Public Goods Emerging as a Central Rationale for Future CAP Support

The reform of the Common Agricultural Policy (CAP) has gained momentum over the last few months, helped along by Agriculture Commisioner Dacian Ciolo?’ large public consultation initiative. As we move closer to the much anticipated release of the Commission’s Communication on a post 2013 CAP expected in November, the issues and priorities surrounding the role and rationale of a future policy are emerging. Recent rhetoric at the Commissioner’s conference on 20 July, which assembled key stakeholders for a discussion surrounding the consultation responses, suggests that this reform could mark a significant shift in policy – particularly towards the use of public money to support to provision of public goods. In this briefing we examine the concept of public goods and analyse how it is currently being used in the debate. A clarification of the term is given and further insight is provided on how the principle may be applied to the CAP, and the tools required to deliver public goods from agriculture to society are assessed. As the public goods agenda rapidly gains ground as an economic justification for future support in the reform debate, it is increasingly imperative that all stakeholders have the same understanding of this important concept. This briefing offers a concise and thoughtful overview of the topic, from the authors of DG Agriculture’s Provision of public goods through agriculture in the EU.

Download the September 2010 CAP2020 Policy Briefing (PDF version) here, or read it below.

The process of reforming the Common Agricultural Policy (CAP) is now seriously underway. Having gathered momentum during Agriculture Commissioner Dacian Ciolos’ public consultation initiative, some of the emerging priorities and issues surrounding the role and rationale of a post-2013 policy were aired and debated at a Commission conference held on 19-20 July attended by almost 600 stakeholders. Despite calls from some quarters to maintain the status quo, this no longer seems likely to be an option. Commissioner Ciolos has already stated that direct payments in a future CAP “cannot be based on historic production",and increasingly it is looking as if this CAP reform could mark a significant shift in policy. In his closing speech at the conference Mr Ciolos stressed that, ‘European agriculture needs to be genuinely green. But Green Europe must be ambitious as far as agriculture is concerned. We must respect the balance of nature but, within this framework, we must also aim for economic performance’. With this in mind, he stated that the Commission will be presenting options for a CAP that supports a “Europe close to its farmers and for farmers aware of the expectations of European citizens” in its Communication on the future CAP expected this November.

This reform has been prompted by a combination of political and economic pressures and drivers affecting the agricultural sector and the overall EU Budget. The EU2020 strategy, formally adopted by the European Council in June 2010, setting out the priorities for Europe over the coming decade, in conjunction with the ongoing EU Budget Review and the imminent discussions on the next Financial Perspective, are feeding a much wider debate about what the future purpose and priorities of EU spending should be. The rationale for the CAP post 2013 has therefore been subject to a greater degree of scrutiny than might have normally been the case.

As the logic behind the last reform fades from memory and Member States enter into times of austerity, policy makers and stakeholders have been left searching for a rationale for the large sums spent each year on the CAP. One such rationale centres on the provision of public goods, and there appears to be an emerging consensus forming around this concept as a clear and economically justifiable rationale for the provision of support through the CAP. Indeed few alternative justifications have been presented to date.

This paper explores the public goods agenda in more detail, while demonstrating how it may be translated into practice. First it discusses which public goods are associated with agriculture, before exploring how these have entered the reform debate. Following this the paper reflects on how the concept can be put into practice and questions what policy tools are required for the task.

Public goods associated with agriculture

European agriculture provides society with a diverse range of public goods. These include environmental public goods such as farmland biodiversity, cultural landscapes, high quality air and water, soil functionality, climate stability through reduced greenhouse gas (GHG) emissions and carbon sequestration, resilience to fire and flooding, as well as more social public goods such as rural vitality and elements of food security.

Public goods are defined by the characteristics of non-rivalry and non-excludability, which means that individuals cannot exclude others from enjoying them, and that in enjoying them, their supply is not depleted. On account of these characteristics, markets cannot function to coordinate supply and demand, because consumers have no incentive to pay for them, and as a result farmers have little incentive to provide them. As such, if the high levels of demand amongst the citizens of the EU for biodiversity, cultural landscapes and other environmental public goods are to be met, the state has to intervene to secure their supply for present and future generations.

