Selecting strategies to reduce the environmental impacts of agricultural production requires choices about who must comply (e.g. all farmers, some subset, agricultural chemical manufacturers, etc.), how their compliance, or performance, will be measured, and how to induce changes in behaviour.
Whom to target?
It seems obvious enough that policies to reduce pollution from agriculture and other non-point and point sources ought to be directed at those who are responsible – the decision-makers who choose what to produce and how to produce it. However, assigning responsibility for non-point pollution loads to individuals is typically not easy. Routine metering of pollutant flows from individual farms is prohibitively expensive and often technically infeasible.
For example, nitrogen fertilizer applied to cropland can have a variety of fates depending on how and when it is applied, weather events during the growing season and other factors. These fates include consumption by plants, leaching through the soil into groundwater, removal in surface runoff, or volatilization into the atmosphere. None of these fates, especially those that involve losses to different environmental media, are easily mea- sured or predicted. Nor can individuals’ contributions be routinely inferred from ambient concentrations in environmental media, because the latter are determined by the joint contributions of many unmeasured sources (both natural and anthropogenic).2
Uncertainty about who is responsible and the degree of responsibility creates significant problems for non-point pollution policy design.3 Regulation of producers who cause little or no problem creates costs without offsetting benefits. Yet failure to target broadly enough diminishes effective- ness and limits opportunities for cost-effective allocations. Fairness is clearly an issue when producers are required to undertake costly activities in the public interest but there is uncertainty about whether the public interest is served at all. Similarly, political support for policies to regulate sources that may cause no actual or apparent environmental damage may be difficult to muster. The fairness and political considerations associated with uncertainty about the responsibility of individuals may help to explain the frequent use of
‘moral suasion’ and ‘government pays’ approaches to agricultural pollution control rather than ‘polluter pays’ approaches (Chapters 3, 5 and 6).
20 R.D. Horan and J.S. Shortle
It is important to note that answers to the ‘whom to target?’ question, as applied to agricultural non-point sources, need not be limited to farmers.
Other plausible answers are manufacturers of chemical inputs and providers of services such as fertilizer and pesticide application. This option is best illustrated by laws regulating the pesticides that chemical companies may offer on the market to farmers and other users. Intensive regulation of a comparatively small number of chemical manufacturers is easier, politically and administratively, than intensive direct regulation of the many house- holds and small businesses that actually cause environmental harm through their activities and use of pesticides.
What to target?
What is it that society wants polluters to do? Here again the answer seems obvious enough. It is to reduce or limit the amount of pollutants that they release into the environment. This suggests that the measure of polluter performance, and the basis for regulatory compliance, ought to be polluting emissions. Not surprisingly, then, economic research on pollution control instruments has established that the economically preferred base for the application of regulatory standards or economic incentives is the flow of emissions from each source into the environment – provided that discharges can be metered with a reasonable degree of accuracy at low cost (e.g. Oates, 1995). As discussed above, this condition is not a characteristic of diffuse, non-point pollution problems in which pollutants move over land in runoff or seep into groundwater rather than being discharged from the end of a pipe.
With pollution flows being for practical purposes unobservable, other constructs must be used to monitor performance and as a basis for the application of policy instruments.4The economics of designing policy instruments for agricultural and other non-point pollution externalities is therefore complicated by the fact that choices must be made between alternative bases as well as between types of regulation or incentive (Griffin and Bromley, 1982; Shortle and Dunn, 1986).
Economically and ecologically desirable candidates will be more or less: (i) corre- lated with environmental conditions, (ii) enforceable and (iii) targetable in time and space (Braden and Segerson, 1993).
With instruments based on metered discharges eliminated from the non- point choice set, perhaps the obvious next choice is emissions proxies (e.g.
estimates of field losses of fertilizer residuals to surface water or groundwater) or other farm-specific environmental performance indicators that are con- structed from farm-specific data.5 In the simplest cases, emissions proxies could be the use of polluting inputs, such fertilizer or pesticide applications by a farmer. More sophisticated indicators aggregate over inputs and other vari- ables. One of the best known examples is the Universal Soil Loss Equation (USLE) developed by Wischmeier and Smith (1987) for predicting gross soil loss from cropland. Another widely used performance indicator is the difference
Environmental Instruments for Agriculture 21
between nutrient inflows and outflows in farm products (National Research Council, 1993; Breembroek et al., 1996). For example, charges for Dutch live- stock producers are to be assessed based on surplus phosphates from manure (Breembroek et al., 1996; Weersink et al., 1998).
