Doubling Organic Farming in Denmark: A Cost-Benefit Analysis

F A C UL T Y O F S C I E N C E
UNIVE R S I TY OF C OP ENHAGEN
“Organic agriculture is a production system that sustains the health of soils, ecosystems and
people. It relies on ecological processes, biodiversity and cycles adapted to local conditions
rather than the use of inputs with adverse effects. Organic agriculture combines tradition,
innovation and science to benefit the shared environment and promote fair relationships and a
good quality of life for all involved.”
(International Federation of Organic Agriculture Movements (IFOAM web, 2014))
Master Thesis
Marianne Lisa Holmgaard Tjørning
A Cost-Benefit Analysis of the Environmental and
Climate Impacts of doubling the Organic Agricultural
area in Denmark in 2020
www.dn.dk

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Institution: Faculty of Science, The University of Copenhagen
Name of Department: Department of Food and Resource Economics
Author: Marianne Lisa Holmgaard Tjørning (wcn882)
Title: A Cost-Benefit Analysis of the Environmental and Climate Impacts of doubling the organic agricultural area in Denmark in 2020
Academic advisors: Alex Dubgaard Main supervisor, IFRO
Jens Erik Ørum Co-supervisor, IFRO
Submitted: 21. october 2014

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Abstract (summary)
This thesis looks into the climate and environmental impacts of a doubling of the Danish organically grown area from a welfare economic perspective. Through a pilot cost-benefit analysis (CBA), it investigates the net benefits of the environmental and climate benefits expected to occur when converting conventional farmland to organic practices, and the conversion costs to the individual full-time farmer, compared to a baseline scenario where no conversion is taking place.
The pilot CBA is based on three conversion scenarios of how the organic farmland area will be doubled. The three conversion scenarios are distributed into four farm types: dairy, crops and pigs and an aggregated category, other, holding all other farm types.
Due to data scarcity, only the environmental and climate effects deemed to have the highest impacts are included. These are reductions in nitrogen leaching, phosphorous losses, ammonia evaporation and greenhouse gas (GHG) emissions.
The benefits are estimated relative to the current level of climate and environmental impacts from conventional farming methods and monetised using the shadow prices of reductions based on their respective binding policy targets. For climate effects, two different shadow prices are applicable depending on whether it will be permitted in the non-ETS to trade emission allowances in the EU-ETS.
Depending on conversion scenario, time horizon used and the shadow price of GHG, the pilot CBA shows positive welfare economic net benefits ranging from DKK 0.5m to over DKK 5bn. These results can form a basis for a proper CBA whereto recommendations are made.

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Foreword
This 30 ECTS master’s thesis is a part of the MSc in Environmental and Natural Resource Economics at the Science Faculty at the University of Copenhagen.
This thesis is relevant for the government’s Organic Action Plan 2020, which contains the goal of doubling the organic agricultural area in 2020, as it looks at the environmental and climate impacts from achieving this goal.
This master’s thesis might also be relevant for others with an interest in environmental economics and its relation to CBA, as well as people interested in organic agriculture and its environmental and climate impacts in general.
I would very much like to thank my thesis supervisor, Alex Dubgaard. I am very grateful for the constructive guidance that I received throughout this process, as well as the vast inspiration found in his report on the welfare economic consequences of doubling the organic agricultural area. Additionally, I would also like to thank Brian H. Jacobsen, Jens Erik Ørum and Søren Boye Olsen for their additional help, and Adam Due Billing for his patience and support throughout this process.
Date __________________ Signature__________________________________

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Table of Contents
LIST OF TABLES VI
LIST OF FIGURES VIII
LIST OF ACRONYMS IX
1. INTRODUCTION 1
2. THESIS OBJECTIVE 3
2.1 THESIS STRUCTURE 3
3. LEGAL REQUIREMENTS FOR ORGANIC AGRICULTURE 4
3.1 ORGANIC PRODUCTION PRINCIPLES 4
3.1.1 REQUIREMENTS FOR ORGANIC CROP PRODUCTION 4
3.1.2 ORGANIC LIVESTOCK PRODUCTION REQUIREMENTS 5
3.2 CONVERSION TO ORGANIC PRODUCTION 7
3.3 MAIN POINTS 7
4. THE DANISH AGRICULTURAL SECTOR 8
4.1 FARMLAND 8
4.2 ENTERPRISE COMPOSITION IN CONVENTIONAL AND ORGANIC AGRICULTURE 9
4.2.1 CROP PRODUCTION 10
4.2.2 MEAT AND DAIRY PRODUCTION 11
4.3 THE ORGANIC AGRICULTURAL AREA 14
4.4 EXPORTS 16
4.5 MAIN POINTS 16
5. FARM ECONOMICS 17
5.1 NET PROFITS AFTER LABOUR REMUNERATION AND NET RETURNS TO LAND IN CONVENTIONAL AND ORGANIC FARMING 17
5.2 MAIN POINTS 19
6. ORGANIC ACTION PLAN 2020 AND PROJECTION OF THE ORGANIC FARM LAND20
6.1 GENERAL CONVERSION TARGET 20
6.2 CONVERSION SCENARIOS 21
6.2.1 PROPORTIONAL CONVERSION 22
6.2.2 REDUCED SHARE OF DAIRY PRODUCTION 23
6.2.3 PROJECTION ISSUES 24
6.3 MAIN POINTS 24
7. ENVIRONMENTAL AND CLIMATE BENEFITS ASSOCIATED WITH THE CONVERSION TO ORGANIC PRACTICES 25
7.1 GENERAL BENEFITS ASSOCIATED WITH ORGANIC AGRICULTURAL PRODUCTION 25
7.2 ENVIRONMENTAL BENEFITS ASSOCIATED WITH ORGANIC PRODUCTION METHODS 27
7.3 CLIMATE BENEFITS ASSOCIATED WITH ORGANIC PRODUCTION METHODS 30
7.3 MAIN POINTS 31
8. WELFARE ECONOMIC POLICY ASSESSMENT 32
8.1 WELFARE ECONOMICS 32

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8.2 ENVIRONMENTAL VALUE CATEGORIES 35
8.2.1 USE VALUES 36
8.2.2 NON-USE VALUES 37
8.3 ECONOMIC VALUATION METHODS 38
8.3.1 REVEALED PREFERENCE METHODS (RPM) 39
8.3.2 STATED PREFERENCE METHODS (SPM) 40
8.3.3 BENEFITS TRANSFER 42
8.3.4 SHADOW PRICING 43
8.4 THE CBA METHOD 46
8.5 MAIN POINTS 51
9. QUANTIFICATION OF ENVIRONMENTAL VALUES 52
9.1 LIMITATIONS AND DELINEATIONS 52
9.2 QUANTIFICATION OF REDUCTIONS IN NITROGEN LEACHING 54
9.3 QUANTIFICATION OF REDUCTIONS IN AMMONIA EVAPORATION 55
9.4 QUANTIFICATION OF REDUCTION IN PHOSPHOROUS LOSSES 56
9.5 REDUCTIONS IN GHG EMISSIONS 57
9.6 MAIN POINTS 57
10. COST-BENEFIT ANALYSIS 58
10.1 DEFINITION OF SOCIAL COSTS AND BENEFITS IN CBA 58
10.2 SOCIAL COSTS ASSOCIATED WITH CONVERSION OF LAND TO ORGANIC PRACTICES 59
10.3 SOCIAL BENEFITS ASSOCIATED WITH CONVERSION OF LAND TO ORGANIC PRACTICES 61
10.4 COST-BENEFIT ANALYSIS OF A DOUBLING OF THE ORGANIC FARMLAND 64
10.5 MAIN POINTS 68
11. DISCUSSION 69
11.1 THE SHADOW PRICE OF GHG EMISSION REDUCTION 69
11.2 CONVERSION SCENARIOS 70
11.3 TIME HORIZON 73
11.4 DATA AVAILABILITY 73
11.5 RECOMMENDATIONS FOR A FULL SCALE CBA 74
12. CONCLUSION 78
REFERENCES 80
APPENDIX 92

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List of tables
Table 3.1.1.1 Main requirements for organic crop production
Table 3.1.2.1 Main organic livestock hold requirements
Table 4.1.1 Agricultural production area and farms in Denmark, 2007 & 2010-2013
Table 4.2.1.1 Composition of crops and livestock on conventional and organic crop farms, 2009-2012
Table 4.2.2.1 Composition of crops and livestock on conventional and organic dairy farms, 2009-2012
Table 4.2.2.2 Composition of crops and livestock on conventional and organic pig farms, 2011-2012
Table 4.3.1 Distribution of the organic farmland on regions and farm types, ha, 2013
Table 4.4.1 Main organic exports, DKK 1,000, 2010–2012
Table 5.1.1 Net profits after labour remuneration and net returns to land for conventional and organic full-time dairy, crop and pig farms, DKK, 2012, average for 2010- 2012
Table 6.2.1 Change in the organic agricultural area, ha, 2012-2013
Table 6.2.1.1 Increase in the organic agricultural area 2014-2020 on regions and farm types, ha, scenario I
Table 6.2.2.1 Increase in the organic farmland with 10 % less weight on dairy farms on regions and farm types, 2014-2020, ha, scenario II
Table 6.2.2.2 Increase in the organic farmland with 20 % less weight on dairy farms on regions and farm types, 2014-2020, ha, scenario III
Table 6.2.3.1 Projected and increase in the organic area on farm types, 2020, ha
Table 7.2.1 Effects, share and sources of GHG emissions related to agriculture
Table 9.2.1 Reductions in nitrogen leaching from converting conventional to organic production distributed on farm type effects, based on the three conversion scenarios
Table 9.4.1 Potential phosphorous reduction from converting conventional dairy farms to organic production methods
Table 10.2.1 Annual and social costs of the three conversion scenarios, 2013-area, DKK
Table 10.3.1 Annual and social benefits of nitrogen leaching reductions of the three conversion scenarios
Table 10.3.2 Annual and social benefits of reductions in GHG emissions
Table 10.4.1 Total social benefits of the three conversion scenarios using an infinite and a 30-year time horizon
Table 10.4.2 Social costs and benefits of the three conversion scenarios, using an infinite and a 30-year time horizon.

