Ian Hodge, Uwe Latacz-Lohmann, Sandra McNally, Alan Renwick and Carol Rush

Since the reforms of the Common Agricultural Policy (CAP) in 1992, set-aside has played a major role in the Arable Area Payments Scheme and recent reforms to the CAP have confirmed its retention in the future. This article draws on an evaluation of set-aside undertaken by the Centre for Rural Economics Research at the University of Cambridge and makes proposals for the way in which set- aside might be further developed to deliver positive environmental gains.

est bonne pour I ’ envi ron ne men t parce qu’elle est tres largement repandue. J 7 Set-aside was introduced as an expedient against a number of essentially incompatible policy pressures, but its primary objective was to limit surplus production and the impacts of the CAP on world markets without reducing domestic price levels sufficiently to achieve this. Other objectives have been added along the way. Set-aside has been argued to provide environmental benefits, and provisions have been introduced into the scheme to promote the production of industrial crops. Details of the operation of set- aside are shown in Box 1.

The particular problems for the evaluation of set-aside arise from the simultaneous changes both in policy and in market conditions

that occurred at the time of the introduction of obligatory set-aside and the varying rules that have applied to set-aside subsequently. We have taken a number of different approaches to this evaluation, including a survey of cereal farmers, interviews with stakeholders, an analysis of data from the UK Farm Business Survey and of data from previous MAFFDEFRA Special Studies. Thus we can assess set- aside from a number of different perspectives. While it has not always been possible to identify the separate influences of the individual elements of policy, we can make some general observations on the different aspects.

While our study related to the situation in the UK, the policy and the general principles are common across the European Union. We do, however, recognise that some of the specifics as to the way in which the policy has been implemented, some of the impacts on the environment and some of the priorities of the stakeholders will differ between countries. This reflects the complexity of attempting to establish a single policy approach across a variety of circumstances. Nevertheless, the experience and general implications are of wider relevance.

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The effectiveness of set-aside as a means of supply control

As a general rule, a reduction in prices would always be more efficient than the introduction of an extra policy mechanism by which to restrain the levels of production. However, if sufficient price reductions are deemed to be politically unacceptable (at least in the short term) then some form of supply regulation is required in order to enable the EU to honour its WTO commitments on subsidised exports.

We have undertaken a comparison of the budgetary costs of set-aside against the budgetary costs of dealing with surplus production via export subsidies. We recognise, of course, that these costs do not represent the (in)efficiency of the

policy. The results are illustrated in Figure 1. This suggests that in 1993, the year in which obligatory set-aside was introduced, set-aside was the cheaper option. However, over the next few years, the cost of set-aside

was higher because of declining internal prices and increasing world prices for cereals. We should, of course, be cautious in making such a simple comparison. The figures do not include other costs of dealing with surplus production, such as the cost of storage, or the costs of administering the various schemes. We should also note the interactions between these approaches. Set-aside will reduce the volume of production and the volume sold on world markets. This will tend to increase the world price and so reduce the level of export refunds.

One common problem with set- aside is that there is ‘slippage’. This refers to the tendency for a particular percentage of land set aside to produce a lower percentage reduction in output supplied. It arises primarily from variations in land quality Farmers face an incentive to set-aside their poorest-quality, least-profitable land. Also, farmers who are required to set some of their land aside may choose to increase the intensity of production, and thus yields, on their remaining cereal land. Finally, ‘slippage’ arises from the way in which the policy is implemented: the small-producer exemption (see Box 1) means that set-aside applies only to a subset of farmers and land areas.

We have estimated the extent of ‘slippage’ associated with set-aside for the UK and other European countries. The analysis suggests that this is not especially large. We have found little evidence that yields or land use intensities on the remaining

cereal land have increased as a result of set-aside. There was no evident break in the trends in yields over the period and an econometric analysis found no evidence of differences in yields or average levels of input use associated with set-aside. Many farmers have been able to benefit from the exemptions for small farmers to set aside land. In 1993 in the EU as a whole, only 70 per cent of land entered into IACS was under the general scheme where set-aside was a condition of claiming area payments. This varied between 33 per cent in Italy to 92 per cent in the UK. However, the total areas of land set aside have often exceeded the official rate set for obligatory set-aside due to voluntary forms of set-aside in operation. Thus, for instance in 1993, in Italy the actual rate of set-aside approached 17 per cent. Set-aside has thus been effective in reducing supply. We estimate on one set of assumptions that between 1993 and 1999, set-aside was responsible for an estimated reduction of some 164 million tonnes of cereals across the EU.

