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Environmental Quality

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Policy Instruments for Protecting Environmental Quality

Last updated: Monday, April 28, 2014

For more information contact: Marc Ribaudo

Environmental quality is a public good. This means that it has characteristics making it unprofitable for the private sector to provide at socially optimal levels. Government can promote the "production" of environmental quality through various policy instruments, ranging from fully voluntary to regulatory:

These instruments are widely used in Federal conservation and environmental policies.

A survey of public policy tools for addressing environmental effects of agriculture    
Policy tool    Participation    Government role    Selected U.S. programs   
Educational/
Technical Assistance    Voluntary    Provide farmers with information and training to plan and implement practices    Conservation Technical Assistance, Cooperative Extension Program   
Government Labeling Standards for Private Goods    Voluntary,
but standard must be met for certification    Government sets standards, which must be met for certification, typically involving voluntary "eco-labeling" guidelines    Organic certification   

Incentive Policies: Long-Term Contracts

Voluntary    Payments for retiring land from crop production for 10 years or longer    Conservation Reserve Program—General Signup   
Payments for partial-field practices, e.g., grass waterways, filter strips    Conservation Reserve Program—Continuous Signup   
Incentive Policies: Financial Assistance    Voluntary    Payments to offset the cost of adopting specified best management practices. Payments may originate from an environmental credit trading program.    Environmental Quality Incentives Program;
Conservation Stewardship Program   
Incentive Policies: Easements    Voluntary    Assist States and other eligible entities to fund easements to restrict non-agricultural use of agricultural land    Agricultural Conservation Easement Program   
Long-term or permanent easements to restore and protect wetlands    Agricultural Conservation Easement Program   
Environmental Taxes    Involuntary, but payment amount depends on behavior    Per-unit charges for failure to meet environmental goals    None at the Federal level   
Compliance Mechanisms    Involuntary,
after opt-in to Farm Programs    Sets standards for environmental performance and determines whether requirements are met before releasing payments    Highly Erodible Land Conservation (Conservation Compliance and Sodbuster)
Wetlands Conservation (Swampbuster)
Sodsaver   
Regulatory Requirements    Involuntary    Producers subject to regulations if voluntary measures do not achieve environmental goals    Coastal Zone Management Act Reauthorization Amendments   
Operations may be subject to effluent discharge permits    Clean Water Act (animal feeding operations)   
Use restrictions and bans on certain pesticides    Federal Insecticide, Fungicide and Rodenticide Act   
Farmers may not "take" a member of a listed species; Agencies must protect and restore species and their habitats    Endangered Species Act   
Source: Claassen et al., Agri-Environmental Policy at the Crossroads: Guideposts on a Changing Landscape, AER-794, ERS, USDA. Updated April 2014.   

Economic Policy Instruments

Education is a broad category of instruments aimed at developing an information base and improving conservation practices and program delivery. Research and data development provides information on the economic, productivity, and environmental performance of production and conservation practices. Extension and technical assistance transfer this information to farmers through education materials, demonstration projects, and face-to-face meetings. In USDA, these activities are undertaken by the Agricultural Research Service (ARS), National Institute of Food and Agriculture, the Economic Research Service, the Agricultural Marketing Service, the Forest Service, and the Natural Resources Conservation Service. 

Education alone is insufficient for protecting environmental quality through conservation, principally because most environmental benefits occur off the farm. Education is more effective for improving onfarm productivity because the farmer can realize an economic gain. Education can, however, be an effective tool for improving environmental quality under certain conditions:

For example, conservation tillage increases net returns for some producers while reducing soil erosion and improving water quality. Other practices that can increase profitability and environmental quality include nutrient management and irrigation water management. Practices that improve environmental quality without boosting profits—such as filter strips, cover crops, and enhanced wildlife habitat—would be less likely to be adopted voluntarily without financial assistance.

Education’s greatest value is as a component of an environmental improvement policy that relies on other tools such as financial incentives and direct regulation. USDA's Area Studies Project demonstrated that education influences which conservation practices a farmer adopts in order to meet the requirements of program provisions such as conservation compliance. By alerting producers to their own pollutant discharge and providing the information needed to implement abatement practices efficiently, overall pollution control can be attained at lower cost with education. USDA coordinates technical assistance with financial incentives it provides for implementing conservation practices through programs such as the Environmental Quality Incentives Program, Conservation Stewardship Program, and Conservation Reserve Program. USDA also provides technical assistance to help farmers comply with Highly Erodible Land and Wetland Conservation Compliance Provisions and environmental regulations such as the Clean Water Act.

