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Theoretical insights on decoupling and environment

A fundamental insight from the literature is that a standard static or marginal economic analysis is not suitable for analysing the impacts of decoupling because it has the capacity to affect farmers’ strategic decisions (e.g. to invest or exit farming). As a consequence, the analysis is done in a dynamic setting where changes in the farmers’ production opportunities can be considered (OECDa, 2001; Romstad, 1999). For example, if some farms close down as a result of decoupling, the opportunity for the remaining farms to expand will improve as more land enters the rental market, and, as a consequence, will result in a smaller reduction in agricultural activity than would be implied by a static analysis.

A basic feature of the 2003 reform is that farmers now have greater freedom to choose what and how to produce, whilst total support to the sector is largely unchanged. This additional freedom or relaxation of institutional constraints on farmers’ decision environment has two important implications. First, greater freedom implies that the cost of producing commodities and non-commodities alike should decline. Second, environmental provisioning (e.g. maintenance of landscape qualities) should become relatively more profitable, given unchanged agri-environmental schemes (OECDb, 2001). Consequently, the potential negative impacts of decoupling on the environment might be counteracted or buffered by reduced costs and the increased relative profitability of agrienvironmental schemes. However, the strength of the effects is likely to vary between regions, because the relative returns from commodity production and levels of agrienvironmental schemes both vary throughout the European Union.

The obvious concern is that decoupling will lead to dramatic declines in agricultural activity in high-cost or marginal regions. However, since high-cost regions tend to be relatively more dependent on Pillar 2 agri-environmental schemes and national support schemes that remain coupled to production, it is likely that these payments will buffer some of the most serious potential consequences of decoupling for the environment (since farmers in these regions will still not be reliant on world market prices alone for their income). In the case of agri-environmental schemes, this could be by encouraging a switch in farming focus from commodity production to “minimizing the costs” of landscape provisioning (e.g. instead of semi-natural grasslands being a by-product of beef production, beef could well become a by-product of environmental conservation), or, in the case of national support, result simply in reduced returns to fixed factors rather than reduced output (i.e. milk quota and land rents must fall to zero before output is affected by reductions in coupled support).

Significant impacts of the reform in relatively productive or low-cost regions are unlikely, since commodity production should prevail on most land despite decoupling. In these regions, a degree of substitution from “eligible crops” to previously unsupported crops can be expected as the relative profitability of the latter increases. The environmental impacts of decoupling in low-cost regions will consequently be conditional upon the environmental characteristics of the substituted crops. From a landscape perspective, greater crop diversity is generally positive for the landscape (Benton et al., 2003) whereas the pollution characteristics of any particular crop are an empirical issue (Shortle and Horan, 2001).

Coupled MacSharry/Agenda-type direct payments affect the relative price of alternative land uses in that the relative price of eligible crops increases (i.e. crops that are eligible for support such as grains and oilseeds). In this way, farmers are provided with an artificial incentive to grow eligible crops, which distorts the market for agricultural products. In some high-cost regions, the coupled payment has been sufficient to induce farmers to grow crops that otherwise would not have been profitable (i.e. the area payment was higher than the land rent). In this way, coupled payments have made it profitable to maintain a greater diversity of commodity production, and hence land uses, in high-cost regions. In contrast, they have contributed to less diversification and hence greater homogenization of the landscape in low-cost regions. Decoupling can be expected to reverse these affects.

The focus of the environmental assessment in IDEMA was therefore on the value of environmental services provided by agricultural landscapes for the reasons argued above. The principal measures used for this purpose are indicators based on changes in land use; specifically landscape mosaic and biodiversity value, which are described more fully below. These indicators are also considered to be positively correlated with other values of landscapes, such as recreation, knowledge-pool, cultural heritage and amenity. However, a complementary assessment of the impact of decoupling on pollution risk is also provided.

 
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