In an econometric analysis of Farm Business Survey data we find evidence that the reduction in output has been similar to the official set-aside rate. We also find evidence that set-aside is a source of inefficiency within individual farms to the extent that other quasi-ftued inputs (e.g. machinery and labour) cannot be revised downwards in the short run. However, this effect is very small and what impacts are evident seem to diminish over time as farmers are able to adjust their businesses to the

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altered policy regime. The responses in the farmer survey suggested that set-aside has had no tangible impact on farm incomes.

The efficiency of set-aside as a means of environmental improvement

Environmental objectives for set- aside were added as something of an afterthought, perhaps to justify a politically unattractive policy of pdying farmers not to grow crops. Despite the secondary and somewhat uncertain nature of these objectives, based on a substantial amount of ecological research reviewed by McNally (2001), there is a quite generally held view that set-aside is good for the environment because it is so widespread. While much depends on the details of the type of set-aside, its location and the form of management, it is generally acknowledged that the introduction of a ‘break’ into intensive arable rotations has been found to be beneficial, particularly for birds. On the other hand, set-aside has a limited impact on nitrate leaching, with reductions from reduced fertiliser applications offset by risks of higher

leaching arising from ploughing up of land cover at inappropriate times. Many of the stakeholders interviewed felt that the environmental benefit is rather different from that offered by existing agri-environmental policy mechanisms and that it would be lost if set-aside were abolished. However, this is not to say that the current policy offers the best way of achieving environmental improvement. Of course, the environmental impacts may be viewed less positively in other countries - with different public preferences towards the environment and different natural circumstances.

The efficiency of set-aside as a means of supporting non-food and industrial crops

We believe that there are strong a priori grounds for doubting that set-aside offers the best means of promoting the production of non- food and industrial crops. A set-aside rate that varies from year to year to reflect changing cereals market conditions exposes the non-food sector to a great deal of uncertainty. A more targeted and consistent policy mechanism would be likely to achieve a given objective on a more secure

basis and at a lower cost. A distinct carbon credit scheme has recently been proposed by the European Commission (EC, 2002).

A future for land diversion?

We have emphasised the inefficiency of set-aside as a supply control mechanism. But the experience of set-aside does suggest a potential role for a policy with some similar characteristics. One objective might be to retain the capacity for the regulation of supply whenever the need arises, and another for environmental compensation in intensively cropped areas.

While the immediate requirement for supply control appears likely to be reduced, the possibility of its use in the future cannot be ruled out. There might thus be some element of option value associated with the maintenance of an institutional structure that can be quickly directed towards supply control, looking one season ahead, if this should prove necessary. At the same time, experience with the environmental impact of the existing set-aside scheme suggests that its major environmental contribution, beyond

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the types of environmental benefits provided by the existing package of agri-environmental policies, is to

ass die FI ac h edst i I I I eg u n g gut fur die Umwelt sein muss, weil sie so weit verbreitet ist. 71 provide for wildlife within relatively intensively cropped areas. In this respect, it can be seen as a form of environmental compensation and would be consistent with the adoption of the principle of sustainable development within the EU. It is widely held that intensive cereal production systems are unsustainable. From a ‘constant natural assets’ perspective, the objective of sustainability might then suggest that some measure of environmental compensation is called for to replace the natural capital degraded by intensive agricultural production. This could take the form of set-aside targeted to provide space for habitat and wildlife in the more intensive areas of production. At first sight this might seem to conflict with the polluter pays principle. Whether or not it does represents a social judgement (Hodge, 2000). Besides the pollution impacts of intensive agriculture, a major concern is the impact that intensive production has on wildlife by removing the food species on which they depend. While it would be generally agreed that chemical emissions should be regulated as external costs (borne by society as a whole), farmers are generally not presumed to have a duty to provide the nectar plants and insects on which many wildlife species depend. A land diversion scheme would be aimed at providing this support to local wildlife populations.

The scheme would operate on a competitive basis. Tenders would be invited from farmers to set aside land. They would provide information against which their bids could be scored on an environmental index. In this context, the environmental benefits would be weighted towards relieving the pressures of intensive

cropping on the environment, taking account of the intensity of production within the local area, such as the percentage of the area under arable production, and the sensitivity of the environment, such as the presence of watercourses or nature reserves.

