This study was mandated by the Joint Working Party on Agriculture and the Environment to examine the links, using a quantitative approach, between various stylised agricultural policies and environmental outcomes. The study, which draws some general observations for policies, is based on analysis and data on four countries with different policy and agri-environmental characteristics: Finland (environmental regulations, payments and taxes in a crop farm); Japan (nutrient management in a rice/crop farm); Switzerland (nutrient management in a mixed dairy/crop farm); and the United States (conservation auctions in a corn/soy farm).

Improving the environmental performance of agriculture is a high policy priority in OECD countries. But determining the environmental impact of agricultural policies is complicated because specific policy measures do not take place in isolation, but within a broad and evolving socio-economic and technological context. Quantitative analysis using models is not designed to exactly replicate the real world but can provide guidance on the expected environmental outcomes, which could be particularly useful in assessing the relative impacts of different policies. This can assist policy makers to better understand the linkages between policy instruments and environmental impacts, and the trade-offs or synergies involved, and therefore aid policy makers in the design and implementation of cost-effective policies.

Agriculture has been subject to considerable public intervention over the past halfcentury, perhaps more than any other economic sector (Robinson, 1989; Gardner, 1990). The provision of public support in the form of guaranteed output prices, input subsidies, deficiency payments, crop area payments, or disaster relief has encouraged and facilitated investment by farmers in production capacity expansion. While this has made it possible to achieve, inter alia, national production objectives, it has also been accompanied by more intensive soil tillage, increased reliance on agrochemicals, and expansion on marginal cropland. Given its associated effects upon the quality of soil, water and wildlife habitat, various authors have implicated agricultural policy as a contributing cause of environmental degradation (Libby, 1985; Pierce, 1993; OECD, 1989; Lewandrowski et al., 1997). Agricultural policies may also have positive effects on environment – for example, agriculture-related semi-natural habitats and open landscape, flood and drought control.

This chapter begins with a brief overview of different approaches to quantifying the impact of agri-environmental policies. This is followed by a description of the general framework of SAPIM. However, each SAPIM application presented in Chapters 4 to 7 adopts an application-specific analytical and theoretical framework.

A brief literature review is a useful starting point to putting into context the agri-environmental analysis later presented in this document. Thus, the purpose of this literature review is not to provide an exhaustive review of previous literature but rather to illustrate various methodologies used to analyse the environmental effects of agricultural policies and main results obtained in these studies. The review is organised according to the following environmental issues: soil erosion, greenhouse gas emissions, pesticides, nutrient-related water quality, livestock manure-related emissions and policy instruments controlling these emissions, and biodiversity. This is followed by a short section on the role of broad-ranging policies and multiple environmental effects.

This case study examines the formulation of agri-environmental policies aimed at multiple environmental outputs in the presence of spatial heterogeneity. A theoretical framework is developed that establishes socially optimal joint provision of agricultural commodities and environmental goods and services (specifically, water quality and biodiversity) as a benchmark. As regards spatial heterogeneity the focus is on differential land productivity that leads to differing fertilizer intensities and differing nutrient runoff. Moreover, biodiversity benefits are dependent on land allocation/use choices between different crops as well as between agricultural land and other land uses, such as forestry.

This chapter develops a dairy farm model which is designed to match the general approach of SAPIM. In the dairy model, the representative farmer maximises revenue from dairy production subject to manure policies. Given the orientation towards policy analysis, the complexities of milk production are described in a simplified way using a concave milk response function with two variable inputs. Dairy production is linked to land use decisions, because the farm always has an opportunity to produce either feed for livestock or crop for sale, or both. Manure emerges as a side-product in the dairy production and can be used as a fertilizer input in the crop production.

This case study focuses on the economic and environmental performance of conservation auctions vs traditional agri-environmental policy measures in the US. The economic and environmental effects are, however, not aggregated in this case study and no social benefit function is computed. The three alternative land-use types analysed in this application are: land retirement for environmental purposes, such as partial field buffer strips, and two alternative tillage methods to produce a cultivated crop; no-till and conventional mouldboard tillage.

This case study investigates the optimal land-use allocation and nitrogen application under a representative Japanese farm that consists of a rice paddy field, upland field and land abandonment. Rice paddy fields, which are the typical land-use type in Asian monsoon conditions, are analysed in this study. Conducting a case study using Japanese data by incorporating characteristics of paddy field cultivation into the SAPIM framework provides interesting extension to the SAPIM studies.

Policy analysis, by testing the impact of different possible states of the world, provides insight into the impacts of different government instruments. These have been discussed in the various SAPIM case studies, and in the comparative analysis chapter. This chapter considers how the validity of these results can be assessed through sensitivity analysis.

This chapter provides an overview of the main results obtained across the case studies for Finland, Switzerland, United States and Japan. In the previous chapters, the importance of the policy environment specific to each case study was emphasised. In particular, within each case study, the role of the “policy package” is crucial, as it defines the context, and therefore the assumptions that must be applied in order to have a realistic representation of the impact of agri-environmental policies. For example, the crop yield response to nitrogen application is location specific, as are the assumptions about exogenous prices for outputs and inputs.

In this report, the conceptual and quantitative linkages between agricultural policies and environmental impacts have been analysed using the Stylised Agri-environmental Policy Impact Model. Developed by the OECD Secretariat, SAPIM was used to analyse the policy-environmental linkages in the cases of Finland, Japan, Switzerland and the United States. Overall, these cases cover a broad range of policy instruments, agricultural situations and environmental conditions.