FOCUS ON FARM POLICY: How green payments work

By Catherine L. Kling
ISU economics professor and head of the
Resource/Environmental Policy Division, Center for Agricultural and Rural
Development

Catherine L. Kling

Aldo Leopold's land ethic calls for humans to act as caretakers of the earth, treating the land and all that is upon it with deep respect. Although Leopold felt that landowners should adopt conservation practices independent of the profitability of doing so, market realities make this a problem for many farmers. A conservation payments program, such as the Conservation Security Act proposed by Senator Tom Harkin, would make payments to farmers based on the number and degree of environmentally-friendly practices adopted on a farm. Such a program could help farmers adopt the caretaker role that Leopold cherished, while allowing many to continue to earn their living from the land.

Why does the market fail to supply environmental goods?
It is well understood among economists that private markets are likely to undersupply environmental goods; in other words, there is likely to be a market failure. Why? This can happen when environmental degradation is a side effect of a market activity (such as farming), which imposes costs on people other than the producer.

For example, a farmer applies fertilizer to increase crop yields, which also results in nutrient-rich runoff. The costs of the fertilizer and the benefits of the crop production accrue to the farmer, but the "costs" of the nutrients that enter the waters are borne by society at large in the form of degraded water quality. This market failure can be corrected by raising the cost of fertilizer use or by paying the farmer to adopt practices that reduce soil erosion, thereby reducing or eliminating the water quality damage.

The market also fails to produce environmental goods because of their public nature; that is, many people benefit from their production. Retaining wetlands, building buffer strips and preserving native prairies, for example, produce wildlife, biodiversity and scenic views that can be enjoyed by all. But it's extremely difficult for farmers to package and sell these environmental goods. A conservation payments program would make it profitable for farmers to produce these environmental goods.

What issues need to be resolved?
With so many arguments in favor of a conservation payments program, why not immediately adopt one? There are a number of political and pragmatic implementation issues that first must be settled.

Among these top issues is the degree to which a farm program with conservation payments also will be designed to provide income support to farmers. If the sole purpose of a conservation payment program were to maximize the environmental gain for the budget provided, the program should be designed to pay the most to farmers who have the most environmental services to offer. However, if the program is also to be viewed as income support, a different set of farmers might be targeted who have fewer environmental services to provide. In fact, a recent USDA study suggests that targeting conservation payments to support low-income farmers is unlikely to serve the goals of conservation very well. Thus, policy makers will need to decide how much they are willing to trade environmental gains for income support and vice versa.

How can early adopters be rewarded?
This leads to a second related issue: whether to pay farmers who had previously adopted environmentally-friendly practices. In Iowa for example, about two-thirds of farmers employed some form of conservation tillage in the early 1990s, either out of a sense of responsibility to the land or because it was already profitable to do so. Most proponents of conservation payments argue that to not pay previous adopters would be both unfair and cause perverse incentives (encouraging people to stop such practices in order to begin them again to get benefits). Such arguments may well be compelling, but it must be recognized that paying previous adopters will increase, probably substantially, the costs of the program with little environmental gain. On the other hand, paying previous adopters can be viewed clearly as an income support policy.

A third issue is the degree to which payments could be based on performance rather than practices. Although it will likely be much easier to base payments on the degree to which farmers adopt particular practices (e.g., low-tillage methods or spring nitrogen applications), it would be more efficient to base them on how successful they are (how much less erosion results or how much additional wildlife is supported). The difference in efficiency arises because some land and locations are better suited to producing wildlife than others, and farmers in those areas should be most strongly encouraged to participate in such activities. Unfortunately, it will be difficult or at least costly to measure the environmental products of any farm's activities.

A compromise approach is to base payments on practices, but to vary payments across locations so that farms located in regions that tend to generate high environmental benefits from a certain practice receive a higher payment for that practice relative to other locations.

Other issues to resolve include how to monitor and verify that conservation contracts are being complied with, what agencies will have primary enforcement responsibility, whether the practices and environmental goods targeted will differ regionally, and how bidding for contracts will be carried out.

Conservation payments on a broad scale, such as those proposed in the Conservation Security Act, would be a bold step in farm policy. Although there are implementation issues yet to resolve, conservation payments may be a real step toward correcting the environmental market failures in agriculture. In so doing, we may take a step closer to Aldo Leopold's view of the landowner as caretaker of the natural world.

This article is a summary of a briefing paper, "Conservation Paymnets: Challenges in Design and Implementation," issued in June 2001 by the Center for Agricultural and Rural Development (CARD).