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Table 10.4.3 Total net benefits of doubling the organically farmed area, DKK m
Table 10.4.4 Net benefits per ha of doubling the organically farmed area, DKK
Table A3.1 Principles of organic agricultural production
Table A3.2 Organic farming principles
Table A3.1.1 General production requirements for organic agriculture
Table A3.1.1.1 Plant production rules for organic agriculture
Table A3.1.2.1 Livestock production rules
Table A3.2.1 Conversion to organic farming
Table A4.2.1.1 Composition of crops and livestock on conventional and organic crop farms, 2009-2012
Table A4.2.2.1 Composition of crops and livestock on conventional and organic dairy farms, 2009-2012
Table A4.2.2.2 Composition of crops and livestock on conventional and organic pig farms, 2011-2012
Table A4.4.1 Organic exports, DKK 1,000
Table A5.1.1 Net profits after labour remuneration and other key economic indicators for conventional and organic full-time dairy farms, 2010-2012
Table A5.1.2 Net returns to land and other key economic indicators for conventional and organic full-time dairy farms, 2010-2012
Table A5.1.3 Net profits after labour remuneration and other key economic indicators for organic and conventional full-time pig farms, 2011-2012
Table A5.1.4 Net returns to land and other key economic indicators for conventional and organic full-time pig farms, 2010-2012
Table A5.1.5 Net profits after labour remuneration and other key economic indicators for conventional and organic full-time crop farms, 2010-2012
Table A5.1.6 Net returns to land and other key economic indicators for conventional and organic full-time crop farms, 2010-2012
Table A6.1.1 19 actions to facilitate a doubling of the organic agricultural area in 2020
Table A6.2.1.1 Proportional projection of the current regional and farm type distribution on regions and farm types, ha
Table A6.2.2.1 Projection of the organic farmland with 10 % less weight on dairy farms on regions and farm types, ha
Table A6.2.2.2 Projection of the organic farmland with 20 % less weight on dairy farms on regions and farm types, ha

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List of figures
Figure 4.1.1 Development in the organic agricultural area, ha, 1989-2013
Figure 8.2.1 Total Economic Value
Figure 8.3.1 Total Economic Value and associated valuation methods
Figure 8.4.1 Steps in conducting a CBA

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List of Acronyms
AU Animal Units
CAP Common Agricultural Policy
CBA Cost-Benefit Analysis
CM Choice Modelling
CS Compensating Surplus
CV Compensating Variation
CVM Contingent Valuation Method
CO2e CO2 equivalents
ES Equivalent Surplus
ETS European Trading Scheme
EV Equivalent Variation
GHG Greenhouse Gases
GMO Genetically Modified Organism
GWP Global Warming Potential
IFOAM International Federation of Organic Agriculture Movements
IFRO The Department of Food and Resource Economics
LCA Life-Cycle Analysis
LULUCF Land Use, Land-Use Change and Forestry
MD Marginal Damage
MPC Marginal Private Costs
MSC Marginal Social Costs
NEC National Emissions Ceiling
NGO Non-Governmental Organisation
NPV Net Present Value
NTF Net Tax Factor
PV Present Value
RPM Revealed Preference Method
SO Standard Output
SPM Stated Preference Method
TCM Travel Cost Method
TEV Total Economic Value
UNECE United Nations Economic Commission for Europe
WFD Water Framework Directive
WTA Willingness To Accept compensation
WTP Willingness To Pay

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1. Introduction
Today’s agricultural production is dominated by conventional farming methods, with several associated negative impacts on the climate and the environment affecting soil quality, water bodies and biodiversity (L.E.A.F. web, 2014). The main environmental impacts arise from the application of pesticides and chemical fertilisers causing nitrogen leaching and phosphorous losses, which affect water bodies causing eutrophication, ammonia evaporation causing soil and water acidification and air pollution, and biodiversity changes (European Environment Agency, 2013). The climate impacts arise from greenhouse gas (GHG) emissions primarily in the form of methane and nitrous oxide from cattle flatulence and manure, which cause climate change1 (Aarhus Universitet web, 2014).
In order to combat these environmental and climate impacts, a conversion to organic agriculture is an option (Buckwell et al, 2014). Organic agricultural production methods respect the environment, ensuring optimal protection of and stability to the soil, aiming at impacts on biodiversity and nature being as small as possible (IFOAM web, 2014) and are therefore generally associated with lower environmental and climate impacts and not over-cultivating the soil (Tuck et al, 2014). Organic practices are, however, also associated with lower yields per ha (Seufert et al, 2012).
In light of an increased demand for organic products and in an attempt to improve the water bodies, increase biodiversity and ensure better animal welfare in Denmark, in 2012, the Danish government made the Organic Action Plan 2020 (Ministeriet for Landbrug, Fødevarer og Fiskeri, 2012), which holds an overall target of a doubling of the organic agricultural farmland in Denmark to 300,000 ha in 2020, relative to the 2007 level of around 150,000 ha (EcoWeb, 2014). Currently, 181,717 ha of the Danish agricultural area are cultivated organically, equivalent to about 7 % of the total agricultural farmland (Landbrug & Fødevarer, 2013).
The question is what the climate and environmental benefits will be and what the welfare economic effects of a doubling of the Danish organic farmland will have. This is investigated by deploying a pilot CBA, where the doubling of the organic Danish farmland is compared to a baseline scenario where no conversion is taking place.
1 The agricultural sector is responsible for around 19 % of all GHG emissions in Denmark (Aarhus Universitet web, 2014)

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The framework of CBA allows for an evaluation and inclusion of all relevant social costs, in this case the costs to the farmer of converting to organic production methods, and benefits arising from a doubling of the organic farmland, including the associated climate and environmental benefits. These benefits are also known as the agricultural externalities and are non-market goods. Therefore, they hold no price. To include these in a CBA, they must be quantified and monetised. This can be done through various economic valuation methods, which enable a derivation of both the associated use and non-use values of the environmental and climate benefits arising from converting to organic practices (Pearce et al, 2006). Here, it is done through the application of a shadow price, which is applicable when there is a policy in place with a binding reduction target (Dubgaard et al, 2013).
The included climate and environmental effects are all covered by various policies holding binding reduction targets (see section 7) and the benefits are therefore estimated based on their relevant shadow prices. The effects included in the pilot CBA are those estimated to have the highest impacts from converting to organic practices. This is in light of the overall scarcity and lack of data on the effects of converting to organic agricultural production. The environmental benefits are reductions in nitrogen leaching, phosphorous losses and ammonia evaporation. The climate benefits included are those arising from reductions in GHG emissions. All are estimated relative to the current level of climate and environmental impacts from conventional farming methods.
The welfare economic effects of converting to organic practices will largely depend on which farm type is being converted. As the Organic Action Plan 2020 holds no plan for where or for which farm type the conversion will take place, a projection of the current distribution of the organic farmland on farm types has been made forming three conversion scenarios for conversion of conventional farmland. Where the first scenario is a direct projection of the current distribution of the organic farmland, the second and third scenarios hold 10 and 20 % less weight on conversion of the dairy farm area. The conversion scenarios enable an investigation of the effects on the individual farm type area, as both the associated benefits and the social costs based on differences in net returns to land to the individual farmers largely depend on which farm types are converted.

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2. Thesis objective
The objective of this thesis is to investigate the welfare economic consequences of a doubling of the organic agricultural area. A doubling of the organic farmland in Denmark is expected to hold large environmental and climate benefits. Climate benefits are expected to be from decreasing GHG emissions, while environmental benefits are expected from reductions in nitrogen leaching, phosphorous losses and ammonia evaporation.
The welfare economic consequences of doubling the organic farmland will be investigated through the framework of a cost-benefits analysis (CBA), which draws on welfare economic theory and economic valuation methods to estimate the associated social costs and benefits related to a conversion to organic practices, based on three conversion scenarios of the organic farmland. Due to time constraints, it is considered beyond the scope of this thesis to conduct a full scale CBA, wherefore a pilot CBA will be made instead, where the requirements to data collection and processing have been scaled down significantly. Data collection has been prioritised based on information holding significant impacts on the outcome of the pilot CBA. Less important data has been given a qualitative treatment.
2.1 Thesis structure
This thesis is structured as follows: Chapter 3 goes through legislation on organic agricultural production to identify the main differences between conventional and organic production methods. Chapter 4 describes the agricultural sector as a whole including the farm types and the distribution of the organic farmland, with the associated farm economics described in chapter 5. Chapter 6 describes the Organic Action Plan 2020 and holds the projection of the organic farmland into three conversion scenarios for a doubling of the organically grown area, while chapter 7 lists the various benefits associated with a conversion to organic practices. Chapter 8 looks into the welfare economic theoretical foundations of the CBA method as well as that of economic valuation used to monetise the climate and environmental benefits associated with converting to organic production methods. Chapter 9 quantifies the climate and environmental impact changes of converting to organic practices, which are subsequently monetised and used in the pilot CBA in chapter 10. Finally, the results are discussed in chapter 11, including recommendations for a proper CBA, with chapter 12 concluding the thesis.

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3. Legal requirements for organic agriculture
In order to establish the environmental and climate benefits associated with converting to organic practices, it is relevant to look at the legal requirements for organic agriculture. This enables an insight into the production method differences between conventional and organic farming.
In 1987, Denmark introduced the first legislation on organic agricultural production (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2011), followed by the Danish ”Ø” label in 1989 (Ministeriet for Fødevarer, Landbrug og Fiskeri web, 2014) and EU legislation in 1991 (The European Commission, 1991). Today, organic production is based on the EU legislation Article 4 of 834/2007 (The European Commission, 2007), with production principles laid out in Article 52. Currently, the European Commission is revising the legislation on organic agriculture. The reason is the large growth in the organic agricultural area and in the demand for organic products. The main focus is a strengthening of the control mechanisms, a simplification of labelling, ensuring fair competition for the organic farmers and generally to match the legislation requirements to the organic expansion in terms of facilitating conversion practices (The European Commission, 2014).
3.1 Organic production principles
In the following, the specific production requirements for the main farm types in Denmark, dairy, livestock and crop production, are laid out. All must comply with the general requirements for organic production, set in Article 11 of the EU 834/20073.
3.1.1 Requirements for organic crop production
Article 12 of EU 834/2007 (The European Commission, 2007) sets the rules for organic crop production4, where the main requirements are listed in table 3.1.1.1. Two of the main differences between organic and conventional crop farming practices are the prohibition of chemical pesticides and non-natural fertiliser use (Article 16, The European Commission, 2007, & Ingvorsen et al, 2013), and crop rotation5. Conventional agriculture often practices monoculture, while organic farming uses different crops (polyculture) in order to ensure
2 See Appendix, table A3.2.
3 See Appendix, table A3.1.1. This concerns i.a. separation of organic and conventional farmland.
4 See Appendix, table 3.1.1.1.
5 To ensure optimal soil nutrition, different crops are grown on the same land; e.g. annually (one crop in spring – another crop in autumn) or multi-annual (Merriam-Webster).

