1) The document discusses improving the targeting and tailoring of future EU agri-environment and climate policy based on OECD principles of policy design. 2) Currently, agri-environmental performance has improved slightly in recent decades but agri-environment policies play a minor role and have heterogeneous costs and benefits. 3) The document recommends better targeting agri-environment policies based on variability in environmental benefits and opportunity costs across locations to improve cost-effectiveness. This could include payment differentiation, auctions, and results-based schemes.

1. FUTURE EU AGRI-ENVIRONMENT
AND CLIMATE POLICY – A ROOM
FOR IMPROVEMENT?
Jussi Lankoski
OECD Trade and Agriculture Directorate
Environment Division
Seminar on “The CAP after 2020”, Helsinki
19 April 2016

2. Context
OECD Ministerial Declaration (7-8 April 2016):
Policies need to be transparent (with explicit objectives and intended
beneficiaries), targeted (to specific outcomes), tailored (proportionate to the
desired outcome), flexible (reflecting diverse situations and priorities over time
and space), consistent (with multilateral rules and obligations) and equitable
(within and across countries), while ensuring value for money for scarce
government resources. “
European Court of Auditors (2011):
Regarding EU agri-environmental policy “The Court found that the objectives
determined by the Member States are numerous and not specific enough for
assessing whether or not they have achieved…In particular very little
information was available on the environmental benefits of agri-environment
payments.”
OECD Trade and Agriculture Directorate 2

3. Agri-environmental performance, average
annual change from 1998-2000 to 2008-10
OECD Trade and Agriculture Directorate 3
-12
-10
-8
-6
-4
-2
0
2
4
Total factor
productivity
Production volume Agricultural land area Nitrogen balance Phosphorus balance Pesticide use Direct on-farm energy
consumption
Water use Ammonia emissions Greenhouse gas
emissions
Average annual % change
Finland OECD EU15

4. Some key policy design principles
for agri-environment
OECD Trade and Agriculture Directorate 4
• Remove policy failures that exacerbate environmental market
failures
• Address remaining environmental market failures by
responding to following key questions:
• Who to target?
– Benefits (B) and (opportunity) costs (C) vary over space → target on the
basis of B/C ratio
• What to target?
– Variables that correlate strongly with environmental objective and can be
relatively easy to observe, preferably performance proxies (such as EBI)
• Which level of incentives?
– Tailor incentives to achieve desired outcome and avoid
overcompensation → improved budgetary cost-effectiveness

5. Environmentally harmful
agricultural support
OECD Trade and Agriculture Directorate 5

6. Quantitative illustration of the gains
from A-E policy targeting and tailoring
OECD Trade and Agriculture Directorate 6
• Data from Finland (distribution of soil productivity and yields,
production costs, distribution of soil textural classes and field
parcel slopes, nitrogen runoff, species diversity in semi-natural
habitats)
• Focus: commodity production, nitrogen runoff, biodiversity
• Benchmark Scenarios: (i) the private optimum and (ii) social
optimum
• Potentially environmentally harmful support measures: (i) price
support and (ii) arable crop area payment (without ECC)
• Current policy: “Stylised policy package” including CAP basic
payment, LFA, and A-E payment

7. Performance of current policy package
OECD Trade and Agriculture Directorate 7
Policy
scenario
Nitrogen
application
barley,
kg/ha
Buffer strip
size, % of
field parcel
Total
commo-
dity
production,
kg
Total N-
runoff
damage, €
Total
biodiv.
benefits, €
Total SW, €
Land
allocation,
barley :
hay
Private
optimum
109
(95-121)
- 438 667 7773 1192 6260 90:10
Social
optimum
94
(79-105)
3.8
(1.2-15.6)
369 012 5270 1539 7699 66:34
Current
policy
94
(60-100)
10.0
(7.3-12.8)
435 276 6062 1401 6650 100:0
Crop area
payment
109
(95-121)
- 456 356 8271 1112 5557 100:0
Price
support
114
(100-126)
- 458 307 8428 1128 5416 98:2