We believe that it would be possible to make an adequate assessment of the environmental benefits that could be expected to arise from a limited amount of information provided by farmers in their tenders, supplemented from available information about local conditions. Farmers might be required to indicate the area of land diversion offered, whether this is rotational or permanent, the length of interface with environmentally sensitive land uses (such as a watercourse, woodland or nature reserve), the proposed form of management (e.g. natural regeneration, game cover, wild bird cover) and whether or not public access will be provided. If supply control is an objective, farmers would also be asked to indicate their level of past cereal yields. This information would be straightforward for the applicant to supply and subject to relatively simple verification. Farmers would also indicate the total amount of payment that they would require.

This could be supplemented with information on the local density of arable cropping, so that relief can be targeted at the most intensively farmed areas. Environmental priorities could be defined against local species composition and densities, potentially matched against priorities identified within Biodiversity

Action Plans. Finally, human population density could be used as a proxy for the potential values from recreation and landscape benefits.

A score would be computed to represent the benefits offered from each bid. It would thus be necessary to determine the weights to be attached to the alternative environmental benefits offered and whether or not supply control is to be a factor. These weights might be set either nationally or regionally

Bids would be ranked by the ratio of the benefits index to the amount of money required and the most competitive bids selected until the available funds are used. It is likely

because it is so widespread. J J that the scheme would be operated in regional pools so as to avoid an imbalance in areas set aside across the country. Enforcement would be similar in most respects to enforcement under the current set- aside scheme. Information on the location of set-aside land with public access could be publicised within local areas as is the case under current schemes. Such a scheme would

~~~ ~

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involve some extra administrative cost, but not excessively Farmers would have to provide some extra information. The other information used in assessing bids is already available from existing sources.

A very similar approach has been in operation in the United States since 1986 under the Conservation Reserve Program (CRP). An Environmental Benefit Index (EBI) is estimated to classify and rank land offered for enrolment in the CRP Scores are based on the expected environmental improvement in soil resources, water quality, wildlife habitat and other resource concerns. Scores are assessed on the basis of indicators relating to certain observable attributes of the land (such as proximity to water bodies or to erodibility) or to certain land management practices (such as land cover type).

In sum-a different approach

The European Commission (EC, 2002 and 2003a) has recently made a number of proposals for the further reform of the CAP in the Mid-Term Review. These have now been adopted in modified form by the EU Council (EC, 2003b). Most importantly the reforms further decouple the farmer’s production decision from the level of subsidy by basing the level of payment received on historical references and giving farmers more freedom in their choice of production activities. The proposals retained provision for a compulsory non- rotational set-aside on 10 per cent of arable land, to promote long- term environmental improvement. Following the Council agreement, the rotational requirements have been relaxed and provision has been included for further set-aside obligations to be applied in case of market needs.

Set-aside was initially introduced in order to meet short-term internal and international policy pressures. Compared with its use in the United States, the operation may be seen as relatively successful to the extent that levels of ‘slippage’ in Europe appear to be substantially lower. However, it fails to address the fundamental cause of excess production, the level of output prices, and as such suffers a major form of inefficiency The only efficient approach to the regulation

of production must be addressed directly through the level of prices.

And yet set-aside is not without its supporters, because of its contribution to the environment, and from the farmers themselves who have found it useful in crop rotations. We have suggested a different approach to land diversion that offers a way of promoting these benefits but in a more targeted and competitive way. Such a scheme would differ from the existing set of agri-environment mechanisms, providing relief to flora and fauna outside of the more highly environmentally valued areas. We do not claim that this approach would be suited to the conditions in all EU countries. This would depend on the agricultural and environmental conditions and the public preferences towards the environment. However, there are countries where similar conditions apply and where a similar approach could be adopted. While we have not undertaken a cost-benefit

