Counterfactual approach for assessing agri-environmental policy: The case of the Finnish water protection policy

Transcription

1 Paper prepared for the 122 nd EE Semnar "EVIDENCE-SED GRICULTURL ND RURL POLICY MKING: METHODOLOGICL ND EMPIRICL CHLLENGES OF POLICY EVLUTION" ncona, February 17-18, 211 Counterfactual approach for assessng agr-envronmental polcy: The case of the Fnnsh water protecton polcy Lankosk J. 1 and Ollkanen M. 1 1 Department of Economcs and Management, Unversty of Helsnk, Helsnk, Fnland uss.lankosk@helsnk.f Copyrght 211 by Juss Lankosk and Markku Ollkanen. ll rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes.

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3 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng Counterfactual approach for assessng agr-envronmental polcy: The case of the Fnnsh water protecton polcy Lankosk J. and Ollkanen M. bstract Ths paper apples counterfactual approach to assess the mpacts of agr-envronmental programs. Counterfactual analyss evaluates polces answerng questons: what would have happened f...? We develop a theoretcal framework for counterfactual analyss based on the nter-lnkages between the behavour of agents and the response of envronmental systems to the economc decsons. We apply our model to assess the performance of the Fnnsh gr- Envronmental Programme to reduce agrcultural nutrent runoff to the altc Sea. Counterfactual analyss allows us to determne both the unt effectveness of the measures ncluded n the Programme and ts preventve mpact. We demonstrate that the Fnnsh gr- Envronmental Programme does not acheve ts goals, because t fals to antcpate farmers responses to ncentves created by the Common grcultural Polcy and the gr-envronmental Programme tself. The socal cost-beneft analyss of the Program shows negatve net benefts: benefts from reduced nutrent loadng are much lower than support payments. Keywords: envronmental polcy evaluaton, counterfactual analyss, nutrent runoff, the altc Sea JEL classfcaton: Q5, H23, H INTRODUCTION Common agrcultural polcy (CP) of the EU ncludes a possblty for voluntary envronmental protecton programs n agrculture. The programs provde an ncentve payment for compensatng the complance costs and farmers prvate transacton costs. In many countres these voluntary programs ental sgnfcant monetary transfers from tax payers to farmers. Thus, t s mportant to assess the success of these voluntary agr-envronmental programs. s s wellknown, t s a challengng task to assess any program, save a case where envronmental effects are deeply nvolved. One method for assessng envronmental polces s to contrast them wth alternatve, hypothetcal polces or states of affars and thereby reveal the mpacts of polces, that s, to resort counterfactual analyss. Counterfactual analyss belongs to the basc tools for polcy evaluaton n economcs. Counterfactual analyss answers the queston: what would have happened f? Counterfactual analyss bulds on a non-observable case, called counterfactual, aganst whch polces can be evaluated. comparson of the counterfactual wth the actual case sheds lght to the crtcal factors explanng the mpacts of polcy. In ths paper we suggest a formal approach to counterfactual analyss based on behavoural assumptons, that s, the proft maxmzaton hypothess of farmers. The farmers maxmze profts both n the presence and absence of polcy. The choces over the use of nputs and land allocaton between crops can then be lnked to nutrent runoff and other relevant Page 1 of 16

