Cost-effective design of agri-environmental payment programs: U.S. experience in theory and practice
Section snippets
Introduction and background
The United States has a long history of providing payments for environmental services. Prompted by drought, dust storms, and economic depression, the U.S. began assisting farmers with soil conservation in the 1930s. Since then, the U.S. government has relied primarily on voluntary payment programs to encourage soil conservation and other improvements in agri-environmental performance, although cross-compliance and regulation have also been used.
Land retirement, in particular, has been a
Design of U.S. agri-environmental payment programs: Broad considerations
U.S. agri-environmental programs involve cash payments from the government to producers in exchange for altering land use or adopting practices designed to help meet environmental objectives on land in production. These programs are funded from general revenues. So, while the public at large is both the “buyer” and “recipient” of the environmental services generated by these programs, there is no attempt to ensure that individuals who benefit from the programs also pay for them.
Many U.S.
Design of U.S. agri-environmental payment programs: Gathering and using information
The foregoing suggests that implementing a (relatively) cost-effective agri-environmental program requires a great deal of information on potential environmental benefits and the minimum level of payment producers would be willing to accept (WTA) for taking actions to achieve these benefits. Because environmental benefits and producer WTA can vary widely, selecting environmentally cost-effective combinations of land and practices could require assessment of potential benefits and knowledge of
Implementation of U.S. agri-environmental programs: The case of CRP and EQIP
As already noted, land retirement has often dominated U.S. agri-environmental policy. Between 1985 and 2002, land retirement accounted for a large majority of USDA conservation-related payments to farmers (Fig. 2). In recent years, however, funding for working-land programs, like EQIP, has increased significantly relative to land retirement. CRP and EQIP are the largest U.S. agri-environmental programs, with funding of roughly $2.8 billion in 2005 — $1.8 billion for CRP and $1 billion for EQIP.
Analysis of U.S. programs: How cost-effective are they?
Because cost-effectiveness is complex and difficult to achieve, economic analysis of cost-effectiveness can also be quite difficult. While the CRP has been the subject of much research, research on EQIP is limited. Nonetheless, simulation analysis and program data can help shed light on key questions related to EQIP. In the following sections, we address five over-arching questions regarding cost-effectiveness:
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Has benefit–cost targeting increased environmental gains per dollar of program
Benefit–cost targeting: CRP
Early research on targeting showed significant potential for gain through benefit–cost targeting in the CRP (Reichelderfer and Boggess, 1988, Ribaudo et al., 1990). Babcock et al. (1996) describe several approaches to targeting and show that the environmental cost-effectiveness of each depends on the nature of heterogeneity among parcels offered for retirement. For example, least cost enrollment will maximize benefits relative to cost only when environmental benefits are negatively correlated
Benefit–cost targeting: EQIP
Unlike CRP, benefit–cost targeting in EQIP has not been explicitly studied. Because the benefit–cost indices used to select contract offers for EQIP participation have been devised at the state and local level, environmental objectives vary by location. Thus, national or regional scale analysis of benefit–cost targeting in EQIP is extremely difficult to do. Nonetheless, program data suggests a large concern for water quality and water conservation. At a national level, water quality and
Bidding for financial assistance: CRP
Bidding on financial assistance in agri-environmental programs can help stretch limited budgets by reducing the cost of individual contracts (Latacz-Lohmann and Van der Hamsvoot, 1997). In terms of cost-effectiveness, as defined in U.S. programs, an ideal auction would induce program applicants to reveal their WTA — the lowest payment they are actually willing to accept for meeting program requirements. The extent to which auctions can, in fact, meet this objective depends largely on the amount
Bidding for financial assistance: EQIP
Between 1997 and 2001, EQIP applicants were also asked to bid for financial assistance. During this period, bids were low relative to maximum rates and the number of applications declined each year. For structural practices (e.g., animal waste handling systems or grassed waterways) producers could bid up to 75% of cost but the average accepted bid was only 35%. For management practices (e.g., nutrient management, conservation tillage) producers could request up to 100% of the (county) maximum
Monitoring and enforcement
The role of compliance monitoring in agri-environmental policy has received increasing attention from a theoretical perspective in recent years. Results include the relationship between monitoring costs and farmers' risk aversion in determining the optimal monitoring effort (Ozanne et al., 2001), the role of monitoring imperfections in leading to higher levels of incentive payments to ensure compliance (Choe and Fraser, 1998), and the importance of different farmer types (in terms of
Transaction costs
Do the gains from bidding or benefit–cost targeting exceed the additional cost of implementing a more complex program? Transaction costs include the government's cost of formulating the program (e.g., establishing the EBI), the producer's cost of submitting an application and the government's cost of processing applications, selecting participants, entering into contracts, making payments, monitoring compliance, and taking enforcement actions when necessary. An indirect component of transaction
Additionality and retention
Agri-environmental programs produce environmental gain only when the practices funded would not be adopted without the incentive provided by the program (Smith and Weinberg, 2004). Environmental gains based on actions that improve environmental performance, but would have taken place in the absence of program incentives (or requirements), do not represent additional gain. In practice, however, U.S. programs generally attempt to fund actions that were not being taken prior to the offer of a
Producer welfare and low income producers
Because CRP enrollment is equal to roughly 10% of U.S. cropland acreage, supply reductions due to CRP are likely to have had some impact on commodity prices and, indirectly, on producer welfare. Sullivan et al. (2004) estimate that only about half of CRP land would return to crop production if the CRP program were ended, but that increased production would have a measurable impact on crop prices. The largest effect was found for corn, where it is estimated production would rise by 4% and prices
Conclusions
The U.S. uses a portfolio of payment programs and other policy instruments to encourage better environmental performance on U.S. farms. While much of the 70 year history of U.S. agri-environmental policy has been dominated by land retirement and by a concern for soil erosion and soil productivity, U.S. policy now focuses on a much broader array of environmental objectives and utilizes a more balanced portfolio of policy instruments. Beginning in 1985, non-payment policy instruments such as
Acknowledgements
We thank Alex Barbarika, Liu Chuang, Daniel Hellerstein, Skip Hyberg, Mike Roberts, Doug Lawrence, Ruben Lubowski, Marca Weinberg, Sven Wunder, and two anonymous reviewers for helpful comments. Views expressed are the authors' alone and do not necessarily correspond to those of the U.S. Department of Agriculture.
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