The Environmental Impact of European Union green box subsidies
Ariel Brunner and Harry Huyton
1Introduction
With over €372 billion to be spent over the 2007-2013 budget period on agricultural subsidies in the European Union (EU), these subsidies have become a key determinant of farmers’ incomes, frequently accounting for over half of European farmers’ annual earnings, and thus of land use decisions. The way in which these subsidies have been allocated has therefore shaped land use patterns across the EU and consequently had a resounding impact on wildlife and the environment in rural areas. At the same time, these subsidies have been accused of heavily distorting world trade to the detriment of farmers in developing countries and have become one of the principal stumbling blocks in the Doha round of negotiations at the World Trade Organization (WTO).
The Common Agricultural Policy (CAP) underwent significant reform in 2003. This reform was driven by negotiations at the WTO and, to a lesser extent, by the environmental impacts of the CAP. It resulted in a shift of CAP spend from traditional market and product support measures to green-box-compliant schemes, i.e. subsidies that are considered to be non-trade-distorting. It also saw the introduction of minimum environmental standards for all farmers in receipt of subsidies, known as cross-compliance, and the strengthening of environmental schemes.
These trends are likely to continue with the ongoing ‘health check’ of the Common Agricultural Policy as well as the post-2013 EU Budget review, which provides an opportunity for substantial reform. Indeed, environmental and landscape concerns are now used widely to justify the EU’s continued support for farmers.1
Critics argue that many green box classified subsidies actually have trade-distorting effects (G20, 2005) and consequently negative impacts on developing countries. Furthermore, there are fears that green box payments are being used to disguise farm subsidies rather than to deliver social and environmental objectives. Indeed, there are many examples of green box classified payments in the EU that are actually causing environmental damage, as discussed in this paper.
The need to address this problem is urgent, as abuse of the green box is damaging the reputation of agricultural support,which can deliver genuine social and environmental benefits. At the same time, the ability of green box payments to effectively deliver environmental benefits is effectively limited by WTO rules that place restrictions on how environmental payments can be calculated. This hampers efforts to reverse biodiversity decline and erodes the social acceptance of international trade rules.
This paper argues that although there are legitimate environmental and social reasons for ensuring that both developed and developing countries are able to provide some kind of agricultural subsidy, there is evidence to suggest that the current subsidy regime does not adequately protect and promote environmental objectives in both developed and developing countries. The Doha round mandate2 for a “review and clarification” of green box subsidies provides an important opportunity for governments to ensure that payments in this category promote and do not undermine sustainable development objectives.
The objective of this paper is to provide trade negotiators and policy-makers with an assessment of the positive and negative environmental impacts of EU agricultural subsidies categorized as green box, and, on the basis of this analysis, to make recommendations for future reform of EU green box subsidies and to suggest possible changes to green box criteria in order to ensure optimal delivery of environmental goods and minimum opportunity to abuse the system.
Given the huge scope of environmentally related subsidies, we focus on the relationship between EU green box subsidies and biodiversity conservation. It is important,however, to note that most comments are equally relevantto other environmental goods, such as water, soil and landscape. Biodiversity is a particularly useful example of a public good that is rarely rewarded by the market. Its conservation therefore depends on biodiversity being given a market value through public support.
2 The Common Agricultural Policy: a journey to the green box
The CAP is the world’s largest system of agricultural subsidies, with €372 billion to be spent over the 2007-2013 budget period. It therefore plays a key role in EU politics and world trade negotiations. Critically, from an environmental perspective, it has considerable impact on how land is used,both in the EU and globally.
The CAP was introduced in 1957 as part of the Treaty of Rome.The aim of the CAP was to put an end to post-war food shortages and widespread rural poverty. The main delivery tools at that time were guaranteed prices, intervention buying, high import tariffs and export subsidies. These policies were so successful in encouraging production that, through a combination of intensification and expansion in the area under production, they quickly led to surpluses and the infamous butter mountains and wine lakes of the 1980s.
It was a combination of the need to address these surpluses and the growing pressure from trade negotiations that initiated the first of the major CAP reforms. The MacSharry reform in 1992 aimed to reduce these surpluses by decreasing price support and introducing direct compensation payments to farmers. This process was continued by the Agenda 2000 reform, which reduced price support further and increased farmer compensation through direct payments. A second pillar of the CAP, aside from normal income payments to farmers, was officially created to pay for rural development measures.
The third and most significant reform took place in 2003 as part of the Mid Term Review of the Agenda 2000 reform. This reform resulted in the replacement of most direct subsidies by a single farm payment scheme that is based on area and historic subsidy allocations, moving most EU payments into the green box classification.
The role of the CAP’s second pillar, i.e. rural development, was strengthened with the introduction of “modulation”, a process whereby funds are shifted from the first to the second pillar. As first pillar payments are still coupled partially to production, modulation also contributes to the shift of CAP subsidies into the green box.