analysis of this scheme, we believe that it would supplement the current suite of agri-environmental schemes in a useful way.

Acknowledgements

The research for the paper was undertaken as part of an evaluation funded by the Department of Environment, Food and Rural Affairs. The authors are grateful to the Department for supporting the research but the views expressed are not in any way attributable to the Department.

Thanks to two anonymous referees and the editors for helpful comments on an earlier draft.

Ian Hodge and Alan Renwick, Department of Land Economy, University of Cambridge, UK. Email: idh3@carn.ac. uk

Uwe Latacz-Lohmann, Department of Agricultural Economics, University of Kiel, Germany. Email: ulatacz@agric-econ. uni-kiel.de

Sandra McNally was at the Centre for Ecology and Hydrology Monks Woods when the research was carried out. Now with the Centre for Economics of Education, London School of Economics and Political Science, UK. Email: s. rncnallyl @lse. ac. uk

Since undertaking the initial research, Carol Rush has sadly died and we dedicate this article to her.

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summary Beyond money for nothing; beyond set -aside?

Set-aside has been effective in reducing supply ‘Slippage’ has not

been a major factor in the operation of the policy However, set-aside has not been cheap: the budgetary costs of set-aside have exceeded the budgetary costs of dealing with surplus production via export subsidies in many years. Experience with the environmental impact of set-aside suggests that its major environmental contribution, beyond the types of environmental benefits provided by existing agri-environmental policies, is to provide for birds and wildlife within relatively intensively cropped areas. While the future requirement for supply control appears likely to be reduced, there may be a continuing environmental rationale for some form of land diversion. We propose a competitive land diversion scheme targeted to provide space for habitat and wildlife in the more intensive areas of production. Such a scheme can be seen as a form of environmental compensation and would be consistent with the adoption of the principle of sustainable development within the ELI. We do not claim that this approach would be suited to the conditions in all ELI countries. This would depend on the agricultural and environmental conditions and the public preferences towards the environment.

Par dela le gaspillage, en plus du gel des terres.. . ?

La jachere aura permis de reduire l’offre. Les ‘derapages’ n’auront pas

ete trop importants. Mais le gel des terres n’aura pas ete une petite depense : au fil des ans, le plus souvent, le coirt budgetaire correspondant aura ete superieur ?I celui des subventions a I’exportation pour se dkbarrasser des surplus. A I’experience, les observations sur les consequences environnementales du gel des terres suggerent fortement que le benefice majeur a en attendre, en plus des avantages directs procures par les mesures agri- environnementales, est de fournir des abris pour les oiseaux et la fame sauvage au sein de zones intensivement cultivkes par ailleurs . Au moment ou les mesures de contr6le de I’offre semblent devoir @tre reduites, il apparait ainsi des raisons pour continuer la politique de mise en jachere. II est propose ici une politique de mise en jachere competitive, destinke a procurer des abris h la faune sauvage dans les zones intensement cultivkes. Un tel systeme pourrait @tre considkre comme une mesure compensatoire au titre de I’environnement, par consequent compatible avec les principes du developpement durable en Europe. Cela ne veut pa dire qu’il devrait etre mis en place partout dans tous les pays europeens. Cela dependrait des situations agricoles et environnementales locales, ainsi que des preferences des citoyens vis-a-vis de I’environnemen t.

Alternativen zum bezahlten Nichtstun;

Die Flachenstilllegung hat das Angebot effektiv verringert.

,Schlupfverluste’ hahen bei der Umsetzung der Politik keine groRe Rolle gespielt. Die Flachenstilllegung war jedoch nicht billig: In vielen Jahren uberstiegen die Haushaltskosten fur die Flachenstilllegung die Haushalkikosten fur Exportsubventionen zum Abbau der Uberschusse. Die Erfahrungen mit den Umweltauswirkungen der Flachenstilllegung legen es nahe, dass ihr groRter Beitrag zum Umwelcschutz - iiber den von vorhandenen Agraruni- weltpolitikmafhahmen etzielten Nutzen fur die Umwelt hinaus - darin besteht. fur Vogel und andere ‘Iiere in relativ intensiv genutzten Bereichen einen Lebensraum zu schaffen. Whrend sich zukunftig die Notwendigkeit einer Angebotsbegrenzung wahrscheinlich verringert, konnte die eine oder andere Form der Umwidmung von Land aus Umweltgesichtspunkten auch weiterhin begriindet sein. Wtr empfehlen ein wettbewerbsfahiges Programm zur Umwidmung von Land, welches das Schaffen von Lebensraumen fur ‘Iiere auf intensiv genutzten Produktionsflachen zum Ziel hat. Ein solches Programm kann als eine Form von Umweltkompensation betrachtet werden und ginge mit dem erklirten Ziel der nachhaltigen Entwicklung innerhalb der EU einher. Wir behaupten nicht, dass dieser Ansatz h r die Bedingungen in allen EU- Landern geeignet ware. Dies hinge von den Agrar- und Umweltbedingungen und den iiffentlichen Priferenzen f i r Umwelt ah.

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