Pollution without subsidy? What is the environmental performance index overlooking?

Ecological Economics 68 (2009) 1903–1907

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Ecological Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e c o l e c o n

Pollution without subsidy? What is the environmental performance index overlooking? Cemal Atici ⁎ Adnan Menderes University, Department of Agricultural Economics, Faculty of Agriculture, Aydin, Turkey

a r t i c l e

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Article history: Received 21 November 2008 Received in revised form 2 February 2009 Accepted 9 March 2009 Available online 3 April 2009 Keywords: OECD Agriculture Environmental performance index Pollution havens

a b s t r a c t Agriculture is heavily subsidized in most Organization for Economic Cooperation and Development (OECD) countries, and environmental externalities can occur due to pollution caused by protectionist policies. This study examines the structure of agricultural protection in OECD countries from a chronological and comparative perspective. In addition, the policy–environment interaction is scrutinized to better explain the environmental implications of agricultural policies in the era of globalization. This paper critically evaluates the environmental performance index and recommends that this index includes polluting inputs in future calculations. © 2009 Elsevier B.V. All rights reserved.

1. Introduction In general, countries of the Organization for Economic Cooperation and Development (OECD) enjoy high levels of agricultural protection, and many OECD members are major players in world agricultural trade whose domestic policies impact on world agriculture. Some agricultural policies such as subsidies have encouraged the continuing use of polluting inputs (FAO, 2002). At the same time, many industrialized countries are reforming these kinds of policies to be more competitive in the era of globalization and as an obligation of World Trade Organization (WTO) membership (European Commission, 2009; USDA, 2009). Agricultural policies impact on not only producer and consumer welfare but also environmental quality (Batie, 1990; Plantinga, 1996), which has been disregarded in policy formulation for many years. International trade policies also impact on the environment. According to the OECD (1994) the five main categories of traderelated environmental effects are scale, structural, product, technical, and regulatory effects. Increasing the international flow of trade can have positive or negative effects on the environment by changing the product composition of trade (product effect); by increasing economic growth and thereby generating the funds needed for environmental protection (scale effect); by altering the location, product-mix and intensity of production via the removal of trade distorting and environmentally harmful subsidies (structural effect); by using more efficient technologies (technical effect); and by creating greater consciousness and higher standards for the environment because of the higher income generated by trade-related flows (regulatory ⁎ Tel.: +90 256 772 7024; fax: +90 256 772 7233. E-mail address: [email protected]. 0921-8009/$ – see front matter © 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2009.03.005

effect). However, with the process of globalization some differences in environmental regulations may provide a comparative advantage in countries with pollution-intensive production, termed the ‘pollution haven hypothesis’ (Cole, 2004). Trade openness also increases the flow of foreign direct investment (FDI) that may affect the economy and, hence, the environment with scale, income and technical effects (Liang, 2006) such that FDI precipitated through globalization can bring new technologies to replace polluting ones and improve standards by raising income when properly monitored, or cause negative externalities due to lax regulations. Given the diversity of agricultural systems, the environmental impact will vary between countries and regions (OECD, 2000), therefore empirical analyses can shed light on this discussion. Some empirical studies have researched the interaction between trade, policy and environment. Many general equilibrium studies (Beghin et al., 1996; Lee and Roland-Host, 1997; Dessus and Bussolo, 1998; Strutt and Anderson, 1999; Kumbaroglu, 2003) showed that after liberalization, welfare enhancement can be achieved along with environmental quality through environmental taxes. In partial equilibrium studies, Saunders et al. (2006) examined the impact of trade liberalization on greenhouse emissions for the EU and New Zealand dairy sectors and found that, although producer returns in New Zealand increased, greenhouse gas emissions also increased significantly, while EU producer returns and emissions decreased. Econometric studies have mostly concentrated on the existence of the environmental Kuznets curve (EKC), which indicates that growth harms the environment at low levels of income but helps at high levels (Cole, 2004). Frankel and Rose (2002) found that trade may be beneficial to the environment largely because of the income effect and also found evidence for the EKC. Also in more recent studies, the existence of EKC and the pollution haven hypothesis was confirmed

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C. Atici / Ecological Economics 68 (2009) 1903–1907

Fig. 1. Environmental performance index (EPI) for OECD countries, 2008. Source: EPI, 2008.