4 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng envronmental process functons to predct the envronmental outcomes of dfferent polces that can then be contrasted to the goals and measured outcomes of agr-envronmental polces. We develop a theoretcal frame and derve the counterfactuals for emprcal analyss from t. We apply our theoretcal frame to agrcultural water protecton polcy whch ams at reducng nutrent runoff from arable lands to the altc Sea. In Fnland, lke n all altc Sea countres, agrculture s the man source of ntrogen and phosphorus loads (6% of the anthropogenc phosphorus and 52% of ntrogen loads) to the Sea (HELCOM 21). Gven that nutrent loads from pont sources have been reduced consderably, pressure to reduce loads from agrculture s hgh and agr-envronmental program tres to cope wth ths challenge. The frst gr- Envronmental Programme was for lthough the program addressed many envronmental ssues (water qualty, ar qualty, bodversty, and landscape), mprovng surface water qualty has been and stll s the hghest prorty also n the subsequent programmes (2-26, ) that have only slghtly fne-tuned the orgnal programme. Fnnsh authortes expected that agr-envronmental program could acheve about 3 4% decrease of phosphorus and ntrogen runoff by 21 (MMM 23). Even more ambtous 5% nutrent runoff reducton targets by 25 were set for agrculture n the Government resoluton as regards surface water protecton targets (YM 2). Despte the ambtous goals and all efforts and support payments, somethng has gone wrong, however. No actual reductons n measured/montored nutrent runoff can be observed and especally ntrogen runoff s reported to have ncreased. Clearly, a theory-guded analyss of the water protecton polcy n agrculture s needed to evaluate the mpacts of the water protecton polcy and to fnd an explanaton for the observed no-progress n actual nutrent loads. To examne the performance of agr-envronmental polcy, we develop theoretcally and employ emprcally two basc counterfactuals. The rest of the paper s structured as follows. Secton 2 provdes our theoretcal framework and secton 3 presents an emprcal framework. Results are presented n secton 4 and concludng secton 5 ends the paper. 2. THE FRMEWORK: COUNTERFCTUL PPROCH Consder an ntroducton of a new agr-envronmental polcy,, startng a perod t = T. Ths ends the prevous polcy regme, whch can be no polcy (free market soluton), or some other polcy denoted by. Now, let x x and x denote the vector of nstruments of no polcy nterventon and polces and, respectvely. For no polcy nterventon, ths nstrument set s naturally equal to zero, x { } nstruments under polcy are a fertlzer applcaton constrant ( l =. To keep the presentaton smple, polcy ), a buffer strp requrement ( m ), the CP area payment (a) and the envronmental support payment per hectare (b), that s, x { l, m, a, b} =. Furthermore, the prevous polcy regme s assumed to consst of drect =. prce support (s) and a requrement for large set-asde areas (E), that s, x { s, E} Page 2 of 16

5 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng The farmers optmze ther agrcultural profts subect to exogenous varables and the polcy nstruments under each polcy regme. Denote the conventonal response functon of crop as y = f ( l ) wth f ( l ) > but f l ( l ) <. Let p be the prce of the crop and c the prce of fertlzer nput, and L be the amount of land allocated to each crop under the three polces. Market parameters alone or together wth the nstruments under polcy regmes and determne the optmal use of nputs and land allocaton (ncludng entry and ext of land n agrcultural sector). We next develop the farmers choces under each polcy regme. Under no polcy nterventon (denoted by supersrcpt ), the profts of a gven parcel allocated to crop are gven by π crop by = p f ( l ) c, and profts from the land area allocated to r = π L. The optmal soluton entals l ( p, c) and L ( p, c, p ), where p refers to prces of the other crops and n = 1 L p, p, c) = ( L, where L refers to overall land n cultvaton n the no-polcy regme. Under the new polcy regme the per parcel profts are gven by [ p f ( l cl ] + a b π = (1 m) ) + subect to l l. t the optmal soluton output prce and fertlzer cost no longer mpact fertlzer ntensty, because the fertlzer applcaton constrant s bndng ( l = l ); also the buffer strp s mandated mandatory fgures, the overall amount of fertlzer appled to each hectare s m = m. Usng these two l = ( 1 m) l. Land allocaton, however, contnues to depend on the relatve proftablty of each crop, and thereby t depends on prces, so that L ( p, c, p, a, b), where a refers to CP compensaton payment and b refers to area-based envronmental support payment. The overall profts are then gven by r = π L wth n L ( p, p, c, a, b) = = 1 L, where L refers to overall land n cultvaton n the polcy regme. Under the prevous polcy the per parcel and total profts for land n cultvaton are gven by π = ( p + s) f ( l ) c and r = π L, respectvely. The optmal fertlzer ntensty s a functon of crop prce, fertlzer prce and prce support, l ( p, s, c) and land allocaton between crops depends on relatve proftablty as follows: L = L p, p, c, s). For the total amount of land n cultvaton, t holds that n =1 L + E = L, where L refers to overall amount of land n cultvaton n the polcy regme (recall E s the mandatory fallow area). The envronmental qualty s a functon of the nput use, the amount of cultvated arable land, and ts allocaton between the crops. Let functon G represent the way the use of nputs n agrculture transform to envronmental qualty, nutrent runoff n our case. Then, drawng on the Page 3 of 16