With regard to environmental public goods, there is significant variation in the scale at which they are provided across different farming systems, with extensive livestock, mixed and less intensive permanent crop systems delivering the greatest range of benefits. The potential also exists, however, to secure environmentally beneficial outcomes in more productive systems, for example through new technologies to improve soil and water management and to reduce GHG emissions, or through the introduction of farming practices that support biodiversity in more intensive agricultural landscapes.

While certain of these public goods can be secured through regulation or the provision of advice and training to farmers, often an economic incentive is required to compensate farmers for the opportunity costs of providing environmental goods and services. In effect, this is an argument for rewarding farmers either for the continuation of environmentally beneficial management that might otherwise be at risk, or for providing an economic incentive – in the form of a support payment - to adopt more environmentally sensitive practices. It provides a robust and long-term justification for ongoing payments to farmers, in line with the demands of the European taxpayer. Arguably, therefore, it affords a more legitimate rationale for public support to farmers than the continuation of direct payments, the role of which is less clear.

Public goods and a post 2013 CAP

The term ‘public goods’ first entered into the consciousness of most of those in the CAP debate in 2007 when it was used in an agricultural context by the environmental NGOs. Since then it has gradually infiltrated the mainstream policy debate appearing in papers and speeches from DG Agriculture and Rural Development, DG Environment, the European Parliament and Member State Agriculture officials as represented in Council meetings. Indeed, Commissioner Ciolos used the two day stakeholder conference in July to stress that both Pillars of the CAP should be adapted to stimulate the provision of public goods.

Janez Poto?nik, the Environment Commissioner, is also using this language. In a major speech on a future CAP on 16 March he noted that ‘the European public is increasingly concerned about how we spend the European budget and also about the environment in general… The CAP needs to be able to provide environmental public goods and services. We need to put forward the proposals to make this happen and let the CAP deliver them to the European public’. The European Parliament too is recognising this debate, having made special last minute amendments to include the concept in its recently approved report on the future of the CAP post 2013. The so called Lyon’s report highlights the importance of the concept in paragraph 6, added late in the process which states that ‘unless sustainable (economically, socially and environmentally viable in the long term) farming activity continues across the EU, the provision of public goods will be at risk’.

Providing support for securing environmental outcomes via a future CAP is also beginning to resonate with an increasing number of stakeholders. Environmental NGOs have been quick to rally behind the slogan of ‘Public Money for Public Goods’, which has been worked up into a suite of policy proposals with the publication of the NGO Vision on the future CAP and the joint statement on a future CAP by the European Landowners’ Organization (ELO) and BirdLife International. The increasing visibility of the public goods concept however, has resulted in the concept being interpreted in different ways. It appears that there has been recognition of this agenda as one with real gravity and legitimacy, and therefore for political reasons some interests are trying to justify various aspects of current policy as conducive to, or essential for outcomes that they have presented as ‘public goods’. There are for example several cases that can be found where the term is being used more generally to refer to any sort of ‘public benefit’ from agriculture. For example, COPA COGECA have started to use the term to refer to ‘maintaining farming activities’ and ‘keeping farm income stable’ as a means of justifying public support. It is also becoming increasingly commonplace for policy interventions via the CAP to be sought as a means of providing public goods, even if this is not the most appropriate policy instrument. The debate over Europe’s role in contributing to global food security is a case in point.

Some clarification of the rhetoric of public goods in the agricultural context is needed. Without it there is the danger that the term will be misused as a justification for supporting anything in the ‘public interest’. CAP commentators such as Alan Matthews of Trinity College Dublin have noted this confusion, stating that current understanding of the term appears overly “elastic”.