Government labeling standards for private goods help create efficient private markets for goods produced with environmentally sound practices.  National certification standards increase the informational value associated with specialized labels (e.g., labels for organic produce or other "eco-labels").  If enough consumers are willing to pay more for products grown in an "environmentally friendly" manner, then more producers will switch to these production practices.  Participation is voluntary, but producers must meet minimum standards to use specific labels. USDA has set uniform national standards defining the term "organic" for both bulk and processed products.

Financial incentive-based policies can provide payments to farmers to encourage environmentally beneficial activities or tax farmers to discourage harmful activities. Ideally, incentives would be based on environmental outcomes. For example, financial assistance for an erosion control practice could be based on the amount that erosion is reduced. Such performance-based incentives are the most economically efficient. However, because of difficulties in measuring environmental outcomes from conservation and production practices, incentives are almost always based on specific practices. Both positive and negative incentives create an opportunity cost of engaging in environmentally harmful activities. Therefore, both can be designed to produce an identical environmental outcome, though the distribution of economic welfare between farmers and taxpayers will differ for each approach. In practice, only positive incentives have been used by Federal conservation programs to induce the voluntary adoption of conservation practices.

Agriculture is generally believed to be able to reduce pollution at a lower cost than most sources typically regulated by U.S. pollution control laws (factories and municipal water treatment plants, or point sources), for those pollutants common to both, such as nutrients. Farmers might be allowed to participate in a trading program in order to provide a source of "cheap" credits that point sources can purchase to meet their discharge requirements. For example, farmers might produce nitrogen credits by reducing nitrogen runoff using a comprehensive nutrient management plan. If point sources are willing to pay more for emissions credits than it costs farmers to produce them (by cutting nutrient loss in this case) then a trade can be made that allows farmers to benefit financially. Point sources also benefit because they pay less for pollution control than if they had to do it themselves. Farmers would continue receiving these payments for as long as they maintained the practices. A major challenge for agriculture participating in trading programs is the accurate measurement of pollution abatement (needed to assign credits) associated with implementing conservation practices. For a more detailed discussion of trading, see EPA’s " Water Quality Trading Assessment Handbook."

Compliance mechanisms require a basic level of environmental compliance as a condition of eligibility for other agriculture programs. This tool shares characteristics with both government standards for private goods/actions and economic incentives. It is similar to the former in that the government establishes a set of approved practices, except that here compliance is linked to a direct economic payment, including subsidies for federal crop insurance. Because existing programs are used for leverage, compliance mechanisms require no new budget outlay for producer payments, although considerable technical assistance is needed to develop conservation compliance plans. Enacted at a time when farm income support programs were more closely tied to production, compliance mechanisms were used to remove apparent inconsistencies between signals for more intensive production (from the income support programs) and conservation programs. Existing compliance mechanisms include the Highly Erodible Land Conservation (Sodbuster and Conservation Compliance), Wetland Conservation (Swampbuster), and Sodsaver (tied only to crop insurance and non-insured crop disaster) provisions.

Regulatory requirements lie at the other end of the policy spectrum from voluntary participation. Rather than attempting to facilitate or encourage improved environmental performance, policymakers can simply require it. Regulations can ban the use of a particular input or practice deemed a significant threat to public safety or the environment, or can require the use of a beneficial practice. The ban on the production and application of the chemical DDT (through the Federal Insecticide, Fungicide, and Rodenticide Act) is an example of the former. The Clean Water Act regulations requiring the implementation of a Comprehensive Nutrient Management Plan by concentrated animal feeding operations (CAFOs) is an example of the latter. Regulatory policies that can affect agriculture include the Coastal Zone Management Act Reauthorization Amendments (for polluted runoff), the Clean Water Act (for polluted runoff), the Federal Insecticide, Fungicide, and Rodenticide Act (for pesticide use), the Clean Air Act (for airborne particulates), and the Endangered Species Act (for wildlife habitat). 

Application of Policy Instruments to U.S Conservation Problems

Three broad groupings organize the instruments: involuntary measures that are, to varying degrees, coercive; voluntary measures providing varying amounts of financial incentive; and facilitative measures that rely primarily on information. Instruments are arrayed from left to right in the chart in order of decreasing level of direct control the instrument has on producer decisions. In other words, the more closely prescribed the producer actions, the farther left a particular instrument falls on the continuum.