3 Greening the Common Agricultural Policy
By generously rewarding production at any cost, the CAP has driven the intensification of agriculture in Europe. This has, in turn, been the main cause of the collapse in biodiversity, demonstrated by the decline in farmland bird populations (Donald et al., 2001) in the EU. With production subsidies making up over half of farmers’ incomes in many instances, it is clear that such subsidies have played a fundamental role in farmers’ decisions, resulting in intensification well beyond the level that would be delivered by the market alone.
Intensification has been achieved through increasing yields and stocking densities, expanding fields and removing hedgerows and other important habitats, and increasing massively the use of pesticides and artificial fertilizers. Besides the collapse of farmland biodiversity, agricultural intensification is linked to a wide range of environmental problems, such as water pollution and eutrophication, over-abstraction of water, and soil erosion and degradation (European Environment Agency, 2006).
The journey to the green box has supposedly been accompanied by a journey from a coarse and environmentally damaging system of farm support to one that now encourages sustainable farming through the removal of the link between payments and production and the introduction of minimum standards and incentive payments for higher standards.
The MacSharry reform began this process in what can be seen as a landmark moment for agricultural policy in Europe. It resulted in official recognition of the environmental problems caused by modern farming, and the introduction of agri-environment schemes as a tool for member states to address them. Agri-environment schemes pay farmers for good environmental practices, rewarding them for being good stewards of the countryside.
This recognition of agriculture’s negative impacts on the environment grew throughout the 1990s and has been supplemented by a new understanding of the role played by some, mainly traditional, agriculture practices in conserving and enhancing biodiversity, epitomized by the European Environment Agency’s project to identify and map Europe’s high natural value (HNV) farming areas.
The 2003 reform was the most important for the environment. The decoupling of agricultural support from production finally removed the perverse incentive to overproduce and thus cause environmental damage. The introduction of cross-compliance has, at a minimum, put a much greater importance on complying with EU environmental legislation, such as the Birds and Habitats Directive, through linking compliance to the receipt of subsidies. Furthermore, the new EU rural development policy, which is paid for through the second pillar of the CAP, has a strong emphasis on the environment and identifies biodiversity conservation as a key objective.
The CAP remains a long way from an environmental policy, and many parts still threaten the environment, but it is certain that the CAP has become significantly greener (Schmid and Sinabell, 2007; Schmid et al., 2007). The journey of the CAP is thus also one from environmentally harmful subsidies to greater use of environmental payments.
4 The case for public payments for land management in the European Union
Environmental payments for farmers, alongside a high regulatory baseline, are a necessary policy tool if agriculture is to deliver the range of environmental and social public goods that society expects of it. Thriving wildlife, beautiful landscapes upon which rural tourism depends, clean water and well-functioning watersheds are all products of agriculture in Europe, given that agriculture is responsible for the management of approximately three-quarters of European land. Wider society values these services, but they have no market value. This results in a market failure in which suboptimum levels of these public goods are delivered, resulting in biodiversity decline, water pollution and degraded landscapes and soils.
The relationship between agriculture and biodiversity in Europe is a particularly close one. Agriculture has shaped the European landscape, with much of Europe’s biodiversity intimately dependent on traditional farming (Baldock, 1995). Traditional mowing and low-intensity grazing, for example, have for centuries maintained a range of semi-natural, biodiversity-rich grasslands that would have otherwise reverted to scrub and forest. The actions of big wild herbivores and large-scale geomorphologic phenomena that used to maintain open landscapes in past eras have mostly gone forever. This means that abandonment of traditional agricultural practices is as much a threat to biodiversity as is intensification (DLG: Government Service for Land and Water Management, 2005). Most traditional High Natural Value (HNV)farming is not economically viable on its own, but its viability can be improved through targeted rural development aid and agri-environment support.
Land use policy, and principally agri-environment policy, is the best tool available to address this market failure and reverse the decline in biodiversity, both at the macro landscape scale and at the more specialized species and habitats scale, including the Natura 2000 protected area network. Agri-environment schemes pay farmers to adopt or maintain specific farming practices based on an income forgone formula.These schemes have been shown to be able to deliver for the needs of specific species (Leitao et al., 2006; Vickery et al., 2004) and are expected to be able to deliver higher environmental standards throughout the countryside (Donald and Evans, 2006).
Climate change places a further importance on improving the sustainability of agriculture and its value to wildlife. The quality of agricultural habitats will determine the ability of many species to move effectively between protected areas in order to follow their shifting climate envelopes, i.e. the areas with the climatic conditions appropriate for the species in question.
5 European Uniongreen box subsidies
This section looks at each of the major green box funding schemes in the EU following the 2003 CAP reform and asks:
(a) Is the scheme targeted at the delivery of an environmental objective?
(b) Is this public benefit not being supplied by the market already, i.e. is a market failure taking place?