Other options for bases are inputs or farming practices that are correlated with pollution flows (e.g. use of polluting inputs such as fertilizers, pesticides, irrigation water; the use of practices such as conservation tillage, integrated pest management). Still another option that has received considerable interest from economists is the ambient concentrationsof pollutants in water resources.
Inputs and emissions proxies are alternative measures of environmental pressures of agricultural production, while ambient environmental condi- tions are an environmental state variable.
What stimulus?
In addition to choices about whom to target and how to measure their perfor- mance, a catalyst is needed to get producers to undertake changes to improve their environmental performance. The least intrusive method is public persua- sion combined with technical assistance to facilitate changes in behaviour. This approach has found extensive use in agriculture. For example, the USDA NRCS Conservation Technical Assistance (CTA) Program has provided technical assistance since 1936. By itself, public persuasion and technical assistance have had limited effects (Chapters 3, 5 and 6). However, technical assistance may be somewhat effective as a component of other programmes, such as the USDA NRCS Environmental Quality Incentives Program (EQIP).
A more direct stimulus is direct regulations (i.e. product, design or environ- mental performance standards) applied to farmers’ choices of inputs and production and pollution control practices. Pesticide registration, which restricts pesticides available to farmers and sets conditions of use, is an example.
Alternatively, farmers’ decisions could be shaped through the use of economic incentives. Major options are taxes or liability for damages to discourage environmentally harmful activities, subsidies to encourage pro-environment behaviours, tradeable permits to ration environmentally harmful activities, and contracts in which environmental authorities purchase specified pro- environmental actions.
The tool kit
Table 2.1 combines the mechanisms with alternative compliance measures discussed above to define a range of instruments for agricultural non-point pollution control. The table is not meant to provide a comprehensive listing of all possible mechanisms that are used in practice or that have been proposed in theory. Instead, it is focused on those types of policy mechanism that have
22 R.D. Horan and J.S. Shortle
Environmental Instruments for Agriculture23 Table 2.1. Pollution control instruments for agriculture.
Compliance measure
Mechanism Inputs/practices Emissions proxies Ambient concentrations
Taxes/subsidies Charges on fertilizer or Charges on modelled nutrient Ambient taxes
pesticide purchases loadings
Charges on manure applications Charges on nutrient applications in excess of crop needs
Cost-sharing or other subsidies
for inputs or practices that reduce Charges on estimated net soil loss pollution
Cropland retirement subsidies
Standards Pesticides registration Restrictions on modelled
nutrient loadings Restrictions on fertilizer application rates
Regulations on nutrient applications Mandatory use of pollution control practices in excess of crop needs
Markets Input trading Estimated emissions trading
Contracts/bonds Land retirement contracts
Contracts involving the adoption of conservation or nutrient management practices
Liability Negligence rules Strict liability/negligence
rules
received significant attention in the economic literature and which are described in this chapter.
There are many examples of product and design standards. Pesticide regis- tration is the principal method for protecting the environment, workers and con- sumers from pesticide hazards in developed countries, and is used increasingly in developing countries (OECD, 1986; Dinham, 1993). Standards governing the amount and timing of manure applications and restrictions on the numbers of farm animals are used to control ammonia, phosphorus and nitrogen pollution from agriculture in The Netherlands (Broussard and Grossman, 1990; Dietz and Hoogervorst, 1991; Leuck, 1993).
Economic incentives applied to inputs and practices are also a dimension of agricultural non-point water pollution control programmes. Australia, Canada, Denmark, Sweden and the United States provide subsidies for adoption of pollution control practices in agriculture and some other sectors. Many of these subsidies come in the form of contracts, under which producers contract with a government agency to implement a negotiated set of practices for a specified time interval in return for payments. Major examples in the US currently include the USDA NRCS EQIP and Conservation Farm Option (CFO) programmes (USDA ERS, 1997). Subsidies are also offered at the extensive margin of production (i.e. to change land use) – for example, the US payments offered for shifting land to activities with lower environmental hazards. The major programme in the US is the Conservation Reserve Program (CRP), which contracts with farmers and pays them to convert land from row crop production to grassed cover or other uses. The total water quality benefits of the CRP when fully implemented have been estimated at nearly $4 billion (1988 dollars) (Ribaudo, 1989). Florida has offered a dairy herd buy-out programme as part of efforts to reduce nutrient pollution of Lake Okeechobee.