for Turkey (Atici and Kurt, 2007); while in a regional case, although findings confirmed existence of an EKC for Central and East Europe, it was found that globalization did not facilitate emission levels (Atici, forthcoming). Studies that researched environmental regulations and development found that laxity of environmental regulations in the host country was a significant determinant of FDI for industries that generate heavy pollution in the US (Xing and Kolstad, 2002), while Jorgenson (2007) confirmed that less-developed countries with higher levels of foreign capital penetration used more pesticides per hectare. This study examines the interactions of agricultural policy, trade and the environment in OECD countries using a comparative perspective. After examining the environmental performance issue, agricultural protection in OECD countries is scrutinized. The rest of the paper examines input use, trade and environment and critically evaluates the environmental performance index (EPI). The findings suggest that alternative measures should be included in future EPI to evaluate the impacts of liberalization on the environment and to design sustainable policies for the region concerned.

2. Environmental performances Environmental performance can be measured in several ways. The EPI (2008), constructed by Yale University, ranks countries according to criteria such as environmental health and ecosystem vitality (Fig. 1). The agricultural score is a part of ecosystem vitality and composed of factors related to irrigation stress, agricultural subsidies, intensive cropland, burned land area and pesticide regulation (Table 1). Switzerland, Norway and Sweden rank top in the EPI, while Belgium, the Czech Republic and Turkey rank lowest. In agricultural scores, New Zealand, Poland and Ireland take the first three places, while Hungary, Denmark and Iceland rank last. 3. Agricultural protection in OECD countries The structure of agricultural policies is important for environmental performances because the level and composition of agricultural subsidies impact on the level of input use and environmental degradation. The structure of agricultural protection in OECD countries

Table 1 Agricultural scores for OECD countries in EPI, 2008. Rank

Country

Agricultural score

Irrigation stress

Agricultural subsidies

Intensive cropland

Burned land area

Pesticide regulation

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

New Zealand Poland Ireland Luxembourg Czech Republic Belgium Canada Finland Netherlands Sweden Australia Japan Germany Slovakia Switzerland Turkey US Mexico Norway UK Austria Greece Portugal France Italy Spain South Korea Hungary Denmark Iceland

97.5 84.4 82.6 82.1 81.9 80.8 80.4 79.4 79.3 79.3 78.7 78.7 78.5 78.5 78.3 78.1 77.9 77.6 77.1 76.9 76.4 76.4 74.1 73.9 73.9 68.5 66.5 65.1 64.5 62.8

100 100 100 100 100 100 98.4 100 100 100 50.7 100 100 100 100 96.8 77.5 78.4 100 100 100 98.2 100 100 100 81.2 100 100 100 –

93.6 89.8 22.8 22.8 61.4 22.8 55.0 22.8 22.8 22.8 99.9 0.0 22.8 56.7 0.0 42.1 65.7 63.6 0.0 22.8 22.8 22.8 23.0 22.8 22.8 22.8 0.0 54.8 22 0.0

97.4 40.7 95.4 100 54.7 87.1 59.6 75.8 85.1 75.0 79.6 97.4 72.8 51.9 93.2 77.6 73.4 84.7 86.2 67.7 63.2 85.1 69.2 54.2 65.3 50.1 93.3 35.7 0.0 –

96.5 95.9 99.5 92.4 93.3 98.6 89.0 98.3 92.9 98.9 63.3 96.2 96.7 83.9 98.1 87.5 86.6 79.7 99.2 98.4 96.0 80.5 82.5 97.1 85.7 93.0 70.8 39.4 99.6 97.6

100 95.5 99.5 95.5 100 95.5 100 100 95.5 100 100 100 100 100 100 86.4 86.4 81.8 100 95.5 100 95.5 95.5 95.5 95.5 95.5 68.2 95.5 100 90.9

Source: EPI, 2008.