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nutrients staying in the soil, retaining the organic matter and thus not over-cultivating the farmland (Pesticide Action Network Europe et al, 2012). Crop rotation can be seen as quite a demanding requirement, in particular in terms of land consolidation, as organic farmers therefore need their land to be closer together (more consolidated) to live up to this requirement.
These requirements all put pressure on the yield of organic agriculture. The application of synthetic chemical fertilisers and chemical pesticides in conventional agriculture increases crop yield, but the excessive use has led to excess nitrogen and phosphorous entering into water systems and groundwater, becoming a threat to the environment (The European Commission web, 2014e).
Table 3.1.1.1 Main requirements for organic crop production
- No GMO
- Organic and non-organic crops cannot be grown simultaneously on the farmland and have to be kept separate
- No pesticides or chemical/non-organic fertiliser
- No mineral nitrogen fertiliser
- Multiannual crop rotation: ”The fertility and biological activity of the soil shall be maintained and increased by multiannual crop rotation including legumes and other green manure crops, and by the application of livestock manure or organic material, both preferably composted, from organic production” (The European Commission, 2007, Article 12, 1.b)
- Fertiliser use, harvested crops and plant protection products must be registered in a plant logbook
Source: Ingvorsen et al, 2013, & Article 12, The European Commission, 2007
3.1.2 Organic livestock production requirements
In addition to the general production requirements, including the prohibition of GMO, Article 14 of EU 834/2007 (The European Commission, 2007) sets the production rules for organic livestock6. Additionally, EU 889/2008 (The European Commission, 2008) sets specific rules for practices for husbandry and requirements for access to open grass areas as well as spatial needs. Directive EU 834/2007 (The European Commission, 2007) states that member states cannot apply stricter rules for organic agricultural production, unless these rules also apply to agricultural production in general (ibid, p. 3, 29). Denmark has additional harmonisation
6 See Appendix, table A3.1.2.1 for full table.

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requirements for livestock, which apply to agricultural livestock hold in general, calculated on animal units (AU) per ha per year7.
Table 3.1.2.1 lists the main requirements for organic livestock production. Most notably are the requirements for livestock’s access to outdoor areas and the requirements for feed where at least 60 % must come from own production (Ingvorsen et al, 2013a). It has previously been allowed for protein feed to have a 5 % non-organic content:
“The production of organic protein crops lags behind demand. In particular organic protein supply is still not sufficiently available in qualitative and quantitative terms on the Union market to meet the nutritional requirements of porcine and poultry animals raised on organic farms. It is therefore appropriate to allow for a minor proportion of non-organic protein feed as an exceptional rule for a limited time-period.” (The European Commission, 2012, 4).
However, from 2015, protein feed must be 100 % organic.
7 Harmonisation requirements (p. 62, Ministeriet for Fødevarer, Landbrug og Fiskeri, 2013):
‒ 1.4 AU/ha/yr for all farms, except dairy farms
‒ 1.7 AU/ha/yr for dairy farms in general; only applies to cattle manure
‒ 1.7 AU/ha/yr for organic dairy farms
‒ 2.3 AU/ha/yr for larger dairy farms where 2/3 of the livestock is cattle
8 “The figures shall be calculated annually as a percentage of the dry matter of feed from agricultural origin. The maximum percentage authorised of non-organic feed in the daily ration shall be 25 % calculated as a percentage of the dry matter” (Article 43, EU 889/2008).
9 “The figures shall be calculated annually as a percentage of the dry matter of feed from agricultural origin”. (Article 1.7, EU 505/2012).
Table 3.1.2.1 Main organic livestock hold requirements
Animal units
The number of livestock shall be limited with a view to minimizing overgrazing, poaching of soil, erosion, or pollution caused by animals or by the spreading of their manure
Outdoor access
- Permanent access to open air areas, preferably pasture, whenever weather conditions and the state of the ground allow this
- Grass access from 15 April - 1 November when weather conditions allow it for at least 6 hours during daytime
Feed
- Permanent access to pasture and roughage
- Primarily obtaining feed for livestock from the holding where the animals are kept or from other organic holdings in the same region
- Growth promoters and synthetic amino-acids shall not be used
- The maximum percentage of non-organic feed8 authorised for species other than herbivores shall be:
10 % during the period from 1 January 2009 to 31 December 2009
5 % during the period from 1 January 2010 to 31 December 2011
Cattle feed
- At least 60 % own produce or if not possible, from other Danish organic farms
- At least 60 % roughage
Protein feed
Until 31 December 2014, a maximum of 5 % of non-organic protein feed9
Source: Ingvorsen et al, 2013a & 2013b, & Article 14 EU 834/2007 (The European Commission, 2007)

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3.2 Conversion to organic production
In relation to the time frame of the Organic Action Plan 2020, a relevant issue is the legislation on conversion from conventional to organic agriculture. Article 17 of EU 834/2007 (The European Commission, 2007) sets the rules for converting to organic production10. Most notably, after 4 years of initiating conversion to organic production, the entire farm must convert to organic agricultural production (Ingvorsen et al, 2013, 2013a, 2013b).
Depending on crop type, it takes between 24 (annual crops) and 36 (perennial crops) months before a crop can be sold as organic. After 12 months, up to 20 % of certain crops (e.g. grass and grass-clover) can be used for organic feed (Ingvorsen et al, 2013, 2013b). For dairy and pig production, the conversion time is six months, where cattle can be sold as organic after 12 months (Ingvorsen et al, 2013a & 2013b).
3.3 Main points
This section has shown the legal requirements for organic agricultural production. Compared to conventional production methods, organic production has stricter requirements on livestock hold, outdoor access and organic feed requirements. In addition to crop rotation requirements, an important difference in relation to the possible environmental benefits associated with converting to organic practices is the prohibition of the use of chemical pesticides and non- natural fertilisers and overall limits on chemical inputs. Finally, conversion rules were described, which is relevant for the time frame of reaching the target of doubling the organically grown farm area in 2020.
10 See Appendix, table A3.2.1.

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4. The Danish agricultural sector
This section describes the Danish agricultural sector for both conventional and organic farms. This allows for a look into the composition of farm type and farm composition differences between conventional and organic farms. Also, the distribution of the organic farmland is described, which forms the basis for the conversion scenarios of a doubling of the organic farmland in section 6.2.
4.1 Farmland
The Danish agricultural sector has historically been and is still dominated by conventional agricultural production, taking up 93 % of the total agricultural farmland. The total agricultural area in Denmark comprises of 2,645 m ha or around 60 %11 of the Danish total area (Landbrug & Fødevarer, 2013), with the organic production taking up almost 7 % of the Danish farmland. Although the mid 1990’s saw a boom in the expansion of the organically farmed area, this development has somewhat stagnated and only increased slightly since 2006 (see figure 4.1.112).
Figure 4.1.1 Development in the organic agricultural area, ha, 1989-2013
Source: Ministeriet for Fødevarer, Landbrug og Fiskeri, 2014, Figure 1, p. 5,
While the organic farmland has been increasing slowly over time, from in 2007 holding 150,000 ha to almost 183,000 ha in 2012, the number of organic farms has been slowly decreasing since 2007, as seen in table 4.1.1. This indicates a tendency for consolidation of production.
11 The Danish total land area excl. water is 42,434 m2 (Index Mundi web, 2014)
12 In figure 4.1.1, the total organic production area comprises both the total converted area as well as areas both under conversion and where conversion is planned.
Total organic production area
Converted agricultural land

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It should be mentioned that the statistics report used on data for the development of the organic agricultural area notes that 93 organic farms had not reported their data on their organic farmland, when gone into press. Therefore, the development of the organic land should be interpreted with caution (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2014). Whether this means that the actual area is larger or smaller than indicated in the report, cannot be said, so this is not taken into account in this thesis.
4.2 Enterprise composition in conventional and organic agriculture
In the following, the composition of conventional and organic full-time farms is described. The data is taken from account statistics from Statistics Denmark for full-time13 farms (Danmarks Statistik, 2013). The data is divided into farm types based on Standard Outputs (SO)14, where over 50 % of the farm’s SO must stem from e.g. dairy to be a dairy farm, crop to be a crop farm, etc. The farm types reviewed here are dairy, crop and pig farms. In 2012, there were a total of 12,435 full-time farms, thereof 637 organically driven. Organic full-time farms are mainly dairy farms, where conventional farms are more or less evenly spread out among the three farm types reviewed in this section.
13 A full-time farm is defined as a farm where the total number of working hours amounts to at least 1.665 working hours annually (Danmarks Statistik, 2013).
14 Standard Output (SO) is calculated based on actual outputs from crop types pr. ha and animal units over a 5-year period (Danmarks Statistik, 2013).
Table 4.1.1 Agricultural production area and farms in Denmark, 2007 & 2010-2013
2007
2010
2011
2012
2013
Production area, ha
Total production area, 1,000 ha
2,663
2,646
2,640
2,645
2,628
Organic farmland
150,207
173,513
177,838
182,930
181,717
Organic share of farmland
5,6 %
6.56 %
6.7 %
6.9 %
6.9 %
Farms
Total no. of farms
43,897
42,099
40,660
39,930
38,829
Organic farms
2,835
2,602
2,601
2,680
2,627
Organic share of farms
6.5 %
6.2 %
6.4 %
6.7 %
6.8 %
Area, ha
Average area, all farms
60.7
62.9
64.9
66.2
67.7
Average organic area
53
66.7
68.4
68.3
69.2
Source: Ministeriet for Fødevarer, Landbrug og Fiskeri, 2008, 2011a, 2012a, 2013a, 2014

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4.2.1 Crop production
Table 4.2.1.115 shows the composition of crops and livestock on crop farms 2009-2012 for conventional and organic farms. Both the conventional and the organic crop area have been increasing, with number of farms decreasing, indicating a consolidation of production. On average, organic crop farms have a larger area than conventional crop farms. Around 80 % of the crops grown on the Danish farmland is used for feed for animals (Danmarks Naturfredningsforening, 2013); primarily for cattle and pigs (Landbrug & Fødevarer, 2013). This is seen in the large cereal production on the agricultural land, which is dominant for both the conventional and organic crop farms, albeit larger on the conventional farmland. The organic crop farms have a larger grass and other types of roughage production than conventional crop farms. The choice of crops on organic farms is largely a reflection of the legal requirements for organic production for self-sufficiency of feed for livestock hold. The larger share of grass and production of other types of roughage on organic farms is also an important aspect in relation to the environmental impact differences between conventional and organic farms, as it holds a large share of grass-clover, which is a nitrogen-fixating crop (Vinter, 2003).
Livestock hold on crop farms is generally not substantial and there is no significant difference in the livestock density between conventional and organic farms. Conventional farms, however, hold a much larger number of pigs, where organic farms hold a larger number of cattle and dairy cows.
Table 4.2.1.1 Composition of crops and livestock on conventional and organic crop farms, 2009-20121
Conventional
Organic
Conventional
Organic
Average 2009-2012
2012
Number of farms
2,696.25
82
2,534
75
Average area per farm, ha
224.8
239.8
239.8
279.3
Percentage share
Cereals, total area
67.5
54.9
69.7
58.6
Spring barley
23.4
11.7
28.7
13.7
Wheat
35.5
17.5
31.7
16
Other cereals
8.6
25.8
9.4
29
Other agricultural cash crops2
24.4
19.3
23.3
20.2
Horticultural cash & other crops3
0.4
1.1
0.2
0.2
Grass & other types of roughage
4.1
20.5
3.1
12.2
Maize and cereals for roughage
1.3
3.1
0.9
1.4
Grass for roughage
2.8
17.4
2.2
10.8
Non cultivated area
3.6
4.2
3.5
8
LIVESTOCK
Number of animals
Dairy & nurse cows, no.
2.5
4.3
2.1
8.5
Other cattle, no.
9.5
17.5
10.1
30
15 See Appendix, table A4.2.1.1 for full table.