8. Can we achieve A-E targets with
smaller budget?
OECD Trade and Agriculture Directorate 8
Policy
scenario
Number of
parcels
accepted
within the
budget
Average
informatio
n rent,
€/ha
Budget Total EBI
points
€/EBI
Current
uniform
payment policy
22 73 1976 886 2.23
Current
uniform
payment policy
with EBI
targeting
24 36 1954 1510 1.29
Current
uniform
payment policy
with EBI/cost
targeting
25 38 1941 1541 1.26
Discriminatory
price auction
with EBI
targeting
94 6 1985 5423 0.37

9. What about administrative costs of
targeted payments?
OECD Trade and Agriculture Directorate 9
Payment
Share of
PRTCs of
payment, %
Cost-
effectiveness,
EUR/EBI point
with PRTCs
Targeting
gains ratio
Targeting
gains ratio
when PRTCs
are
increased by
100%
Uniform
payment
5.0 0.95 - -
Auction with
EBI targeting
7.0 0.80 8 4
Uniform
payment with
EBI targeting
5.4 0.84 28 15

10. Different payment types suit for
different situations
OECD Trade and Agriculture Directorate 10
Environmental
quality
Opportunity costs
Homogenous Heterogeneous
Homogenous
Uniform payment
(N,n)
Differentiated
payment-cc (N,n)
Heterogeneous
Differentiated
payment-eb (N,n)
Auction-eb (N)
Results-based
payment-eb (n)
Differentiated
payment-cc and eb
(N,n)
Auction-cc and eb
(N)
Results-based
payment-cc and eb
(n)
N = works with large number of participants; n = suitable for small number
of participants; cc = differentiated on the basis of compliance costs;
eb = differentiated on the basis of environmental benefits

11. Carbon farming
• Carbon farming practices refer to:
– soil carbon sequestration through conservation tillage (no-till and
reduced tillage), rotational cropping, green fallowing, and afforestation
– reduced GHG emissions through fertilizer and livestock management
• Agriculture has potential to contribute to global mitigation effort:
– agricultural soils can offset 15% of global GHG emissions
– mitigation costs of soil carbon sequestration practices vary greatly from
$3 to $130/t CO2-eq depending on e.g. practice, spatial location etc.
• Current CO2-eq offset prices do not necessarily compensate profit foregone
of adopting mitigation practices
• Environmental co-benefits are seldom considered, but their consideration
would make adoption of practices more profitable
OECD Trade and Agriculture Directorate 11

12. US Corn Belt: consideration of co-benefits
makes adoption more profitable
OECD Trade and Agriculture Directorate 12
Offset scenario
and
environmental practice
Acreage
response
million
acres
Carbon
offsets,
‘000 tons
Nitrogen
credits,
tons
Phosphoru
s credits,
tons
Farm profit
increase,
USD
million
Carbon offsets: switch to
no-till
0.8 44.4 - - 18.4
Carbon offsets + water
quality offsets: switch to
no-till
1.0 49.4 23 83 20.4
Carbon offsets + water
quality offsets: Green set-
aside
0.05 20.7 1 251 102 1.6
Carbon offsets + water
quality offsets: Vegetated
field strips
0.6 6.5 5 140 58 12.4
Carbon offsets + water
quality offsets: Reduced
fertilizer use
4.6 141.2 16 408 418 74.6

13. Conclusions
• A-E performance has improved over the last decade
• But A-E policies still play a minor role and environmental effects
are mainly driven by agricultural support policies and market
drivers
• A-E policy needs to address better heterogeneous opportunity
costs and environmental benefits → there is a need for improved
targeting and tailoring of the policy for improved cost-
effectiveness
• Research and piloting: environmental benefit indices, auctions,
results-based schemes, GHG mitigation policy design for
agriculture
OECD Trade and Agriculture Directorate 13