Policy Challenges and Priorities for Internalizing the Externalities of Modern Agriculture

Agriculture is inherently multifunctional. It jointly produces more than food, fibre or oil, having a profound impact on many elements of economies and ecosystems. A comprehensive framework is used to present new data on annual external costs in Germany ( 1.2 billion; US$2 billion), in the UK ( 2.3 billion; US$3.8 billion) and in the USA ( 21 billion; US$34.7 billion). These costs are equivalent to 49-208/ha (US$81-343/ha) of arable and grassland. Agriculture also produces positive externalities, and though there is no comprehensive valuation framework, the public benefits in the UK appear to be in the range of 10-30 (US$16-49) per household, or some 20-60/ha (US$32-100/ha) of arable and pasture land. These external costs and benefits raise important policy questions. In particular, should farmers receive public support for the multiple public benefits they produce? Should those that pollute have to pay for restoring the environment and human health? Policy options available for encouraging behavioural changes are of three types: advisory and institutional measures; regulatory and legal measures; and economic instruments. Three of the most promising options for discouraging negative externalities and encouraging positive ones are: (1) environmental taxes; (2) subsidy and incentive reform; and (3) institutional and participatory mechanisms. The greatest challenge, however, will be to find ways to integrate such policy tools into effective packages that will increase the supply of desired environmental and social goods whilst ensuring farmers' livelihoods remain sustainable.