11
Breeding & other pigs, no.
67
14.3
84.8
0
Livestock units, no.
11.7
8.2
13.5
13.9
Livestock density, AU4/ha
0.05
0.03
0.06
0.05
1. Flowers in the open, Nursery, Greenhouse, Vegetables incl. mushrooms, Potted plants, Cut flowers, nursery etc., and Unused greenhouse have been taken out due to no values. Fodder beets have been taken out due to insignificant values.
2. Includes Peas, Rape seeds, Seeds, Potatoes, and Potatoes for processing
3. Includes Fruits and berries, Vegetables in the open, Christmas trees and energy crops
4. Animal Units
Source: Statistics Denmark (2014a)
4.2.2 Meat and dairy production
Dairy
Generally, Denmark has an extensive meat production of especially pigs, but also cattle, dairy cows and milk take up a substantial proportion of Danish agricultural production. The crop and livestock composition for dairy farms is shown in table 4.2.2.116.
Table 4.2.2.1 Composition of crops and livestock on conventional and organic dairy farms, 2009-20121
2009-2012
2012
Conventional
Organic
Conventional
Organic
Number of farms
3,405.25
387.5
3,220
393
Average area per farm, ha
144.7
211.2
140.3
201.2
Percentage share
Cereals
22.8
18.3
21
20
Spring barley
10.6
6.6
12.5
7.7
Wheat
9
2.7
6.2
2.5
Other cereals
3.1
9
2.3
9.8
Other agricultural cash crops
1.9
1.5
1.6
1.6
Horticultural cash crops2
0
0.1
0.2
0
Grass & other types of roughage
74.3
79.5
76.6
77.6
Maize for roughage
30
8.5
30.7
7.5
Cereals for roughage
5.3
10.5
5.6
9.6
Grass for roughage
38
60.5
39.4
60.5
Non cultivated area
1.1
0.6
0.6
0.6
LIVESTOCK
Number of animals
Dairy cows, no.
164.9
165.1
168.3
170.1
Nurse cows, no.
0.4
0.4
0.4
0.7
Other cattle, no.
169.9
162.4
172.4
157.1
Breeding pigs, no.
0.4
0.8
0
0.5
Other pigs, no.
24.3
5.2
18
3
279
280.7
282.8
271.2
1.9
1.3
2
1.3
16 See Appendix, table A4.2.2.1 for full table

12
1. Flowers in the open, Nursery, Greenhouse, Vegetables including mushrooms, Potted plants, Cut flowers, nursery etc., and Unused greenhouse have been taken out due to no values. Christmas trees, and energy crops have been taken out due to insignificant values.
2. Includes Fruits and berries and Vegetables in the open.
3. Animal Units
Source: Statistics Denmark, 2014a
Both the conventional and organic dairy farm area has overall decreased, with number of farms increasing, indicating a possible saturation of this farm type. Overall, the average area for organic dairy farms is larger than for conventional farms. The livestock density is therefore lower on organic farms due to the different harmonisation requirements (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2013), although they have an almost identical number of animal units.
Again, the crop composition on organic farms reflects the legal requirements for 60 % self- sufficiency of feed. Organic dairy farms have a larger grass for roughage production than conventional farms. Cattle being ruminants mainly living off grass, roughage and grains (AnimalSmart web, 2014), organic cows can be fed throughout the summer on grass as they spend a large amount of time outdoors during the summer months due to the outdoor access requirements. Maize for roughage, on the other hand, is not grown extensively on organic dairy farms, but to a much larger extent on conventional dairy farms. This is due to the nature of maize, which is a row crop very sensitive to weeds; a challenge, when chemical pesticides cannot be used in production (Landbrug & Fødevarer web, 2014).
On average, the number of pigs is higher on conventional dairy farms than organic dairy farms. The average number of both cattle and dairy cows is almost identical for conventional and organic dairy farms, but with a larger average organic dairy farm area, AU/ha is higher for conventional dairy farms.
Pigs
In Denmark, organic pig production is very small, whereas conventional pig production is extensive, with only 28 organic pig farms compared to 2,818 conventional pig farms in 2012. Where the number of conventional pig farms and the average area has decreased from 2011 to 2012, the average area for organic pig farms has increased along with the number of farms. This is shown in table 4.2.2.2 along with the composition of crops and livestock on conventional and organic pig farms. Conventional pig farms hold over twice as many pigs on average as organic farms, resulting in a livestock density twice as high on conventional pig farms as on organic pig farms. Cereal production is dominant on both conventional and organic pig farms. As on

13
organic dairy and crop farms, the production of grass for roughage is much larger on organic pig farms than on conventional pig farms.
Table 4.2.2.2 Composition of crops and livestock on conventional and organic pig farms, 2011-20121
Conventional
Organic
2011
2012
2011
2012
Number of farms
3,182
2,818
26
28
Average area per farm, ha.
181
166.2
159.2
202.3
Percentage share
Cereals
77.6
79.1
59.8
68.3
Spring barley
17.4
26.4
18
25.7
Wheat
44.5
37
17.2
12.4
Other cereals
15.7
15.8
24.6
30.2
Other agricultural cash crops
14.6
14.3
3.8
7.3
Horticultural cash crops2
0.1
0
0
0
Grass and roughage
3.7
2.4
32.8
19.8
Maize & cereals for roughage
1.6
1.1
2
4.5
Grass for roughage
2.1
1.3
24.5
15.4
Non cultivated area
4
4
3.6
4.7
LIVESTOCK
Number of animals
Dairy & nurse cows, no.
3.9
1.9
1.5
3.7
Other cattle, no.
4.5
2.7
1.8
5.1
Breeding pigs, no.
330.8
350.8
269.6
188.2
Other pigs, no.
3695.4
3924.4
1700.4
1916.8
298.6
320.1
164.4
190.5
1.7
1.9
1
0.9
1. Flowers in the open, Nursery, Greenhouse, Vegetables including mushrooms, Potted plants, Cut flowers, nursery etc., and Unused greenhouse have been taken out due to no values. Fruit and berries and vegetables in the open have been taken out due to insignificant values.
2. Includes Fruits and berries and Vegetables in the open
3. Animal Units
Source: Statistics Denmark, 2014a
Data on organic pig farms has only been available for 2011 and 2012, which is not a long time range. Therefore, it could be interesting to look at data on the individual pig farms from this period instead; especially seen in the light of the lower number of organic pig farms. Although not available, this would give an insight into how the individual organic pig farms are distributed and would give grounds for a more detailed interpretation.

14
4.3 The organic agricultural area
This section looks at the distribution of the organically grown farm area, divided into geographical area and farm type areas. This distribution enables a projection of the organic farmland distributed on farm types. Following the main farm types in the previous section, only the farms in the categories Dairy, Crops and Pigs will be discussed in detail.
The following is based on data from statistics on organic agriculture (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2014), distributed geographically and on the different farm types as described below, based on units instead of SO17. The farm types are divided into 6 categories as follows:
Dairy: Farms with more than 20 dairy cows
Pigs: Farms with more than 200 pigs or 20 sows
Poultry: Farms with more than 100 units of poultry
Horticulture: At least 30 % or more than 3 ha of the total area is utilised for crops with crop codes 150-153 (potatoes), 160-162 (chicory and roots), 400-413, 415-418, 420-424,429-433, 440 and 448-450 (vegetables), 500-536, 539-545, 547-550, 559-563, 570 and 579 (fruits, berries, horticultural crops, etc.), and 650-669 (garden seeds)
Several: Farms that fall into more than one of the categories listed above.
Crops: Farms that do not fall into more than one of the above categories. These include crop production (cereals and roughage), and farms with goats, sheep, horses and beef cattle.
The current geographical distribution of the organic agricultural area in Denmark is shown in table 4.3.1.
17 Account statistics used in section 4.2 do not hold any distribution on neither farm types nor geographical area, wherefore different statistical data is used, where this distribution is available.

15
Farms in the category Crops (henceforth referred to as crop farms) hold the largest area taking up almost 42 % of the total organically grown farmland, with farms in the Dairy category (henceforth referred to as dairy farms) being the second largest with over 38 %. The last 20 % of the organic farmland is occupied by farms in the remaining categories.
Southern and Western Jutland has the largest concentration of organic farms, with over 55 % of the total organic agricultural area. These areas are dominated by crop and dairy farms as well as the farms in the categories Pigs (henceforth referred to as pig farms) and Several. Northern Jutland holds the third largest area and is also dominated by dairy and crop farms as well as holding the second largest area for farms in the category Poultry. Zealand and islands and Eastern Jutland are primarily occupied by the farms in the categories Poultry and Horticulture. The Capital area holds the smallest organic farmland area dominated by crop farms and farms in the category Horticulture.
The largest pig farm area is found in Western Jutland, with Southern Jutland holding the second largest area. Crop farms are somewhat evenly distributed over the organic farmland, albeit with a larger concentration in Southern Jutland. Southern Jutland also holds the largest density of dairy farms, with Western Jutland holding the second largest concentration of dairy farmland area. Southern and Western Jutland are dominated by sandy soils (Hedemand et al, 2003), where dairy farms holding a large grass and other types of roughage production have a relative comparative advantage18. Due to the fact that the relative yield reduction on sandy soils is less
18 In economic theory, comparative advantages relates to a party being able to produce a given good at a lower marginal cost, under a given technology, relative to another party. Comparative advantage includes absolute advantage where a party can produce more of a given good with the same resources compared to another party (Investopedia web, 2014)
Table 4.3.1 Distribution of the organic farmland on regions and farm types, 2013, ha
Region
Dairy
Pigs
Poultry
Horticulture
Several
Crops
All
Capital area
0
0
2
816
0
983
1,801
Northern Zealand
652
104
38
336
561
2,825
4,518
Zealand and islands
3,303
719
1,502
4,208
1,165
12,827
23,724
Western Jutland
20,576
2,736
283
2,999
2,019
12,384
40,997
Eastern Jutland
2,789
582
457
2,016
665
11,970
18,479
Northern Jutland
15,583
725
1,173
2,079
1,962
11,191
32,715
Southern Jutland
26,408
1,528
750
1,709
5,158
23,933
59,485
Total
69,311
6,394
4,205
14,163
11,530
76,113
181,719
Percentage share of organic farmland
38.1
3.5
2.3
7.8
6.4
41.9
100
Source: Ministeriet for Fødevarer, Landbrug og Fiskeri, 2014