6 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng above dscusson envronmental qualty can be expressed for our three cases as a functon of respectve optmal choces: G G G n = G l ( p, c) L ( p, p, c) (1) = 1 n = G l = 1 n = G l = 1 L ( p, p, c, a, b) ( p, s, c) L ( p, p, c, s) + εe (2) (3) Recall, our am s to assess the performance of the new agr-envronmental polcy. Let G be the announced envronmental target of the new polcy; n our case reducton n nutrent loads, whle the observed envronmental qualty under ths polcy s G. Naturally, the dfference between the goal and the actually measured nutrent runoff, G G, can be any sgn and due to multple reasons. The challenge of the counterfactual analyss s to explan ths dfference. We can now use the above analyss to formulate our two counterfactuals, whch recall, were the followng. What would have happened to G f the land allocaton between crops and green set-asde would not have changed from polcy regme? Second, what would have happened to G f no voluntary agr-envronmental polcy would have taken place when Fnland oned the EU? Economc mechansms present n (2) and (3) readly suggest how to formalze these counterfactuals (CF): CF 1 n CF1 = G ( l L ( p, p, c, s) + ε) = 1 n CF 2 CF2 = G l ( p, c) L ( p, p, c, a, b) = 1 (4) (5) Takng the dfference G CF1 and G CF2 allows us evaluate the relatve role of nput use ntenstes and land use changes of the agr-envronmental polcy regme. Counterfactual CF 1 allows us to defne the unt effectveness of the nstruments n polcy regme and counterfactual 2 CF n turn defnes the preventve mpact of the polcy on nutrent loads. In the emprcal part we also consder the role of some fne tunngs of polcy regme on envronmental mpacts; they are our mnor counterfactuals that are developed n a smlar fashon as (4) and (5). Page 4 of 16

7 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng 3. EMPIRICL FRMEWORK 3.1. Crop yeld response to fertlzer Per hectare crop yeld s modelled as a functon of ntrogen fertlzaton. y assumpton, farmers use a compound fertlzer that contans ntrogen and phosphorus n fxed proportons and n the absence of constrants choose the applcaton rate of fertlzer on the bass of yeld response to ntrogen applcaton. The crop yeld functon for sprng wheat, barley, and oats s assumed to follow the Mtscherlch form, y ν N = µ ( 1 σ e ) (6) where y s yeld per hectare, N s ntrogen use per hectare, and µ, σ and ν are parameters. These parameters are estmated by äckman et al. (1997) on the bass of Fnnsh feld experments. The yeld functon for rape, slage and hay s assumed to have the quadratc form y = + χ N + γ N (7) 2 where y s yeld per hectare, N s ntrogen use per hectare, and, χ and γ are parameters. Parameters for rape have been estmated by Petola et al. (1999) and parameters for slage and dry hay are based on Lehtonen (21) Optmal fertlzer use Farmer s short-run restrcted profts π are gven by equaton (8a) for sprng wheat, barley, and oats and by equaton (8b) for rape, slage and hay. = p (1 e ) c N ν N π µ σ (8a) 2 π = p ( + χ N + γ N ) c N (8b) Where π s farmers per hectare profts, p s output prce for a gven crop () and c s ntrogen prce for a gven combned fertlzer (NPK). Optmal ntrogen applcaton level can be solved by takng frst-order condtons wth respect to ntrogen applcaton N and settng them to equal zero and then solvng for optmal N Nutrent runoff The modelng of nutrent runoff follows Lankosk et al. (26) who modeled ntrogen and phosphorus runoff on the bass of Fnnsh data. In the case of phosphorus runoff two forms are dstngushed: () dssolved reactve phosphorus (DRP) and () partculate phosphorus (PP). s already noted, farmers use a compound fertlzer (NPK) and because these man nutrents are Page 5 of 16