C. Atici / Ecological Economics 68 (2009) 1903–1907

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Table 2 Structure of agricultural support in OECD countries, 1990–2006. Year

Support

Australia

Canada

EU

Iceland

Japan

Korea

Mexico

N. Zealand

Norway

Switzerland

Turkey

US

1990

PSE (%) CSE (%) TSE (million $) TSE/GDP Transfer from consumers (%) Transfer from tax payers (%) GSSE/TSE PSE CSE TSE (million $) TSE/GDP Transfer from consumers (%) Transfer from tax payers (%) GSSE/TSE

11 − 14 2.176 0.7 28 72 17 6 −2 1.677 0.2 0.5 99.5 27

34 − 17 9.103 1.6 36 64 20 23 − 17 10.110 0.8 37 63 26

33 − 27 125.228 2.1 64 36 12 32 − 16 156.452 1.1 37 63 10

75 − 60 288 4.5 56 44 8 66 − 46 238 1.5 37 63 9

52 − 50 52.438 1.7 79 21 18 53 − 46 48.872 1.1 79 21 17

74 − 70 21.875 8.3 84 16 12 63 − 61 29.073 3.3 83 17 12

16 − 16 5.659 2.1 62 38 22 17 − 11 7.937 0.9 49 51 11

2 −3 174 0.4 21 79 46 1 −2 258 0.3 13 87 66

72 − 57 3.807 3.3 50 50 4 65 − 50 3.219 1.0 46 54 8

73 − 69 7.416 3.1 74 36 7 63 − 47 5.486 1.5 51 49 7

21 − 23 7.133 4.7 77 23 7 20 − 13 11.794 2.9 50 50 14

17 0 65.794 1.1 22 78 30 11 13 96.854 0.7 6 94 37

2006

Source: OECD, 2008 and calculations.

Table 3 Composition of PSE in OECD countries, 1990–2006 (%). Year

Support

Australia

Canada

EU

Iceland

Japan

Korea

Mexico

N. Zealand

Norway

Switzerland

Turkey

USA

1990

Support on output Payments based on Payments based on Other Support on output Payments based on Payments based on Other Support on output Payments based on Payments based on Other Support on output Payments based on Payments based on Other

77 23 0 0 41 44 15 0 1 73 26 0 0 63 37 0

67 16 12 5 45 13 38 3 53 8 37 2 50 7 43 0

85 7 8 0 63 5 31 1 60 7 34 −1 46 10 44 0

91 8 1 0 96 4 0 0 81 4 14 0 77 7 16 0

93 4 3 0 94 5 1 0 93 4 3 0 93 3 4 0

96 2 0 0 95 1 0 4 96 2 0 2 90 2 7 3

42 58 0 0 − 43 74 69 0 88 11 2 0 55 25 20 0

40 42 17 1 59 41 0 0 11 81 7 0 51 43 6 0

75 5 20 0 63 4 33 0 56 6 39 0 52 5 43 0

84 4 8 0 70 6 22 2 64 3 29 4 53 4 40 3

82 18 0 0 51 50 0 0 87 12 0 1 73 9 18 0

47 23 30 0 45 32 23 0 52 15 33 0 20 33 47 0

1995

2000

2006

inputs area

inputs area

inputs area

inputs area

Source: OECD, 2008 and calculations.

is shown in Table 2. The producer support estimate (PSE) is an indicator of the annual monetary value of transfers from consumers and taxpayers to support producers. Conversely, the consumer support estimate (CSE) measures annual transfers to or from consumers arising from agricultural policies. The general service support estimate (GSSE) is an indicator of annual monetary transfers to agriculture in the form of general services such as infrastructure, services, and extension. Total support estimate (TSE) includes both direct and indirect protection and is composed of PSE, CSE and GSSE (OECD, 2006). Iceland, Korea, Norway and Switzerland had high levels of PSE values in the early 1990s and in 2006. Australia and New Zealand had the lowest PSE values in the 1990s and in 2006, indicating their liberal agricultural policies of the last 15 years. Because of their high PSE values, Switzerland, Korea, Iceland and Japan had the most negative CSE values in 1990 and 2006. The highest TSE values were for the EU, the US and Japan in the 1990s. In the

EU, 64% of protection is financed by consumers through high domestic prices (compared to world prices), and 36% is financed by taxpayers through taxes. However, the US has a different pattern, with only 22% of protection coming from consumers, and 78% from taxpayers. The highest consumer burden is in Korea and Japan, with consumers paying 84 and 79% of protection, respectively. The lowest consumer burden was in New Zealand, where consumers paid for 21% of protection in 1990. In 2006, consumers' share of protection payments decreased in the EU and in the US, as a result of the trade liberalization movement of the WTO and agricultural reforms towards competitiveness. Japan and Korea retained their high share for consumers, while the share of consumer transfers decreased to less than 1% in Australia. The GSSE is an important factor in indirect agricultural protection and is also favored by the WTO because they do not disturb production. The ‘green box’ as defined in the agricultural agreement

Fig. 2. Production index for OECD and developing countries, 1990–2006 (Base: 1999–2001). Source: FAO, 2008.