Taxes are also used to varying degrees. Typically, input taxes (in agricultural and other contexts) are levied at such low rates that they offer little incentive to reduce input usage (OECD, 1994a). The purpose is more often to generate rev- enue for environmental programmes than to reduce input use (Weersink et al., 1998). For example, Iowa levies taxes above and beyond the usual sales taxes on fertilizers to raise money for conservation programmes, but the rates are not suf- ficient to produce much in the way of environmental impacts (Batie et al., 1989).
Subsidies and regulations are the dominant mechanisms for reducing agricultural pollution. Subsidies are often used to reduce the costs of comply- ing with mandated activities. In such cases, they serve primarily to spread costs and increase the political acceptability of direct regulations. However, there is considerable economic evidence that input-based incentives could be effective in bringing changes in resource allocation. Firms respond to changes in the costs of inputs, increasing the use of those that become relatively cheap, while conserving on those that become relatively expensive (Shumway, 1995).
In the long run, input price responsiveness is even greater, as technologies are developed and adopted to conserve further on more expensive inputs and expand the use of those that are cheaper (Hayami and Ruttan, 1985). Thus
24 R.D. Horan and J.S. Shortle
policy-makers, if they are willing to use taxes or subsidies at levels that will have an impact, can expect results from input-based incentives.
Pollution trading, in which individual sources of pollution are provided with limited rights to pollute and allowed to trade these rights in markets, is drawing significant interest as a means for agricultural non-point pollution control in the US, with a number of pilot programmes under way or on the drawing boards. In most of these programmes, municipal and industrial sources of pollution that are regulated by the US National Pollution Discharge Elimination System (NPDES) are able to avoid costly discharge reductions at their own facilities by paying agricultural sources to reduce their emissions. Liability rules of law have also found application in the US, particularly for managing hazards from pesticides and other harmful chemicals (Wetzstein and Centner, 1992;
Segerson, 1995).
The remainder of this chapter examines issues in designing different instruments, and their economic merits. The focus is on instruments that are enforceable, and that have the sole purpose of reducing agricultural non-point pollution. (Chapter 3 examines voluntary approaches and approaches that explicitly serve multiple objectives.) Our presentation roughly parallels the evolu- tion of the theoretical economic literature on non-point instruments. Growing recognition of the magnitude of agriculture’s contribution to the water pollution problems in the USA and Europe in the 1970s stimulated economic interest in the design of environmental policy instruments for reducing polluting runoff and groundwater contamination from agricultural production. This literature has focused on the three questions (whom to target, what to target, and what stimulus) that are raised above. Initially, researchers looked to the theoretical and empirical literature of environmental economics for guidance. Because this liter- ature highlighted the control of conventional point sources of pollution where emissions are often readily observed, the emphasis there was on the economic merits of alternative types of discharge-based economic incentive (e.g. discharge charges/standards, discharge reduction subsidies, transferable discharge permits). As we noted above, the literature on discharge-based environmental instruments is of limited relevance to the design of pollution control instruments for agriculture (and other non-point sources) because the movement of pollu- tants from farm fields in runoff or through soil into drains or aquifers generally cannot be so measured. With unobservable pollutant flows, other constructs must be used as performance standards and as a basis for the application of policy instruments.
Griffin and Bromley (1982) was the first in a series of three particularly influential articles, the others being Shortle and Dunn (1986) and Segerson (1988), that initiated the development of an economic theory of non-point pol- lution control. Griffin and Bromley and Shortle and Dunn focused on the design of instruments that require measurement of farmers’ choices of inputs or prac- tices, either because the instruments are input based (e.g. fertilizer taxes), or because farm inputs are used to construct an emissions proxy. The sections below begin with instruments of this type, followed by the ambient-based
Environmental Instruments for Agriculture 25
instruments proposed by Segerson (1988), and closely related liability rules, which shift performance monitoring from farms or other enterprises that cause polluting emissions to the resources that are damaged. We then take up point–non-point trading systems and other recent developments.