(c) What are the environmental impacts,both positive and negative, of the scheme?
(d) Are the objectives quantified and measurable? Is there a monitoring and feedback system?
(e) Do payments reflect the environmental benefit?
These questions are designed to test the validity of the subsidy and are based on the principle that support should be used only to deliver public goods that would otherwise not be delivered by the market. Food production in the EU might have passed this test 40 years ago when the CAP was conceived, but it no longer does so, whereas schemes that reward farmers and other land managers for the delivery of positive externalities, such as wildlife, ecosystem services and landscapes, would pass the test. Questions(d) and (e) seek to establish whether the mechanism is fit for purpose by asking whether it has the basic attributes of a scheme that is able to deliver on its stated objectives (Evans et al., 2002).
Note that although some blue box support remains, including partially coupled payments and export refunds, these are not looked at in detail in this paper as they can be assumed to be generally environmentally harmful (OECD, 2002a).
5.1 Overview of CAP spending
Figure 1 gives indicative3 annual spend on the principal chapters of the EU budget. Life+ is made explicit as it is the only dedicated spend on biodiversity, demonstrating the relative size and importance of agri-environment and other agricultural spend for conservation in the EU. Pillar 1 includes all market support mechanisms, such as export subsidies and intervention, but consists principally of decoupled and partially coupled direct payments. In 2003, approximately 75 percent of pillar 1 spending went to direct aid, and this proportion can be expected to have increased with reform.
Figure 1: Overview of EU budget in 2007, in €bn
Pillar 2 of the CAP consists of measures that fall into three axes:
Axis 1 – competitiveness of agriculture: aims to increase the economic competitiveness of the farm sector and includes investments in infrastructures, modernization of farm holdings, land consolidation, training and other measures.
Axis 2– land management and the environment: aims to improve the countryside and the environment through supporting particular types of land management. Includes lessfavoured areas (LFA) payments, agri-environment and afforestation, all of which are considered separately in this section.
Axis 3 – improving quality of life in rural areas: aims to achieve diversification of the rural economy and increase the quality of life in rural areas. Includes investments in rural tourism and recreation and in rural infrastructure.
Axis 2 measures are of greatest interest in terms of environmental delivery, and they are given special attention in this section, but the environmental impacts of Axes 1 and 3 are also considered.
5.2 Decoupled and partially coupled direct payments and cross-compliance
Direct payments are the principal subsidy for EU farmers following the 2003 reform and are aimed at maintaining farmers’ incomes. Individual payments are calculated on the basis of either historic subsidy allocation in 2000–02 or area, or a combination of both. This decision has been made at the member state level, and in some instances at the regional level, with a preference towards historical allocation. Average yearly payments, for the whole EU are estimated at € 237/ha (Farmer et al. 2008), but individual payment can range from few €/ha/y tomaximums of approximately €700/ha for farmers who grew sugar during the reference period in France and are even higher for olive oil and tobacco-related support.
Although in principle these payments are decoupled from production, member states have had the option to retain partial coupling of up to 25 percent of the payment for cereals and up to 100 percent for suckler beef in order to avoid land abandonment. This system of direct payments is being phasedin the new member states over a ten-year period and will be implemented fully by 2013.
Decoupling payments from production will lessen the incentive to intensify and therefore will deliver environmental benefits relative to the pre-2003 system of support (Schmid andSinabell, 2007; Schmid et al., 2007).However, environmental criteria have not been considered in the calculation of direct payments, and farmers who reduced production during the reference period as part of an environmental scheme may even be penalized by the system. Indeed, the historical allocation of payments, which has been the preferred method of distribution in most member states, will favour the most intensive producers during the reference period, essentially rewarding those with a record of environmentally destructive practices instead of redistributing funds to smaller farm units and HNV.
The receipt of direct payments is, however, linked to the respect of a set of statutory management requirements (SMRs) and to keeping eligible land in good agricultural and environmental condition (GAEC). The expressed aim of these conditions, known as cross-compliance, is to maintain environmental, food safety, animal and plant health, and animal welfare standards.
Cross-compliance seeks to protect the environment, but the demand these standards place on farmers, and consequently the benefits they deliver, are disproportionately small relative to payments. Thus, the bulk of the direct payment scheme is not about maintaining these standards but about improving farmer incomes. On a 181-ha arable farm in Cambridgeshire, England, for example, it was calculated that the costs of implementing cross-compliance were approximately €75 compared to €27,000 received in direct payments.4
Cross-compliance requirements are basic rules, theoretically prohibiting the worst practices, such as the destruction of the most important habitats on farms, and requiring management plans to be drawn out. They are, however, by no means comprehensive: permanent grassland, which is one of the most valuable farmland habitats in Europe, is not protected fully and can still be ploughed up in many circumstances, while many landscape features, including ancient trees and hedgerows, can still be destroyed, depending on how member states interpret the EU rules.