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4. Input use, trade and environment

Table 4 Food export values and shares in OECD countries, 1990–2005. Country

1990

2005

Value Share in world (million $) export (%)

Value Share in world (million $) export (%)

% Change value (1990–2005)

14.257 20.618 180.016 1.761 2.450 2.467 8.911 10.264 5.240 2.784 6.494 48.239 464.000

88.31 123.64 94.13 41.55 69.90 22.49 310.64 146.90 129.22 102.03 182.22 60.315 17.14

Australia 7.571 Canada 9.219 EU (12) 92.727 Iceland 1.244 Japan 1.442 Korea 2.014 Mexico 2.170 N. Zealand 4.157 Norway 2.286 Switzerland 1.378 Turkey 2.301 US 30.090 World 294.000

2.57 3.13 31.0 0.40 0.68 0.71 0.73 0.40 0.77 0.46 0.78 10.20 52.56

3.07 4.3 38.79 0.37 0.52 0.53 1.92 2.21 1.12 0.6 1.39 10.38 61.57

Source: Comtrade, 2008; FAO, 2008.

covers subsidies that do not distort trade or cause only minimal distortion. These subsidies have to be government-funded and must not involve price supports, including supports for environmental protection and regional development programs (WTO, 2008). These policies are environmentally friendly since they provide information that can be disseminated for the use of more efficient and clean technologies. The ratio of GSSE to TSE in the 1990s was highest in New Zealand and the US, and lowest in Norway, Switzerland and Turkey in that period, and these values did not change in 2006. The composition of PSE in OECD countries is presented in Table 3. Both in the EU and the US support on output was highest in 1990. Korea, Japan, Iceland and Turkey also had high levels of output support in the 1990s. In 2006, the average output support decreased to almost half that of the 1990s, and share of payments based on area increased in the EU. These values show that direct income payments to farmers aimed to eliminate problems caused by overproduction. In the US, payments based on area also increased, but the most striking observation is that the share of input payments, which have the highest share of environmental polluting impact, increased significantly in Australia and remained significant in New Zealand. The implication is that these two highly competitive countries benefited from trade liberalization and globalization and, despite having the lowest overall support, input subsidies have become important due to changing world demand, such as higher demand for grains and beef. International Fertilizer Industry Association (IFA) (2008) expects that, given normal seasonal conditions, the increasing use of fertilizers will continue in Australia and New Zealand. Recent climate changes may also have negative impacts on productivity, which could lead to use of additional inputs, such as fertilizers. These developments can harm sustainable development in the region.

Input use is crucial for production, but it also contributes to environmental pollution. The production index for OECD countries and the developing world (Fig. 2) shows a tendency to increase except in Japan, Norway and Switzerland. The EU production index values decreased little over the period, while those for Mexico, New Zealand, Turkey and the US increased significantly. Developing countries also performed well in terms of agricultural production. Another rationale for input use policies is demonstrated in Table 4. Both Australia and New Zealand significantly increased their food exports and their share in world markets. However, the shares of Iceland, Japan and Korea decreased during that time. The highest increase in value was in Mexico, distantly followed by Turkey, New Zealand and Norway. The CO2 emissions and fertilizer consumption of OECD countries between 1990 and 2005 are shown in Table 5. The highest CO2 emission and per capita emission increase was in Norway, followed by Korea and Canada, while the highest increase in agricultural fertilizer consumption was in Australia and New Zealand. However, the construction of EPI does not include the polluting input use. Therefore it erroneously attaches high rankings to countries that do not protect their agriculture as much as intensively use inputs because of foreign demand caused by globalization, such as New Zealand ranking 1 and Australia 11 in agricultural score in OECD (Table 1). 5. Conclusion This paper examined the interactions between agricultural policies and environment from a chronological perspective for the OECD countries. The policies of the EU, the US and other countries have evolved over the years from payments-to-output to payments-toarea. Payments-to-output reflect the various subsidies, including price support and input subsidies, which encourage production. On the other hand, payments-to-area are independent of production and are provided to producers as income support. Given that direct income supports have positive impacts on the environment, these policy changes will benefit the environment. However, trade liberalization may also cause environment-related problems, even without high levels of support. For instance, the recent trade liberalization and increased globalization benefited some countries, such as Australia and New Zealand, with comparative advantages in agriculture. However, since both of these countries increased their total agricultural exports and their share of world markets significantly, they increased their use of inputs such as fertilizers, which cause environmental pollution, making them vulnerable to becoming pollution havens in agriculture. In addition, while many other countries decreased their share of input-based payments in their agricultural supports, Australia and New Zealand increased their share of input-based payments to meet world demand. In that sense, the EPI