8 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng n fxed proportons, ntrogen fertlzer ntensty determnes also the amount of phosphorus used. Part of ths phosphorus s taken up by the crop, whle the rest accumulates and bulds up sol P. The concentraton of dssolved phosphorus n surface runoff s found to depend lnearly on the easly soluble sol P, and the runoff of partculate phosphorus depends on the rate of sol eroson and the P content of eroded sol materal. The followng ntrogen runoff functon (Smmelsgaard 1991) s employed, Z N = φ exp( b + bn ), (9) where Z N = ntrogen runoff at fertlzer ntensty level N, kg/ha, φ = ntrogen runoff at average ntrogen use, b < and b > are constants and N = ntrogen fertlzaton n relaton to the normal fertlzer ntensty for the crop,.5 N 1.5. Ths runoff functon represents ntrogen runoff generated by a ntrogen applcaton rate of N per hectare and the parameter φ reflects dfferences n crops. In the case of phosphorus, both dssolved and partculate runoff s modeled. Drawng on Fnnsh experments (e.g. Saarela et al. 1995) t s assumed that 1 kg ncrease n sol phosphorus reserve ncreases the sol P status (.e., ammonum acetate-extractable P) by.1 mg/l sol. Uustalo and Jansson (22) estmated the followng lnear equaton between sol P and the concentraton of dssolved phosphorus (DRP) n runoff: water soluble P n runoff (mg/l) =.21*sol_P (mg/l sol).15 (mg/l). The surface runoff of potentally boavalable partculate phosphorus s approxmated from the rate of sol loss and the concentraton of potentally boavalable phosphorus n eroded sol materal as follows: potentally boavalable partculate phosphorus PP (mg/kg eroded sol) = 25 * ln [sol_p (mg/l sol)]-15 (Uustalo 24). Thus, the parametrc descrpton of surface phosphorus runoff s gven by Z DRP ϖ [ ψ (.21( Φ +.1* P ).15]/1 (1a) = 6 Z PP = [ ζ {25 ln( Φ +.1* P ) 15}]*1 (1b) where ψ s runoff volume (mm), Φ s sol_p (common to all crops) and ζ s eroson kg/ha, and P s the phosphorus applcaton rate. s n the case of ntrogen, the crop, sol textural class and feld slope based dfferences n the runoff of dssolved and the potentally boavalable partculate phosphorus are captured by parameters ϖ and, respectvely. Sol_ P s fxed at 12.6 mg/l n 1995, 11.6 mg/l n 21 and 1.6 mg/l n 27 on the bass of the average for Fnnsh sol test samples taken on those respectve years (MMM 23 and Myyrä et al. 25). fashon as (4) and (5). Page 6 of 16

9 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng 4. DT ND NUTRIENT RUNOFF UNDER FINNISH GRI-ENVIRONMENTL PROGRMME Followng the theory, we develop the emprcal counterparts for equatons (4) and (5). Data s needed on land allocaton, fertlzer applcaton ntenstes and nutrent runoff. Data on the development of actual land-use and ts allocaton between the man crops s gven by farm statcstcs; for our counterfactuals the actual land allocaton represents revealed proft maxmzaton by farmers. nother gven data are fertlzer restrctons of the agr-envronmental program durng the years Usng annual crop and fertlzer prces we solve prvately optmal fertlzer applcaton level n the case where no agr-envronmental program would have been mplemented. Smlarly nutrent runoff (both ntrogen and phosphorus) s estmated by usng ths modelng approach Data on land use and fertlzer applcaton Table 1 shows the land use between the man crops n 1994 (ust before the begnnng of current polcy) and durng the agr-envronmental program. We present the land area of those crops that are external to the analyss under the land use class Other. It ncludes crops, such as sugar beet, potatoes, and peas. Table 1. Land use (ha) n 1994, 1995, 21, and 27 (Yearbook of Farm Statstcs). Land use Wheat arley Oats Rape Hay Slage Fallow Other Total Table 1 shows that durng the agr-envronmental program perods ( ) the total cultvated land ncreased by 2.1% from 1995 to 21 and 5.1% from 1995 to 27 n Fnland. lso land allocaton between dfferent crops has changed much. Land allocaton to wheat cultvaton has ncreased from 4.8% to 8.6% between 1995 and 27. The share of barley, oats and rape has remaned qute stable whle land allocated to hay has decreased from 15.7% to 5.3% and land allocated to slage ncreased from 16.4% to 22.6%. Thus, there has been a clear shft n land use towards more fertlzer ntensve crops wheat and slage. Table 2 presents the actual fertlzaton constrants and the fertlzer ntensty under the hypothetcal case, n whch farmers optmze on the bass of market prces only and do not partcpate n the agr-envronmental programme (labeled as N prvate ). We do not dstngush between manure and chemcal fertlzer applcaton. Ntrogen appled can be a combnaton manure and chemcal ntrogen or from chemcal ntrogen only. Page 7 of 16

