropriate balance between monitoring effectiveness, penalties for environmental damage and payments for positive environmental activity. I2 Thus the twin-track approach suggested by Waters could be analysed in some detail. However, a more elaborate framework than that presented here would be required to accomplish this analysis.
Concluding “Cost-sharing investment grant schemes to encourage farm modernization and improve agricultural production efficiency have been available (until recently) since the 1950s. The tried and tested monitoring procedures from these schemes are now available for conservation grants. “The nature of this incentive is more difficult to characterize. It is related to the notion of ‘assurance’ often associated with the analysis of social investment An individual is more willing to participate in a social investment project by being assured of the participation in the project of others. See A.K. Sen, ‘Isolation, assurance and the social rate of discount’, Quarterly Journal of Economics, February 1967, for a detailed analysis of this idea in another context. “The waste handling component of the Farm and Conservation Grants scheme is an example of a policy system which might be analysed in this way. The balance between monitoring of farmyard pollution, penalties for detected pollution incidents, rate of investment grant and monitoring of investment activities would provide a particularly interesting focus for the analysis.
LAND USE POLICY
April 1994
remarks
Agri-environmental policy has evolved in response to concerns that the complex relationship between agriculture and the rural environment has changed, from being characterized by a complementary symbiosis to displaying features of a competitive trade-off. A large number of policy options are being considered (and some have been implemented on an experimental basis), focused principally on the notion of providing positive incentives to farmers and landowners, encouraging a switch to more environmentally friendly farming practices. This has not precluded the use of options providing penalty-based incentives, and where appropriate combinations of positive incentives and penalties. However, the evolving policy system has not been guided by a formal analytical framework and most research in this area has proceeded on an ad hoc basis. What has emerged from jointly considering the papers presented here are some suggestions for the rudiments of such a framework. This framework is based on significant numbers of research studies into the economics of information and incentives, and provides many interesting interpretations of existing options for agrienvironmental policy, even with the overly simplified structure presented here. Further research in this area promises a more general framework, capable of providing an assessment of the appropriate balance between monitoring, incentives and penalties for specific agrienvironmental policy options.
87