ENVIRONMENTAL EFFECTS OF AGRICULTURAL TRADE LIBERALIZATION AND DOMESTIC AGRICULTURAL POLICY REFORMS

The paper reviews existing studies on linkages between agricultural policies, trade liberalization and the environment. Since the price and production changes induced by the Uruguay Round Agreement on Agriculture seem likely to be quite modest for most countries, this partial trade liberalization may not cause major changes, positive or negative, in the environmental impacts of agricultural production. Instead, the environmental impacts of domestic agricultural policy reforms will probably be more significant than impacts induced by the Uruguay Round Agreement on Agriculture. This is largely due to the fact that agricultural trade liberalization, partial or complete, can alleviate some policy failures which have adverse environmental impacts, but does not correct environmental market failures. By contrast, domestic agricultural policy reforms, while alleviating policy failures, could also tackle environmental market failures through, for example, agroenvironmental programmes.

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

The environmental dimension of multifunctionality: economic analysis and implications for policy design

In this study an analytical model was developed, and then empirical results were obtained by calibrating the model to Finnish data. First, the farmer's private optimim was compared to the social optimum where nutrient runoffs, landscape diversity, and agrobiodiversity were valuated at their social marginal values. Next, solutions were developed for the first-best differentiated policy instruments and the second-best uniform and semi-uniform policy instruments. Finally, farm income support measures and environmental cross-compliance schemes were analysed

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,

Evaluating the Impact of Alternative Policy Scenarios on Multifunctionality: A Case Study of Finland. CEPS ENARPRI Working Papers No. 13, 1 July 2005

This paper provides first results of the sector-model approach to analysing the effects of alternative policy scenarios on the multifunctional role of Finnish agriculture. In terms of environmental non-commodity outputs, this study focuses on nutrient runoffs, landscape diversity and biodiversity. As regards other non-commodity outputs, the paper considers rural socio-economic viability. The results suggest that, on the whole, reform of the common agricultural policy is not likely to result in any drastic decline of agricultural production in Finland. The amount of green fallow will increase considerably when agricultural support payments are decoupled from production, and as a result the remaining cultivated agricultural land will become biologically richer. The agricultural labour force is likely to decrease substantially irrespective of agricultural policy. The study concludes that the credibility of the production economics and biological relationships of the economic model determine the validity of the results of the many indicators examined. Further, the economic logic of microeconomic simulation models provides a consistent assessment of the many aspects of multifunctionality

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 literature 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.biodiversity, employment, nutrient runoffs, rural viability, Labor and Human Capital, Resource /Energy Economics and Policy,

Multifunctionality: Environment versus Rural Viability in Social Optima

We examine policy implications of including rural viability to the notion of multifunctional agriculture. We assume that rural viability refers predominantly to the number of people living in rural areas to keep the infrastructure and living conditions at good state for a good life. The economic core of viability is employment in agriculture and agriculture serving sectors. Viability benefits are modelled with the help of a viability valuation function. We demonstrate that rural viability entails adjusting fertilizer tax and buffer strip subsidy below their environmental first-best Pigouvian levels to reflect the direct and indirect employment effects of agricultural production. Moreover, 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 socially optimal level. Thus, inclusion of rural viability creates distortions in multifunctional policies. Theoretical results are illustrated with Finnish data to examine how the inclusion of rural viability to multifunctionality relates to the true socially optimal agri-environmental multifunctionality. We also assess welfare loss from promoting rural viability in the case where there is no base on viability benefits.biodiversity, employment, nutrient runoff, rural viability, Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Environmental Economics and Policy, Political Economy, Production Economics, Productivity Analysis,

Impacts of Agri-Environmental Policies on Land Allocation and Land Prices

We develop a Ricardian framework with heterogeneous land quality to analyse the effects of agricultural and agri-environmental support policies on land allocation decisions and land prices. Four agri-environmental policy instruments are considered: a uniform area payment, a quality-dependent area payment, a mandatory buffer strip policy and a voluntary buffer strip payment. We also analyse how general tax and monetary policies may affect agricultural land prices. The theoretical framework is illustrated by an empirical model applied to Finnish agriculture. The empirical model shows that macroeconomic factors, such as general tax and monetary policies, may exert a greater impact on land prices than some minor fine-tuning in agrienvironmental policies.agri-environmental policy, acreage subsidy, land price, Q11, Q18, Environmental Economics and Policy, Land Economics/Use,

Agri-environmental program compliance under heterogeneous conditions

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.nutrient runoff, monitoring, enforcement, Environmental Economics and Policy,

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,