Conservation Payments: Challenges in Design and Implementation

As Congress develops new farm legislation, some are lobbying for a new partnership between U.S. taxpayers and farmers. In exchange for an annual transfer of $10 to $20billion from taxpayers to agriculture, farmers would do much more to enhance environmental quality. An attractive feature of a new partnership is that paying for an improved environment provides a clear and justifiable rationale for farm program payments, something that is lacking under current farm programs. By changing management practices and land use, farmers can provide cleaner water, cleaner air, better wildlife habitat, lower net greenhouse gas emissions, and improved long-run soil quality. Private profit maximizers largely ignore the value of these environmental goods. Hence, the goods are underprovided. Having government step in to increase their supply may increase economic efficiency. New, highly funded conservation payment programs for agriculture could achieve both the current income support objective of farm programs as well as environmental objectives if program payments are targeted to achieve environmental benefits rather than targeted to low-income producers. Significant reductions in environmental benefits will occur if payment limits or means testing is used to target payments, unless low-income farmers provide the highest environmental benefits. For many farms, the potential quantity of environmental benefits that can be produced is proportionate to farm acreage. The two basic approaches to conservation payments are (1) voluntary programs that pay farmers for specific actions they take, and (2) programs that penalize farmers with taxes or disqualification from other program benefits if prescribed actions are not followed. The first approach is preferred if agricultural income enhancement is a goal. Also, it is doubtful that the second approach is political feasible given that farmers will be asked to give up the ?no strings? income support they have enjoyed in recent years. Past conservation programs have taught us three key lessons. The first is that making payments based on environmental benefit-to-cost ratios can greatly enhance program efficiency by either cutting the cost of meeting an environmental objective or by greatly increasing the amount of environmental benefits that can be obtained from a given expenditure. Second, adequate verification, monitoring, and enforcement programs will need to be put in place if the promised environmental benefits are to be realized. And third, land set-asides are the most costly way of obtaining environmental benefits. When possible, it is more efficient to encourage productive use of land rather than to retire land. So, for example, instead of paying a farmer to remove land from production in order to reduce nitrate water pollution, a program would pay the farmer to adopt practices that reduce the risk of fertilizer runoff.