16
for roughage than for crops like cereals and rapeseed, over 90 % of organic dairy production takes place on sandy soils (Waagepetersen, 2008).
4.4 Exports
In the Organic Action Plan 2020 (see section 6.1), one of the proposed ways to expand the organic agricultural production is via an increase in the export of organic products, wherefore this is mentioned briefly. About two thirds of the total agricultural production is exported (Erhvervs- og Vækstministeriet, 2013), with a mere 1.3 % being of organic origin (Natur- og Landbrugskommissionen, 2012). Organic exports are dominated by dairy products, constituting almost half of the total export sum, meat, and fruits and vegetables (Statistics Denmark 2014c), as seen in table 4.4.119. Dairy products are mainly milk, in particular raw milk exported to Germany and the Netherlands and made into cheese (Landbrug & Fødevarer, 2014, p. 3).
Table 4.4.1 Main organic exports, DKK 1,000, 2010–2012
2010
2011
2012
Dairy Products And Birds Eggs
416,915
505,442
541,457
Meat And Meat Preparations
121,919
151,674
187,869
Vegetables And Fruit
85,634
125,702
135,224
Cereals And Cereal Preparations
52,293
69,270
64,030
Coffee, Tea, Cocoa, Spices And Manufactures Thereof
29,479
17,785
25,488
Feeding Stuff For Animals
24,770
22,605
41,637
Beverages
21,352
16,483
24,863
Total
855,916
1,038,089
1,165,661
Source: Statistics Denmark, 2014c
4.5 Main points
This chapter has shown the size and composition of the conventional and organic farm types dairy, pigs and crops. Organic farms hold larger average areas and a larger production of grass and roughage than conventional farms, which are smaller in average area and have larger productions of pigs and cereals. The geographical distribution of the organically grown area was also described, showing that the organic farm area is primarily dominated by dairy and crop farms situated in Southern and Western Jutland. Additionally, the main organic exports were briefly described.
19 See Appendix, table A4.4.1 for full table

17
5. Farm economics
In order to calculate the welfare economic costs associated with a doubling of the organic farmland, the following section describes key economic indicators for conventional and organic farms, to form the social costs of converting conventional farm type areas to organic practices to be included in the pilot CBA in section 10.
5.1 Net profits after labour remuneration and net returns to land in conventional and organic farming
To be able to estimate the social costs of conventional farmers converting to organic production, this section compares the net profits after labour remuneration and net returns to land for the main farm types for conventional and organic farms. The data used is based on data from Statistics Denmark20, as used in section 4.2. As before, the data is for full-time farms, divided into three main farm types: dairy, pigs and crops, according to Statistics Denmark own categorisation. The key economic indicators calculated are net profits after labour remuneration and net returns to land, based on the calculations of and calculated as:
- Labour remuneration = number of labour hours x hourly costs21
- Net profits = net profits before interests - cost of financing + general subsidies
- Net profits after labour remuneration = net profits - labour remuneration
- Calculated interest = agricultural assets x interest rate22
- Net profits before interests = gross output - operation costs
- Net returns to land = net profits before interests - environmental subsidies + (green and real property taxes) - (calculated interest + labour remuneration)
Looking at net profits after labour remuneration and net returns to land enables a look into the resource allocation efficiency of labour and capital at the farm level for both conventional and organic farms. The net returns to land described below form the social costs associated with converting to organic production methods.
20 The data is taken from Statistics Denmark’s data on full-time farms, divided into the four main farm types: Dairy, Other cattle, Pigs and Crops20. As in section 4.2, the data is based on a sample of 191 full-time fully converted organic farms based on Standard Outputs (SO) on the individual farm types with 128 dairy farms, 11 other cattle farms, 13 pig farms and 24 crop farms (Statistics Denmark, 2014a).
21 The hourly wage is assumed to represent the alternative costs of labour and is based on the contractual hourly wage for the agricultural sector, which amounts to DKK 185.50 for 2012 (Danmarks Statistik, 2013).
22 The interest rate used is 4 %, reflecting the socio-economic discount rate (Energistyrelsen 2013), and thus reflecting societal alternative costs on capital.

18
To give an overview of the costs associated with converting to organic production methods, table 5.1.1 shows net profits after labour remuneration and net returns to land for conventional and organic full-time dairy, pig and crop farms23. The two right hand columns show the costs per ha for the conventional farmer of converting to organic practices.
Table 5.1.1 Net profits after labour remuneration and net returns to land for conventional and organic full-time dairy, crop and pig farms, DKK, 2012, average for 2010-20121
Conventional
Organic
Difference
2012
Ave.
2012
Ave.
2012
Ave.
Net profits after labour remuneration, average per ha, DKK
Dairy
-2,231
-3,340
-1,213
-1,535
-1,018
-1,805
Pigs
3,002
631
3,124
3,134
-122
-2,503
Crops
1,384
96
-1,031
-1,055
2,415
1,151
Net returns to land, average per ha, DKK
Dairy
-1,671
-2,374
-1,465
-1,601
-206
-773
Pigs
5,012
2,673
3,759
3,971
1,253
-1,298
Crops
2,147
856
-148
-541
2,295
1,397
1. Average on pig farms is for 2011-2012
Source: Data and own calculations from tables A5.1.1-A5.1.6 in Appendix, based on Statistics Denmark, 2014a, 2014b and 2014c
Net profits after labour remuneration
Overall, net profits after labour remuneration per ha is negative both for conventional and organic full-time dairy farms, and positive for all pig farms, whereas it is positive for conventional crop farms and negative for organic crop farms.
In the long run, having a negative net profit after labour remuneration is normally not conducive, and could indicate that these farm types are not profitable to run. However, this must be interpreted in light of how net profits after labour remuneration is calculated, as shown at the start of this section. If net profits after labour remuneration is zero, it simply indicates a normal wage level for the farms. If net profits after labour remuneration, however, are negative, it does not necessarily mean that the farm is running at a deficit, but mainly indicates a lower pay to the farmers. Certain farmers might gain utility from a lower wage on their farm compared to other employment options, which might be less profitable for them24 (e.g. older farmers). For other farmers, the utility might be higher in other sectors25.
23 Full tables are available in the Appendix from tables A5.1.1 – A5.1.6 as follows: A5.1.1- A5.1.2 dairy farms, A5.1.3-A5.1.4 pig farms, and A5.1.5-A5.1.6 crop farms.
24 Utility is an individual and subjective measure. This is not taken into account in account statistics.
25 Standard welfare economic theory states that employment should take place where the highest utility can be gained from a welfare economic point of view (Varian, 2006)

19
Net returns to land
The numbers for net returns to land show the same tendency as the results for net profits after labour remuneration, with negative results for all dairy farms, positive results for all pig farms, positive results for conventional and negative for organic crop farms.
A negative result for net returns to land could indicate that alternative investments might be more profitable, particularly in the long run. The interpretations are the same as above, such that if the result had been zero, it would indicate a normal wage level and return on capital. With a negative result, both wage level and return on capital would be below the normal level.
The difference in the average net returns to land between conventional and organic farm types form the social costs per ha of conventional farm type areas being converted to organic practices. Assuming that price premiums of organic products do not decline, from table 5.1.1, it is clear that converting conventional dairy farms to organic production would be beneficial for the average dairy farmer, whereas the opposite would seem the case for crop farmers. The case for pig farms is a bit more complex. If only looking at 2012 numbers, net returns to land for conventional pig farms was DKK 1,253 higher than for organic pig farms, while if looking at the average 2011-2012, it was DKK 1,298 lower than for organic farms. With data only available for 2011-2012 for organic pig production, it is not a lot of data to draw any conclusions upon. However, as the social costs included in the pilot CBA are based on the average values, this indicates large benefits for the individual conventional pig farmer from converting to organic practices.
5.2 Main points
This section has shown the net profits after labour remuneration and the net returns to land of conventional and organic dairy, crop and pig farms. It also shows the difference in the net return to land, which forms the social costs of converting to organic practices. Although both conventional and organic dairy farms hold negative net returns to land, the negative result is smaller for organic farms, which indicates that there are benefits to gain from converting dairy farms to organic production. Both conventional and organic pig farmers show positive net returns to land, but with higher returns for organic pig farms, there are gains from converting pig farms to organic production. Conventional crop farms, however, have no apparent gains from conversion. This naturally assumes that farmers can continue receiving a price premium for their organic products.

20
6. Organic action plan 2020 and projection of the organic farm land
In the following section, first, the Organic Action Plan 2020 (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2012) is described, followed by a projection of the organic farmland area. The projection of the organic agricultural area is done in two ways forming three conversion scenarios for a doubling of the organically grown area in Denmark: a direct projection of the current distribution of farm types, and a projection of the current distribution of farm types with 10 and 20 % less weight on the conversion of the dairy farm area. A lesser weight on dairy farms is a reflection of the development of the organic dairy farmland as well as a possible saturation of this farm type (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2014a).
6.1 General conversion target
In 2012, the Danish Ministry of Food, Agriculture and Fisheries published the Organic Action Plan 2020 listing 19 initiatives to facilitate reaching the target of doubling the organic agricultural area by 2020, to 300,000 ha, relative to the 2007 area (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2012), with various funding earmarked to aid in achieving this target (Ministeriet for Fødevarer, Landbrug og Fiskeri web, 2014a)26.
The 19 initiatives listed in the Organic Action Plan 2020 are based on various ways of increasing demand and facilitating the conversion process to organic farming methods, divided into 6 overall areas27. Some of the ways mentioned are e.g. organic land consolidation, an increase in the conversion of state owned agricultural area28 or an increased public demand through e.g. conversion of public canteens to organic food based on a market-driven approach, or ways to increase export possibilities. Also, on the EU level, to work for e.g. better subsidy schemes for organic farmers (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2012).
One important issue with the Organic Action Plan 2020 is that it does not hold any specific goals for how the doubling will be achieved. Furthermore, it doesn’t address where it will take place in terms of geographical location, nor what is being converted in terms of farm types. As
26 DKK 2.4 bn in total from 2009-2015 (Ministeriet for Fødevarer, Landbrug og Fiskeri web, 2014a). Also, farmers who already have organic production on their lands and are looking to expand, or have been granted permission to convert to organic production can achieve an annual 5-year subsidy during their conversion period of DKK 1,050 per ha the first two years, followed by DKK 100 per ha the subsequent 3 years (Ingvorsen, 2014)26.
27 See Appendix, table 6.1.1 for list over the 19 initiatives described in the Organic Action Plan 2020
28 Today, 24 % of the state owned agricultural area is organically grown (Ministeriet for Fødevarer, Landbrug og Fiskeri, 2012)

