CAP#What does the public pay for?

Common Agricultural Policy

Tom Lancaster, Senior Agriculture Policy Officer at the UK’s Royal Society for the Protection of Birds (RSPB) assesses the uncertain terrain of the UK, farm subsidies and public goods post Brexit. In doing so, some interesting considerations emerge for the EU and CAP too. 

The question is often asked of the Common Agricultural Policy – what is it exactly that the public is paying for? For a policy that continues to absorb 40% of the EU budget, it’s an enduring scandal that no one can provide a satisfactory answer to that question.

As we head toward the EU exit, what we pay for in future environment and farming policies will be the central question for all concerned. From our (RSPB) perspective, the focus should be on the environmental goods and services that farmers and land managers can provide to society. The fact that these are not rewarded through the market (unlike food for instance) provides a strong case for public intervention.

If you take this as read, the question again becomes, what should the public pay for? In this instance, I don’t mean what the balance should be between objectives, or the line between regulation and incentive, crucial though those questions are. Instead, here I want to focus on what is the basis upon which we make payments to farmers and land managers in return for environmental benefits?

This is where we descend into some uninhibited policy wonkery, but stick with it, because it matters.

In traditional markets, prices are established by the interaction of supply and demand, but what are the options when dealing with environmental goods and services which markets cannot handle? From a public policy perspective, there are roughly three options that I can think of – the classic income-foregone and management costs model of agri-environment fame; attaching conditions to direct payments, as per the recent CAP greening measures; or an approach that attempts to replicate market forces and prices the benefits provided, a la payments for ecosystem services.

With the caveat that I know next to nothing about trade policy generally and World Trade Organisation (WTO) rules specifically, I think you can start from the assumption that the third of these is tricky when thinking about public policy. Private ‘buyers’ of these services can pay what they want – i.e. a nominal or ‘market’ value – but public buyers will presumably still have to abide by WTO rules if it involves agriculture (which it probably will given 75% of the UK is farmed).

This then leaves you with the first two, for which the WTO rules are set out in Annex II of the Agreement on Agriculture. From environmental, economic and political perspectives, they both have pros and cons.

Conceptually, a basis to payments of income-foregone and management costs makes sense. It’s economically efficient, easy enough to calculate at a relatively fine spatial scale and readily understood. Importantly, it also means that payments have a basis in specific actions, meaning that, roughly speaking, the more you do for the environment, the more you get. It does however also have its limitations.

As the Farmers’ Union of Wales pointed out, covered by one of Miles King’s recent blogs, using this as your basis for payments can limit what you can pay. If you have a sector where 55% of income comes from subsidy, paying ‘enough’ through this route can become [politically] problematic. This is particularly an issue for uneconomic farming systems – if there is no income from agriculture, there is no income to forgo – and becomes an environmental issue when some of these systems are needed to secure the environmental benefits that only certain types of agriculture can secure, such as extensive cattle grazing.

The alternative then is to add strings to direct payments. This is the model the European Commission pursued with CAP greening by making 30% of direct payments conditional on complying with certain environmental measures. The temptation of this approach is that it means you can pay what you want, without being inhibited by WTO rules. There are some big ‘ifs’ attached to this though that sour things quite a bit.

First and foremost is the fact that with this approach, the payment has no connection to the action that it is conditional upon. Without this, farming union lobbyists are free to water down the level of ambition associated with these ‘strings’, without jeopardising the level of payment. This is exactly what happened with CAP greening – the budget was secured in February 2013, which gave the European Parliament and Council carte blanche to dilute what farmers had to do for the money, without any negative consequences, before political agreement on the CAP in the summer of 2013.

As CAP-guru Alan Matthews puts it, “Farm groups and status quo-minded member states and MEPs could work to weaken the ambition of the greening proposals without having to worry that this could lead to a further reduction in the CAP budget” (page 178). Matthews here was referring to the fact that budget was ring fenced and secured, but the fact that politicians could do this without worrying about implications for individual farmers was because farmers would get 30% of direct payments, irrespective of how ambitious what they did for the money was.

It’s also limited by the fact that direct payments cannot alter the factors of production, for good reasons given the environmental degradation that was driven by coupled payments. So if you want to support the extensive cattle grazing mentioned above specifically, as opposed to a generic land use that may be environmentally benign at best, or damaging at worst, you can’t use this payment basis to do it, because that would mean specifying a specific type of production.

So if you’re an NGO policy officer (like me), or perhaps more pressingly, a time poor civil servant, this leaves you in a bit of a pickle – how do you pay enough to secure the good things society wants and needs from land, in a way that ensures every pound spent secures a tangible outcome not secured by the market?

To demonstrate value for money and a link between outcomes and expenditure – surely vital if we are to make any sort of case to a Treasury not known for its largesse – then we need to start from a principle that all payments should secure a definite action or outcome. This then leads you toward an approach to payments based on income-foregone and management costs. WTO rules matter, but only up to a point – they are only relevant if another member challenges the payment, and given that the UK is unlikely to match the EU’s generosity to farmers, you could make a cogent argument that a challenge is unlikely.

Crucially within WTO rules, or at least the EU’s current interpretation of them, income-foregone is much more flexible than the FUW may have you believe. For example, as this work for the Land Use Policy Group suggests, you can do things like pay total costs of management, so that all of the costs associated with uneconomic but environmentally beneficial cattle grazing are covered (for instance). Critically, this then allows for payments significantly beyond those in conventional agri-environment schemes, whilst still retaining the link between payment and action or outcome that a policy focused on the provision of public goods will need.

It is issues such as this that need to be tackled as we develop post-Brexit environment and farming policies across the UK. This is just a snapshot into the options available, and the complexity that faces us over the coming years. It is also indicative of how relatively (very) dry policy questions and decisions will have a major impact.

We can’t pretend to have all answers yet, but we are working with others, including farmers, to build towards what we want to see in a future policy to ensure that it delivers for nature, farming and society. Being clear about what the public is paying for, why and how, will be central to this.

Picture credit: CEEweb

This article was originally published on Miles King's blog.