Upscaling environmental incentives in the Common Agricultural Policy: an assessment of the potential of transfers from the first to second pillar

From Firenze University Press Journal: Bio-based and Applied Economics (BAE)

Fanny Le Gloux, Unit Research and Innovation, Directorate-General For Agriculture and Rural Development, European Commission, Brussels

Pierre Dupraz, SMART, INRAE, L’Institut Agro Rennes-Angers

The agricultural sector accounted for 10% of the European Union’s (EU) greenhouse gas (GHG) emissions for the period 1990 to 2018 and is the sec-ond largest contributor after the energy sector (EEA, 2020). The continuous intensification of agricultural activities also contributed to natural habitat degradation and dramatic biodiversity decline (Dasgupta, 2021). Behind the concept of agroecological transition lies the idea of moving away from agricultural practices harming ecosystem services, in par-ticular the systematic use of chemical inputs, towards farming systems maintaining or supporting them (Mil-lennium Ecosystem Assessment, 2005). The EU adopted ambitious environmental targets by 2030 and 2050, in particular on the development of organic farming (OF) to reach 25% of organic agricultural land by 2030. Many levers at various scales can foster this transition. An important one is better targeting agricultural support to make agroecological farming more profitable than conventional farming (FAO et al. , 2021). The Common Agricultural Policy (CAP) represented 36% of the 2019 EU’s budget (58.4 billion euros) (EC, 2019) and is the main EU policy supporting environment-friendly farm-ing practices (Coderoni, 2023). The CAP budget allo-cated to environmental commitments is low in compari-son to income support payments (direct payments of the “first” CAP pillar), the latter including little restrictions on agricultural practices (Dupraz and Guyomard, 2019; European Court of Auditors, 2017; Grethe et al., 2018; Matthews, 2013). Following the definition of the Bio-diversity Strategy for 2030 and the Farm to Fork Strat-egy for the agricultural and food sectors, rethinking the design of the CAP and its instruments is central to trig-gering the large-scale agroecological transition of farm-ing systems (EC, 2020a, 2020c). In this study, we develop a farm-based model-ling framework to assess a reorientation of the direct payments budget specifically towards environmental contracts in France. In the 2014–2020 CAP program-ming period, environmental incentives were offered in two voluntary 5-year contractual schemes of the rural development pillar (“second” pillar) of the CAP: (i) sup-port to OF, and (ii) agri-environment-climate measures (AECM). OF support are area-based payments to eligible farms undertaking a conversion towards OF, or to eligi-ble certified organic farms for maintaining their organic practices. AECM are area-based payments to eligible farms complying with a set of management require-ments targeting an environmental objective such as the maintenance of biodiversity or the improvement of water quality. OF support has proven to be effective in main-taining the relative competitiveness of OF and is a major driver of the sector development (Casolani et al., 2021; Sanders et al., 2011), while AECM are the CAP instru-ments the most targeted towards public good provision (Batáry et al., 2015; Dupraz and Guyomard, 2019; Euro-pean Court of Auditors, 2020; Matthews, 2013). In 2019, direct payments accounted for 69% of the CAP budget (40.5 billion euros), while 8.6% (3.5 billion euros) was allocated to OF support, AECM and Natura 2000 sites altogether (EC, 2019). The literature shows that after 30 years of existence, the voluntary environmental schemes of the CAP were unsatisfactory to improve the state of the environment.The lack and unbalanced funding, as well as poorly designed instruments, led to insufficient participation and effort to reach environmental thresh-olds (Dupraz et al., 2009; Dupraz and Pech, 2007; Espi-nosa-Goded et al., 2013; Targetti et al., 2022; Zavalloni et al., 2019). In 2020, only 13% of the EU’s UAA was under an AECM contract, and 6% under an OF support contract (EC, 2020b, 2020d). Rather than increasing the policy budget to raise environmental incentives, many argued in favour of rebalancing the budget allocation among the various CAP instruments (Dupraz and Guy-omard, 2019; Matthews, 2013). Since the 2014–2020 CAP programming period, Member States have the flexibility to transfer up to 15% of their direct payments budget to increase support to rural development measures, includ-ing OF support and AECM (EU, 2013). In France, 7.5% of direct payments have been redirected since 2017 (MAA, 2021). For the 2023–2027 CAP programming period, it has been decided to dedicate 25% of the direct payments budget to finance a new instrument (eco-schemes) open to all farmers and supporting the volun-tary implementation of environment-friendly measures (generally less ambitious than OF support or AECM contract requirements) (EC, 2021; Runge et al., 2022). Although the negotiations ruled out this option, dedi-cating a higher share of the CAP budget to finance more OF support and AECM was another potential (comple-mentary) lever to upscale environmental incentives and was preliminarily evaluated by (Chatellier et al., 2021). In this paper, we estimate an environmental con-tract adoption model with observed