If interpreted with sufficient rigour the supply of public goods can offer a robust justification for public support, as discussed in the recent IEEP paper on ‘Developing a More Comprehensive Rationale for EU Funding for the Environment’. Of course the legitimacy of the case depends of the level of public demand for environmental management, which can be garnered from evidence such as the recent Eurobarometer survey, and other evidence suggesting that there is a real public demand. This legitimacy will wain if the concept is degraded, and its value in distinguishing workable policy decisions is eroded. The European Network for Rural Development research initiative on this theme, including its forthcoming publications and European conference on public goods aim to explore the concept further and prompt a European debate.

Putting Public Goods into Practice

If expenditure under a future CAP is to be focused on farming systems and management practices that can provide environmental public goods, then the CAP needs to undergo fundamental reform. This will include changes to the targeting of support, the allocation criteria for the distribution of the budget between Member States, and in the eligibility criteria for support payments, resulting in a fundamental redistribution of support.

If European agriculture is to be ‘genuinely green’, then it will not be sufficient to make marginal changes to direct payments based on new criteria. A new CAP needs to be set within an overarching strategic framework and be transparent and accountable, to allow the effectiveness and efficiency of public expenditure to be evaluated against its objectives, and the outcomes to be transparent for Europe’s citizens. Some of the characteristics of the current Pillar 2 approach would seem to be important if this is to be achieved. Specifically we suggest that there are seven key principles on which a reformed CAP should be based:

  • Consistent strategic policy framework - a strategic framework for the CAP as a whole is needed to set out the objectives for a future agriculture policy and to manage tensions in policy objectives, ensuring that an appropriate balance is struck between the economic, social and environmental dimensions of sustainable agriculture.
  • Clarity of objectives and targets – clear objectives and targets should be established for the full range of public goods that relevant policy measures are intended to deliver.
  • Contractual base - all payments should be based on a clear agreement between the beneficiary, usually the farmer, and society;
  • Transparency - all data about public payments should be made public;
  • Accountability - beneficiaries should be fully accountable for complying with the terms of their agreement, and national and regional spending authorities should be fully accountable for the achievement of agreed EU objectives and the use of taxpayers’ money;
  • Monitoring - there should be a sound system of performance monitoring to ensure the targets are achievable and results acceptable. This will guide the further adaptation of measures and their implementation over time and could build on the Common Monitoring and Evaluation Framework (CMEF) now in use for Rural Development Policy.
  • Sufficient budgetary resources – securing adequate funding for supporting the provision of public goods is an essential prerequisite for achieving the required outcomes and will need to be a clear priority for the future.

What tools do we need for the CAP of tomorrow?

The question remains as to how these principles should be translated into practice to create a system of obligations and payments that is capable of delivering public goods. There are divergent opinions on this issue. For example, does it imply a gradual shift from income support payments, via a suite of transitional arrangements, to more targeted payments for environmental goods and services? Alternatively, should income support payments be maintained and, if so, should these be directed at all eligible farmers, or targeted at those who are economically marginal, or those who are providing the greatest additional environmental benefits to society?

What is becoming increasingly evident is that a two pillar structure of the CAP is likely to remain post 2013. However, it seems likely that Pillar 1 payments in particular could differ quite significantly in nature to the Single Payment Scheme currently in place. The public goods agenda provides the opportunity to move beyond the unsatisfactory historic distribution of expenditure to establish new criteria on which to base these payments. That the historic basis for payments was no longer tenable was highlighted by Dacian Ciolos in his closing speech to the Commission’s recent conference on the future of the CAP post 2013, in which he made clear that, ‘maintaining historical criteria is no longer an option ... The signposts of the past will not enable us to prepare for the future and help the sector modernise….We need to build upon objective, realistic criteria: the type of farm and the socio-economic, climatic and environmental context in which farmers work’ . Such a reorientation of Pillar 1 would be likely to mean that many of the beneficiaries of a new system of support would be in regions with less intensive land use and generally lower farm incomes which would match public expectations of a fair budget more closely than the present arrangements.

