1. Modeling the efficiency of the agri-environmental payments to Czech agriculture in a CGE framework incorporating public goods approach Zuzana Křístková - Czech University of Life Sciences, Department of Economics Tomáš Ratinger - Institute of Agricultural Economics and Information (UZEI)

2. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Presentation Outline  Introduction and the objective of the paper  Description of the methodological approach  Model application and results  Conclusion

3. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Introduction  The effects of the agrarian policy simulations cannot be captured fully without incorporation of multifunctional aspects of agriculture such as the landscape provision.  In the context of the Czech agriculture, the landscape function is mainly supported by agri-environmental payments directed to permanent grasslands with the extensive livestock production.  The objective of the paper is to incorporate the landscape provision into the CGE model and to assess the efficiency of the agri-environmental payments.

4. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Presentation Outline  Introduction and the objective of the paper  Description of the methodological approach  Model application and results  Conclusion

5. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Methodological approaches in modelling multifunctionality  EU-based research focused on the integration of bio- physical, land use and economic models: – Uthes, Ittersum and Sieber (2010), Renting, Rossing and Ittersum (2009), Rossing, Zander and Josiem (2009), Parra- Lopez, Groot, Torres et al. (2009)  Incorporation of demand side of multifunctionality in the CGE framework: – Cretegny (2002) - Switzerland, and Rødseth (2008) – Norway.

6. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Applied methodology  The CGE model is built for the economy of the Czech Republic (base year 2006) and provides simulations till 2020.  SAM for the CGE model constructed with the use of the National Accounts, Statistics of Household Accounts and agricultural surveys provided by UZEI.  Public goods in form of landscape provision stemming from extensive beef production on permanent grasslands is incorporated into the CGE model.

7. Main features of the CGE model  Recursively dynamic CGE model following standard IFPRI structure.  Supply of labour and land fixed; capital stock grows at the rate of net investments (following Tobin q investment function).  Two types of households – farmer and other households maximizing utility modelled by the LES function.  Standard macroeconomic balance of savings and investment.  Government closure determined by a fixed share of governmental budget to GDP.  Both foreign sector closures (for the EU and the RoW) assume fixed foreign savings and endogenously adjusting exchange rates.  Direct payments modelled partially as land subsidies, partially as production subsidies.

8. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Incorporation of landscape into the CGE model  Sector of extensive livestock farming is explicitly included in the SAM.  Following Cretegny, supply of landscape (public commodity) is modelled in a joint production function with beef meat (market commodity)  The demand for landscape corresponds to the households´ WTP and is incorporated into the LES (instead of originally intended use of the contingent valuation for CR, parameters for LES determined by certain assumptions)

9. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Production sectors included in the CGE model SectorLand employmentDescription sec1 Secland cereals sec2fruits and vegetables sec3oilseeds sec4sugar beet sec5intensive livestock sec6pigs and poultry sec7milk sec8other agriculture sec14extensive livestock sec9 Secnland forestry and fishing sec10food industry sec11other industry sec12R&D sec13other services

10. Nested production structure in the CGE model Linear function of capital Value added i Intermediate Consumption i Leontief Gross production i Depretiation i Value added of secnland i CES I CapitalLabour Value added of secland i CES II Capital $secland Land Intensive farming (Sec 1-8) CES I Capital $secland Capital- Land Extensive farming (Sec 14) Leontief Capital $secland Capital- Land Leontief Capital $secland Land

11. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Optimal grassland area with internalized demand for landscape Source: own illustration following Rødseth (2008)

12. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Presentation Outline  Introduction and the objective of the paper  Description of the methodological approach  Model application and results  Conclusion

13. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Scenario Description ScenarioPurposePerformed simulation Scenario 1 Determine optimal landscape provision based on households´ WTP, no additional agri-envi payments to the extensive livestock sector Additional agri-envi support removed from 2007 on, subsidies redistributed to hous Scenario 2 Determine optimal landscape provision under parallel existence of landscape market and additional agri-environmental support Subsidy rates according to baseline Scenario 3 Illustrate changes of landscape provision if additional agri-envi subsidies are removed in 2014 Additional agri-envi support removed from 2014 on, subsidies redistributed to hous

14. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Results  The impact of the considered scenarios is evaluated with respect to: – Evolution of grassland size – Demand for landscape – Production of extensive and intensive livestock sector – Total gross agricultural production and GDP

15. Impact on the size of grasslands Figure 1. Land employed in the extensive farming sector (‘000 ha) Note: If the provision of landscape is determined purely by the households´ WTP, the optimal landscape size converges to 1,100 mil. ha, which is about 30% less than if the extensive livestock sector is also supported by additional agri- environmental payments

16. Impact on the demand for landscape Figure 2. Demand for landscape by households (bln. CZK) Note: In the absence of additional agri-envi support, demand for landscape referring to optimal subsidy rate would converge to 1.4 bln CZK, which is 50% lower compared to actual subsidy rates. This is mainly attributed to growth of landscape prices.

17. Impact on the livestock production intensity Figure 3. Gross production of beef in extensive and intensive livestock farming (bln. CZK, constant prices of 2006) Note: The longer term size of the extensive livestock sector would stabilize around 1 bln. CZK, which is 22% less than the initial period. With additional governmental support, the size of extensive livestock would reach 1.6 bln CZK.

18. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Impact on gross agricultural production Figure 4: Gross value added in agriculture (CZK bln., constant prices 2006)

19. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Impact on GDP Figure 5: GDP components (average % growth between 2006-2020)

20. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Conclusions  Incorporating public goods in the CGE model has important capacity to improve insight in the analysis of agri-environmental policy.  The results confirm the theoretical assumptions: – landscape demand increases with growing households´ income – Additional subsidy payments allow households to consume more landscape  It is hard to conclude which subsidy rate is the socially optimal taking into account that under additional governmental subsidies, the households are willing to consume more landscape.

21. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011 Further research considerations  It is necessary to obtain correct WTP estimates that will significantly improve the valuation of the non-commodity production of agriculture.  The research can be further extended with the incorporation of other sectors with multifunctional activities and the special attributes of the bio-beef meet.

22. Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation 122 nd EAAE Seminar, February 17 – 18, 2011  Thank you for your attention.