Regulating negative environmental externalities of agriculture

1
Regulating negative environmental externalities
of agriculture

• Lecture 20
• Economics of Food Markets
• Alan Matthews

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Key issues

• treatment of adverse environmental impacts as
  negative externalities
• ambiguity of the 'polluter pays' principle
• relative advantages and disadvantages of
  alternative policies to address negative
  externalities
• case studies of the EU Nitrates Directive and
  greenhouse gas emissions from agriculture

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Reading

• Surveys (Scott, Ribaudo et al)
• Policy material on implementing the Nitrates
  Directive

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Environmental damage as an externality
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Polluter pays principle

• In the case of negative environmental impacts,
  there is now general endorsement of the Polluter
  Pays Principle (PPP) which has been adopted by
  all OECD countries.
• However, the question of what is 'pollution'
  whose avoidance costs should be borne by
  producers and how to define 'environnmental
  benefits' for which producers should be
  compensated is a social construct which depends
  entirely on the distribution of property rights
  in the environment in any society.

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Who should have the property right?

• the preservation of the tropical rain forests as
  a CO2 sink - should Brazil be required to protect
  its forests, or should the West be required to
  compensate Brazil for doing so?
• public access to farmland for recreational
  purposes - should farmers be compensated for
  giving rights of way on their land, or is this a
  public entitlement?
• wetland preservation - should farmers be
  prevented from draining important wetlands on
  their property, or should they be compensated for
  foregoing their right to improve their land in
  this way?
• traditional farm buildings - should farmers be
  required to preserve farm buildings of heritage
  interest, or should the public compensate farmers
  for so doing?
• Farmers are asked to improve the housing of their
  animals by giving them more space in response to
  public concerns about animal welfare - should
  they be compensated by the public or not?

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Regulating environmental bads by assigning
property rights

• Implications of zero liability and full liability
  rules
• - either lead to socially optimal output level,
  but distribution of income very different

The Coase Theorem
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Difficulties in implementing the Coase solution

• transactions costs involved in negotiating
  solutions would be high where more than two
  parties were involved, and in practice it may be
  difficult to identify who all the affected
  parties are
• the optimal solution assumes that there is full
  information about the environmental implications
  of different activities which is unlikely
• often property rights are not divisible (e.g.
  landscape amenity values) implying that
  individual market transactions do not work and
  the free rider problem makes collective action to
  pay compensation difficult.

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Fiscal instruments
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Drawbacks of fiscal instruments to tackle
nonpoint agricultural pollution

• Agricultural pollution is not of the 'point' or
  'end-of-pipe' variety which allows emissions to
  be precisely measured. This makes the use of an
  emissions-based tax infeasible.
• Taxing an input rather than pollution itself can
  lower the costs of tax collection, monitoring and
  enforcement although it is not necessarily fair.
• The effectiveness of taxation in controlling
  pollution can be limited because of low price
  elasticies of input demand.
• Scott (1997) argues that, even before considering
  taxation, the removal of fiscal privileges to
  polluting inputs should be undertaken.
• Alternatively, subsidies may be paid to farmers
  to encourage them to avoid pollution

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Emissions trading schemes
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Regulatory approaches

• Non-market based approaches are of two types
• performance standards. These are regulations
  based on measuring the observable outcome of the
  polluter's behaviour, such as limits on the
  chemical residues in water effluent from a
  factory or power station. Such emission-based
  standards are used for point sources of pollution
  but are rarely practical in agricultural
  situations because the pollution contributions of
  individual farms are virtually unobservable.
• design standards. These are regulations which
  govern the way farmers produce food and manage
  their land. For example, to reduce nutrient
  runoff, regulations could be imposed on waste
  management practices and on the level, timing and
  form of nutrient applications to cropland.
• May lead to higher total costs of pollution
  abatement

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Case studies

• Nitrates Directive 1991 to control water
  pollution from agricultural sources
• Tackling greenhouse gas emissions from livestock
  production