If the public goods concept is to form the basis for the objectives of future CAP support, there are, at the very least, a number of components that could be included within a restructured CAP. These are:

  • The presence of a regulatory baseline, strengthened with the introduction of any new legislation that is agreed, such as the Soil Framework Directive or future climate change related regulation;
  • Compliance with a set of additional environmental standards, building on those currently available under cross-compliance to seek a minimum level of maintenance of landscape features/ habitats/ soil functionality / water quality / carbon sequestration etc.
  • The provision of area payments focused on encouraging a basic level of sustainable land management across the farmed landscape;
  • The provision of additional, more targeted top-up payments for farms or farming systems that are of high social or environmental value but which would be at risk of disappearing without additional support (for example High Nature Value farming systems);
  • The extension of targeted, tailored support for the enhanced provision of environmental and social goods and services, including both area based incentive payments and grants to assist with capital investments that enhance environmental sustainability;
  • Measures to support advice, training and capacity building.

Attention needs to be paid to the design and implementation of measures to ensure that they are as effective and efficient as possible. This may involve the use of different policy measures in synergy to achieve better results as well as the fostering of increased institutional capacity at the Member State level.

This proposed new system of support for achieving environmental outcomes should be accompanied by a wider programme of support for rural economies and communities, helping to encourage farm diversification and to deliver wider economic and social objectives. In the short term, transitional arrangements would be necessary to facilitate a smooth adjustment process away from the present CAP, and to provide support for investments designed to enhance the sustainable competitiveness of the agricultural sector and its capacity to adapt to an environmentally focused system of support. Greater resilience to climate change would be one priority for example.

In addition, some form of limited market intervention is likely to be needed to prevent excess volatility in agricultural incomes if commodity prices are to fluctuate in the way that many expect. However, this should not involve routine intervention in the normal working of markets. A new CAP and accompanying policies also needs to face future challenges more squarely. For example to promote sustainability there is a continuing need for investment in agricultural research and technical development.

Conclusions

The challenges of restructuring the CAP and the funding that it offers to farmers and land managers to meet more tightly defined goals are not insignificant. Any redistribution of support between funds and between Member States will be highly politicised, and coupled with the prospect of adjustments to the allocation criteria of CAP support under both Pillars, a markedly different pattern of ‘winners and losers’ could emerge post 2013.

However, if the opportunities offered by the public goods agenda for the CAP are firmly seized by policy makers and followed through into real changes to the structure and design of support in practice, then this could mark the beginning of a genuinely progressive CAP reform which could deliver for the environment and farmers alike. If on the other hand the term becomes misappropriated, and used to justify the continuation of the status quo, then this would represent a significant missed opportunity and hasten the scaling back of the CAP budget and re-distribution of resources outside rural areas. In these circumstances, the environmental community may decide that the time has come to look at alternative solutions for funding rural environmental management outside the CAP and the priority allocated to rural issues within European policy diminished permanently.

1 comment posted

  • Tom Hind NFU September 14th, 2010

    Your concerns about the degrading of public goods smacks somewhat of sour grapes and a refusal to accept that the concept as defined by academic economists (not policy makers) would embrace a wider spectrum of public interests than the environment. Landscape character is arguably not an environmental factor, nor are animal welfare standards and to some extent food traceability that go beyond norms permitted under WTO rules.

    What is more, the use of the term public benefits by COPA/COGECA and NFU is quite deliberate since we share a belief that farming provides wider societal benefits that do not fulfill academic’s precise notions of public goods. There is nothing wrong with this and as the Eurobarometer survey indicates there is strong (indeed stronger than the environment) public interest in safe, high quality food production for example.

    Farming is first and foremost an economic sector yet as we have seen in the last 4 weeks, it can be rocked by vagaries of commodity markets that academic economists find hard to deal with. Income support from the CAP provides a coherent, credible answer to ensuring that the EU maintains productive capacity that is likely to be in ever greater need in the future.

    Tom Hind Head of Economics and International Affairs, NFU

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PUBLICATION DATE

09 Sep 2010

AUTHOR

IEEP

FURTHER INFORMATION

The Institute for European Environmental Policy coordinates CAP2020. It is an independent not for profit institute which undertakes research in a number of policy areas including agriculture and rural development.