Exploring The Potential For Payment-By-Results Agri-Environment Schemes

Published on 30 March 2010 in Sustainability and Communities , Ecosystems and biodiversity

Introduction

Agri-environment schemes have been an important policy tool within the EU for over 15 years. Currently, such schemes tend to be action-based (i.e. they offer payments for adherence to management prescriptions that are assumed to deliver environmental benefits, rather than making payments conditional on realisation of the benefits themselves). This prescription-based approach is a pragmatic response to the measurement and monitoring problems associated with identifying and valuing many environmental benefits or linking these benefits to causal factors with total certainty. However, payment-for-actions does lead to economic inefficiencies. As a result, the potential for payment-by-results as an alternative approach is generating increased international interest under a variety of different names. This desk-based study explored the potential for applying a payment-by-results approach to agri-environment schemes within the UK.

Key Points

In order to implement a payment-by-results approach effectively, a number of issues need to be addressed:

There is often a substantial delay between the adoption of changes in land management and the production of the environmental outputs. Farmers would require some extra financial incentive to compensate for the period before the return is received.
The relationship between changes in land management and the delivery of environmental outputs can be very uncertain, often depending on factors outside of the land managers’ control.
Farmers are generally risk-averse and so would potentially demand higher payment rates for the same level of uptake. The scheme funder, operating a large number of contracts, may effectively be indifferent to risk and so it could be less costly (and more efficient) for the scheme funder rather than individual farmers to take on this risk.
There is often no consensus over what counts as an acceptable environmental output or outcome. Even ecologists tend to disagree on this question in many cases, such as in the botanical composition of grassland.
It may be difficult (and costly) to determine, measure and quantify environmental outputs to a standard that would satisfy the requirements of an enforceable, written contract. It may thus be difficult to determine replicable output levels and so increases the potential for complaints and appeals by farmers who feel that they have been treated unfairly.
Current WTO Green Box criteria constrain agri-environment payments to be based on additional costs and income foregone. Payments directly linked to environmental benefits would be most likely not condoned by existing WTO requirements.

Research Undertaken

This study was conducted for the UK Land Use Policy Group by a consortium led by the Macaulay Institute in association with Pareto Consulting and SAC. The main aim was to investigate the practical feasibility of a payment-by-results approach and to derive generic criteria for applying the approach to agri-environment schemes within both the UK and EU. The study considered how best to develop agri-environment measures based entirely on a payment-by-results approach and on the partial use of the concept. The advantages and difficulties associated with sixteen selected examples of existing payment-by-results agri-environment schemes were reviewed. A set of generic principles for the implementation of payment-by-results schemes were suggested and discussed in more detail in relation to potential applications at habitat or wider landscape scale.

Policy Implications

Payment-by-results schemes can improve the environmental targeting of agri-environment measures in comparison to the payments based on management prescriptions. However, the payment-by-results approach needs further testing through the implementation of prototypes at a local level and the incorporation of specific outcome-based elements (such as bonus payments) into standard prescription-based schemes.

Any workable pay-by-result scheme has to be based on sound measurement of environmental baselines and the monitoring of changes in these baselines. The setting of targets and the understanding of how they might be achieved needs to be developed in partnership with land managers. In addition, self-monitoring by scheme participants has the potential to reduce the amount of resources devoted to administration and monitoring and so merits further exploration.

By offering incentives to achieve results, the payment-by-results approach can potentially deliver economic efficiency gains. However, making rewards conditional on results when these are not entirely within the control of a manager exposes them to a greater level of risk than more conventional prescription-based approaches. This suggests that payments may need to incorporate a risk premium or perhaps be split between a guaranteed payment for participation plus a bonus on delivering the desired outcome.

The strict interpretation of WTO Green Box requirements (i.e. that agri-environment scheme payment calculations must be based on income forgone and additional costs) does not sit easily with the logic of payment-by-results since it should be the value of the outcome not the cost of delivery that determines payment rates. However, a more flexible interpretation of WTO requirements would be dependent on high-level negotiations and a clear demonstration that such a policy instrument would not affect commodity production and trade flows.

Auctions offer a possible means of not only improving efficiency relative to the current use of flat-rate payments but also of relaxing the WTO constraint on the basis for payment calculations (since bids could be interpreted as reflecting costs incurred and thus may permit a payment-by-results approach). However, the setting of a public budget and the identification of a maximum acceptable price to pay for a unit of a given public good requires a measure of demand to match the supply-side bid. This implies recourse to some form of environmental valuation technique.

A pilot payment-by-results scheme with its desired outcome set in terms of the characteristics of a particular habitat or plant species assemblage would be potentially easier to implement in practice. However, the desired biodiversity outcome not only needs to be set at the level of the individual site but also at the level of the area the scheme is designed to cover. Any payment-by-results approach needs to set broader outcomes (e.g. the amount of any particular habitat in that region which should be managed under that scheme).

The design challenges of implementing a payment-by-results approach at the level of an individual site are amplified at the landscape-scale (e.g. where there may be a need to co-ordinate the activities of neighbouring land managers to achieve a combined outcome). This not only poses additional challenges for scheme managers in terms of setting and monitoring targets, but also suggests that payment incentives alone may be insufficient to deliver desired environmental outcomes.

Author

Dr Davy McCracken, SAC davy.mccracken@sac.ac.uk

Topics

Sustainability and Communities , Ecosystems and biodiversity