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Policy effects upon aggregated commodity production

In this section we examine the impact of various policies and macro-economic drivers on production and land use in the EU27 in the three main scenarios. The following figures present the results of the decomposition of the production growth for agri-food, livestock and biofuel crop products.

In Figure 7.3 production growth of all agri-food products (primary agriculture and processed food products) is 4.1% in the Reference scenario. Without policy changes the growth would be 4.9% due to other effects such as growth in technological change and production factors. The negative contribution of the border effect due to the Falconer proposal is dominant among the policies and equal to -1.4%. The contribution due to the cut in direct payments of 30% in the Reference scenario is limited to -0.1%, indicating that the decoupled payments have only minimal production effects. A positive contribution to the production of agri-food products is due to the EU Renewable Energy Directive (0.1%) and all rural development measures (0.6%); with regard to the EU Renewable Energy Directive, this concerns especially oilseeds, grain and sugar. The rural development impact is mainly caused by human and physical capital investments, which lead to a higher productivity and therefore production growth.

Figure 7.3. Decomposition of growth (volume) in agri-food production

EU27, 2007-20

Source: LEITAP results.

The main difference between the Conservative CAP scenario and the Reference scenario is that fewer Pillar 1 payments are transferred to Pillar 2. As Pillar 1 payments are fairly decoupled and some Pillar 2 payments, such as human and physical capital investments, have positive productivity and production effects, the net effect on production is surprisingly lower in the Conservative scenario than in the Reference scenario. In Figure 7.4, it can be seen that the main difference between the bars in the Reference and Conservative CAP scenarios is that the grey bar is lower in the Conservative CAP scenario than in the Liberalisation scenario. As this is the main difference between the scenarios the blue bar indicating the total effect is also lower for the Conservative CAP scenario. As this figure depicts the total agri-food production, the difference due to this relatively small policy change is small. The growth of agri-food production is lowest in the Liberalisation scenario. The main difference with the other scenarios comes from abolishing border support (-2.4%). The impact of abolishing direct payments is small (-0.35%) as they are fairly decoupled.

Figure 7.4 shows the decomposition of growth in livestock production. Livestock products observe a small positive production growth in the Reference and Conservative scenarios and a negative production growth in the Liberalisation scenario. The other effects (3.0%) in the Reference scenario have the highest positive contribution to the small positive livestock production growth of 2%. The impact of higher rural development measures is also positive and equal to 1.5%, mainly due to the productivity gains of capital investments. The impact of border effect (-1%) in the Reference scenario is negative, as most livestock products are assumed to be sensitive products. The impact of the Renewable Energy Directive is negative (-0.75%) as feedstocks and production factors (land) become more expensive.

In the Conservative CAP scenario the production growth of livestock products becomes slightly lower. The main difference from the Reference scenario is that the lower rural development spending has a smaller positive contribution. In the Liberalisation scenario the production growth of livestock products turns from more than 2% positive to -4% negative production growth. This is mainly due to a higher negative impact of border support (-4%) due to complete liberalisation. The difference is large, as the assumption is that in the Falconer proposal many protected products (cattle, pork and poultry) are sensitive products. Removing direct payments has a negligible impact on livestock as Pillar 1 payments are fairly decoupled.

Figure 7.4. Decomposition of growth (volume) in livestock production

EU27, 2007-20

Source: LEITAP results.

Projections for individual livestock commodities are discussed in the following section. It is important to be aware that these projections are made with a partial equilibrium model, ESIM. But considering the projected change in aggregated livestock volume, globally ESIM produces similar results as with LEITAP. Under the Liberalisation scenario, the volume of production of total livestock declines by 6% between 2007 and 2020 for the EU27, but under the Reference scenario it increases by 4%.

Figure 7.5 shows production growth of the crops (grains, oilseeds, sugar) that can also be used for biofuels. The main driver for this positive production effect is the positive contribution due to the EU Renewable Energy Directive (14.6%). The negative contribution of the border effect that can be attributed to the Falconer proposal is also substantial and equal to -5.6%. The contribution due to the cut in direct payments of 30% in the Reference scenario is -1.7% indicating that the decoupled payments have small production effects. This negative impact is due to the assumption that decoupled payments are linked to land in our methodology and biofuel crops are relatively land intensive relative to other agricultural sectors and other sectors in the rest of the economy. A positive contribution to biofuel products is due to all rural development measures (1.5%). If RD measures were to become more targeted to biofuels in the future, as this is an explicit target in the Health Check agreement, this impact might be more substantial. Without policy changes the growth would be 5% due to other effects such as growth in technological change and production factors.

Figure 7.5. Decomposition of growth1 in the production of crops2 that can also be used for biofuels,

EU27, 2007-203

In terms of volume.

Grains, oilseeds and sugar.

Biofuels are treated as a blend of cereals, oilseeds and sugar in the current LEITAP model. Ethanol is not a separate product in LEITAP and this has the disadvantage that the high trade tariff on ethanol cannot be treated explicitly. This has a serious drawback in the analyses of changes in border support in the various scenarios as ethanol is assumed to be a sensitive product under the WTO agreement and gets only fully liberalised in the Liberalisation scenario. In this report we address this shortcoming by using ESIM outcomes as ESIM is able to quantify this effect as ethanol is a separate product and differences in import tariffs are explicitly modelled. ESIM scenario results indicate that due to liberalisation the impact on biofuel production is 75% of the impact in the Reference scenario. This ratio is used to adjust the impact of the Renewable Energy Directive, border support and the total effect.

Source: LEITAP results.

The growth of biofuel crop production is much lower in the Liberalisation scenario. The main difference with the other scenarios comes from abolishing border support (-9.6%) and a lower impact of the EU Renewable Energy Directive (10.5%), as more biofuels will be sourced from imports. The impact of abolishing of all direct payments is more pronounced.

 
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