Table 5 CO2 emissions and fertilizer consumption in OECD countries, 1990–2004 and 1990–2005, respectively. CO2 emission1 (mil. ton)

Country Australia Canada EU (12) Iceland Japan Korea Mexico N. Zealand Norway Switzerland Turkey USA Source: (1),

(2)

CO2 emission per capita2 (metric ton)

Fertilizer consumption3 (metric ton)

1990

2004

%Change

1990

2004

%Change

1990

2005

%Change

273 416 2883 2 1112 252 415 23 33 40 168 4731

321 638 3595 2.3 1270 480 408 32 86 37 213 6153

17.58 53.36 24.69 15.0 14.20 90.47 − 1.68 39.13 160.60 − 7.5 26.785 30.05

16 15 9.6 8 9 6 5 7 8 6 3 19

16 20 10 8 10 10 4 8 19 5 3 21

0 33.3 4.1 0 11.1 66.7 − 20 14.28 137.5 − 16.67 0 10.52

1163700 2073852 18586281 23163 1838000 770000 1798400 650000 209590 167900 1887520 18586940

2215296 2798401 12692152 17674 1692782 722407 1730759 1053926 165468 91420 2031210 19273700

90.36 34.93 − 31.71 − 23.69 − 7.90 − 6.18 − 3.76 62.14 − 21.05 − 45.55 7.61 3.69

: World Bank, 2008; (3): World Bank, 2005; FAO, 2008.

C. Atici / Ecological Economics 68 (2009) 1903–1907

may have some deficiencies in terms of agriculture-related pollution. The EPI covers some parameters, such as agricultural subsidies and irrigation stress, but does not include changes in input use, such as fertilizers. Therefore, some countries providing lower support compared to other OECD countries have misleadingly high rankings. For this reason, the future EPI should consider these factors. In the era of globalization and environmental concerns, the trade-off between higher trade and income and environmental quality will be a main issue. Therefore, governments and international agencies should consider in their policy goals the socially optimal level of production and trade, rather than the achievement o of the highest level of income. Acknowledgement The author would like to thank International Centre for Economic Research (ICER), Italy, for its support during the research. References Atici, C., Forthcoming. Carbon emissions in Central and East Europe: environmental Kuznets curve and implications for sustainable development. Sustainable Development. Atici, C., Kurt, F., 2007. Turkey's foreign trade and environmental pollution: an environmental Kuznets curve approach. Turkish Journal of Agricultural Economics 13 (2), 61–69. Batie, S.S., 1990. Agricultural policy and environmental goals: conflict or compatibility? Journal of Economic Issues 24 (2), 565–573. Beghin, J., Dessus, S., Roland-Host, D., van der Mensbrugghe, D., 1996. General Equilibrium Modeling of Trade and Environment. OECD Development Center Working Paper 116, Paris. Cole, M.A., 2004. Trade, the pollution haven hypothesis and the environmental Kuznets curve: examining the linkages. Ecological Economics 48 (1), 71–81. Comtrade. 2008. http://comtrade.un.org [June 23, 2008]. Dessus, S., Bussolo, M., 1998. Is there a trade-off between trade liberalization and pollution abatement? A CGE assessment applied to Costa Rica. Journal of Policy Modeling 20 (1), 11–31. EPI. 2008. http://epi.yale.edu [June 17, 2008].

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