Counterfactual approach for assessing agri-environmental policy: The case of the Finnish water protection policy

This paper applies counterfactual approach to assess the impacts of agri-environmental programs. Counterfactual analysis evaluates policies answering questions: what would have happened if...? We develop a theoretical framework for counterfactual analysis based on the inter-linkages between the behaviour of agents and the response of environmental systems to the economic decisions. We apply our model to assess the performance of the Finnish Agri- Environmental Programme to reduce agricultural nutrient runoff to the Baltic Sea. Counterfactual analysis allows us to determine both the unit effectiveness of the measures included in the Programme and its preventive impact. We demonstrate that the Finnish Agri- Environmental Programme does not achieve its goals, because it fails to anticipate farmers’ responses to incentives created by the Common Agricultural Policy and the Agri-Environmental Programme itself. The social cost-benefit analysis of the Program shows negative net benefits: benefits from reduced nutrient loading are much lower than support payments.Environmental policy evaluation, counterfactual analysis, nutrient runoff, the Baltic Sea, Agricultural and Food Policy, Q5, H23, H43,

Optimal Private and Public Harvesting under Spatial and Temporal Interdependence

This paper extends the Hartman model to include the case where two adjacent stands may be interdependent in the provision of amenity services. We show first that the relationship between the focal and exogenous rotation age depends on the nature of their temporal interdependence, i.e., on what happens to the degree of substitutability or complementarity between the stands when the rotation age of the private focal stand changes. We then apply this analysis to the determination of public rotation age in a two-stage game where the government first decides upon its harvesting and private harvesting is chosen in the second stage. Several new rules are derived for the socially optimal design of public harvesting depending on the nature of interdependence between private and public stands as well as on whether citizens have access to private forests for recreation or not.Substitutability/complementarity, amenity valuation, private and public rotation age

Multifunctional agriculture: The effect of non-public goods on socially optimal policies

We develop a general framework for multifunctional agriculture, which includes not only public goods but also rural viability as a non-public good item. We contribute to the literaure in two ways. First, we demonstrate how the broader definition of multifunctional agriculture differs from the agri-environmental multifunctionality, and how agri-environmental policy should be reformed to include these aspects. We show that rural viability entails adjusting fertilizer tax and buffer strip subsidy below their first-best Pigouvian levels to reflect the direct and indirect employment effects of agricultural production. Moreover, we show that when non-agricultural land use is present, an additional, non-agricultural instrument is needed to adjust the amount of land allocated to agriculture to its optimal level. In a parametric model calibrated to Finnish agricultural conditions and Finnish valuation of agri-environmental amenities and rural viability, we assess how the socially optimal provision of non-public good multifunctionality relates the socially optimal agri-environmental multifunctionality

Miten yhteiskunnan tietotarpeet ja tutkimuksen terävin kärki saadaan kohtaamaan

Tieteen tori: Tutkijoiden näkökulmia metsäntutkimuksee

Designing Cost Effective Auctions as Instruments to Reduce Nutrients Run-off from Agriculture into the Baltic Sea - An Experimental Study

This research studies the use of auctions for reducing leaching of phosphorus and nitrogen into the Baltic Sea. Auctions are introduced as a tool for creating environmental contracts in agriculture for the first time in Finland. A controlled laboratory experiment is used to analyze the effect of introducing a bundle mechanism in the auction. Landholders submit sealed bids on multiple parcels in a one shot reverse auction. Each parcel is assigned an environmental quality and varies in size. In one treatment landholders can offer bids on environmental contracts for their parcels individually. In the other treatment landholders are given the opportunity to bundle parcels of land together when submitting bids as well as submitting bids for individual parcels. The results suggest that the bundle mechanism increase environmental efficiency of the auction compared to the individual parcel auction. In the treatment with individual parcel bids environmental value significantly affects over half of landholders’ offers. The bundle treatment however shows sign of a cognitive bias where landholders use the hectare size to determine their offers.Resource /Energy Economics and Policy,

Saddles, Indeterminacy and Bifurcations in an Overlapping Generations Economy with a Renewable Resource

We incorporate a renewable resource into an overlapping generations model with standard, well-behaved utility and constant returns to scale production functions. Besides being a factor of production the resource serves as a store of value. We characterize dynamics, efficiency and stability of steady state equilibria and show that the nature of steady state equilibrium depends on the value of the intertemporal elasticity of substitution in consumption. In particular, if that elasticity is at least half, but not exactly one, stationary equilibria are saddle points. The stationary equilibrium is stable when the intertemporal elasticity of substitution is unity. For smaller values of that elasticity we use a parametric example to demonstrate the existence of stable equilibria (indeterminacy) and a subcritical flip bifurcation. Hence, an overlapping generations economy with a renewable resource can display cycles and indeterminacy even in the absence of externalities or imperfect competition.Overlapping generations, renewable resources, bifurcations

Optimal Forest Taxation under Private and Social Amenity Valuation

This paper analyzes socially optimal forest taxation when the government has a binding tax revenue requirement. In the Faustmann model the optimal design of forest taxation consists of non-distortionary taxes, such as site productivity tax, site value tax or profit tax. A combination of distortionary unit (or yield) tax and timber tax can also be used to collect the tax revenue in a non-distortionary way. In the Hartman model with amenity services as a public good, the optimal design consists of a non-distortionary tax and a Pigouvian tax, which adjusts the private rotation age to the socially optimal one. Now only the site productivity tax is non-distortionary, while unit, yield, timber, site value and profit taxes generally serve as a corrective Pigouvian taxes. In the absence of a non-distortionary tax, a combination of unit (or yield) and timber taxes can often be used to both tax revenue collection and Pigouvian correction.Rotation age, forest amenities, optimal forest taxation

Optimal forest conservation: Competitiveness versus green image effects

This paper provides a theoretical framework to study the behavioral and welfare effects of forest conservation, which leads to a binding harvesting constraint for landowners. The economy is modeled as a three-stage game by the interaction of the government’s conservation policy, with consequent adjustments in domestic timber market, and in output determination in a Cournot rivalry with the foreign forest industry. More specifically, we study how forest industry’s competitiveness constrains forest conservation and whether the “green image” demand resulting from forest conservation compensates the loss in competitiveness. It is shown that although the green image effect may locally be strong enough to even increase the profits of domestic forest industry, at the socially optimal forest conservation level it never dominates the competitiveness effect. Hence, there is a trade-off between forest conservation and the competitiveness. These findings are robust to the issue of whether timber markets are perfectly or imperfectly competitive. – biodiversity ; harvesting constraint ; timber price bargainin

Agri-Environmental Program Compliance in a Heterogeneous Landscape

Heterogeneity of agricultural landscapes may necessitate the use of spatially targeted instrument combinations to implement the social optimum. But compliance with these policies may require costly enforcement. This paper examines the design of agri-environmental policies featuring two of the most commonly used instruments, reductions in fertilizer application rates and installation of riparian buffers. While compliance with buffer strip requirements is verifiable at negligible cost, fertilizer application is only verifiable through costly monitoring. We derive optimal subsidies for fertilizer reduction and buffer strip set-asides and enforcement strategies for the cases of low and excessive monitoring costs. An empirical simulation model suggests that enforceable policies can come close to replicating socially optimal crop production, nitrogen runoff, and overall welfare without requiring increases in overall subsidy expenditures, at least under conditions characteristic of Scandinavia. Sensitivity analysis suggests that these conclusions may carry over to areas with higher overall land quality as well.nutrient runoff, monitoring, enforcement, Agricultural and Food Policy, Environmental Economics and Policy, Q15, Q18, H23,