10 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng Table 2. Optmal ntrogen use ntensty and ntrogen applcaton constrant n agrenvronmental program n 1995, 21, and 27. Crop N prvate N constrant N prvate N constrant N prvate Wheat arley Oats Rape Slage Hay N constrant Table 2 shows that for most crops the ntrogen applcaton constrant has been bndng throughout program years. For wheat, rape and hay the economcally optmal applcaton rate has been clearly hgher than the constrant, whle n the case of oats farmers economc optmum and ntrogen use constrant are suffcently close to each other Estmatng nutrent runoff under the agr-envronmental programme We estmate the average per hectare ntrogen and phosphorus runoff by employng equatons (9) (1b) for each crop. Total nutrent runoff for each crop s obtaned through multplyng the average runoff by the total land area allocated to each crop. Table 3. Ntrogen, dssolved phosphorus (DRP) and partculate phosphorus (PP) runoff, kg/ha, under constraned fertlzer use ntensty n 1995, 21, and 27. Crop N DRP PP N DRP PP N DRP PP Wheat arley Oats Rape Slage Hay Fallow Other The most alarmng feature n Table 3 s that due to the relaxaton of the ntrogen applcaton constrants, the last phase of the program wtnesses the hghest per hectare ntrogen runoff. In contrast to ths per hectare runoff of partculate and dssolved phosphorus has dmnshed steadly over tme due to the decrease n sol phosphorus. Hence, the total load of phosphorus per hectare has decreased. Table 4 combnes the observed land allocaton between the crops and the estmated per hectare average nutrent runoff to produce total ntrogen and phosphorus runoff n tons n 1995, Page 8 of 16

11 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng 21, and 27 under the Fnnsh gr-envronmental Programme. In terms of our theory, Table 4 corresponds to equaton (2). Table 4. Total ntrogen and phosphorus runoff (tons) under constraned fertlzer use n 1995, 21, and Crop N P N P N P Wheat arley Oats Rape Slage Hay Fallow Other Total The tme path of the ntrogen load shows that despte all efforts, ntrogen runoff has ncreased durng all three phases of the program. Recall that the per hectare ntrogen runoff was the same n 1995 and 21 for all crops wth one excepton. Therefore, t s the shft of arable land to more fertlzer ntensve crops, such as wheat and slage that ncreased ntrogen runoff durng the second phase of the agr-envronmental program. Ths tendency s re-enforced by the relaxed ntrogen constrant durng the thrd phase. The development of phosphorus runoff follows a dfferent path snce the gradual decrease of sol phosphorus content decreases phosphorus runoff n the second and thrd phase of the program. Thus, nutrent loadng evolves to opposte drectons; the reason s that phosphorus applcaton s roughly constant across crops, whle ntrogen applcaton vares consderably between crops. We can clearly conclude that the Fnnsh gr-envronmental Programme has faled to reduce ntrogen loadng to nland waters and the altc Sea. 5. THE IMPCTS OF THE FINNISH GRI-ENVIRONMENTL PROGRMME ON NUTRIENT RUNOFF: COUNTERFCTUL PPROCH We now turn to the counterfactual analyss. We frst assess the effectveness of the key polcy nstruments, fertlzer applcaton constrants and mandatory buffer strps, n reducng nutrent runoff. Ths can be made by solatng the mpacts of these ntensve margn nstruments from changes takng place n the extensve margn that s land allocaton, as equaton (4) suggest. Ths helps us to answer the queston whether the key nstruments have been effectve or not. We follow then equaton (5) to trace out how much the agr-envronmental program has potentally offset nutrent runoff relatve to the non-regulated market-based development. Page 9 of 16