panel data from the French farm accountancy data network (FADN). We propose a generalised Tobit model estimating the adop-tion decision and the minimum farm-level payment trig-gering adoption (“acceptable” farm-level payment). We develop a simulation approach to predict the impact of a budget transfer from direct payments towards the imple-mented environmental contracts during the 2014–2020 CAP programming period: support to OF and AECM. Simulating a budget neutral transfer under ceteris pari-bus conditions, we decrease the direct payments received by farmers and increase the environmental payments to be distributed to OF support and AECM adopters. Our farm-based model estimates are used to predict a new contract uptake outcome in 2019. Our framework does not integrate the market effects of the simulated budget transfers. It means that we assume that induced farm input and output price changes are negligible. We find that the transfer of an additional 7.5% (reaching the maximum transfer rate of 15% between the two CAP pillars) of direct payments towards AECM and OF support results in an increase of participation in AECM from 11% to 23%, and in OF support from 7% to 15%. The predicted participation rate and UAA under environmental contracts increase linearly with the budget transfer rate simulated. Our model suggests that an additional transfer rate of 15.5% to reach 23% of transfer between the two pillars would allow to reach the Green Deal target of 25% of organic UAA. We observe an indirect effect on farmers’ behaviour of decreasing direct payments. In particular, the probability of partici-pating in AECM significantly increases with the amount of coupled payments for suckler cows received at the farm level (+0.1% per 1,000€). We also estimate a strong positive effect of decoupled direct payments on OF sup-port acceptable farm-level payments (+1,039€ per 100€/ha), such that our model predicts that farms participate in OF support for lower farm-level payments after the budget transfer. We identify a differentiated impact of the budget transfer according to the type of farm, with an increased incentive for farms specialised in grazing livestock to contract AECM, and for farms specialised in cereal and field crops, permanent crops, dairy, pigs and poultry or mixed farming with field crops and grazing livestock to contract OF support. Our first contribution is an ex-ante evaluation meth-od of the transfer mechanism from direct payments to environmental contracts. In particular, we model the impact on adoption. To our knowledge, the effect of such a budget transfer has not yet been assessed at the farm level and for an allocation targeting environmental con-tracts specifically. Previous ex-ante evaluations of the reorientation of direct payments used the CAPRI (Com-mon Agricultural Policy Regionalised Impact) partial equilibrium model (Himics et al., 2020; Schroeder, 2021; Schroeder et al., 2015), or linear programming (Gian-nakis et al., 2014), to study the impact on environmen-tal indicators aggregated for farm types and EU regions. Hence, it remains unsure how effective it can be to sig-nificantly increase the voluntary adoption of environ-ment-friendly practices at the farm level, and what are the underlying microeconomic mechanisms. Adoption results from the confrontation of the supply of envi-ronmental commitments by farmers (farm and farmer characteristics, opportunity costs), and the demand from public authorities (budget, eligibility criteria, technical requirements, payment). Our model partly overcomes the absence of information on the diversity of contract characteristics and eligibility rules by controlling for many factors of farm heterogeneity. Our second contribution is to capture the effect of direct payments on both the environmental contract adoption decision and the associated acceptable farm-level payment in France under the 2014–2020 CAP framework. Beyond a direct positive effect on the par-ticipation of an increased budget available to finance environmental contracts, one can expect an indirect effect of the transfer on farmers’ response to environ-mental incentives, resulting from the decrease of direct payments (lower income support). Monetary aspects from different sources, including direct payments, are important drivers of the decision to adopt AECM and OF (Darnhofer et al., 2019; Jaime et al., 2016; Sanders et al., 2011; Van Herzele et al., 2013). Allaire et al. (2011) and Pufahl and Weiss (2009) found different effects of direct payments coupled to production on participation in AECM, with an overall positive effect in Germany, and a marginal or negative effect in France for exten-sive grassland measures. Moreover, a positive effect of the decoupling of direct payments on the adoption of OF was found in Sweden (Jaime et al., 2016). This lit-erature proved that both direct payments and environ-mental payments affect the decision to adopt environ-ment-friendly practices, showing the importance of con-sidering direct and indirect effects when evaluating the potential of a budget transfer in boosting more adop-tion. In our study, we complement previous studies by looking at the effect of direct payments on not only the adoption decision, but also the amount of payment to allocate to farms to trigger this adoption.

DOI: https://doi.org/10.36253/bae-14414

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