Topic Area: Agriculture

Geographic Area: France

Focal Question: Does farmer behavior matter in determining the supply of environmental benefits?

Sources:

(1) Bonnieux, F., P. Rainelli and D. Vermersch, “Estimating the Supply of Environmental Benefits by Agriculture: A French Case Study.” Environmental and Resource Economics (1998) 11: 135-153.

Reviewer: Sanval Nasim, Colby College ‘08

Review:

After the Second World War, European countries adopted agricultural policies based on self-sufficiency arguments. In order to protect farm incomes and increase agricultural development, European governments imposed a price floor in the agriculture market, essentially keeping agricultural prices well above world market levels. The subsequent implementation of the Common Agriculture Policy (CAP), which allowed generous tax allowances and capital grants to farmers in addition to the price floors, led to overproduction of agricultural goods. It became apparent that CAP failed to efficiently increase farm income and solve the low-income problem. Facing high European agricultural surpluses and low world prices, the European Union sought to reform CAP. Though this reform concentrated on implementing appropriate measures to solve the farmers’ low-income problem, it, nonetheless, also acknowledged the relationship between agricultural expansion and environmental degradation. From an environmental perspective, the CAP reform advocated the shift from a system based purely on price guarantees to a partially decoupled system that included direct encouragement of more environmentally friendly farming.

The CAP reform package recognized the important role of farmers in protecting landscape and natural resources, and hence justified direct payments to agriculture. The main regulation directly compensated farmers for any loss in income as a result of their agreement to engage in more environmentally beneficial practices. From an economic point of view, using compensation to tackle the negative externalities created incentives for the farmers to indulge in more environmentally friendly farming practices, an approach that promised to increase the consumer welfare by more than the loss in producer surplus.

This recognition of the connection between less-damaging farming practices and environmental benefits led to the creation of the Environmentally Sensitive Area Agreement (ESA) scheme, a policy based solely on economic incentives. The ESA scheme involves standardized contracts to buy changes in agricultural production practices through direct payments to farmers in order to reduce environmental damage. Farmers in specific geographic locations are targeted based upon the environmental and ecological conditions of the areas and concentration of people who benefit from the reduction in the negative externality. These centrally managed voluntary agreements regulate production practices by either banning the use of certain activities deemed to produce negative externalities and/or requiring farmers to engage in such activities that could potentially produce public goods (Bonnieux et al. 137). Agreement terms vary depending upon the specific regions involved and the farming practice to be targeted.

Since the program is voluntary, the main issue with ESA concerns how incentives affect participation behavior. Even with sufficient compensation to meet all costs, the participation rate determines the success of the program.

France adopted a particular form of the scheme in 1991 to protect the Cotentin Wetlands in Lower-Normandy, an area covering 37 500 ha. The agricultural revolution after World War II led to increased land conversion of the wetlands into heavily farmed areas. Furthermore, intensive dairy farming altered the pastoral landscape and damaged the permanent pasture lands. Fertilizer use also changed the landscape of the area in a way that threatened the breeding grounds of native bird species. Therefore, agricultural expansion had a dire effect on the delicate environmental equilibrium of the region.

To protect this ecologically important area, the government declared it a Natural Regional Park and assigned an ESA to 8000 ha of the wetland area. The main objectives of the ESA were: (1) support dairy farming and cattle rearing in the existing grassland area; (2) conserve wet grassland areas, ditches, drainage channels and their associated landscape; (3) improve the ecological value of the wet grassland and associated habitats (Bonnieux et al. 144). The agreement regulated various farming practices that involved use of pesticides, amount of fertilizer, grazing areas, and construction of proper drainage systems. In return, the regulatory authority set an explicit level of direct payment to be made to individual farmers to meet the costs associated with the regulations.

By conducting an empirical analysis, Bonnieux et al. examined the effect of farmer characteristics on their participation in the ESA scheme. Empirical evidence reveals that age had a significant impact on participation, with younger farmers willing to join an ESA. Farm size also had an effect on participation; farmers with bigger farms had higher enrolment rates. Farmers’ attitude towards the environment also contributed to participation rates as farmers who supported green tourism were more likely to enroll in the ESA program. Other results revealed that enrolment rates were high in those areas where acreage of the wetland was important and required some amount of nitrogen as fertilizer. As the scheme allowed farmers to use a considerable amount of nitrogen as fertilizer (maximum of 30 kg), farmers on this type of wetland found it easier to comply with the requirements of the scheme.

Though economic incentives provide a mechanism to protect environmental habitat, behavioral issues have a large role to play in determining how people would react to voluntary programs. The empirical evidence from France on the supply of environmental benefits from agriculture using ESAs suggests that certain characteristics of farmers determine the extent to which they would react to the incentives provided to them. Hence, for future implementation of such agricultural schemes as ESA, it may well be worthwhile to investigate how farmers’ participation rates would affect the amount of environmental benefit the incentives would provide.