21
converting new farmland is not an option (Retsinformation web, 2014b), the doubling must come from converting conventional farmland to organically grown areas. To be able to estimate the welfare economic consequences of a doubling of the organic agricultural land in Denmark, distribution on farm level is needed. Firstly, this is because the environmental benefits of conversion largely depend on the farm type being converted (see section 9.2-9.4). Secondly, it is due to the social costs included, where using aggregated numbers is not an option. The social costs are based on numbers from account statistics, where aggregated numbers for conventional farms hold a large mink production; something, which is not a part of the organic production (Statistics Denmark, 2014a), making a comparison of these not relevant. Therefore, a projection of the organic farmland divided into farm types is made forming three conversion scenarios for a doubling of the Danish organic farmland.
6.2 Conversion scenarios
The following projection scenarios are based on the current distribution of the organic farmland.
There are two ways of approaching a doubling of the organic agricultural area; it can be done either proportionally, i.e. based on the current distribution of the organic farmland, or with more or less weight on certain farm types. The projection that forms the three conversion scenarios is based on the current development and distribution of the organic area29. To correspond with the account statistical data available, the organic area has been aggregated into four farm types: dairy, crops, pigs and others, where the farm type others is an aggregation of the categories poultry, several and horticulture from table 4.3.1. The change in the organic agricultural area 2012-2013 is shown in table 6.2.1
Table 6.2.1 Change in the organic agricultural area, ha, 2012-2013
Region
Dairy
Crops
Pigs
Others
All
Capital area
0
-86
0
-13
-98
Northern Zealand
156
303
-9
-349
104
Zealand and islands
24
-1,578
51
1,048
-452
Western Jutland
-604
1.221
128
-380
364
Eastern Jutland
-843
462
176
-1,386
-1,590
Northern Jutland
-153
649
10
17
524
Southern Jutland
-1,846
1,936
190
-346
-66
Total
-3,266
2,907
546
-1,409
-1,214
Source: Ministeriet for Fødevarer, Landbrug og Fiskeri, 2014
Looking at last year’s development of the organic farmland, it is clear that especially the number of dairy farms has declined, where crop farms have increased by almost the same
29 See table 4.3.1

22
number. This could indicate a shift in production between these two farm types, especially in Southern Jutland.
Taking the recent decline in organic dairy farm area into account as well as the possible saturation of this farm type, there are two ways of converting the organic area:
- A projection of the current distribution of farm types
- A projection of the current distribution, with a lower emphasis on dairy
This provides three projection scenarios for 300,000 ha as follows30:
- Scenario I: A proportional conversion based on the current farm type distribution
- Scenario II: A conversion based on a projection of the current distribution, with 10 % lower weight on the conversion of the dairy farm area
- Scenario III: A conversion based on a projection of the current distribution, with 20 % lower weight on the conversion of the dairy farm area
6.2.1 Proportional conversion
Scenario I entails a proportional projection of the current distribution of the organic farmland, as shown in table 6.2.1.131.
30 The projection scenarios are of the same structure as those of Dubgaard et al (2014) and Ministeriet for Fødevarer, Landbrug og Fiskeri (2014a), but with 2013 data.
31 Appendix, table A6.2.1.1 shows the total projected organic area distributed on all farm types
Table 6.2.1.1 Increase in the organic agricultural area 2014-2020 on regions and farm types, ha, scenario I
Region
Dairy
Crops
Pigs
Others
All
Capital area
0
640
0
532
1,172
Northern Zealand
424
1,839
68
609
2,939
Zealand and islands
2,150
8,349
468
4,475
15,442
Western Jutland
13,393
8,061
1,781
3,450
26,685
Eastern Jutland
1,815
7,791
379
2,042
12,028
Northern Jutland
10,143
7,284
472
3,394
21,293
Southern Jutland
17,189
15,578
995
4,957
38,719
Total
45,115
49,542
4,162
19,461
118,283
Source: Own calculations based on table 4.3.1 and table A6.2.1.1 in Appendix

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In scenario I, the largest increase will be for the crop farm area with an increase of almost 50,000 ha, with the dairy farm area seeing the second largest increase of more than 45,000 ha, which is the largest converted dairy farm area in all the three conversion scenarios. The largest geographical increase will be seen in Southern and Western Jutland where these farms are primarily located, followed by Northern Jutland.
6.2.2 Reduced share of dairy production
The projected increase in the organic agricultural area on regions and farm types with 10 % and 20 % less weight on dairy farms respectively is shown in table 6.2.2.1 and table 6.2.2.232, forming conversion scenarios II and III.
32 Appendix, tables A6.2.2.1 and A6.2.2.2 show the total projected organic area
Table 6.2.2.1 Increase in the organic farmland with 10 % less weight on dairy farms on regions and farm types, 2014-2020, ha, scenario II
Region
Dairy
Crops
Pigs
Others
All
Capital area
0
740
0
616
1,356
Northern Zealand
317
2,126
78
704
3,223
Zealand and islands
1,605
9,655
541
5,176
16,976
Western Jutland
9,996
9,322
2,060
3,990
25,368
Eastern Jutland
1,355
9,010
438
2,363
13,165
Northern Jutland
7,570
8,424
546
3,925
20,463
Southern Jutland
12,829
18,015
1,150
5,734
37,729
Total
33,672
57,293
4,813
22,505
118,283
Source: Own calculations based on table 4.3.1
Table 6.2.2.2 Increase in the organic farmland with 20 % less weight on dairy farms on regions and farm types, 2014-2020, ha, scenario III
Region
Dairy
Crops
Pigs
Others
All
Capital area
0
840
0
699
1,539
Northern Zealand
209
2,414
89
798
3,509
Zealand and islands
1,059
10,961
614
5,876
18,510
Western Jutland
6,599
10,583
2,338
4,530
24,050
Eastern Jutland
894
10,229
497
2,682
14,302
Northern Jutland
4,998
9,563
620
4,456
19,634
Southern Jutland
8,470
20,452
1,306
6,509
36,737
Total
22,229
65,042
5,464
25,549
118,283

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Most notably, with a 10 % reduced share of increase in the organic dairy farm area, the organic crop farm area will increase by over 57,000 ha, where dairy farms will only increase with around 33,000 ha, almost 12,000 ha less than in the proportional projection in in scenario I. With a reduced share of dairy farms of 20 %, the organic crop farm area will increase with over 65,000 ha, where dairy farms will only increase with a bit over 22,000 ha; almost 23,000 ha less than in scenario I and 11,000 ha less than in scenario III.
6.2.3 Projection issues
The three scenarios outlined above are both geographically distributed and divided into the four main farm types. In the following, the geographical distribution is taken out for simplification reasons. This simplification holds no consequences for the pilot CBA conducted in section 10, as the estimated monetary values only relate to farm types and the geographical location is in a sense implicit in the farm type due to the interrelationship between soil and farm type. Therefore, table 6.2.3.1 lists the three conversion scenarios for the total projected organic farm area in 2020 and the actual increase 2014-2020 in the organically grown area distributed on the four farm types.
6.3 Main points
This section has described the target in the Government’s Organic Action Plan 2020 of doubling the organically grown area in 2020 to 300,000 ha, relative to the 2007 level. As the Organic Action Plan 2020 does not hold any specific targets as to where, how or for which farm type areas this doubling will take place, three conversion scenarios for a doubling of the organically cultivated land have been made distributed on the four farm types, dairy, pigs, crops and other farms, based on the assumption that the doubling will take place through the conversion of existing conventional farmland. Where the first scenario is a direct projection of the current distribution of the organic farmland, the two other scenarios hold 10 % and 20 % less weight on the dairy farm area, reflecting a possible saturation of this farm type.
Table 6.2.3.1 Projected and increase in the organic area on farm types, 2020, ha
2020-level
Increase 2014-2020
I
II
III
I
II
III
Dairy
114,426
102,983
91,540
45,115
33,672
22,229
Crops
125,655
133,406
141,155
49,542
57,293
65,042
Pigs
10,556
11,207
11,858
4,162
4,813
5,464
Others
49,359
52,403
55,447
19,461
22,505
25,549

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7. Environmental and climate benefits associated with the conversion to organic practices
The purpose of this section is to give an overall idea of the expected environmental and climate benefits associated with conversion to organic practices, with the possible benefits estimated relative to the current impacts from conventional agricultural production methods. This allows for an identification of the effects with the largest possible climate and environmental impacts from conversion.
No study has previously been published on the welfare economic consequences of doubling the organic agricultural farmland33. In 1999, a Danish study looked into the welfare economic consequences of 100 % conversion to organic practices using a 30-year time horizon for 6 different conversion scenarios based on 1995/1996 numbers (Miljøstyrelsen, 1999). The study assumes a total restructuring of the agricultural sector, which is not relevant for this pilot CBA.
7.1 General benefits associated with organic agricultural production
In addition to the production of food, organic agriculture is often associated with positive externalities (see section 8) such as a cleaner environment, improved soil quality, higher levels of biodiversity, healthier products, better animal welfare, less pesticide use, etc. (Gerrard et al, 2011, & Christensen et al, 2011).
A study by IFRO (Christensen et al, 2014) has looked into which external benefits consumers associate with organic production. The study uses a survey of around 5,500 people asking about their habits related to organic food consumption. Most of the respondents stated that organic production is associated with i.a. lower pollution, lower pesticide and medicine residue risks, higher biodiversity and better animal welfare but also higher costs of production and higher prices (ibid). The price premium that consumers pay for organic products can be assumed to reflect the positive externalities of the organic products, which are of a private good nature (see section 8), such as quality, taste and health attributes. The additional positive externalities such as a cleaner environment, however, are characterised as public non-market goods (see section 8), and are not reflected in the price34.
33 Dubgaard et al, 2014, also investigates the welfare economic effects of doubling the organic agricultural area on which this thesis is largely based, but has not gone into press yet.
34 A review sponsored by the Rise Foundation actually states that all the positive externalities are indeed reflected in the higher price of organic products, such that a higher price is paid for e.g. the provision of cleaner groundwater (Buckwell et al, 2014). This reflection in a sense the

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Another report by IFRO (Christensen et al, 2011) has looked into how to monetise the total value of organic production and make a subsequent economic valuation, recommending a holistic approach, where all externalities are accounted for. The paper found 7 positive externalities associated with organic production as follows:
- Healthier products
- Lower levels of pesticides residues
- Food security35
- Rural development36
- Improved biodiversity
- Lower nitrogen leaching (see section 7.2)
- Higher energy efficiency37 and lower GHG emissions (see section 7.3)
In addition, better animal welfare was mentioned as playing an important part for consumers when deciding on whether to buy conventional or organic foods (ibid).
Better animal welfare
Improved animal welfare is a positive externality associated with organic agricultural methods as e.g. livestock have access to outdoor areas and livestock density is generally smaller. Also, limited use of antibiotics indicates healthier animals. Where it can be argued that to some extent better animal welfare is reflected in the price premium for organic meat, certain aspects cannot be deemed reflected in this price, such as smaller livestock density. Therefore, estimates of the monetary values of the benefits of improved animal welfare need to be derived using economic valuation methods (see section 8.3).
Healthier products & lower levels of pesticide residues
According to Christensen et al (2011), there is no overall scientific evidence that indicates that organic products are healthier than conventional products, wherefore this is not accounted for in the pilot CBA. Organic products do, however, contain less pesticide residues (Christensen et al, 2011), but this can to a large extent be assumed reflected in the price premium for the organic products as it is seen as a quality aspect and thus of a private good nature.
opposite of the polluter pays principle which states that the polluter responsible for the pollution must be the one baring the costs to achieve the desired pollution level (Field et al, 2009, p. 388).
35 Given the time frame, it is beyond the scope of this thesis to look into the aspect of food security.
36 It is beyond the scope of this thesis to account for rural development impacts given the time frame of this thesis as rural development refers to not only economic factors but also social and environmental factors.
37 It is beyond the scope of this thesis to account for this, due to time constraints.