12 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng 5.1. The effectveness of nstruments targetng nutrent runoff In Table 5 we examne what would have happened to nutrent loads f agrcultural land use would not have changed over the years but would have stayed as t was ether n 1994 or Takng the dfference between ths and the actual loads under the current polcy regme, whch s called the aselne ndcates the mportance of controllng both entry-ext (total amount of arable land) and extensve (land allocaton) margns n addton to ntensve margn (fertlzer use ntensty and buffer strps). Table 5. Total ntrogen and phosphorus runoff (tons) under constraned fertlzer use n aselne and n the case of total cultvated land and ts allocaton fxed to correspond to that of 1994 or Land allocaton N P N P N P aselne Fxed Fxed Table 5 reveals that under ether 1995 or 1994 land allocaton total ntrogen load would have ncreased much less and phosphorus load decrease much more than they actually dd. Under 1995 land allocaton, decrease n phosphorus runoff by 27 would have been 223 tons and under 1994 land allocaton 218 tons, makng 11.% and 1.8% reducton of nutrent loads. Gven that the phosphorus fertlzaton lmt has been the same over all three perods, these fgures ndcate the true mpact of phosphorus lmts on loads that s purfed from the changes n land allocaton. Due to changes n land allocaton, the actual decrease n phosphorus loads was 53 tons only, representng 2.6% reducton. The dfference of these two fgures, tons, represents smply the ncrease n total phosphorus load due to the ncreased land area n cultvaton. Durng the years ntrogen loads would have ncreased by 4668 tons (14.7%) under 1995 land allocaton and by 3859 tons (13.3%) under 1994 land allocaton. Contrast ths to the actual ncrease n ntrogen loads that was tons (36.9%). The ncrease n actual loads s explaned by two factors: ntrogen fertlzaton constrants were relaxed n the thrd programme perod (year 27); and the amount of cultvated land has ncreased and more land s allocated to more ntrogen ntensve crops. The relaxed ntrogen fertlzaton constrants ncreased ntrogen loads by 5753 tons n the baselne, representng 48.9% of the total load ncrease, relatve to a stuaton where constrants would not have been relaxed. Consequently we can conclude that the mpact of the ncrease n the amount of cultvated land and land allocaton change towards more ntrogen ntensve crops was 69 tons, representng 51.1% of the load ncrease. Table 5 reveals how mportant role the total amount of land n cultvaton (entry-ext margn) and land allocaton between the crops (extensve margn) play n determnng total nutrent loadng from agrculture. Page 1 of 16

13 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng 5.2. Preventve mpact of the Fnnsh gr-envronmental Programme Let us ask next what would have happened wthout the program when the farmers are allowed to choose ther fertlzer applcaton rates freely on the bass of crop and fertlzer prces. Ths s our second counterfactual that s defned by equaton (5). To answer the queston, one must solve nutrent runoff per hectare under market soluton and lnk ths to land allocaton between the crops. Table 6 provdes nformaton on nutrent loads under both cases. The dfference between the two fgures ndcates how much the Fnnsh gr-envronmental Programme has prevented nutrents loads by ts presence n each program phase. Table 6. Total ntrogen and phosphorus runoff (tons) under constraned and free prvate fertlzer use n 1995, 21, and N P N P N P Constrant Prvate Dfference s Table 6 reveals, the preventve effect of the Fnnsh gr-envronmental Programme has been on average 768 tons of ntrogen and 14 tons of phosphorus. Combnng Table 6 wth Table 5 allows us to make the followng concluson. The Programme has been somewhat successful n the ntensve margn but ths success has been outweghted by a falure to control both extensve margn (land allocaton) as well as entry-ext margn (total amount of cultvated land). Consequently, ntrogen loads have ncreased and phosphorus loads have decreased less than expected. 6. COST-ENEFIT NLYSIS OF WTER PROTECTION POLICY IN THE FINNISH GRI- ENVIRONMENTL PROGRMME We end the analyss by askng whether the benefts from water qualty polcy n the Fnnsh agr-envronmental programme exceed the costs, or not. Costs of the polcy s the overall amount of annual support payments to farmers targeted to water qualty, whle the benefts are gven by the reduced nutrent runoff damages. Reductons n nutrent loads reduce damages both n nland waters and n the altc Sea. s the man goal s to mprove the state of the altc Sea, we express phosphorus loads as ntrogen equvalent usng the Redfeld rato 7.2. The Redfeld rato descrbes the optmum N/P rato for the growth of phytoplankton, relevant for algal growth n sea waters. The margnal damage from ntrogen equvalents s assumed constant, so that the damage functon s gven by d Z ) = R ( N + 7.2P ), (11) ( n Page 11 of 16

