Agri-environmental payment schemes which operate as voluntary programmes that pay farmers to achieve certain environmental criteria have gained increasing interest and popularity amongst policy makers and farmers. There is growing evidence, however, that the majority of such schemes that have been implemented have had little environmental effectiveness. Building on past OECD work, this report identifies and discusses “best practice” design principles for cost-effective agri-environmental payment schemes. To this end, the report reviews the literature, develops a Policy Spectrum Framework that classifies payment types based on key design features for achieving cost-effective outcomes, and presents policy simulations undertaken to assess the cost-effectiveness of different payment designs and a multi-country choice experiment conducted with farmers to explore their preferences for different types of payments, ranging from practice-based to results-based payments.
Making Agri-Environmental Payments More Cost Effective
Abstract
Executive Summary
Tackling the environmental challenges facing agriculture will require improvements to the current set of instruments available to policy makers. One such set of instruments is government agricultural support through agri-environmental payment schemes – voluntary programmes that typically pay farmers for achieving certain environmental objectives.
Despite their increased popularity among policy makers, there is mounting evidence that a large majority of such schemes underperform in achieving environmental objectives due to weakness in design. These include imperfections in the targeting of beneficiaries and linking payments to the right mix of practices or results. This report identifies and discusses “best practice” design principles for agri-environmental payment schemes. It develops a policy spectrum framework that classifies payment scheme types based on key design features for achieving cost-effective outcomes. It performs policy simulations on those design features to assess their cost effectiveness and conducts a multi-country choice experiment with farmers to explore their preferences for contracts based on the adoption of practices, the achievement of environmental results (based on either measured or modelled results) or hybrid mechanisms that offer a payment in exchange for adopting practices and achieving results.
The Policy Spectrum framework, based on the literature review, policy simulations and choice experiment with farmers, identifies seven dimensions of payment design that are important for achieving cost-effectiveness. These key dimensions are:
Clear, and preferably quantifiable, policy objectives.
Targeted payment designs that allow consideration of spatial variation of compliance costs and environmental benefits.
Tailored payment rates that do not overcompensate but cover income forgone from practice adoption (opportunity costs) and farmers’ private transaction costs associated with participation in the payment scheme.
Adjusted eligibility criteria —such as determination of beneficiaries and decisions whether to pay to individual versus groups of individuals or collectives— depending on the environmental issue in question and whether environmental results are sought at field-parcel or landscape level.
Acknowledgement and consideration of behavioural responses in payment design, such as farmers’ environmental preferences and risk profiles, to increase participation and render payment schemes more effective.
Assurance of strong additionality that contributes to budgetary cost-effectiveness by limiting budgetary outlays that do not directly deliver environmental benefits.
Monitoring and enforcement, assuring that the payments are made for actual environmental improvements, or actions leading to those improvements.
Farm-level policy simulations based on a micro-economic modelling framework and focusing on reducing nitrogen runoff show that results-based schemes are the most cost-effective despite their higher policy-related transaction costs. More specifically:
The results-based payment, which provides direct incentives to reduce nitrogen runoff is the most cost-effective, as nitrogen runoff reduction is allocated to those production units with relatively high abatement potential.
Hybrid payments, in which payments are based on both practice adoption and abated nitrogen runoff, are the second most cost-effective payment type.
The practice-based component of the hybrid payment design is less cost-effective relative to results-based payment, since it provides incentives for stronger practice adoption in the least productive production units that have smaller opportunity costs but also less nitrogen runoff abatement potential. Practice-based payments, where payment is conditional on the stringency of the adopted practice, have a lower cost-effectiveness than hybrid mechanisms, but still grant farmers some degree of flexibility, since farmers can optimise practices based on their opportunity costs and payment levels for each practice adoption.
Uniform payments for a given selection of practices eliminate that flexibility and are the least cost-effective option. These budgetary cost-effectiveness ranking results hold for both risk-neutral and risk-averse farmers, and with the inclusion of public transaction costs associated with administration of the schemes.
Results from policy simulations differ with those of the choice experiment conducted in Finland, the Netherlands and Sweden. This choice experiment provides insights into the willingness of farmers to enter into AES contracts considering water quality, climate change mitigation, and biodiversity objectives. In contrast to results from the policy simulations, the choice experiment shows that farmers (arable and mixed livestock and arable farmers) in the three countries tend to prefer practice-based and hybrid schemes more than results-based schemes. These preferences are stable across farm types (arable and mixed). Hybrid schemes are preferred over practice-based schemes only in the case of payments for biodiversity requiring the lowest level of environmental practice and result requirements. Practice-based schemes were the most preferred option for higher level environmental requirements, and for considering water quality and greenhouse gas mitigation in addition to biodiversity.
The average willingness to accept (WTA) contracts ‒ that is, the average payment level required by farmers to participate in AES contracts ‒ for achieving water quality, climate change mitigation, and biodiversity objectives with low level of environmental requirements for practice-based schemes (i.e. adopting two practices) is EUR 182/ha/year. The average WTA for adopting a hybrid scheme with the lowest environmental requirements (adopting two practices and achieving biodiversity objectives) varies between EUR 147/ha/year and EUR 179/ha/year, if 10% and 90% of the payment is conditioned upon results being achieved, respectively. For results-based schemes, farmers would require an average of EUR 246/ha/year to adopt a contract with the lowest environmental requirements (i.e. biodiversity objectives only). These estimates increase with the level of environmental requirements and, for hybrid contracts, with the share of payment conditioned on achieving results. Arable farmers tend to display higher WTA levels to participate in AES contracts than mixed farmers
In conclusion, hybrid agri-environmental payment schemes appear to offer the best payment option to take into account of both budgetary constraints and the need for schemes to attract sufficient farmer participation to be environmentally effective. These payments offer policy makers an opportunity to partially test and implement results-based schemes and offer farmers a lower financial risk opportunity to test results-based features of the payments.
