ELO Brussels Conference 6 th & 7 th November 2003 CAP reform: Entrepreneurial Opportunities in the Enlarged EU Paying for environment Prof. Allan Buckwell Chief Economist, Country Land and Business Association and Chairman of ELO Policy Group

Paying for Environment The coupling of entitlements to land and environmental production to ensure sustainable management of land Principles Existing CAP schemes for environment The new Fischler CAP Have we a coherent policy? How does Natura 2000 fit in? Concluding remarks

What is the environment? The conventional three elements –Biodiversity: habitat: nature –Landscape: aesthetic: heritage –Resource protection These really are an opportunity for land owners and managers Highly complex; interrelated and dynamic –Goods and bads: link to property rights –Actions to promote goods may reduce bads

Principles: who should pay? The popular wisdom is that the polluter should pay…but… Are we considering positive or negative externalities? Even for negative externalities practicality, efficiency and fairness have to be considered. Lets shift balance of the discussion from focus on the bads to the goods

Positive and negative externalities A positive externality, is a side effect of production which is desirable to some others, but for which the producer is not paid. Examples – landscape, habitats, biodiversity Positive externalities are under-supplied by markets A negative externality is a side effect of production which is considered undesirable by others, and whose costs are not borne by the polluter. Examples – pollution of soil, water, air. Negative externalities are over-supplied. The lack of clear property rights lies at the heart of these market failures.

How to deal with these failures? Assign the property rights: EU and National law defines a baseline which producers respect at their own cost, and above which collective action to arrange provision of the environmental services. Collective action need not only be payments from the public purse, but private schemes, C-credits, eco-points.

Is it always possible and fair to make the polluter pay? For diffuse pollution the costs of detecting and tracing the polluter; enforcing the rule, and extracting the payment may exceed the size of the damage. Regulation designed for industrial enterprises is disproportionate for SMEs which characterise rural business. We want outcomes, less pollution, not the comfort of fine principles Hence other solutions may be more effective: information – publicity – advice - social pressure - taxes - tax incentives - other inducements.

The ELO perspective Long list of EU and Member State regulations which attempt – with varying degrees of success - to deal with the negative externalities. Command and control regulation will generally be bad at inducing positive behaviour. The new focus is on the positive environmental and cultural landscape services, which only private land managers can supply. Many actions to increase positive externalities will also cut negative externalities Our motto…Nature needs Farming

Existing agri-environmental measures 1.Agri-environment schemes in the RDR 2.Less Favoured Area schemes 3.Extensification payments 4.Organic Farming 5.Management of set-aside 6.Cross compliance conditions in 1259/99

New agri-environment measures Horizontal Regulation 1782/03 1.Reduced production support and decoupled payments per se. 2.Cross-compliance on decoupled payments (Annexes III and IV) 3.New rules for set-aside 4.National Envelopes (article 69) 5.New chapter of revised RDR – meeting standards 6.Financing Natura 2000 within the RDR

C Is this a coherent framework? It would be nice to say ‘yes’ but not possible. Problem of the overall policy concept… Is the strategy to get the environmental delivery in Pillar 1 or in Pillar 2? There are evidently severe restrictions in moving resources from Pillar 1 to 2.

Natura 2000 and its financing N2K sites cover ~18% EU land area The principle of compensation for all costs and forgone output The estimated need for funding ~€6b Where does it come from? Agricultural share from RDR? Non- agricultural share, forest land, wetlands form enlarged LIFE? Degree of integration with other agri- environment schemes – ecologically & administratively.

Concluding remarks Large scale market failure in rural land management Large role for private sector land managers. If we expose EU faming to US, Brazilian, Australian world market prices we will get US/Brazilian/Australian farmed landscape and biodiversity This is NOT want Europe wants Hence the substantial role for paying for environmental and cultural landscape services Current arrangements are far from optimal Funding debate has scarcely begun: pillar 1: pillar 2 and other sources, especially for N2K This has to be regionally differentiated, big differences in what is ecologically necessary and socially acceptable.