14 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng where R n s the constant socal margnal damage. Drawng on Gren (21), the wllngness to pay for nutrent load reducton n the altc Sea s set to be R n = 6.7/kg of N equvalent. Hence, ths estmate provdes socal value of reductons n nutrent runoff. s regards socal costs of nutrent runoff reducton we use the budget allocated to water protecton measures n the agr-envronmental program as a prmary measure of socal costs of nutrent runoff reducton. lso, we report a more developed socal net beneft estmate by ncludng the polcy related transacton costs (PRTCs) to the socal costs. Our estmate of polcy related transacton costs of agr-envronmental support s based on Ollkanen et al. (28) who estmated that the PRTCs of asc measure support (ncludng fertlzer use constrants and buffer strps) are 1.5% of the total transfer. Fnally, the most comprehensve socal net-beneft estmate takes also nto account the so-called margnal cost of taxaton (margnal cost of publc funds) as a measure of economc welfare losses due to rasng government revenue wth dstortonary taxes (such as labor taxes). We employ 1% of the total transfer as our estmate of margnal cost of taxaton. Fnally, for the purposes of comparson we provde a hypothetcal case assumng that only complance costs were compensated to farmer. crude estmaton of complance costs of mplementng the program s measured as forgone profts when a farmer comples wth fertlzer use constrants and buffer strp establshment. Thus, profts forgone show the mnmum level requred for compensaton payment. Table 7 provdes the three estmates of the socal net benefts for the Fnnsh gr- Envronmental Scheme and the net benefts from hypothetcal case where only complance costs are compensated, that s there s no overcompensaton. Table 7. Socal net-benefts of agr-envronmental program Socal net benefts of the agr-envronmental program N-eq reducton, tons Program outlays, mllon Value of damage reducton, mllon Net beneft, mllon Transacton costs (TC), mllon Net beneft - TCs, mllon Net beneft TCs - MCT, mllon Socal net benefts f only complance costs were compensated N-eq reducton, tons Proft forgone, mllon Net benefts, mllon Table 7 reveals that the socal net beneft of the programme s negatve n every program perod under all three net beneft measures. Ths clearly refers to overcompensaton of farmers complance costs, that s part of the envronmental support payments seem to ental farm ncome support. Ths can also be verfed n the lower part of Table 7, where the drect complance costs Page 12 of 16

15 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng (.e. short-run proft forgone) are estmated. The estmated complance costs vary over tme as a functon of crop prces and cultvaton costs. These drect costs are qute low relatve to the envronmental payments, because they underestmate the long-run cost burden on farmers. However, even f these costs were doubled or trpled they would stll reman relatvely small n comparson to program outlays. The lower part of Table 7 also llustrates what the benefts would have been f the Progamme compensated only complance costs. In ths case entry of cultvated land due to Progamme would have been zero and the reducton of ntrogen equvalents more than double. Ths would have made the socal net benefts of the program postve wth a wde margn of 3 mllon euros. 7. CONCLUDING REMRKS We developed a theoretcal framework usng the nterlnkages between the behavour of agents and the response of envronmental systems to the economc decsons. We appled our model to agrcultural water protecton polcy of the Fnnsh gr-envronmental Programme, whch ams at reducng nutrent runoff from arable lands to the altc Sea. Counterfactual analyss allowed us to examne both the unt effectveness of the measures ncluded n the Programme and ts preventve mpact. We fnd that the Fnnsh agr-envronmental programme has faled to acheve ts goals: ntrogen loads have ncreased and phosphorus loads have decreased only slghtly. Our counterfactuals help to trace out the mechansms leadng to ths falure. Ths s not to say that the Fnnsh gr-envronmental Programme would have faled entrely. We demonstrated that the loads of both nutrents would have been much hgher f no polces would have been mplemented. The socal cost-beneft analyss of the program showed, nevertheless, strongly negatve net benefts. Thus, there s a lot of scope for mprovng the agr-envromental water protecton polces. CKNOWLEDGMENT Ths paper s a part of the proect Cost-effcent nstruments for the Protecton of the altc Sea funded by the Mnstry of the Envronment and Mnstry of grculture and Forestry. Fundng s gratefully acknowledged. Ollkanen also acknowledges fundng from Yrö Jahnsson Foundaton. REFERENCES äckman, S.T., Vermeulen, S. and Taavtsanen, V.-M. (1997). Long-term fertlzer feld trals: comparson of three mathematcal response models. grcultural and Food Scence n Fnland 6: Gren, I-M., 21. Internatonal versus natonal acton aganst polluton at the altc Sea. Envronmental and Resource Economcs 2, HELCOM (21). tlas of the altc Sea. Helsnk Commsson, Helsnk, Fnland. Lankosk, J., Ollkanen M. and Uustalo, P. (26). No-tll technology: benefts to farmers and the envronment? Theoretcal analyss and applcaton to Fnnsh agrculture. European Revew of grcultural Economcs 33: Page 13 of 16