The evolution of environmental concerns is echoed in the rows of the matrix, with the initial concerns about soil productivity losses from erosion occurring in the top rows, and more recent concerns (such as nitrogen leaching and manure management) appearing in the bottom rows. The approximate dates that specific policies were first applied to an environmental concern are indicated in the body of the matrix. Some of the programs listed have been phased out or combined with other programs. For example, the functions of the Wildlife Habitat Incentive Program were taken over by EQIP in 2014.

Policymakers have at their disposal policy instruments that can induce changes in agricultural practices and technologies that lead to more sustainable agro-environmental systems. No general statement can be made about which policy instruments meet program goals in the most efficient or cost-effective manner. And within each broad policy tool grouping, implementation decisions can have significant impacts on program costs and environmental impacts.

In addition, the characteristics of agriculture’s impacts on environmental resources vary widely across regions and resource bases. The choice of policy instruments depends on the nature of the resource issue or problem, the information available to the administering agency on the linkages between farming activities and the environmental resources, farm economics, and societal decisions about who should bear the costs of providing more sustainable production systems.

Matrix of Federal agricultural conservation/environmental policy instruments and problems   
Participation   
Involuntary    Voluntary    Facilitative   
Regulation    Conservation Compliance    Land Retirement    Cost Sharing    Incentive Payments    Trading/ Banking/ Bonding*    Labeling    Education/ Technical Assistance   
Problem:    Instrument   
Erosion: soil productivity      Sodbuster/
compliance (1985)    Soil Bank (1956-60)
CRP (1985)    ACP (1936-96)
EQIP (1996)    CSP (2002)
EQIP (1996)        CTA (1936)
CEP (1914)   
Erosion: sedimentation    CZARA (1990)    Sodbuster/
compliance (1990)    CRP (1990)    ACP (1936-96)
EQIP(1996)    WQIP (1990-96)
EQIP (1996)
CSP (2002)        CTA (1936)
CEP (1914)   
Erosion: airborne dust    Clean Air Act    Sodbuster/
compliance (1990)    CRP (1996)    ACP (1936-96) EQIP (1996)    WQIP(1990-96)
EQIP (1996)
CSP (2002)        CTA (1936)
CEP (1914)   
Greenhouse gases        CRP (1996)    EQIP (1996)    EQIP (1996)        CTA (1936)
CEP (1914)   
Wetlands    CWA Section 404 (1972)    Swampbuster (1985)   

Water Bank (1970-95)
CRP (1988)
WRP (1990-2014)
EWRP (1993)
ACEP (2014)

CWA (1990)      CTA (1936)
CEP (1914)   
Water quality: nutrients    CWA Section 402 (2003)      CRP (1996)    EQIP (1996)    WQIP (1990-96)
EQIP (1996)
CSP (2002)    CWA (1990)    OFPA (1990)    CTA (1936)
CEP (1914)   
Water quality: pesticides    FIFRA (1947)
CZARA (1990)      CRP (1996)    EQIP (1996)    WQIP (1990-96)
EQIP (1996)
CSP (2002)      OFPA (1990)    CTA (1936)
CEP (1914)   
Water quantity          ACP (1936-96)
EQIP (1996)    CSP (2002)        CTA (1936)
CEP (1914)   
Wildlife habitat    ESA (1973)      CRP (1996)
GRP (2002)    WHIP (1996-2014)    EQIP (1996)
CSP (2002)    ESA (2003)    OFPA (1990)    CTA (1936)
CEP (1914)   
Acronyms:
ACEP—Agricultural Conservation Easement Program, ACP—Agricultural Conservation Program, CEP—Cooperative Extension Program, CRP—Conservation Reserve Program, CSP—Conservation Stewardship Program, CTA—Conservation Technical Assistance, CWA—Clean Water Act, CZARA—Coastal Zone Act Reauthorization Amendments, EQIP—Environmental Quality Incentives Program, ESA—Endangered Species Act, EWRP—Emergency Wetland Reserve Program, FIFRA—Federal Insecticide, Fungicide, and Rodenticide Act, OFPA — Organic Food Production Act, WHIP—Wildlife Habitat Incentives Program, WQIP—Water Quality Improvement Program, WRP—Wetland Reserve Program.
*Trading relies on regulatory measures to create a market. However, agriculture’s participation is currently voluntary.   
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