Production Effects of Agri-environmental Policy Measures: Reconciling Trade and Environmental Objectives

In addition to generating commodity outputs, agricultural production activities affect water, air, and soil quality, influence eco-systems and biodiversity, and shape rural landscapes. Many of these environmental effects exhibit the characteristics of negative or positive externalities or public goods, for which private markets do not exist or are poorly functioning. OECD countries implement a variety of agri-environmental policy measures with the aim of addressing the environmental effects associated with agricultural production. Policy measures include regulations and taxes to contain or prevent environmental harm, information and training programmes to promote environmentally friendly farming practices, and payments that remunerate farmers for environmental services they provide. Over the past 10-15 years, the scope and complexity of agri environmental policies has increased, not least because of growing concerns of society for the state of the environment. In parallel to the rising importance of agri- environmental considerations, agricultural trade policy reforms, in particular through policy changes following the Uruguay Round Agreement on Agriculture, have gradually opened domestic agricultural markets to international competition. Trade barriers, export subsidies, and domestic support have been bound and are being scaled down. In this context of greater international interdependence, there are two related policy debates on the possible impact of environmental standards, programmes, and payments on agricultural production and trade. The first is concerned with the impact of differences of agri-environmental regulations among countries on agricultural production costs and farm competitiveness, and the second with the issue whether and to what extent domestic agri-environmental policies influence international trade. The two policy debates do not have the same prominence in all OECD countries, and in some countries the underlying issues are seen to be of no relevance at all. Yet, the discussions have the potential to influence negotiations on agricultural trade and the environment at the international level. This paper examines several related questions: What are the effects of agri environmental policy measures on agricultural trade? To what extent do agri environmental regulations influence farming costs and international competitiveness? Would an international harmonisation of agri environmental policies increase welfare? Which characteristics might policy measures have to possess in order to be considered minimally trade distorting?