16 ncona nd EE Semnar "Evdence-ased grcultural and Rural Polcy Makng Lehtonen, H. (21). Prncples, structure and applcaton of dynamc regonal sector model of Fnnsh agrculture. PhD thess, Systems nalyss Laboratory, Helsnk Unversty of Technology. grfood Research Fnland, Economc Research (MTTL). Publ p. MMM (23). Horsontaalnen maaseudun kehttämsohelma. EU:n yhtesen maatalouspoltkan ltännästomenpteet. Manner-Suom. Helsnk. 229 s. Myyrä, S. Ketola, E., Yl-Halla, M. and Petola, K. (25). Land mprovements under land Tenure nsecurty: the case of ph and phosphate n Fnland. Land Economcs 81: Ollkanen, M., Lankosk, J. and Nuutnen, S. (28). Polcy-related transacton costs of agrcultural polces n Fnland. grcultural and Food Scence 17: Petola, L., Tann, R. & Elonen, P. (1999). Responses of yeld and N use of sprng sown crops to N fertlzaton, wth specal reference to the use of plant growth regulators. grcultural and Food Scence n Fnland 8: Puustnen M, E. Turtola, M. Kukkonen, J. Koskaho, J. Lnama, R. Nnoa, S. Tattar (21). VIHM a tool for allocaton of measures to control eroson and nutrent loadng from Fnnsh agrcultural catchments. grculture, Ecosystems and Envronment 138: Saarela, I., Järv,., Hakkola, H., and Rnne, K. (1995). Fosforlannotuksen porraskokeet Vuosttan annetun fosformäärän vakutus maan vlavuuteen a peltokasven satoon monvuotsssa kenttäkokessa. In Englsh: Phosphorus fertlzer trals, : effects of the rate of annual phosphorus applcaton on sol fertlty and yelds of feld crops n long-term feld experments). Maatalouden tutkmuskeskus, Tedote 16/95. Smmelsgaard, S. (1991). Estmaton of ntrogen leakage functons Ntrogen leakage as a functon of ntrogen applcatons for dfferent crops on sand and clay sols. In: Rude, S. (ed.). Ntrogen fertlzers n Dansh grculture - present and future applcaton and leachng, Report 62, Insttute of grcultural Economcs, Copenhagen, (n Dansh: Kvaelstofgödnng landbruget - behov og udvaskng nu og I fremtden). Uustalo, R. (24). Potental boavalablty of partcular phosphorus n runoff from arable clayey sols. grfood Research Reports 53, Doctoral Dssertaton, MTT grfood Research Fnland. Jokonen: MTT grfood Research Fnland. Uustalo, R. and Jansson, H. (22). Dssolved reactve phosphorus n runoff assessed by sol extracton wth an acetate buffer. grcultural and Food Scence n Fnland 11: Vehkasalo, V. (1999). Ympärstötuen yhteskunnallnen kannattavuus. In: Maatalouden ympärstöohelma :n taloudellnen analyys. grcultural Economcs Research Instute, Publcatons 9: Ympärstömnsterö (2). Vesen suoelun tomenpdeohelma vuoteen 25. Suomen ympärstö 42. Helsnk. 47 s. Page 14 of 16