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Improved biodiversity
Biodiversity improvements are non-market positive externalities, which are not reflected in the price of the organic products. The associated monetary value therefore has to be derived using economic valuation methods (see section 8.3).
Biodiversity can be defined as “the number, variety and variability of all living organisms in terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are parts” (Perman et al, 2003, p. 26). Overall, there are two ways of looking at biodiversity; either as a biological resource in terms of species types or ecosystems and its services, or as the variation in these biological resources (Pearce et al, 2006). An important attribute associated with biodiversity is resilience of the ecosystem services, which refers to the “benefits and costs that occur when the ecosystem shifts to another regime” (Kumar et al, 2012, p. 12). This refers to the recovery ability of biodiversity after changes in provision levels of ecosystems. This is especially relevant for threshold values and the irreversibility aspect of certain species (ibid).
A recent Danish study has looked into the effect of biodiversity from organic agricultural practices (Andersen et al, 2014). The study concluded that biodiversity improvements as such cannot be directly attributed to organic agriculture, but that it is a number of interrelated factors such as landscape structure and farm type that determine the effect on biodiversity and that organic production methods in themselves do not guarantee any positive effects on biodiversity.
7.2 Environmental benefits associated with organic production methods
The agricultural sector as a whole is associated with negative environmental impacts through extensive chemical pesticide and chemical fertiliser use. Several of the negative environmental impacts from the agricultural sector are sought combatted through policies holding binding reduction targets for the emitting sources. These policies are naturally related to conventional agricultural methods, as conventional farming methods are the norm.
Prohibition of chemical pesticide and chemical fertiliser use
The use of chemical fertilisers and chemical pesticides in conventional agriculture is ever increasing with subsequent harmful impacts to the environment, our water systems and biodiversity (Regeringen, 2013a). As these are not allowed in organic agricultural production, converting to organic production could indicate positive environmental benefits in terms of cleaner water bodies and environment, a possible improved biodiversity, etc. Ammonia, nitrogen and phosphorous emissions in particular through the application of chemical pesticides,

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chemical fertilisers and manure are harmful to the environment causing i.a. eutrophication38 and acidification of water bodies and soil (Landbrug & Fødevarer web, 2014a). The Danish Government currently has no specific reduction goals on chemical pesticide or chemical fertiliser application, although, there is an overall strategy to reduce the impacts from fertiliser application including a tax on fertiliser use (Regeringen, 2013a). Ammonia, nitrogen and phosphorous all form part of policies that hold binding reduction targets for each pollutant. The following describes the potential environmental benefits in terms of reductions in these pollutants from converting to organic production methods.
Nitrogen (N) leaching
According to a report from Aarhus University, the difference in nitrogen leaching between conventional and organic agriculture has diminished somewhat over the years due to various environmental policy goals (Børgesen et al, 2013). When estimating potential benefits of reductions in nitrogen leaching from conversion, the farm type is an important factor, as the effects vary between farm types. According to a memo from Aarhus University (Waagepetersen, 2008), the leakage effect is highly related to the soil type and to the farm type and crops grown on the land. The report looks at crop and dairy farms and the amount of grass grown on the two soil types, sandy and clay soils. Both organic crop and dairy farms have a high grass production, in particular grass-clover39, whereas this is much smaller on conventional dairy and crop farms. Where there is hardly any difference in nitrogen leaching on clay soils between organic and conventional crop farms, nitrogen leaching is slightly higher for organic crop farms on sandy soils compared to their conventional counterpart, whereas it is lower for organic dairy farms on sandy soils compared to conventional crop farms (Waagepetersen, 2008). This indicates possible positive environmental benefits to be found through reductions in nitrogen leaching from the conversion of dairy farms, whereas there would be apparent negative benefits associated with the conversion of crop farms to organic practices.
Nitrogen leaching reduction is a part of the Water Framework Directive III (The European Commission web, 2014a, LandbrugsInfo web, 2014a), which holds a 13 % binding reduction target for nitrogen leaching to water bodies from fertiliser and manure application by 2015 relative to the 2003 level (Danish Ministry for the Environment web, 2014).
38 Eutrophication refers to the acidification of the water bodies through an excessed content level of nutrients, particular nitrogen and phosphates (U.S. Geological Survey web, 2014)
39 Grass-clover is a nitrogen-fixating crop (Vinter, 2003)

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Phosphorous (P)
When applying fertiliser and manure to the agricultural farmland, phosphorous is added as a vital plant nutrient. Most of the phosphorous is absorbed by the soil, however, when applied in excess amounts, there is a risk of losses, which can lead to eutrophication in the water bodies (Landbrug & Fødevarer web, 2014b). Organic farming methods can potentially hold positive benefits in phosphorous loss reductions through lack of chemical synthetic fertiliser use and e.g. using green manure.
Reducing phosphorous losses is a part of the WFD (The European Commission web, 2014a), which holds a 50 % binding reduction target by 2015 compared to the 2001/2002 level of 37,700 ton (Danish Ministry for the Environment web, 2014).
Ammonia evaporation (NH3)
The pressure ammonia evaporation has on the environment and the climate is increasing. In particular, ammonia not only has negative effects on ecosystem processes and human health, but also results in acidification and eutrophication of soils and waters bodies through its interaction with other pollutants SO2 and NOx (European Environment Agency, 2013).
The agricultural sector is the largest source of ammonia evaporation with livestock hold having the largest evaporation (ibid). Ammonia is a naturally occurring nitrogen-containing element, and a main content in chemical fertilisers, chemical pesticides and manure. Due to the prohibition against the use of chemical fertiliser and chemical pesticides in organic farming methods, converting to organic practices could hold potential environmental benefits from lower ammonia evaporations.
Binding reduction targets for ammonia evaporation are set in the revised Gothenburg Protocol40 2012, with a reduction target for Denmark of 24 % by 2020 compared to the 2005 level, where the level was 83.000 ton (UNECE, 2012). Furthermore, the EU NEC Directive also sets European targets for the reduction of ammonia (The European Commission web (2014b)). Additionally, the target for nitrogen leaching reduction set in the WFD will also affect ammonia evaporation (The European Commission web, 2014a, and LandbrugsInfo web, 2014a). The reduction requirement for ammonia evaporation is only applied to farms holding livestock, as these farms are the primary emitters (Miljøstyrelsen web, 2014).
40 Originally adopted in 1999, the Gothenburg Protocol is a multi-pollutant agreement to battle eutrophication, acidification and ground-level ozone at the same time through reducing levels of ammonia (NH3), sulphur dioxide (SO2), nitric oxide and nitrogen dioxide (NOx), methane (CH4), PM2.5, PM10, CO and VOC (UNECE, 2012)

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7.3 Climate benefits associated with organic production methods
Climate benefits are related to the reduction in GHG emissions, measured in CO2 equivalents (CO2e). The Danish agricultural sector is responsible for around 20 % of the total Danish GHG emissions; incl. LULUCF41 and energy use (Færgeman et al, 2014). The key GHG emissions from the agricultural sector are listed in table 7.2.1. They consist of CO2 (carbon dioxide), CH4 (methane) and N2O (nitrous oxide) with CH4 by far being the largest contributor. CO2 mainly stems from the energy used in agricultural production, but is also released through the cultivation of the soil (Færgeman et al, 2014). CH4 mainly stems from the digestive system of cows and their manure, while N2O is emitted through the application of animal manure and the use of fertilisers.
Table 7.2.1 Effects, share and sources of GHG emissions related to agriculture
CO2
CH4
N2O
Effect compared to CO2
n.a.
Around 20 times stronger
Around 300 times stronger
Source
Energy use
Livestock – mainly cows’s digestive system
Animal manure
Cultivation of soil & LULUCF
Slurry and manure
Fertiliser use
Share of total emissions
12 %
68 %
20 %
Source: Færgeman et al, 2014, Kristensen et al, 2011
Where CO2 from energy use can easily be measured, and is regulated in the Kyoto Protocol and the EU-ETS (The European Commission (c)), CH4 and N2O emissions are not as easily measured due to their many emission sources and their estimations hold vast insecurities (Færgeman et al, 2014).
As evident from table 7.2.1, the climate impacts clearly depend on the farm type, with farms holding livestock potentially being the largest emitters of GHG. However, there are currently no data available for the climate impact differences for farm types from converting conventional farms to organic production. A report by DCA has looked at the overall conversion effects and found potential GHG emission reduction benefits from conversion to organic practices (Schelde et al, 2014). This is due to the significant share of pasture on the organically grown area, as grass has a high carbon storage capacity. They also found that nitrous oxide emissions are smaller due to the prohibition of chemical fertiliser use on organically grown soil (ibid).
41 LULUCF is defined as the "emissions and removals of greenhouse gases resulting from direct human-induced land use, land-use change and forestry activities" (UNFCCC web, 2014)

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Reductions in GHG emissions from agriculture, transport, waste and buildings are a part of the Effort Sharing Decision42 in the EU (The European Commission (d)), which regulates GHG emissions from sectors not included in the EU-ETS. Under this act, Denmark is committed to a 20 % reduction of GHG emissions outside the EU-ETS by 2020, not including LULUCF (ibid).
7.3 Main points
This section has looked into the benefits associated with organic production: improved animal welfare, healthier products, less pesticide residues and improved biodiversity, as well as benefits from possible reductions in environmental impacts from reduced nitrogen leaching, phosphorous loss and ammonia evaporation, and climate benefits through decreased GHG emissions. It has shown that there are potentially positive environmental and climate benefits associated with converting conventional farms to organic practices.
42 In the Effort Sharing Decision, based on GDP, Denmark is committed to a 20 % binding reduction target in the non-ETS sector by 2020, relative the 2005 level (The European Commission (d)), where the agricultural sector is responsible for around 1/3 % of all emissions (Energistyrelsen, 2011)

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8. Welfare economic policy assessment
To be able to compare the social benefits of reductions in environmental and climate impacts from converting from conventional to organic agricultural practices to the associated social costs of conversion in a CBA, the associated benefits have to be monetized. The aim of this chapter is to describe the underlying welfare economic foundations of CBA and economic valuation methods. First, the basic theory of welfare economics is described. Secondly, environmental valuation categories are described followed by the associated economic valuation methods. Subsequently, the CBA method, which is based on welfare economics, is described for the purpose of inclusion in the pilot CBA conducted in section 10.
8.1 Welfare economics
Where microeconomics study the behaviour and utility on the individual level, neoclassical welfare economics study the aggregated, i.e. societal, utility level, with an ethical base in utilitarian43 concepts (Perman et al, 2003). Welfare thus refers to the aggregate individual utility.
Utility
Societal welfare is equivalent to the sum of all individuals’ utility (ibid). Reflecting the Marginal Rate of Transformation44, choice is an important element as the utility gained reflects substitution between environmental goods, as limited resources have many alternative uses (ibid). Here, it is assumed that the individual knows his or her own preferences and always wishes to increase welfare, i.e. wanting more of a given good. It is also assumed that individual utility is comparable across individuals and can be aggregated to represent utility at the societal level to form a social welfare function, as follows (Freeman et al, 2003, p. 69, Varian, 2006, p. 617):
Individual utility function: Social welfare function:
( )45 ( ) Σ 46
43 As a normative ethics, originally introduced by John Stuart Mill, utilitarianism looks the ways to maximize welfare for all (Perman et al, 2003)
44 Assuming two goods require the same amount of inputs, the Marginal Rate of Transformation reflects the rate one good is given up to produce one more unit of another good (Perman et al, 2003)
45 u = utility for commodity j for individual i, subject to the income constraint, Y, and the price, p, and quantity, Q, of commodity, j, where j = 1,…,J

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The classical social welfare function is a measure of the aggregated utility for all individuals. Critique has been made on the assumption of the ability to aggregate individual welfare into a social welfare function. The Arrow Impossibility theorem e.g. states that it is not possible to derive a social welfare function “without traversing one or more of a set of axiomatic rules that would seem sensible” (Pearce et al, 2006, p. 47). Critique has been made on this assumption in relation to environmental goods, which should be looked at through the society as a whole and aggregated individuals’ preferences might not reflect society’s preferences as a whole (Bruyn et al, 2010). The idea behind economic valuation is precisely to give an idea of people’s preferences with the assumption that this is a view of society as a whole, so the opposite could also be argued. Nevertheless, this assumption forms a basis for welfare economics.
In a perfect market, an efficient allocation of resources is assumed achievable. In the presence of externalities, however, markets become imperfect unless regulated. An externality occurs when an action taken by one individual affects another individual’s welfare without there being an incentive for the first individual to compensate the other party (Pearce et al, 2006). This is the same as saying that a potential market is not created for a given good, which subsequently results in an societal efficiency loss (ibid). Unless property rights are well-defined as stated in the Coase Theorem47, when externalities occur, be they positive or negative, an efficient allocation of the externality is not achieved and equilibrium does not maximize total benefit to society as a whole. This is because the social costs exceed private costs at the private market solution, i.e. the cost of the externality is not internalised (ibid). This is due to the wedge between the marginal social and marginal private costs that an externality makes. The marginal social costs are the sum of the marginal private cost and the marginal damage (i.e. the externality) accruing from the good. In the case of environmental goods, an inefficient allocation can for instance lead to degradation of the environment.
Where some of the externalities associated with agricultural production are private goods48 with well-defined property rights, such as the taste and consumption of the organic product, others like cleaner water through no application of fertilisers are non-market goods and public-good by nature. Public goods provision in their nature of being non-rival and non-excludable lead to market-failure and free riding as there is no incentive to pay for the provision of these goods and thus needs governmental intervention (Perman et al, 2003). Without governmental intervention,
46 W = welfare
47 Given low transaction costs, according to the Coase Theorem, an efficient allocation of a given externality can be achieved through the allocation of property rights (Varian, 2006).
48 A private good is rival and exclusive (Varian, 2006)

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an allocative efficiency or Pareto optimal allocation of the non-market good might not be achieved.
Pareto optimality
An allocation of a resource is said to be Pareto efficient when no other allocation of the resource can be made that makes one individual better off without making another individual worse off (Varian, 2006). Neoclassical welfare economics thus assumes a socially efficient allocation of resources. Allocative efficiency of society’s resources is a necessary condition for a social welfare maximum, wherefore a social welfare maximum is always Pareto efficient (ibid).
A reallocation of resources will, however, always lead to certain individuals experiencing a gain and others experiencing a loss. Therefore, when moving into the CBA framework the concept of Pareto efficiency no longer holds. Instead, the Kaldor-Hicks compensation test applies. This states that as long as the winners can compensate the losers and still be better off had the reallocation not taken place, the reallocation is societally efficient (Perman et al, 2003).
Consumer surplus and measures for welfare changes
In standard economic theory the consumer surplus is given as the area under the demand curve at the intersection of the market price, given a constant income level. Hicks, however, argued that it should be utility that should be held constant when looking at a change in welfare of a price change of a good (Pearce et al, 2006). Subsequently, this has led to the four additional measures to the traditional consumer surplus. Where the variation measures relate to a price change, the surplus measures relate to a quantity change, i.e. a change in the provision level of a good. Based on the arguments of Mäler, who argued that a quantity rather than a price change is more relevant for environmental goods (ibid), in the context of this thesis, only the quantity change in the provision level of environmental goods is relevant as it can be measured in terms of changes in its provision level, e.g. cleaner water can be measured in terms of some water standard level. The four measures are as follows:
Compensating Variation (CV)
CV refers to a price change and is a measure of how much income compensation is required for an individual to experience the same level of utility as before the price change occurred; i.e. the original level of utility (ibid).
Equivalent variation (EV)
EV refers to a price change and relates to the value of the change in well being before the price change. It is a measure of the income that would have to be given – or taken from the individual

35
depending on the situation - to make the individual as well off as if the price change did occur; i.e. a new utility level (ibid).
Compensating Surplus (CS)
CS relates to a quantity change and the new provision level of a good; i.e. after a quantity change. It is a measure of the income compensation required to enable the individual to stay at the same initial utility level at the new provision level of the good (ibid).
Equivalent Surplus (ES)
ES relates to a quantity change at the old provision level of a good; i.e. before the quantity change. It is a measure of the income change required for an individual to experience the same utility as if the quantity change did occur (ibid).
The above variation and surplus measures rely on utility values being available for a good. Environmental values of e.g. cleaner groundwater or increased biodiversity, however, are non- market goods and therefore hold no market price (Freeman et al, 2003). The next section describes the values associated with environmental goods, with the subsequent section describing the economic valuation methods to derive their associated monetary values.
8.2 Environmental value categories
Environmental values are associated with both use and non-use values. The valuation of environmental goods can at times be challenging, as sometimes it can be difficult to assess its direct use to the society as a whole, due to the inherent valuation problems in assessing many forms of environmental damage or degradation. E.g. a rare bird species in a land field far away might not be of any direct use value to a person, but knowing that it exists, can be of value to people.
In this relation, economic valuation and CBA draws on the concept of Total Economic Value (TEV) (see figure 8.2.1), where the TEV relates to the net sum of all the use and non-use values of the good.

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Figure 8.2.1 Total Economic Value
Source: Based on Pearce et al, 2006, figure 6.1, p. 87
8.2.1 Use values
The use value of an environmental good refers to the actual use of the good. There are overall three use values:
Actual use
Actual use refers to actual or planned use of the environmental good, e.g. as production inputs or visiting or planning a future visit to a nature area (Pearce et al, 2006).
Indirect use
Indirect use refers to using a service where the good forms a part; e.g. carbon sequestration, watching wildlife nature shows on TV or birdwatching (Perman et al, 2003).
Option value
Option value refers to the utility gained from having the possibility of using the environmental good at some point in the future, without knowing this for certain (Reiling et al, 1980).

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Quasi option value
A sub category under option value, which accounts for uncertainties about the knowledge of the environmental goods; this way reflecting the uncertainty of future associated benefits. This refers to the possible use of the good, provided new information or new possibilities arising (Pearce et al, 2006). Option and quasi option value allows for the inclusion of irreversibility effects, where exceeding certain thresholds for a species has irreversible effects on the species (ibid).
8.2.2 Non-use values
The non-use value of an environmental good refers to the value being placed or utility being gained from the good without actually making use of it (ibid). Non-use values are the sum of the existence, altruistic and bequest values:
Existence value
Existence value refers to the utility that individuals gain from the knowledge of knowing the environmental good is there, i.e. the existence of the resource, but without actually drawing direct use of it and without the intent to use it at any point in time (ibid). In relation to this thesis, it is highly relevant for biodiversity issues as people rarely draw use of biodiversity in person, nor plan to, but the knowledge of its existence somewhere in the world (e.g. a rare bird species on a field somewhere far away) can be of value. The existence value can be somewhat challenging to determine, and is often associated with overestimated benefits as it is difficult to put a monetary value on knowing e.g. a certain cattle type exists somewhere.
For others
This refers to the utility that an individual experiences from others having the option of drawing use of an environmental good (Perman et al 2003). This refers to:
Altruism - The altruistic value refers to the value of the environmental good being preserved for others, again without drawing direct use of it yourself (Pearce et al, 2006), and
Bequest - Bequest value relates to the utility gained from the option of other people drawing use of the preservation of an environmental good for future generations (ibid).
The environmental externalities associated with organic agricultural production methods are both of use and non-use values with prices not always evidently available. The following section describes the different methods to derive their associated monetary values.

38
8.3 Economic valuation methods
This section describes the different economic valuation methods for determining the monetary values of non-market goods (Bateman et al, 2002), based on the aforementioned use and non- use values. This allows for a monetary comparison of all the relevant social costs and benefits to be used in the pilot CBA in section 10. In the following, the economic valuation methods and their relevance to this thesis are described. In general, the externalities linked to agricultural production are mainly non-market goods related primarily to non-use or possibly indirect use values. Where Revealed Preference Methods is only used for determining use values, Stated Preference Methods can also be used to determine non-use values and are therefore more relevant for this thesis.
The total economic value as described in section 8.2, can be derived using the various methods as illustrated below in figure 8.3.1.
Figure 8.3.1 Total Economic Value and associated valuation methods
Source: Based on figure 1.4, p. 30, Bateman, 2002

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